Financial stability of Asian Nations: Governance quality and financial inclusion

Abstract This study investigates the role of governance quality in maintaining financial stability and enhancing financial inclusion in Asian countries using the stakeholder theory. Composite variables were constructed for the governance quality, financial stability, and financial inclusion dimensions using principal component analysis (PCA). The impact of governance quality on financial stability and financial inclusion was analyzed using dynamic system generalized method of moments (GMM) estimations. Additionally, using Baron and Kenny's approach, the mediating role of financial inclusion in the relationship between governance quality and financial stability was examined. The results obtained were robust to various standardization techniques. This study's findings suggest that governance quality negatively affects financial inclusion but has a positive influence on financial stability. Furthermore, financial inclusion positively affects financial stability in Asia. Finally, based on the results, we conclude that financial inclusion mediates the relationship between governance quality and financial stability.