Conference Papers OPNSit : financial openness index (financial openness) for
country i year to t.
Dit : dummy of financial crisis variables for country i in year t (1 if during the crisis and 0 when there‘s no crisis).
74
Conference Papers
banking penetration dimension represented by the number of deposit accounts at commercial bank per 1000 adult population, availability of financial services dimensions represented by a number of commercial bank branches per 100 000 population adults, and product usability of formal financial institutions dimensions represented by the proportion of outstanding loans and deposit to GDP.
Upper-middle income countries has an average value of financial inclusion index at 0.236. The index value is less than 0.3 so classified in the group of countries with poor financial inclusion (Sarma 2008). Dimension that contribute the greatest value on the financial inclusion index in upper middle income countries group is dimension of financial services usability. It is represented by the relatively high proportion of outstanding loans and deposit to GDP compared to other dimensions. The obstacles in the implementation of financial inclusive in Upper-middle income countries group is lack of financial services illustrated by low number of branches provided by commercial banks.
Lower middle income countries group has the lowest average value of financial inclusion index at 0.127. The index value is less than 0.3 so classified in the group of countries with poor financial inclusion (Sarma 2008). All dimension of financial inclusion in the group of middle income countries is the lowest compared to other groups. Moreover, the lowest dimension in lower middle income group of countries is availability of financial services illustrated by the low number of branches provided by commercial banks.
Financial Stability Based on Income Group Countries
Table 3 shows the results of calculation for the average financial stability index based on Income Group Countries. Financial system stability index is composed of four sub-indexes representing the development of financial sector, the vulnerability of financial sector, the soundness of financial sector, and world economic climate. From the calculation results obtained as follows:
Conference Papers
Table 3 Financial System Stability Index Based on Income Group Countries
Group Average
FDI FVI FSI WECI AFSI
LMIC 0.291402 0.383061 0.582903 0.636415 0.449327 UMIC 0.38888 0.48467 0.568669 0.622765 0.505066 HIC 0.583699 0.534287 0.518552 0.654864 0.561867 Where FDId is Financial Development Index; FVI: Financial Vulnerability Index; FSI is Financial Soundness Index; WECI: World Economic Climate Index; and AFSI is Aggregate Financial Stability Index (Indeks Stabilitas Sistem Keuangan).
Table 3 shows that the group of countries having the highest value of an average financial stability index is high income countries group. The high index of financial stability in high- income group of countries due to the relatively high constituent sub-indexes such as the Financial Development Index and Financial Vulnerability Index. The high index of financial development is illustrated by the high average value of capital in the financial markets, high value of domestic credit, low interest rate spreads, and high concentration of banking sector. Then, the high index of financial vulnerability is illustrated by the low rate of inflation and high real effective exchange rate.
Either lower middle income countries group or upper middle income countries group has lower value of financial stability index than high-income countries group because group of lower middle income countries and upper middle income have low value of financial development index. The low index of financial development is illustrated by low value of the capital in the financial markets and the low domestic credit value thus inhibiting stability of financial system.
Impact of Financial Inclusion of the Financial System Stability Based on income group countries
76
Conference Papers
This is the result of regression using tobit model to answer the impact of financial inclusion and other factors on financial stability based on income group countries:
Table 4 Impact of financial inclusion and other factors on financial stability based on income group countries.
LMIC UMIC HIC
AFSI AFSI AFSI
IFI 0.07829 0.01375 0.1529***
LNGDP 0.01384 0.0239
CGDP 0.00097***
LIQ -0.0017* -0.00003 0.00286***
NFDI -0.3231 0.0472 0.02981
OPNS 0.02667 -0.02489***
D -0.06472*** -0.0703*** -0.05436***
Cons 0.3888*** 0.24639 0.6293***
Wald-Chi2 32.25 53.39 78.35
P-value 0.0000 0.0000 0.0000
*** : Significant level of 1%, ** : Signifiant level of 5%, * : Significant level of 10%.
Table 4 shows that financial inclusion has a positive impact on the stability of the financial system in lower and upper middle income countries group, but the effect is not significant. In high income countries group, financial inclusion has a positive and significant impact with a significance level at 1%, which means increasing in financial inclusion in terms of access, availability and usability of financial services will improve the stability of financial system. This is due to increasing in financial inclusion illustrates the strengthening of real sector. In addition, increasing in financial inclusion will be followed by a strengthening of the base deposit that can be used to improve the process of intermediation (Khan 2011).
Other variables also affect the stability of financial system.
Other variables that significantly affect financial stability are the ratio of private credit from bank deposits and other financial institutions to GDP. This variable is a significant positive influence on stability of financial system over the group of middle income countries with a significance level at 1%, it means
Conference Papers increasing in the ratio of private credit from bank deposits and
other financial institutions to GDP will improve the stability of financial system. This is because increasing in private credit will lead to growth in the real sector and growth in financial sector that will strengthen the stability of financial system (Sahay et al.
2015).
Liquid assets to deposits and short-term financing in lower middle income countries has significantly negative affect on financial stability with a significance level at 5%. The negative impact due to increasing in the availability of liquid assets liabilities will reduce the proportion of credit so it will resist function of formal financial institutions (Calderon and Serven 2011). In the group of high-income countries, liquid assets to deposits and short-term financing has a positive and significant impact on financial stability with a significance level at 1%, which means increasing in liquid assets to deposits and short-term financing will improve stability of financial system. The positive impact due to increasing in liquid assets will enhance customer‘s trust to the bank when shock happened (Morgan and Pontines 2014).
Financial openness has a significant negative impact on stability of financial system in high-income countries at the level of 1%. It means increasing in financial openness will reduce the stability of financial system due to high level of financial openness will increase the vulnerability to capital outflows from short-term capital when shocks occur. Capital outflow will be followed by volatile capital (depreciation of capital in the stock market) and the depreciation of the currency will eventually enhance instability in financial system (Estrada, Park, and Ramayandi 2015).
Last variables that affect the stability of financial system is crisis dummy variable. The financial crisis significantly affects the stability of financial system with a significance level at 1% in all income level group. The impact of crisis causes instability in the financial system. This is because the financial crisis lead to reducing customer‘s trust. it will lead to bank runs that may cause
78
Conference Papers
ineffectiveness of the financial system, which means creating a financial system instability (Han and Melecky 2013).