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

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Keywords: Financial inclusion; Panel data analysis; Principal component analysis; Standardization; Asia
G20 Summit held in Seoul, South Korea in November 2010, also involves access to appropriate credit from formal financial
institutions, in addition to the use of insurance products that
enable people to alleviate financial risks such as fire, flood or
crop damage (Demirguc-Kunt et al., 2017). Furthermore, ac-
cess to accounts through financial inclusion increased savings
* Corresponding author.
E-mail address: Ha.lethai@rmit.edu.vn (T.-H. Le).
Peer review under responsibility of Borsa _Istanbul Anonim S¸irketi.
Available online at www.sciencedirect.com
Borsa _Ista
Borsa _Istanbul R
+ MODEL1. Introduction
Financial development is a critical and inextricable part of the
growth process and has thus received considerable attention in
recent years since the emergence of the endogenous growth the-
ory. Financial inclusion, i.e. the use of formal financial services, is
a feature of financial development which received a great deal of
public attention and research interest in the early 2000s, origi-
nating from a research finding that attributed poverty to financial
exclusion (Babajide, Adegboye, & Omankhanlen, 2015). At the
financial inclusion has been recognized as one of the nine key
pillars of the global development agenda (GPFI, 2011).
Financial inclusion implies that all adult members of the
society are granted access to a range of proper financial ser-
vices, designed based on their needs and provided at afford-
able costs. Formal financial inclusion begins with having a
deposit or transaction account, at a bank or other financial
service provider, for the purpose of making and receiving
payments as well as storing or saving money (Demirguc-Kunt,
Klapper, & Singer, 2017). At a later stage, financial inclusionJEL classification: O16; O57; C38; C33Received 10 April 2019; revised 8 June 2019; accepted 11 July 2019
Available online ▪ ▪ ▪
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.
Copyright © 2019, Borsa _Istanbul Anonim S¸irketi. Production and hosting by Elsevier B.V. This is an open access article under the CC BY-NC-
ND license ( inclusion and its impact on
Empirical evid
Thai-Ha Le a,b,*, Anh Tu Chu
a RMIT Univ
b IPAG Busine
c Academy of F
d Waseda UPlease cite this article as: Le, T.-H et al., Financial inclusion and its impact on
_Istanbul Review, https://doi.org/10.1016/j.bir.2019.07.002
https://doi.org/10.1016/j.bir.2019.07.002
2214-8450/Copyright © 2019, Borsa _Istanbul Anonim S¸irketi. Production and hos
license ( efficiency and sustainability:
ce from Asia
, Farhad Taghizadeh-Hesary d
ty, Viet Nam
chool, France
nce, Viet Nam
rsity, Japan
nbul Review
eview xxx (xxxx) xxx
rsa-istanbul-review/2214-8450financial efficiency and sustainability: Empirical evidence from Asia, Borsa
ting by Elsevier B.V. This is an open access article under the CC BY-NC-ND
anb
+ MODELamong farmers, leading to greater agricultural output and
household spending (Demirguc-Kunt et al., 2017). This
particularly matters for those people who live in the poorest
households in rural areas. In this regard, financial inclusion
helps reduce poverty and inequality.
Financial inclusion is recognized as ‘a process that marks
improvement in quantity, quality, and efficiency of financial
intermediary services’ (Babajide et al., 2015), which helps
improve lives, foster opportunities and strengthen economies.
Local savings are promoted through financial inclusion,
leading to increased productive investments in local businesses
(Babajide et al., 2015).
This study examines the financial inclusion in Asia
regarding two matters: (1) the trend of financial ... 016. These findings hold
for the whole sample and the subsamples of countries at
different income levels.
Our empirical evidence indicates that financial stability and
financial inclusion are mutually reinforcing and thus a balance
between these two objectives can be achieved. That is, poli-
cymakers can obtain the objectives of including a growing
number of users of financial services while maintaining sys-
temic stability. Indeed, it is opined that the recent policy re-
forms that promote financial inclusion in Asia have supported
an accessible and stable financial sector environment (Hannig
& Jansen, 2010).
On the contrary, our findings suggest that policy measures to
increase financial inclusion might have the side effect of
11ul Review xxx (xxxx) xxxreducing financial efficiency. This is attributable to the higher
intensity of participation in the financial markets that lead to the
financial efficiency and sustainability: Empirical evidence from Asia, Borsa
Supplementary data to this article can be found online at
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