Financial inclusion, financial stability, and poverty reduction in Africa

Abstract Financial inclusion universally remains one of the critical means to end poverty in the world, especially Africa, where the level of poverty is high. It has however been argued that financial inclusion equally has the tendency to destabilize the financial system, thwarting the poverty reduction efforts, which necessitates the interrogation of the relationship between the variables. This study therefore investigates how financial stability mediates the financial inclusion and poverty reduction relationship in Africa. Using the panel Autoregressive Distributive Lag model, covering a period of 2004–2020, the study found that financial inclusion is positively related to financial stability in both short and long‐run, with education, Gross National Income per capita (GNI) and domestic credit to private sector, contributing to financial stability, and trade openness negatively related to financial stability in the long‐run. The study further established that financial stability is positively related to household consumption expenditure as such leads to poverty reduction with trade openness, government expenditure, GNI, education, domestic credit to private sector, and institutional quality contributing significantly to poverty reduction. This confirms the mediating role financial stability plays in enhancing the impact of financial inclusion on poverty reduction in Africa and must therefore be given the necessary attention, through proper regulatory mechanisms.