Financial Inclusion: Issues for Central Banks
This paper highlights various ways in which increasing financial inclusion affects central bank policies intended to maintain monetary and financial stability. It discusses measures of level of financial inclusion and policy actions aimed to support access to financial services from central banks’ perspective. The paper suggests that, for central banks, financial inclusion matters for a number of reasons. First, it has an impact on long-term economic growth and poverty reduction, and hence on the macroeconomic environment of a nation. Second, it has implications for monetary and financial stability which are policy areas that are at the core of central banking. Key findings include:
- Increased financial inclusion facilitates consumption smoothing, as households have easier access to financial instruments. As a result, output volatility is no longer as costly and this facilitates central banks’ efforts to maintain price stability;
- Growing financial inclusion increases the importance of interest rates in monetary transmission as a greater share of economic activity comes under the sway of interest rates. This increases the effectiveness of monetary policy;
- Too strong a focus on improving access to credit could increase risks, especially if it leads to deterioration in credit quality or too rapid growth in unregulated parts of the financial system.