Unraveling the interplay of financial inclusion, stability, and shadow banking in emerging markets

This paper fills the momentous gap by explicitly investigating the interplay of financial inclusion, financial stability, and shadow banking in 11 emerging market economies (EMEs) from 2010 to 2021. Employing panel quantile regression approaches, including simultaneous bootstrapped quantile regression and generalized quantile regression, the results indicate that while financial inclusion has a negative impact on financial stability, its impact is less pronounced in countries with high stability. Moreover, shadow banking, whether broadly or narrowly defined, tends to weaken the negative effects of financial inclusion, particularly in EMEs with medium and high levels of financial stability. Finally, Dumitrescu–Hurlin's panel causality test confirms bidirectional causality between financial stability and financial inclusion, financial stability and shadow banking, as well as financial inclusion and shadow banking. These findings highlight the need for policymakers in EMEs to prudently adjust shadow banking regulations to maximize their positive impact on financial inclusion and stability while concurrently minimizing potential risks.