The Role of Financial Inclusion Indicators in Enhancing Bank Profitability: An Analytical Study of the Iraqi Banking Sector

Abstract

In recent years, the banking sector in Iraq has witnessed an expansion in the field of financial services; however, the relationship between this expansion and the profitability of the banking sector still requires analysis, particularly in light of the differences among financial inclusion indicators and the variation in their ability to support banking financial performance. The study aimed to analyze the effect of financial inclusion indicators on the profitability of the Iraqi banking sector. The study was conducted on the Iraqi banking sector for the period (2010–2023). To analyze and test the relationship between the variables, the Autoregressive Distributed Lag model was estimated separately for each indicator, in addition to using the Unit Root Test to measure the stationarity of the variables, as well as the Bounds Test and the Error Correction Model to verify the short- and long-run relationships, using the statistical software (EViews 10). The results of the Bounds Test showed the existence of long-run equilibrium relationships between the financial inclusion indicators and the profitability of the Iraqi banking sector, except for the banking penetration indicator, for which the test result was inconclusive at the 5% significance level. The estimates of the long-run coefficients showed positive and significant effects for banking density, Automated Teller Machines, credit, and deposits, and a negative and significant effect for banking penetration. The Error Correction Model showed the existence of a mechanism for correcting disequilibria and returning to long-run equilibrium. The study concludes that enhancing financial inclusion may contribute to increasing profitability if banks’ financial resources are efficiently utilized through increasing credit activity and attracting deposits.