Relationship between financial inclusion and banks' financial soundness: Case study of selected countries

The aim of this thesis is to determine the relationship between financial inclusion and the financial soundness of banks. To achieve this goal, data representing bank z score, banking penetration, accessibility, and usage were collected annually covering the period from 2010 to 2021, and two models were subjected to panel cointegration analysis. The analysis revealed that there is no panel cointegration between the dependent variable (bank z score) and the independent variables (banking penetration, accessibility, and usage) in Model 1; hence, the analysis continued with Panel VAR. In Model 2, panel cointegration was observed between the dependent variable (bank z score) and the independent variable (financial inclusion index calculated by us); therefore, the analysis continued with Panel VEC methods. According to the Panel VAR analysis conducted for Model 1, a negative and significant relationship was found between the bank z score value and its lagged values of one and three periods. Furthermore, according to the Wald test conducted within the scope of the analysis for Model 1, there is no causality from the independent variables to the dependent variable. However, it was found in the study that there is causality from the bank z score to the usage variable, and also from accessibility to banking penetration. In Model 2, no statistically significant causality relationship was found between the financial inclusion index and the bank z score in the long run, nor was there a statistically significant short-term effect of the financial inclusion index on the bank z score, or vice versa. According to the Chi-square statistics, while there is no short-term causality relationship from the financial inclusion index to the bank z score, there is a short-term causality relationship from the bank z score to the financial inclusion index.