On the relationship between financial inclusion and bank performance

Abstract

This study examines the relationship between various financial inclusion measures and banks' performance across multiple countries with varying institutional, regulatory and income levels. To construct an aggregate bank performance index, we employ principal component analysis, which utilises a set of critical indicators summarised by the CAMEL rating system, including banks' solvency, asset quality, efficiency, profitability and liquidity. Our primary findings indicate that different measures of financial inclusion exhibit varying associations with bank performance. Specifically, there is a trade-off between bank performance and credit deepening, especially in high-income nations. Conversely, in low-income nations, higher financial inclusion, measured by deposits to GDP, number of deposits, and number of borrowers, does not affect bank performance adversely. Banks in low-income nations could achieve significant gains by improving financial access and enhancing regulatory environments.