Financial Inclusion and Bank Profitability: Evidence from Island Banking Sector

[Purpose] The main aim of this study is to investigate the effects of financial inclusion on bank profitability in island banking sectors. For this purpose, 19 banks from North Cyprus Banking Sector has been choosen which operates between 2007 and 2020. [Design/methodology/approach] The dynamic panel of System Generalized Method of Moments (GMM) estimation technique was utilized in the research to account for probable endogeneity. The research utilized Pooled Mean Group (PMG) and Cross-Sectionally Augmented Autoregressive Distributed Lag (CS-ARDL) methods. [Findings] The findings reveal that the financial inclusion and bank profitability in the islands have a positive association. In other words, financial inclusion is a major factor in island banks' profitability. Mainly, the results prove that the deposit ratio is correlated to the bank's size in a beneficial way. The study's findings are consistent with the findings of capital structure principles, particularly the hierarchical and balance theories. [Originality/Value] All the findings are original, and this is the first study that analyses the effect of financial inclusion on bank profitability in Northern Cyprus. [Practical implications] The study's policy implications include that in order for banks on islands to boost their profitability and get the optimum capital structure from funding, policies supporting financial inclusion must be developed. Banks should also make an effort to make establishing bank accounts considerably simpler for the most disadvantaged and marginalized members of society by easing customer identification criteria in certain cases when they may obstruct financial inclusion objectives and efforts.