Financial Inclusion, Macroeconomic Conditions, and Their Role in Indonesia’s Financial Stability

Abstract

Financial inclusion improves financial stability by strengthening the bank's funding base through savings, encouraging broader credit distribution, especially for SMEs, and reducing the risk of default. By providing access to financial products and services for the public and businesses, financial inclusion creates a more resilient and efficient system that can withstand economic shocks. This study aims to analyze the influence of financial inclusion and macroeconomic conditions on financial stability in Indonesia, from January 2021 to May 2025. During this period, COVID-19 has impacted the ability of businesses to survive amid the crisis. The ARDL dynamic model was chosen to accommodate the economic dynamics during and after the pandemic. The main advantages of ARDL are its ability to analyze both long-run and short-run relationships simultaneously, its capacity to handle variables with varying degrees of integration (including non-stationary ones), and its efficiency in dealing with small data samples. Based on the ARDL model regression results, financial inclusion and price stability have a significant influence on financial stability in Indonesia. Higher credit access and rising inflation can increase the risk of bank bankruptcy by leading to an increase in non-performing loans. Financial inclusion and inflation can impact financial stability through complex mechanisms. Increasing credit access without strong risk management and adequate regulation can increase the risk of non-performing loans, while uncontrolled inflation can exacerbate the situation by affecting borrowers' repayment capacity. However, with the right policies, financial inclusion can ultimately enhance the long-term stability of the financial system.