Impact analysis of financial inclusion on profitability and stability of bank using rolling-window autoregressive lag modeling

Abstract

This research examines the influence of financial inclusion on the profitability and stability of commercial banks using the bank observations of Japan from 2004–2018. The composite index of financial inclusion was created by utilizing principal component analysis after identifying the significant financial inclusion indicators. The bank performance or profitability variables namely return on equity (ROA), return on assets (ROE), net interest margin (NIM), and bank stability variable (z-score) are used in this analysis. Then, to analyze the long-run relationship existing between financial inclusion and bank’s performance and stability, this research used the rolling-window autoregressive distributed lag model (RARDLM) testing strategy of co-integration, a new technique. This approach can potentially assess the relationship between variables when details regarding the underlying variables are not known with certainty. Financial inclusion has a favorable influence on bank stability, according to the findings. Financial inclusion indicators such as the number of bank branches, deposit accounts, depositors, and borrowers have a considerable positive influence on bank performance, whilst the number of loan accounts and ATMs has no effect. The findings imply that banks should work to improve the efficiency of financial technology, which would boost financial inclusion while also enhancing bank profitability and stability.