EFFECT OF FINANCIAL INCLUSION ON THE FINANCIAL PERFORMANCE OF DEPOSIT MONEY BANKS

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EFFECT OF FINANCIAL INCLUSION ON THE FINANCIAL PERFORMANCE OF DEPOSIT MONEY BANKS

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Financial inclusion, a critical aspect of economic development, revolves around providing individuals and businesses with access to essential financial services. It encompasses a broad range of services, including banking, credit, insurance, and investment opportunities. In recent times, financial inclusion has gained significant attention globally as a key driver for fostering economic growth and reducing poverty. One sector profoundly influenced by financial inclusion is the banking industry, particularly Deposit Money Banks (DMBs).

Deposit Money Banks play a pivotal role in the financial system by mobilizing funds from savers and channeling them into productive sectors of the economy. The extent to which these banks embrace and implement financial inclusion initiatives can significantly impact their overall financial performance. As such, understanding the relationship between financial inclusion and the financial performance of DMBs is imperative for policymakers, regulators, and banking institutions.

Financial inclusion and performance of deposit money banks continuously stimulate the interest of finance and economics researchers globally. This is because financial inclusion stimulates financial deepening and economic growth. According to Kinyua and Omagwa (2020), financial inclusion is becoming more germane as it is turning out to be a policy concern, particularly in developing countries. Johnpaul et al. (2021) posited that financial inclusion is designed at ensuring that all adult members of the society have easy access to a broad range of financial products, designed according to their needs and provided at affordable costs. Similarly, Kinyua and Omagwa (2020) stated that financial inclusion is intended at ensuring formal system access to financial service requesters. All financial inclusion roles are expected to promote economic development and growth, reduce poverty, and enhance individuals’ personal well-being. Additionally, greater financial inclusion ensures that the financial system requires more small savers. This helps in expanding a financial network and creating an effective financial flow within the borders of the organization (Ahamed & Mallick, 2017). Winful et al. (2022) noted that research on financial inclusion and financial performance revealed that financial inclusion was one of the solutions to the development of firms globally. In Nigeria, the Central Bank of Nigeria and deposit money banks is in the driving seat of the national effort to achieve financial inclusion. The CBN policy recognized the role of deposit money banks in providing services to the individual and SMEs operators who are traditionally excluded from or not well served by the conventional financial institutions.

Financial inclusion, in general, is defined as a process of engaging all social groups and disadvantaged groups in having access to formal financial systems (Pham et al., 2019). In a broader perspective, Oz-Yalaman (2019) defined financial inclusion as “individuals and businesses have access to useful and affordable financial products and services that meet their needs e-transactions, payments, savings, credits and insurance delivered in a responsible and sustainable way”. Koker and Jentzsch (2012) defined financial inclusion as ensuring access to formal financial services at an affordable cost in a fair and transparent manner. These definitions entail that financial inclusion includes accessibility, availability and the usage of financial systems. Financial inclusion does not only influence financial performance of deposit money banks but also lead to an increase in Gross Domestic Product (GDP) growth rate which encourages more financial inclusion. Financial performance is a state whereby a financial system constituting of market infrastructure, financial intermediaries and financial markets can withstand financial shock that are capable of significantly disrupting savings distributions to profitable substitute investments (Anatolyevna & Ramilevna, 2013). This has resulted in governments, central banks and other policy makers increasingly taking on the mandate of ensuring performance of both financial institutions, non-financial sectors and by extension the economic stability of countries.

Kinyua and Omagwa (2020) supported three key strategies by way of which financial inclusion can influence banks performance positively. First, banks could diversify their investment portfolio by increasing the amount of credit, which in effect will reduce the banks’ overall risk. Second, greater financial inclusion ensures that the financial system requires more small savers. Besides, the availability of more small savers would result in an increment of the size of deposits and their stability, thus decreasing non-core funding reliance, which has a great impact especially in financial crisis times. The key metrics for bank financial performance includes capital sufficiency, asset performance, sound management, earnings and productivity, liquidity, and market risk tolerance (Morgan & Pontines, 2018). Deposit money banks are perceived as fundamental financial intermediaries in any economy. Deposit money banks are vital for carrying out the basic functions of money transfer services, money lending and accepting deposits hence represent a critical role in the implementation of governments’ economic policies (Odundo, 2018).

Several studies were carried out analyzing and comparing the determinants of financial inclusion among regions (Sarma & Pais, 2011; Gupte et al., 2012; Akudugu, 2013; Hassan, 2015; Park & Mercado, 2015; Lotto, 2016; Hillary, 2016; Uddin et al., 2017; Abel et al., 2018; Hussaini & Chibuzo, 2018; Neaime and Gaysset, 2018; Anyanwu et al, 2018; Mdasha et al,

2018; Ojwang & Otinga, 2019; Kapaya, 2019; Kinyua & Omagwa, 2020; Al-Chahadah et al., 2020; Koomson et al., 2020; Singh, 2020; Anastesia et al., 2020; Kamal, 2021; Eze & Alugbuo, 2021; Johnpaul & Patience, 2021; Maity & Sahu, 2021; Naser & Alabassi, 2022; Al-Eitan et al., 2022; Winful et al., 2022). However, most of the previous studies focused on the determinants of financial inclusion in the developing countries of Asia, South America, Europe, North Africa, Sub-Saharan Africa or in countries such as Bangladesh, India, China and Indonesia. Even in Nigeria, most prior studies focused on financial inclusion and economic development or economic growth. For instance, Naser and Alabassi (2022) result showed that financial inclusion has a positive and moral effect on financial performance, and financial inclusion supports the interaction of (banks, customers) with banks in a way that leads to building long-term relationships with customers.

1.2 Statement of the Problem

In the case of Nigeria, according to Central Bank of Nigeria (2012), 39.2 million adult populations, representing 46.3% of Nigerian Adults are financially excluded with regards to access and usage of financial services. This concern has led Nigeria, among others, (more than 50 countries), after the Maya Declaration in 2011, to set formal targets of universal financial access by 2020. Consequent upon this, the CBN launched the National Financial Inclusion Strategy (NFIS) in 2012, with the main objective of achieving 80% financial inclusion success by the year 2020 by increasing the bankable businesses and adult populations enrolled into the banking nets through easy access and usage of broad range of banking and financial services to Micro Small and Medium Enterprises (MSMEs), rural populace and low income earners at affordable pricing.

Despite the increasing emphasis on financial inclusion as a catalyst for economic development, there is a need to explore its specific effects on the financial performance of Deposit Money Banks. The nature and extent of this relationship remain unclear, raising questions about the optimal strategies DMBs should adopt to enhance both financial inclusion and their financial standing. This study seeks to address these gaps by examining the effect of financial inclusion initiatives on the financial performance of Deposit Money Banks.

1.3 Objectives of the Study

The primary objectives of this study are as follows:

To assess the level of financial inclusion initiatives adopted by Deposit Money Banks.

To examine the financial performance indicators of Deposit Money Banks.

To determine the relationship between financial inclusion and the financial performance of Deposit Money Banks.

1.4 Motivation for the study

The investigation into the effect of financial inclusion on the financial performance of Deposit Money Banks (DMBs) holds considerable significance for various stakeholders, including policymakers, regulators, banking institutions, and the broader community. The importance of this study is underscored by the following key aspects:

This study contributes to the existing academic literature by providing empirical evidence on the relationship between financial inclusion and the financial performance of DMBs. The academic community will benefit from a deeper understanding of the nuanced connections between financial inclusion initiatives and key financial metrics within the banking sector.

The findings of this study have direct implications for policymakers and regulatory bodies. As financial inclusion remains a key policy objective in many jurisdictions, insights from this study can inform the development of targeted policies and regulations. Policymakers can gain a better understanding of the specific impact of financial inclusion on DMBs, enabling them to tailor interventions for enhanced effectiveness.

Deposit Money Banks can leverage the study’s findings to refine and optimize their strategies for integrating financial inclusion into their operations. The study will offer insights into which specific financial inclusion initiatives contribute most significantly to improved financial performance. Banking executives can make informed decisions to enhance their institutions’ overall sustainability and competitiveness.

1.5 Research Questions

What is the extent of financial inclusion initiatives adopted by Deposit Money Banks?

What are the financial performance indicators of Deposit Money Banks?

Is there a significant relationship between financial inclusion and the financial performance of Deposit Money Banks?

1.5 Justification of the Study

This study is significant for several reasons. Firstly, it contributes to the existing body of knowledge by providing empirical evidence on the relationship between financial inclusion and the financial performance of Deposit Money Banks. Secondly, the findings of this research will be valuable for policymakers and regulators in designing effective strategies to promote financial inclusion within the banking sector. Moreover, banking executives will benefit from insights into how financial inclusion initiatives can be leveraged to enhance their institutions’ financial performance.

1.6 Scope of the Study

This study focuses on Deposit Money Banks operating within a specific geographic region or country. The research will consider the financial inclusion initiatives undertaken by these banks and their subsequent impact on selected financial performance indicators. The time frame for the study will cover the most recent years for which comprehensive data is available. The scope of this study covers 2010-2022

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