The New Structural Economics & International Development Forum was initiated in March 2016 by the Institute of New Structural Economics (INSE). It is co-organized with the Institute of South-South Cooperation and Development (ISSCAD) at Peking University. The INSE aspires to advance the frontier research on structural change and help developing countries to promote economic structural transformation. The Forum aims to bridge the gap between research and practice by hosting high-profile, open and equal conversations among scholars, professionals, policy makers and entrepreneurs in the field of international development.
Abstract
Using data for 1,740 banks from 86 countries over the period 2004-2015, this paper contributes to the ongoing policy debate on whether greater financial inclusion can help improve bank performance, even in the presence of financial regulation. We, first, document a strong positive association between financial inclusion and bank efficiency, and then show that this association is stronger in countries with limited restrictions on banking activities, less barriers on foreign bank entry, and more capital regulation stringency. Exploring plausible channels, we find that greater financial inclusion helps banks reduce the volatility of their deposit-funding share, providing more stable long-term funds for banks while also mitigating the negative effects of their return volatility. Exploiting cross-country and temporal variation in the timing of inclusive financial agenda with hand-collected data on membership of an inclusive policy network of countries to actively promote inclusiveness, we also show, using a difference-in-differences estimator, that an enabling inclusive financial environment has positive impact on bank performance. Thus the significant benefits of inclusive banking have ramifications for enabling regulatory incentives to promote inclusive financial intermediation.
Abstract
Using data for 1,740 banks from 86 countries over the period 2004-2015, this paper contributes to the ongoing policy debate on whether greater financial inclusion can help improve bank performance, even in the presence of financial regulation. We, first, document a strong positive association between financial inclusion and bank efficiency, and then show that this association is stronger in countries with limited restrictions on banking activities, less barriers on foreign bank entry, and more capital regulation stringency. Exploring plausible channels, we find that greater financial inclusion helps banks reduce the volatility of their deposit-funding share, providing more stable long-term funds for banks while also mitigating the negative effects of their return volatility. Exploiting cross-country and temporal variation in the timing of inclusive financial agenda with hand-collected data on membership of an inclusive policy network of countries to actively promote inclusiveness, we also show, using a difference-in-differences estimator, that an enabling inclusive financial environment has positive impact on bank performance. Thus the significant benefits of inclusive banking have ramifications for enabling regulatory incentives to promote inclusive financial intermediation.
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