Determinants Of Financial Inclusion In Bangladesh: Dynamic Gmm & Quantile Regression Approach

Financial Inclusion has been recently acknowledged as a key enabler for reducing poverty and improving prosperity. However, more than 50% adults of the poorest households are still unbanked globally. According to IMF (2016), 45% people of Bangladesh are out of formal financial services. High interest rate, vast rural population and low literacy rate are among the prominent factors that restrained the government and the World Bank joint initiatives to reach universal financial access. Researchers have reasons to believe, there are certain other factors that remain unnoticed by the policy maker and which in turn, probably affecting their ability to formulate effective policy. The quest to identify these factors materialize this study. In this study, the determinants of financial inclusion have been clustered in two broad areas: bank specific factors and macroeconomic factors. Then, econometrically try to analyse which group of factors has more influence in determining the level of financial inclusion in a country. In the study, static model like, random effects and dynamic panel models like, generalized methods of moments (GMM) methodologies have been applied. Data from 25 banks: 18 conventional and 7 Islamic banks operating in Bangladesh during the period 2005–2014, is collected to analyze the role of both types of banks in financial inclusion. For robustness, this study also employs Quantile regression approach. The study found that, on the supply side, the size of a bank, its efficiency, and the interest rate it charges has a directs impact on financial inclusion. Where on the demand side, literacy rate is positively and age dependency ratio is negatively related to financial inclusion. In addition to that, quantile regression analysis found that bank size has a significant impact on both deposit collection and loans & advances disbursement of a bank. The study can be beneficial for both government and bank authorities in developing their policy decisions to ensure more inclusive financial system. Setting the loan interest rate close to international level and extending the branch facilities can encourage excluded population to use formal financial services. Finally, the study also signifies that, by developing human capital developing country countries can improve their financial market participation and therefore can foster economic growth.