Bank Performance and Economic Growth: The Moderating Role of Digital Financial Inclusion in Developing Countries Sumayyah Abdul Aziz, Lutfi Abdul Razak, Ly Slesman, Muhamad Abduh
Universiti Brunei Darussalam
Abstract
This study investigates the moderating role of Digital Financial Inclusion (DFI) on the relationship between bank performance and economic growth, utilizing data from nine developing countries spanning from 2011 to 2020. A comprehensive DFI index is constructed using Principal Component Analysis (PCA) to capture the nuanced dimensions of digital financial inclusion. A one-step system Generalized Method of Moments (GMM) estimator is employed to mitigate endogeneity issues and dynamic panel bias. The outcomes of our analysis were interesting. Although conventional theories generally anticipate a positive effect of bank performance and DFI on economic growth, our results unexpectedly indicate the opposite. The findings demonstrate a negative relationship between both bank performance and economic growth, and between DFI and economic growth. However, the interaction variable between bank performance and DFI shows a significant positive influence on economic growth. The results underscore the potential synergies between efficient banking and digital finance that could positively impact growth. This implies that while a high return on assets and rapid expansion of digital financial services might individually hinder growth, their interaction with efficient banks leveraging digital services can promote economic growth. Policy interventions should therefore focus on enhancing the synergies between bank performance and DFI, for instance, by promoting responsible banking practices that harmonize profitability with long-term growth objectives and advancing inclusive digital financial services that cater all segments of society.
Keywords: Digital Financial Inclusion- Bank Performance- Economic Growth.
