Financial inclusion, institutional quality, and financial stability in BRICS

Purpose This study aims to examine the impacts of institutional quality (IQ), financial inclusion (FI) and their interaction or total effect (IQ×FI) on financial risk (FR) in BRICS countries from 2012 to 2020. It explores how the interaction between IQ and FI affects financial stability (FS) across different levels of IQ and FI conditions. Design/methodology/approach Fixed-effects panel regression with Driscoll–Kraay standard errors is employed to examine the relationships, while two-stage least squares instrumental variables (2SLS-IV) address potential endogeneity and test the robustness of the results. Further, diagnostic tests, including Anderson LM, Cragg–Donald F, Stock–Yogo, Sargan/Hansen J and the endogeneity Test, were conducted to validate the 2SLS-IV results. Findings The findings indicate that IQ and FI independently help to contain FR, but limited to some FR measures. However, when IQ interacts with FI (IQ×FI), the effect on reducing FR is significantly stronger. The study emphasised the need for integrated policy strategies that enhance IQ and FI to ensure FS in BRICS nations. Originality/value Past studies link IQ, FI and FR, as well as FI and FS, yet empirical investigation on the impact of IQ, FI and their interactions on FR in BRICS nations remains limited. This study addresses this gap by using stakeholder theory to examine the IQ-FI-FR relationship, focusing on FI’s mediating role. Findings suggest to BRICS policymakers the importance of enhancing IQ to foster FI and FS. Continuous regulatory oversight is essential to remove barriers that restrict inclusion in the formal financial sector, promoting broader FS and risk reduction.