Does financial inclusion improve bank performance in the Asian region?

Abstract

World Bank considers financial inclusion a fundamental and practical mechanism for reducing poverty and boosting prosperity in developing and emerging markets. However, the direct benefits of financial inclusion to bank performance appear to have been largely ignored in the academic literature, in particular in the emerging markets in the Asian region. Unlike previous studies, both bank and country characteristics are considered in this paper. The financial inclusion index is estimated using four sub‐indices that can be classified into two groups: the penetration and utilisation of financial products and services. Principal component analysis and dynamic generalized method of moments (GMM) are used on a sample of 1507 banks in emerging markets in Asia for the 2008–17 period. Findings indicate that, across various scenarios, financial inclusion provides a positive and significant contribution to bank performance in the Asian region. In addition, a larger distance to the bankruptcy of banks and higher national economic growth will enhance bank performance.