EFFECT OF FINANCIAL INCLUSION ON FINANCIAL STABILITY: COUNTRYS BY INCOME LEVEL CLASIFFICATION, 2004-2014

Published: 05-09-2020 Abstract. Financial inclusion has become a main key for financial service development yet this development should also consider financial stability. The Asian financial crisis 1997 and the Global financial crisis 2008 gave us lesson of how important to maintain financial stability. Thus, the development of the financial services sector through financial inclusion is expected to impact the financial stability of the countries income levels. This study aims to determine the effect of financial inclusion relation to the financial stability in many countries based on their level of income during 2004-2014. This study used unbalanced panel data regression with fixed effect model. The results showed that financial inclusion proxied by commercial bank outstanding deposit has positive yet unsignignificant effect on financial stability for high income and upper-middle income countries, and has negative significant effect for lowermiddle income and low income countries. Meanwhile, financial inclusion proxied by commercial bank outstanding loan has negative significant effect on financial stability in high income and upper middle income countries. This result is the opposite of lower-middle income which showed positive yet unsignificant effect, and positive significant impact for low income countries


INTRODUCTION
Financial inclusion is an important global agenda. International Organization like the G201, IMF2, CGAP, APEC3, World Bank, ADB4, AFI5, OECD6, and others is now focusing its activities on financial inclusion to support economic development globally.
Financial inclusion has been applied to various countries, both high-income countries, middle to upper, lower middle income countries (lower middle income countries), and low (low  (2007) to -2 percent, 1 percent, -1 percent, and -8 percent (2009). Apart from these inclusion factors, the research also includes external factors. These factors include per capita GDP and current assets against deposits and short term funding.

METHOD
The research model used to see the effect of financial inclusion on financial stability is a modification of the model from Amatus research and Alireza (2015) as follows: DEPi,t + β3 LOANi,t + β4 Xi,t + εi,t (3. [2004][2005][2006][2007][2008][2009][2010][2011][2012][2013][2014]. This data limitation is due to the limited availability of data and aims to limit the potential for observation in order to focus more on seeing the relationship between financial inclusion and financial stability. The data used in this study are secondary data an annual basis obtained from the World Bank and International databases Monetary Fund (IMF). The data in this study were processed using tools Eviews 6 software.

Descriptive Statistics
Statistical descriptive analysis The research object countries were 162 countries during the period 2004-2014. Result descriptive statistics can be seen in Table 1.  These results show that Syria is able to meet its short-term obligations and withdraw its deposits which can be paid through current assets due to the high current assets of banks. If this current asset decreases, it could be due to the bank optimizing existing funding sources to finance credit increases and short-term funding (BI, 2012: 34). The high level of current assets can support its asset base. However, low current assets can endanger the health and sustainability of financial institutions. The deposit-receiving institution must plan for the potential for unexpected deposit withdrawals in addition to the liquidity needs of its loan program. If the institution requires greater liquidity, it will increase its cash position or commit to building credit lines that can provide a potential source of liquidity. This path cannot be expected during situations of financial stress. Another way to increase this ratio in the short term is to delay capital spending. Indonesia as a lower middle income country is still dependent on global funding. It is recommended that banks in Indonesia perform stress tests Aini & Prasetiantono,Effect of Financial Inclusion… 15 and revise their liquidity contingency planning as a step to reduce liquidity risk (Loukoianova et al, 2016).

DISCUSSION
After going through a series of tests, the results of regression modeling are obtained for the relationship between financial inclusion and financial system stability in countries categorized based on the level of state income. The test results show that countries with different income levels using the fixed effect model have different effects.  Table 2 shows the relationship between outstanding deposits at commercial banks and financial system stability in high and middle income countries and has a positive and insignificant effect. These results were obtained by accepting H0 on the statistical t test.
This relationship means that high outstanding deposits will reduce the probability of default. Every 1 percent increase in outstanding deposits will increase financial stability by 0.005 percent in high-income countries, ceteris paribus, and vice versa. Every 1 percent increase outstanding deposits will increase financial stability by 0.01 percent in upper middle income countries, ceteris paribus, and vice versa. The positive relationship between outstanding deposits and financial system stability in high and middle-income countries indicates that the ratio of deposits in commercial banks has diversified. This condition means that there has been an intermediation efficiency in which the financial sector has grown wider with an increase in the number of small savers. This can increase the size and stability base of deposits, reduce bank dependence on non-core funding which tends to be more volatile during crises, and reduce the linkage of procyclical risk. Diversified deposits can minimize deposit withdrawals on a large scale due to systemic shocks. This is because the depositors respond to different shocks so that stability is maintained more resistant to shocks. Demirguc-Kunt and Klapper (2012) examined the share of people who use deposits in banking (2011), and found that the results of the study showed that an increase of 10 percent of people who have access to deposits to banks will reduce deposit withdrawals by 3 to 8 percent. This supports financial inclusion which has a positive effect on financial stability.
The relationship of outstanding loans from commercial banks to the stability of the financial system in high and middle income countries has a negative and significant effect.
These results are obtained by rejecting H0 in the statistical t test at the 10 percent significance level in high-income countries, and at the 1 percent, 5 percent, and 10 percent significance levels in upper middle income countries. This relationship means that low outstanding loans will increase the probability of default. Every 1 percent increase in outstanding loans will reduce financial stability by 0.006 percent in a high-income country, ceteris paribus, and vice versa. Every 1 percent increase in outstanding loans will reduce financial stability by 0.04 percent for lower middle income countries, ceteris paribus, and vice versa. The negative relationship between outstanding loans and financial system stability in high and middle income countries indicates that the lending ratio to commercial banks can lead to erosion of credit standards. This is because financial institutions lower the terms of loans so that they can reach poor households so that the number of borrowers increases. The relationship between foreign GDP per capita and financial system stability in high and low income countries has a positive and insignificant effect. These results were obtained by accepting H0 on the statistical t test. Middle to upper and lower middle income countries have a positive and significant effect. These results are obtained by rejecting H0 on the t-test statistic at the 1 percent, 5 percent, and 10 percent significance levels.
This relationship means that an increase in GDP per capita decreases the probability of default. Every 1 percent increase in GDP per capita will increase financial stability by 0.001 percent in high-income countries, ceteris paribus, and vice versa. Every 1 percent increase in GDP per capita will increase financial stability by 0.007 percent in upper middle income countries, ceteris paribus, and vice versa. Every 1 percent increase in GDP per capita would increase financial stability by 0.01 percent in lower middle income countries. ceteris paribus, and vice versa. Whereas in middle and upper income countries, every 1 percent increase in GDP per capita will increase financial stability by 0.002 percent in upper middle income countries, ceteris paribus, and vice versa. The positive relationship of GDP per capita to financial system stability between country categories based on income levels indicates that an increase in income is directly proportional to an increase in financial system stability. Allen et al. (2012: 4) suggest that the level of income represented by GDP per capita plays a large role in the variation in account penetration around the world. This is where an increase in GDP per capita will lead to an increase in formal account holders in the banking sector.
The effect of the current asset relationship on financial stability between countries of opinion levels can be seen in Table 4.15, where high-income countries have a positive and significant effect. These results were obtained by rejecting H0 on the t-test statistic at the 5 percent significance level. Low and middle income countries have a positive and insignificant effect. These results were obtained by accepting H0 on the statistical t test. This relationship means that high current assets will reduce the probability of default. Each 1 percent increase in outstanding deposits will increase financial stability by 0.009 percent in high-income countries, ceteris paribus, and vice versa.

CONCLUSION
This study shows that there is a relationship between financial inclusion and the stability of the financial system between countries and income levels in the 2000-2014 period.
Second, financial inclusion uses a proxy for outstanding deposits at commercial banks and outstanding loans from commercial banks to see the relationship to financial stability as reflected in the Bank z-score variable. Apart from the main independent variables, other factors such as GDP per capita and current assets are also used to assess their relationship to financial stability. The relationship of outstanding deposits at commercial banks to financial system stability in high-income countries (HIC) and upper middle income countries (UMC) has a positive and insignificant effect. This relationship indicates that the deposit ratio at commercial banks has diversified. This condition means that there has been an intermediation efficiency in which the financial sector has grown wider with an increase in the number of small savers. This can increase the size and stability base of deposits, reducing bank dependency on non-core funding, which tends to be more volatile during the crisis, and reduces the associated procyclical risk. Meanwhile, the relationship of outstanding deposits at commercial banks to financial system stability in lower middle income countries (LMC) and low income countries (LIC) has a negative and significant effect. This relationship indicates that the deposit ratio at commercial banks is not yet diversified. This could significantly reduce the resilience of the funding base of banking sector deposits during financial pressures. The relationship of outstanding loans from commercial banks to financial system stability in high-income countries (HIC) and upper middle-income countries (LMC) has a negative and significant effect. This relationship indicates that the ratio of loans to commercial banks can cause erosion of credit standards. This is because financial institutions lower the terms of loans so that they can reach poor households so that the number of borrowers increases. However, the results of credit extension have the potential to affect the quality of the credit portfolios of banks and financial institutions.
This situation makes finances fragile (financial fragility) and financial instability. These results indicate the value of financial stability as seen from the opportunity to default or the health value of the financial sector not only influenced by banks but also the securities market. Meanwhile, the relationship of outstanding loans from commercial banks to financial system stability in lower middle income countries (LMC) has a positive and insignificant effect, and in low income countries (LIC) it has a positive and significant effect. This relationship indicates that increasing lending to small companies can reduce the risk of bank credit portfolios such as single borrower portfolios, volatility, and associated financial risks.
The relationship between LN GDP per capita and financial system stability in high income countries (HIC) and low income countries (LIC) has a positive and insignificant effect.
Meanwhile, upper middle income countries (UMC) and lower middle income countries (LIC) have a positive and significant effect. The positive relationship between an increase in GDP per capita will be in line with an increase in financial stability, because an increase in GDP per capita will lead to an increase in formal account holders in the banking sector. The relationship between current assets and financial stability in high-income countries (HIC) has a positive and significant effect. Lower middle income countries (LMC) and low income countries (LIC) have a positive and insignificant effect. This relationship indicates that an increase in current assets can strengthen stability by encouraging banks to reduce risk on the balance sheet. This increased stability is because banks can liquidate assets during a crisis.
Meanwhile, the relationship of current assets to financial stability in upper middle income countries (UMC) has a negative and significant effect. This relationship indicates that an increase in current assets is inversely related to an increase in financial system stability. This occurs because an increase in liabilities for the availability of current assets will reduce the proportion of credit provision, thus hampering the smooth functioning of formal financial institutions.

RECOMMENDATIONS
The existence of financial inclusion is important because it has a significant effect on financial stability. Therefore, it takes the efforts of various related parties such as the government, central bank, and financial institutions to work together to focus on increasing a country's financial inclusion. Policies, regulations and an enabling environment can Aini & Prasetiantono,Effect of Financial Inclusion… 19 accelerate increased financial inclusion. Increasing financial inclusion can be carried out in various income level countries and in various ways such as financial education to the public, increasing public financial facilities, improving intermediation and distribution facilities, improving education, and so on.
Financial inclusion can have a positive impact on strengthening financial stability by increasing the diversification of deposits and credit, so that diversification is very necessary for each country between income levels. In addition, easy access to account opening, affordability, mileage, and financial literacy are also needed to reach low-income groups in reducing risks in times of financial stress. What is important in increasing financial inclusion is that regulations are properly regulated so as not to create reputational risks and erosion of credit standards which will lead to a crisis. Efforts to reduce barriers to access both in price and non-price in obtaining financial services and access are at the forefront of achieving the goal of financial inclusion towards financial stability.