Impact of Financial Inclusion on Banking Sector in BRICS: Evidence from the Indirect Role of Credit Risk

Abstract

Purpose – Financial inclusion refers to a phenomenon related to ease of use, affordable having accessibility to a wide range of financial services. Research focuses on exploring the degree/level to which increasing access to financial services tends to contribute towards improving banking efficiency through operationalization and financial stability to improvements. Research further measures the role-played credit risk in shaping the relationship between financial inclusion and banking efficiency, due to increased credit lending activities.

Methodology/Design/Approach – Financial inclusion has a vital role in improving overall economic growth, which is the base factor for enhancing banking sector performance. Research adopted panel fixed effect, mediating analysis through two-stage path modeling, sensitivity analysis through fixed effect regression, and two-step system GMM to evaluate and provide a new understanding of the association between banking efficiency, financial inclusion, and credit risk using BRICS countries as a sample covering a dataset of 24 years on an annual basis. Financial inclusion is used as an independent variable through proxy Number of branches, Banking efficiency is used as a dependent variable through proxy Return on Equity, and lastly Credit Risk is used as a mediation variable. Fixed effect, mediation, and GMM were selected as they address methodological bias effects in the panel dataset. Fixed effects help in controlling unobserved heterogeneity for the reduction of omitted variable bias to improve parameter consistency. Mediation analysis enables us to examine causal relationships by focusing on the indirect approach through which the independent variable tends to impact the outcome variable. Lastly, GMM estimation is used to get more reliable and robust results by addressing problems of endogeneity, heteroscedasticity, and autocorrelation.

Findings – Results of the research confirm that financial inclusion has a significant positive impact on bank efficiency, with a β coefficients 0.085 having p-value of 0.0009, but this impact depends on the macroeconomic environment and the riskiness of the banking system. To be more specific, an increase in financial inclusion will have a positive effect on the banking sector’s profitability, whereas the credit risk tends to negatively affect the relationship between financial inclusion and banking efficiency. Research findings provide important insight for policymakers and financial institutions to develop strategic objectives that encourage financial inclusion while maintaining threshold risk control and stability of the banking sector.

Practical Implications – This research presents a number of policy and practical implications for banks, financial regulatory bodies, government agencies, and development organizations. They confirm the point that financial inclusion is not to be aimed at as some generic and symbolic objective, but as a well-timed intervention informed by risk assessment and economically contextualized. The direct and the mediated effects of inclusion on the efficiency of banking are empirically observed, but their size and stability are subject to the macroeconomic and institutional context.

Originality/Value – The study derives several new insights that position it apart from other current research in financial inclusion and banking efficiency. For a start, it offers a holistic approach to understanding the impact of financial inclusion on banking efficiency since this relationship is studied in an area characterized by unique socio-economic and institutional challenges, specifically the BRICS region.