Financial inclusion and financial stability in West Africa: An egg-and-chicken problem?

Financial inclusion is widely recognized as a crucial development objective, yet its implications for financial stability remain theoretically ambiguous and empirically unsettled. This paper examines the two-way relationship between financial inclusion and financial stability in Africa. To do so, we use a dataset covering 52 banks in the West African Economic and Monetary Union (WAEMU) over the period 2002–2019. By combining heterogeneous panel causality tests with a panel vector autoregressive (PVAR) framework, we provide a dynamic assessment of the inclusion–stability nexus at the microeconomic level. The findings reveal an asymmetric relationship: financial inclusion increases banks' credit risk exposure — as captured by rising loan loss provisions — while leaving overall solvency broadly unaffected. This risk channel operates primarily through the extensive margin — the number of accounts and ATMs — rather than through aggregate deposit volumes. Heterogeneity analyses further show that the effects are more pronounced for smaller and undercapitalized banks, highlighting the conditional nature of the relationship. Conversely, we find no robust evidence that financial stability significantly drives financial inclusion. Overall, the findings suggest that broadening access to formal banking services through account ownership and payment infrastructure raises provisioning needs without systematically undermining bank solvency, calling for risk-sensitive inclusion policies accompanied by adequate capital buffers.