Financial inclusion and its impact on financial efficiency and sustainability: Empirical evidence from Asia

TLDR

This study examines the trend of financial inclusion in Asia and its impact on financial efficiency and financial sustainability. The authors analyze 31 Asian countries from 2004 to 2016, constructing composite indicators for financial inclusion, efficiency, and sustainability using PCA, and estimating their relationships with Feasible Generalized Least Squares. The analysis shows that financial inclusion trends vary across countries with no clear pattern, and that increasing inclusion reduces financial efficiency while enhancing sustainability, a finding that holds across income levels and is robust to different normalizations.

Abstract

This study examines the trend of financial inclusion in Asia and its impact on financial efficiency and financial sustainability. For this purpose, the study employs a sample of 31 Asian countries during the period spanning from 2004 to 2016. Composite indicators for the three financial dimensions are constructed using principal component analysis (PCA) based on normalized variables. We find that the trends are fluctuating across countries and there is no clear pattern in several cases. The findings are robust to different normalization techniques. Furthermore, the impact of financial inclusion on financial efficiency and sustainability is analysed using Feasible Generalized Least Squares (FGLS). The estimation results indicate that growing financial inclusion negatively affects financial efficiency while favourably influences financial sustainability. The findings hold for the whole sample as well as across the two subsamples of countries with different income levels. This implies that while there are policy synergies between growing financial inclusion and maintaining financial sustainability, proper attention needs to be paid to the side effect of financial inefficiency associated with increasing financial inclusion.