The impact of financial inclusion on bank efficiency: empirical evidence from ASEAN 5+1 countries

Bank efficiency is essential for ensuring effective financial intermediation, cost management, and optimal allocation of financial resources within the economy. Inefficient banking operations may lead to higher operational costs, poor resource utilization, and weaker financial system performance. At the same time, financial inclusion has become a key global policy agenda aimed at expanding access to affordable financial services, particularly for underserved populations. Despite its growing importance, the relationship between financial inclusion and bank efficiency remains inconclusive due to the lack of standardized indicators and comprehensive empirical evidence, particularly within the ASEAN region. This study examines the impact of financial inclusion on banking sector efficiency in the ASEAN 5+1 countries, namely Indonesia, Malaysia, Singapore, Thailand, Vietnam, and the Philippines. Specifically, the study aims to determine the level of efficiency in the ASEAN 5+1 banking sectors. Second, it investigates the impact of financial inclusion on bank efficiency. Third, it analyses how financial inclusion strategies influence bank efficiency across ASEAN 5+1 countries with different income levels. Bank efficiency is measured using the intermediation approach, where total deposits, physical capital, and labour are used as input variables, while loans, investments, and net interest income represent output variables. Financial inclusion is assessed through two dimensions: accessibility and usage. Accessibility is proxied by the number of bank branches, ATMs per 100,000 adults and per 1,000 km² while usage is measured by the number of bank accounts, outstanding deposits, outstanding loans, credit and debit cards. Financial inclusion strategies are represented by the Alliance for Financial Inclusion Maya Declaration (AFI Maya), the National Financial Inclusion Strategy (NFI), and the National Strategy for Financial Education (NSFE), measured using binary variables. The study analyses 200 banks across the ASEAN 5+1 countries over the period 2013-2021 using a two-stage approach. In the first stage, Data Envelopment Analysis is employed to estimate bank efficiency scores, while in the second stage panel regression models, including Ordinary Least Squares, Fixed Effects Model, or Random Effects Model, are applied to examine the relationship between financial inclusion indicators, financial inclusion strategies, and bank efficiency. Interaction variables are also incorporated to capture differences across high-income, middle-income, and low-income countries. The findings indicate that the impact of financial inclusion on bank efficiency varies across different financial inclusion indicators and country income levels. Accessibility indicators such as bank branches and ATMs demonstrate mixed effects on bank efficiency, reflecting differences in banking infrastructure development and operational costs across countries. Meanwhile, usage indicators including bank accounts, loans, deposits, and payment cards show varying relationships with bank efficiency depending on the level of financial sector development. In addition, financial inclusion strategies exhibit heterogeneous effects across income groups, suggesting that the effectiveness of financial inclusion policies depends on the economic and institutional conditions of each country. Overall, this study provides empirical evidence on the relationship between financial inclusion and bank efficiency in the ASEAN 5+1 region. The findings highlight the importance of designing country-specific financial inclusion policies that expand access to financial services while maintaining banking sector efficiency, thereby supporting sustainable financial sector development and inclusive economic growth.