On the Relationship between Financial Inclusion and Bank Performance

We explore the relationship between different measures of financial inclusion and banks’ performance across a global sample of countries, characterised by different institutional and regulatory environments and income levels. We employ principal component analysis to construct an aggregate bank performance index, composed of a set of key indicators summarised by the CAMEL rating system, including banks’ solvency, asset quality, efficiency, profitability, and liquidity.
Our main findings suggest that different inclusion measures can have a different association with bank performance. Specifically, there seems to be a trade-off between bank performance and increased financial deepening, particularly in high income countries. In contrast, greater financial inclusion, measured as deposits to GDP, number of deposits, and number of borrowers, does not seem to adversely affect bank performance in low income countries. In fact, we find that banks in low income countries could achieve significant gains from improving financial access and enhancing the regulatory environment.