Financial inclusion and bank performance among Asia-Pacific countries: Evidence from autoregressive distributed lag-pooled mean group

Abstract

To address the relationship between financial inclusion and bank performance, a balanced panel dataset of nineteen Asia-Pacific countries (2004-2022) was employed, including three financial inclusion dimensions: penetration, availability, and usage. Weighting schemes, arithmetic, geometric, and entropy, were used to construct the Financial Inclusion Index (FII). Banking performance was proxied by return on equity, return on assets, and net interest margin. The results show that Malaysia and Japan reached higher levels of inclusion in the early 2000s, followed by Thailand and Bangladesh. The findings indicate a negative long-run relationship between the Financial Inclusion Index and bank performance. In contrast, the short-run relationship is positive, suggesting a structural trade-off. The study also shows that return on equity and return on assets return to long-run equilibrium rapidly after shocks, while net interest margin indicates a moderate speed of recovery. These results imply that a balanced regulatory approach is essential to ensure that inclusion positively impacts bank performance. This research contributes by providing cross-country evidence on financial inclusion, employing the autoregressive distributed lag-pooled mean group method on a multidimensional measure of financial inclusion. It recognizes the differences between short-run and long-run effects of financial inclusion on bank performance over time.