Can Tougher Banking Rules Bring More People Into Formal Finance?

Financial inclusion is vital to economic participation. Access to bank accounts, savings, credit, insurance and payment services can help households manage shocks, enable small businesses to invest and connect underserved communities to the formal economy. However, access also depends on something less visible: whether people trust financial institutions, whether banks can manage risk and whether regulation encourages institutions to serve new customers rather than retreat toward the safest and wealthiest borrowers.

A new study suggests that stronger banking rules can help widen access, but also reveals a more uncomfortable tension. Regulation appears to support financial inclusion across the Southern African Development Community, while some conventional measures of financial stability are associated with narrower access.

The study, "Effect of Financial Regulation on Financial Inclusion in the SADC Region," was authored by Lwazi Genukile and Leward Jeke of Nelson Mandela University and published in the journal Economies. It examines 14 SADC economies between 2010 and 2022, asking whether capital and liquidity requirements help or hinder access to formal financial services.

Credible regulation can reduce information gaps, reinforce public confidence and give institutions a safer foundation from which to expand. Yet stability can become exclusionary when banks protect themselves by avoiding customers with irregular incomes, limited collateral or little credit history. For SADC policymakers, the real objective is not simply stronger regulation; it is inclusive resilience: a financial system that remains safe without becoming inaccessible.

Regulation Can Open the Door

The study covers Angola, Botswana, the Democratic Republic of the Congo, Eswatini, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Tanzania and Zambia. Its panel contains 182 country-year observations covering the period from 2010 to 2022.

The authors construct a financial-regulation measure using capital-adequacy and liquidity requirements. Capital rules require banks to maintain sufficient buffers against possible losses, while liquidity rules are intended to ensure that institutions can meet short-term obligations such as customer withdrawals.

To measure inclusion, the researchers combine six indicators: the number of bank branches and ATMs relative to population and geographic area, deposits held with commercial banks and outstanding commercial-bank loans.

The study then applies a system-Generalised Method of Moments model, an econometric technique designed for situations where current financial inclusion may depend on previous levels and where regulation, credit and inclusion may influence one another. In simpler terms, the method attempts to separate the effect of regulation from the broader institutional and economic conditions surrounding it.

The preferred model finds a positive and statistically significant relationship between financial regulation and inclusion. The interpretation offered by the authors is that sound regulation can reduce information asymmetry, strengthen contract enforcement and improve confidence in financial institutions. Banks operating with stronger capital and risk-management systems may be more willing to maintain services during downturns rather than abruptly withdrawing credit.

Prudential regulation is frequently treated as a necessary but inherently restrictive cost. Higher capital requirements can reduce short-term profitability, while liquidity requirements may limit the funds available for lending. But the study suggests that these costs can be offset when regulation produces a safer, more credible and operationally efficient banking system.

Trust is central to that process. People are less likely to deposit money with institutions they believe may fail, misuse their funds or offer opaque and unfair products. Businesses are also more likely to rely on formal finance when contractual rights are credible and financial institutions are adequately supervised.

However, the result should not be interpreted as evidence that any increase in regulation will automatically expand access. Rules can become counterproductive when compliance costs push smaller providers out of the market, discourage new entrants or cause banks to abandon customers deemed expensive to serve.

More Credit Widens Access, But Stability Can Narrow the Gate

The study also finds that domestic credit to the private sector has a positive relationship with financial inclusion. The system-GMM results report a coefficient of 0.026, indicating that countries where banks extend more private-sector credit tend to record stronger access and use of formal financial services.

The relationship is intuitive. Credit brings households and firms into formal financial networks. A small business receiving a loan may also begin using payment services, deposits, insurance and transaction accounts. Households that access formal credit can develop financial records that improve their future eligibility.

For SADC governments, the finding strengthens the case for improving credit-information systems, secured-transactions frameworks and consumer protections. Better information can help lenders assess risk without excluding people simply because they lack conventional collateral or long banking histories.

The more surprising result concerns financial stability. The bank z-score, used to represent the distance of a banking system from insolvency, has a statistically significant negative relationship with financial inclusion.

The authors interpret this as a possible trade-off: efforts to maximise safety may encourage banks to narrow lending, raise eligibility thresholds and concentrate on established customers. A bank can reduce risk by avoiding microenterprises, informal workers or rural households, but such behaviour can leave the institution safer while making the wider system less inclusive. This does not mean instability promotes inclusion or that regulators should weaken solvency requirements. It means stability metrics cannot be evaluated independently of distributional outcomes.

The study also reports a small negative relationship between broad money and inclusion. That finding reinforces the distinction between financial depth and financial reach. An economy can have a large volume of liquid financial assets while those assets remain concentrated among governments, large corporations and higher-income clients. More money inside the financial system does not guarantee that excluded groups can open accounts, obtain credit or afford transaction fees.

However, the numerical results require caution. Table 5 reports a regulation coefficient of 0.061, while the narrative cites 0.022. It reports a stability coefficient of –0.034, while the discussion refers to –0.038. Broad money is significant in the model table and abstract but described as insignificant in the discussion.

These inconsistencies do not overturn the general direction of the findings, but they limit confidence in the precise magnitudes. Policymakers should treat the study as evidence of relationships that merit attention, not as a formula for setting regulatory thresholds.

The Digital Finance Revolution Is Missing From the Picture

The study's biggest blind spot is also one of the most important forces reshaping African finance: digital inclusion. Its financial-inclusion index relies on bank branches, ATMs, deposits and loans. These indicators remain relevant, but they do not capture mobile-money accounts, agent banking, digital wallets, app-based savings, fintech lending or interoperable payment platforms.

The authors acknowledge that data limitations restricted the research to traditional measures and state that future studies should incorporate digital financial inclusion.

Physical banking infrastructure no longer tells the full story. A rural community may have no bank branch but still conduct payments through mobile agents. A microenterprise may lack a conventional bank loan yet receive digital working capital based on transaction histories. Migrant workers may rely on mobile transfers rather than formal bank counters.

Digital finance can lower transaction costs and reach customers whom traditional banks consider unprofitable. It can also create new risks involving data privacy, cybersecurity, opaque credit scoring, excessive borrowing and concentration among dominant technology platforms.

Regulation must therefore evolve beyond the traditional question of how much capital a bank should hold. Authorities must also decide who can use financial data, how algorithms make lending decisions, how consumers challenge errors and how digital providers are supervised without eliminating competition.

For smaller SADC economies, regional coordination could become increasingly important. Mobile payments and remittances cross borders, but licensing rules, consumer protections and identity systems remain fragmented. Greater interoperability could lower costs, particularly for workers, traders and households dependent on cross-border transfers.

Development institutions can support this transition by financing digital identity systems, interoperable payment infrastructure, regulatory technology and consumer-literacy programmes. But investment should be tied to public-interest outcomes. Digital expansion that increases account numbers without improving affordability, transparency or meaningful usage would produce only superficial inclusion.

The study cites regional estimates suggesting that about 45% of the SADC population uses formal financial institutions, while roughly 25% remains completely excluded. The rest relies on non-bank or informal providers. The gap cannot be closed by banking regulation alone. It also reflects poverty, geography, informality, weak infrastructure, limited financial literacy and high service costs.

SADC Needs Inclusive Resilience, Not Regulation for Its Own Sake

The study challenges the idea that financial inclusion and regulation sit on opposite sides of the policy ledger. Good regulation can help inclusion by building confidence, reducing market failures and enabling banks to lend through periods of stress. Poorly calibrated regulation can do the opposite: raise compliance costs, protect incumbents and push excluded borrowers toward informal or unregulated alternatives.

The solution is not deregulation; it is regulation designed around how different institutions and customers actually operate. Large commercial banks, microfinance providers, savings cooperatives and fintech firms do not pose identical risks. Applying uniform requirements may favour institutions that already possess capital, technology and compliance teams. Proportional regulation can preserve safety while preventing smaller providers from being driven out.

Consumer protection should also be treated as a financial-inclusion policy. Transparent fees, fair complaints systems, responsible lending rules and protection against fraud can increase meaningful participation more effectively than simply counting opened accounts.

Regulators should track who receives credit, not only how much credit is issued. Data disaggregated by gender, income, location and business size could reveal whether expanded lending reaches underserved groups or remains concentrated among established borrowers.

The study itself has methodological strengths. It uses a multidimensional inclusion index and a dynamic model intended to address persistence and endogeneity. Its diagnostic tests report no evidence of problematic second-order serial correlation, while the Sargan test does not reject the validity of the instruments. However, the results should still be interpreted carefully. The sample includes only 14 countries, several reported statistics are internally inconsistent and the financial-inclusion index omits the region's expanding digital ecosystem.

Future research should separate capital requirements from liquidity rules, since they may affect lending differently. It should also incorporate digital finance, compare effects across customer groups and test whether the relationship between stability and inclusion changes once a system reaches a certain level of financial development.