The global financial crisis has emphasized the importance of identifying well-designed bank regulation that would work for promoting inclusive finance and bank performance. In this paper, we contribute to this ongoing policy debate by analyzing whether greater financial inclusion can help improve bank efficiency using an international sample of banks. We, first, document a strong positive association between financial inclusion and bank efficiency, and then show that this association is stronger in countries with limited restrictions on banking activities, less barriers on foreign bank entry, and more capital regulation stringency. Exploring plausible channels, we find that greater financial inclusion helps banks reduce the volatility of their deposit-funding share, implying inclusive banking providing more stable long-term funds while also mitigating the negative effects of return volatility. We also show that banks operating in less developed financial markets benefit more from inclusive financial development compared to banks in developed economies. The results are robust to an array of robustness tests, and have significant ramifications for contemporary regulatory reform debate.
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