Impact of Financial Inclusion, Financial Leverage and Liquidity on Financial Performance of Banking Sector of Pakistan

Abstract

The present research investigated the impact of financial inclusion, liquidity and leverage on financial performance in banks. The financial inclusion, financial leverage and liquidity are the key determinants of financial performance of the banking sector. The study utilizes the data retrieved from bank's balance sheets, their income statements and notes to the accounts. The impact of the variables under study have been analysed by using financial ratios as proxies including Return on Assets for Financial Performance, Debt to Equity Ratio for Financial Leverage, Cash Ratio for Liquidity and for the dimensions of financial inclusion, the number of ATMs and number of branches of the commercial banks have been considered. This study examines the impact of financial inclusion, financial leverage and liquidity on financial performance. For the purpose of analysis, the annual secondary data of24 listed banks in Pakistan Stock Exchange from 2012 to 2016 is collected. Multiple regressions were used to evaluate the impact of financial inclusion, financial leverage and liquidity on the profitability of the banks. The findings of the study were that financial inclusion has a significant positive impact on financial performance, financial leverage has a significant but negative impact whereas liquidity also has a significant negative impact on financial performance. With increase in number of bank branches, the access to banking services increase, resulting in higher customer deposits that have a positive impact on the profitability of banks; therefore, the banks should focus on financial inclusion for improved financial performance. The banking sector should also focus on maintaining a healthy financial structure to benefit its investors. Likewise, improved liquidity position can result in better financial performance. These serve as a stimulator of competitiveness and financial performance. Modem technologies prove helpful to improve operational efficiency of banking sector