Is better banking performance associated with financial inclusion and mandated CSR expenditure in a developing country?

Abstract

Motivated by legislation mandating CSR expenditure to improve social equality and economic development in India, we examine the association of CSR expenditure and financial inclusion with the performance of banking firms in the period after introduction of the legislation. We study whether mandated CSR expenditure and/or financial inclusion measures are associated with better financial performance, using both accounting and stock market measures of performance, for Indian banks during 2015–2017. Our results demonstrate that level of CSR expenditure and degree of financial inclusion is not associated with banks’ financial performance when performance is measured in accounting terms. However, a significant negative association is found when performance is measured by stock market return. These results suggest that the current design of the legislation is unlikely to achieve its purpose. This is the first study to present clear evidence on the associations of mandatory CSR spending and firm‐level financial inclusion with accounting‐based and market‐based bank performance.

Does financial inclusion improve bank performance in the Asian region?

“…For instance, Mendoza et al (2009), studying international financial integration during the 1980s, find a negative relationship between financial access and non-performing loans in countries with deep financial market borrowing. Similarly, Bhattacharyya et al (2020) confirm no association between financial inclusion and market-based banks' performance in India between 2015 and 2017.…”

“…Similarly, Dabla-Norris et al (2015) and Sarma and Pais (2011) conclude that adverse effects can be found from financial inclusion on bank's non-performing loans and that nonperforming assets are inversely associated with financial inclusion, indicating that greater financial inclusion has not contributed to the performance of the banking system. No link between expenditure on corporate social responsibility, financial inclusion, and marketbased bank's performance was found in Bhattacharyya et al's (2020) study using a sample of Indian banks covering the period 2015-17.…”

“…A fundamental basis for this view is that extending financial inclusion will lead to potential bankruptcy because providing bank products and services to underprivileged companies or clients is very risky. Selected studies with findings that support this view include Čih ak et al ( 2016), Dabla-Norris et al (2015), Sarma and Pais (2011), Bhattacharyya et al (2020), Vo et al (2020a,b), and Uddin et al (2017). In particular, Čih ak et al ( 2016) consider that the inclusiveness causes banks to be more vulnerable to noncreditworthy groups of firms and households.…”

A Systematic Review of Sustainable Banking through a Co-Word Analysis

“…Together with clients, employees have been added as another relevant stakeholder, and one for whom sustainable banking also has effects [76][77][78][79]. In the line of CSR performance, which is more central in this second period, one finds a large quantity of studies that border the relationship between surrender of corporate social responsibility and financial performance [6,[80][81][82][83][84][85][86][87][88][89][90][91][92]. One explanation of such significant growth in the works in this area is that it is due to the availability of new sources of data that consider measurements of CSR performance.…”

“…In much smaller measure, but also of interest, some studies border a middle area, which is the relationship between CSR performance and corporate reputation [10,13]. In the field of studies that are more about banks' behavior in CSR, noteworthy studies include some that have addressed financial inclusion [6,87,93], about CSR reporting and Global Reporting Initiative [94][95][96][97][98], not forgetting studies that continue the line of Socially Responsible Investment [99,100]. Finally, it is also interesting to note how in this last period, various studies that consider the theme in developing countries have emerged [58,[101][102][103][104][105][106].…”