The objective of this study is to analyse the financial inclusion impacts on the financial stability of Islamic banks in Pakistan. This study used balance panel data of 15 full-fledged Islamic banks and Islamic windows from 2011 to 2021 by employing the feasible generalized least squares (FGLS) estimation technique to count the heteroskedasticity and potential endogeneity issue. The results of the present study lend support to the notion that financial inclusion as assessed by bank branches, financing, and availability of ATMs plays a substantial role in stimulating the financial stability of Islamic banks.
TopIntroduction
Financial inclusion, often regarded as a cornerstone of economic development, has garnered significant attention in the realm of banking and finance (Bhardwaj, Hedrick-Wong, & Howard, 2018). This idea captures the notion of providing businesses and individuals in all societal strata with access to basic financial services and opportunities, with a special emphasis on those who have historically been left out of the formal financial system (Neaime & Gaysset, 2018). Its effects go well beyond simple accessibility, as financial inclusion has become a potent force that has the ability to drastically alter the environment surrounding the financial stability of Islamic banks and the financial industry as a whole (Banna et al., 2022).
One of the primary tenets of the contemporary financial landscape, financial inclusion has a significant impact on the dynamics of economic development, social equity, and general well-being (Banna & Alam, 2020). The stability of banking systems is inextricably linked to the importance of financial inclusion, which is commonly understood as the availability and accessibility of basic financial services to all facets of society (Aslam, Ur-Rehman, & Iqbal, 2021). This mutually beneficial relationship is a crucial aspect of current financial research and policy discussions.
The development of finance is contingent upon financial inclusion. On the other hand, reduced disparities and destitution are a result of increased accessibility to financial amenities and products (Okonkwo & Nwanna, 2021). Researchers and policymakers including both developed and developing countries have emphasized the importance of financial inclusion (Eid, Al Houl, Alqudah, & Almomani, 2023). Thus, easier availability of formal financial services for households and corporations helps to advance financial conditions and reduce hardship in emerging as well as developed nations (Pham & Doan, 2020).
Financial stability can be attained when a nation's financial system operates smoothly and effectively. This is because crises in the system are less likely to occur when financial risks are properly evaluated and controlled. Second, economies everywhere strive to improve economic inclusion as a component of their plans to expand the economic and financial industries by granting access to financial services (Khan & Aslam, 2018; Vo, Nguyen, & Thi-Hong Van, 2021). Therefore, for all adults in the community to have access to reasonably priced goods and services that meet their needs, they must all be financially included, eventually stimulating financial stability. (Malik et al., 2022).
Pakistan is a developing country, there is a significant need for financial inclusion. According to State Bank of Pakistan1 around186 cellular mobile connection in Pakistan, only 11.3 million, 16.44 percent of Pakistanis use mobile money, either from their own or other people's accounts. As a result, financial inclusion can have a significant impact on the evolution of the formal financial system since it will include a wide range of the public in having a large amount of money in the banking system, making money available for productive use, and eventually leading to positive changes in the development of the economy (Ahmad et al., 2021). Thus, stronger financial institutions are in a better position to offer products and services related to finance that greatly broaden financial inclusion. Although banks are essential for tying the financial system to the actual economy, financial inclusion makes monetary policy more effective at containing inflation by affecting a larger segment of the economy (Jungo, Madaleno, & Botelho, 2022). There is evidence that financial stability contributes to a nation's ability to develop sustainably (Musau, Salome & Munthe, 2018). On the other perspective, financial instability might significantly hinder the growth of developing countries. The country's growth process is significantly linked to its financial stability (Siddik & Kabiraj, 2018).