Financial Stability and Efficiency in Selected Asian Countries: The Impact of Governance Quality, Environmental and Social Sustainability and the Mediating Role of Financial Inclusion

Arsalan Haneef, Malik (2023) Financial Stability and Efficiency in Selected Asian Countries: The Impact of Governance Quality, Environmental and Social Sustainability and the Mediating Role of Financial Inclusion. PhD thesis, Universiti Malaysia Sarawak.

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Abstract

Financial institutions in any country play a vital role in the economic system as they mobilize and allocate capital for productive purposes. Financial efficiency and stability of a country are determined by how efficiently financial institutions utilize capital to increase profitability while ensuring stability. Efficiency and stability are highly dependent on the use of financial services by the population (financial inclusion). Financial inclusion (FI) aims to ensure that all individuals and businesses have access to basic financial services, including loans and insurance. It is also imperative to consider that poor governance, environmental risks, and an unsustainable social system (ESG) can undermine the FI and hence the profitability and stability. Using stakeholder theory, this study focuses on the Asian region. Although Asia is the most populous and fastest-growing region economically, it also has the poorest population (lack of social sustainability). Moreover, despite tremendous economic progress in the last decade, nearly one billion Asians still face the dearth of FI, and lack of ESG. This means that policymakers, individuals, businesses, and all entities within the region have a stake in ensuring the financial stability and efficiency of the region. To ensure financial efficiency (FEF) and financial stability (FST), stakeholders should work in a close framework to ensure ESG and FI. In this wake this study examined the impact of ESG on FI, FEF, and FST in selected Asian countries between 2009 and 2021 using a generalized method of moments regression. Using principal component analysis (PCA), the study created composite indices for ESG, FI, FEF, and FST. The mediating role of FI was also examined. It was found that good ESG in a country increases FI while maintaining FST at country level. ESG has an adverse impact on FEF due to the loss of existing customers associated with carbon-intensive enterprises and an increase in operational costs. In all relationships, the mediating role of FI was supported by the findings of the study. The study suggested that Asian governments should prioritize ESG strategies in their policies to reduce financial, environmental, and social risks in the region. Furthermore, Asian policy makers can also increase FI through better ESG practices. Despite some negative impacts on FEF, better ESG ensures the sustainability of the sector. Similarly, an increase in FI will increase the number of customers of the financial sector, which will offset the temporary losses incurred by the financial sector. Previously, these relationships were never studied at country level, hence the findings add their contribution to the literature. Methodologically, none of the studies have developed composite indicators for environmental and social sustainability that have been contributed by this study.

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