The nexus between financial inclusion and bank profitability: a dynamic panel approach

Abstract

ABSTRACT This study examines the impact of financial inclusion on bank profitability in Sub-Saharan Africa (SSA) over the period 2000–2017. Using different sub-indicators of financial inclusion, the study employs the principal component analysis (PCA) to generate an index of financial inclusion. Applying the generalized method of moments technique which addresses the problem of endogeneity, the results show that financial inclusion negatively influences bank profitability in Sub-Saharan Africa, particularly in the post-global financial crisis period. Banking sector stability is noted to positively and significantly drive bank performance. Besides, while inflation has a significant positive impact on profitability, the effect of economic growth on profitability differs depending on the period of analysis. The study suggests that policy measures aimed at achieving a financially inclusive economy should encompass policies directed at improving banking sector profitability. That is, strategies to stimulate financial inclusion should move in tandem with policies to boost profitability.