Impact of Financial Inclusion on Financial Performance of Banking Sectors in Pakistan

Abstract

This study investigates the impact of financial inclusion on the financial performance and banking risk of commercial banks in Pakistan, with a specific focus on three key inclusion factors: the number of bank branches, ATM availability, and online banking services. Using panel data from 20 commercial banks over a ten-year period (2015–2024), the research employs a quantitative methodology incorporating descriptive statistics, correlation matrices, and the Random Effects Model (REM) to evaluate how financial inclusion influences Return on Assets (ROA), Return on Equity (ROE), credit risk, and default risk.The empirical findings reveal a significant and positive relationship between all three financial inclusion indicators and financial performance. Likewise, a negative and committed relationship is observed between the inclusion variables and banking risk indicators, suggesting that increased access to financial services contributes not only to profitability but also to risk mitigation. Online banking services emerged as the most influential variable, reflecting the growing importance of digital transformation in the banking sector. The study confirms the applicability of the Resource-Based View (RBV) theory by demonstrating how internal resources like physical infrastructure and digital capabilities lead to competitive advantage through enhanced performance and reduced risk.This research contributes to the literature by integrating financial inclusion, financial performance, and banking risk into a single analytical framework, offering both theoretical and practical insights. It further provides policy recommendations for regulators and strategic guidance for banks to invest in both physical and digital infrastructures to promote inclusive and sustainable financial growth. The results are especially relevant for developing economies with evolving banking ecosystems.