Exploring the Relationship Between Financial Inclusion and Liquidity Creation in The SAARC Countries

Abstract

The stimulation of economic growth and stability is facilitated by the increased accessibility to financial services, as it effectively enhances liquidity within the banking system. Our study seeks to enhance comprehension of the function of financial inclusion in advancing economic development and financial stability by illuminating the bidirectional association between liquidity creation and the financial inclusion of banks operating in the SAARC region. We employed the Simultaneous equation model by utilizing the Generalized Method of Moments (GMM) to establish the bi-causal association between financial inclusion and liquidity generation. The empirical data comprises banks operating in SAARC countries from 2010 to 2020. Overall, the empirical results suggest that financial inclusion, operational risk, capital, bank size, and monetary policy have a significant impact on liquidity creation in banks. Moreover, it is also concluded that financial inclusion is positively influenced by economic growth and monetary policy while negatively affected by liquidity risk, inflation, and unemployment. Policymakers should take steps to increase financial inclusion by expanding access to financial services, which leads to the provision of liquidity creation.