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Dynamics of firm-level financial inclusion:


Empirical evidence from an emerging economy

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Dynamics of firm-level financial inclusion:
Empirical evidence from an emerging economy
Sudipta Bose, Asit Bhattacharyya and Shajul Islam*
This article examines the financial inclusion disclosure practices of Bangla-
deshi banks from 2008 to 2013. The authors develop a financial inclusion index
from the banking firm perspective to measure the level of financial inclusion
disclosures in the annual reports and explore the potential determinants of
such disclosures. The results demonstrate that the level of financial inclusion
disclosures improved significantly after the central bank of Bangladesh
released directive relating to financial inclusion. The results also indicate that
the level of financial inclusion is positively influenced by banking firm size,
growth opportunities, institutional investors, audit committee size and religion-
based operations of the bank, whereas the percentage of female directors and
firm age are negatively associated with the level of financial inclusion
disclosures. The findings of this study should be of interest to managers,
regulators and policy makers in countries that share similar financial systems.
INTRODUCTION
Financial inclusion is the process that ensures access, availability and usage of the formal financial
system to all members of an economy.1 Recently, financial inclusion has emerged as an important
issue on the global policy agenda for sustainable development due to its contribution to the economic
development of a country. It is argued that an inclusive financial system ensures efficient allocation of
productive resources and thereby reduces the cost of capital. An inclusive financial system also
reduces the informal sources of credit (eg, money lenders) that are often considered to be
exploitative.2 Widespread global recognition of inclusive financial systems drives this issue as a policy
priority in many countries. Financial regulators, the government, and the banking industry mainly play
active roles in this policy issue.3 In response, a number of central banks, in both emerging and
developed countries, have introduced various initiatives to promote financial inclusion in their
countries.4 In addition to central banks’ initiatives, an increasing number of world frontrunners are
playing an active role at the international level to set standards to improve financial inclusion.5 The
International Finance Corporation (IFC), the International Monetary Fund (IMF), the Group of Twenty
(G20), the Alliance for Financial Inclusion (AFI), and the Consultative Group to Assist the Poor
(CGAP) are among the major international players involved in promoting financial inclusion activities.
Moreover, this issue has also attracted the attention of academic researchers. For example, Burgess
and Pande provide evidence that banks’ branch expansion is positively associated with the reduction
*
Dr Sudipta Bose is a Sessional Academic in Accounting, UNSW Business School, UNSW Australia.
Dr Asit Bhattacharyya is a Lecturer in Accounting, Newcastle Business School, University of Newcastle.
Mr Shajul Islam is an Assistant Professor in Accounting, Stamford University, Bangladesh.
1
M Sharma and J Pais, “Financial Inclusion and Development” (2011) 23 Journal of International Development 613-628.
2
Sharma and Pais, n 1.
3
For example, a voluntary code providing for an “everyman” current banking account was introduced by the German Bankers’
Association in 1996 to facilitate basic banking transactions. In 2004, a low cost bank account called “Mzansi” was launched by
the South African Banking Association for financially excluded people. To achieve greater financial inclusion such as facilitating
“no-frills” accounts and “General Credit Cards” for low deposit and credit, the Reserve Bank of India has initiated several
measures. Indian banking system has started “Jan Dhan Yojana (Prime Minister’s People Money Scheme)” for greater financial
inclusion in 2015. Alternative financial systems such as micro-finance institutions (MFIs) and “Self-Help Groups” have also
been introduced in some countries.
4
G Amidzic, A Massara and A Mialou, “Assessing Countries’ Financial Inclusion Standing – A New Composite Index”
(Working Paper No WP/14/36, International Monetary Fund (IMF), 2014).
5
Amidzic, Massara and Mialou, n 4.

(2016) 27 JBFLP 47 47

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Bose, Bhattacharyya and Islam

in rural poverty in rural unbanked locations in India.6 Allen et al find that population density is a vital
factor for financial development and inclusion in Africa compared to other nations. The authors also
report that mobile banking has a significant effect on improving financial access.7
Most previous studies on financial inclusion used country-level indicators to measure the extent of
financial inclusion, and they also used country-level factors to identify the determinants of the level of
financial inclusion.8 The indicators used by a majority of these studies have significant limitations;
more importantly, the data used, which are aggregated at the country level, make it impossible to
assess how the effects of policies vary across organisations.9 Policies that promote financial inclusion
have substantial favourable effects for individuals. For example, having a bank account increases
savings, female empowerment and consumption, and the productive investment of entrepreneurs.10
However, Kempson et al assert that simply having a bank account is not enough for an inclusive
financial system.11 Whether the banking services are adequately utilised is an important question.
Moreover, measuring the level of financial inclusion is multidimensional and complex. Thus, a single
indicator for measuring the level of financial inclusion fails to adequately capture it.12 Although the
significance of financial inclusion is inherent, a formal consensus on how it should be measured at the
organisational level has yet to be established. The current study tries to fill this gap by exploring the
extent and dynamics of financial inclusion at the banking firm-level and proposes a measurement
index. Thus, the objective of our study is to examine the extent of financial inclusion activities
disclosure by the commercial banks in Bangladesh and to identify the firm-level factors that may
affect the extent of such disclosure.
This article differs from other existing studies because the authors propose a new index to
measure the level of financial inclusion from the banking firm perspective. The authors argue that
firm-level engagement of a broader area of financial inclusion activities can play a pioneering role to
raise the level of financial inclusion of a country. Although different countries may have different
priorities related to financial inclusion, a legislative approach may be an effective way to solve the
problem of financial inclusion.13 This study develops a financial inclusion index in light of the
directive of financial inclusion released by Bangladesh Bank, the central bank of Bangladesh.14 The
authors assess the present status of the financial inclusion activities in the Bangladeshi banking sector
after issuance of such directive and the factors that may influence the disclosure of such activities.
This study contributes to the literature by examining the extent of financial inclusion at the
banking firm-level. To the authors’ knowledge, the study initiates the first attempt to understand
financial inclusion at the firm-level. The study is also the first to attempt to explore the banking
6
R Burgess and R Pande, “Do Rural Banks Matter? Evidence from the Indian Social Banking Experiment” (2005) 95(3)
American Economic Review 780-795.
7
F Allen, E Carletti, R Cull, JQ Qian, L Senbet and P Valenzuela, “The African Financial Developments and Financial Inclusion
Gaps” (Working Paper No WPS7019, World Bank Policy Research, 2014).
8
For example, the common type of indicators used in prior studies include the number of bank A/Cs (per 1,000 persons), number
of bank branches (per million people), number of ATMs (per million people), amount of bank credit and amount of bank deposit.
The country-level factors include both socio-economic (such as GDP per capita, literacy rate of the adult population,
unemployment rate, rural population, gini coefficient, religion, legal origin, country-level governance) and infrastructure
variables (such as number of cable TV subscription, number of personal computers, number of internet users, telephones lines
per capita).
9
Sharma and Pais, n 1; T Beck, A Demirguc-Kunt, M Soledad and M Peria, “Reaching Out: Access To and Use of Banking
Services across Countries” (2007) 85(1) Journal of Financial Economics 234-266.
10
P Dupas and J Robinson, “Savings Constraints and Microenterprise Development: Evidence from a Field Experiment in
Kenya” (Working Paper No 14693, National Bureau of Economic Research, 2009).
11
E Kempson, A Atkinson and O Pilley, Policy Level Response to Financial Exclusion in Developed Economies: Lessons for
Developing Countries, (Report of Personal Finance Research Centre, University of Bristol, 2004).
12
Sharma and Pais, n 1.
13
A Patanjali, “Road Map for Financial Inclusion in India” (2014) 25 JBFLP 26-42.
14
Bangladesh Bank, Mainstreaming Corporate Social Responsibility (CSR) in Banks and Financial Institutions in Bangladesh
(Department of Off-Site Supervision, Bangladesh Bank, 2008).

48 (2016) 27 JBFLP 47
Dynamics of firm-level financial inclusion: Empirical evidence from an emerging economy

firm-level factors that are associated with the level of disclosure of financial inclusion activities. In
particular, it explores the level, determinants and actions undertaken to date by commercial banks to
address concerns of financial inclusion in Bangladesh. Another contribution of the study is the
development of the firm-level financial inclusion measurement index. The literature on financial
inclusion lacks a comprehensive measure at the firm-level that can measure the level of financial
inclusion across economies. Hence, it contributes to the literature by proposing an index of financial
inclusion. Although banking systems of different countries may have different priorities associated
with financial inclusion, the study’s measurement index can be used by similar banking systems of
other countries in emerging economies. The results of this study have several implications for
managers, regulators and policy makers in Bangladesh. Regulators and policy makers may use our
result as factors in formulating future policies and directives to further promote the financial inclusion
and overall corporate social responsibility of the banking industry.
The remainder of this article is organised as follows. Part two discusses the institutional and
regulatory settings of the banking industry in Bangladesh. In part three, the theoretical framework of
this study is discussed. Part four follows with a discussion of the prior literature. In part five, the
authors describe the methodology of the study. Part six presents the empirical results and discusses the
major findings and implications. In part seven, sensitivity analyses of the findings are discussed. The
final section concludes the article.

THE INSTITUTIONAL AND REGULATORY SETTING OF THE BANKING INDUSTRY: THE


BANGLADESH SCENARIO
Bangladesh, an emerging economy located in Southeast Asia, has been placed among the “Next
Eleven” economies and the global growth-generating countries considering its strong economic rise
and an increasingly active role in the world economy.15 Bangladesh has been recording impressive
growth and consistent economic development by attaining an annual GDP growth rate of more than
6% since 2004 and aspires to be a middle-income country by its 50th birthday in 2021.16 Despite its
political upheaval, rampant political and bureaucratic corruption, lack of economic resources, huge
burden of unskilled population and status as one of the most ecological vulnerable countries in the
world due to global climate change, Bangladesh has set an example of maintaining a consistent growth
of above 6%, even during the global financial crisis.17 Moreover, Bangladesh has significantly reduced
its foreign dependency. The total annual development budget in receiving grants and loans is below
one-third of the levels in 1970 and 1980.18 Most recently, The Guardian noted the continuous and
sustainable economic development of Bangladesh and predicted that Bangladesh might overtake the
West by 2050, along with the other 11 countries it called “new wave countries”.19 This progress could
largely be attributed to its growing and export-leading industry, human capital and, above all, the
banking institutions as the lynchpin in capital mobilisation.
The financial system in Bangladesh consists of mainly two types of institutions: banks and
non-bank financial institutions (NBFIs). Formally, it includes Bangladesh Bank (the central bank), 39
private commercial banks (PCBs), four state-owned commercial banks (SCBs), nine foreign
commercial banks (FCBs), four specialised banks, 31 non-bank financial institutions (NBFI), 17
private life insurance companies, one state-owned life insurance company, 43 general insurance
companies, one state-owned general insurance company, two stock exchanges, some cooperative
banks, four credit rating agencies and more than 500 semi-formal micro finance institutions as of
15
Goldman Sachs, It is Time to Re-Define Emerging Markets. In Goldman Sachs Strategy Series. (Goldman Sachs, 2011)
<http://www.ivci.com.tr/Uploads/GoldmanSachsTurkeyBRIC.pdf>.
16
World Bank, World Development Indicators (World Bank, 2013).
17
World Bank, n 16.
18
Bangladesh Bank, Of Changes and Transformations: July 2009-June 2013 (Bangladesh Bank, 2014)
<http://www.bangladesh-bank.org/pub/special/chngtrnsform.pdf>.
19
Larry Elliott, “New-Wave Economies Going for Growth”, The Guardian, 12 December 2012,
<http://www.theguardian.com/world/2012/dec/18/booming-economies-beyond-brics#start-ofcomments>.

(2016) 27 JBFLP 47 49
Bose, Bhattacharyya and Islam

30 June 2014.20 Among these, 30 banks, 23 non-banking financial institutions and 46 insurance
companies are listed on the stock exchanges as of 31 December 2014. Bangladesh Bank (BB), the
central bank of Bangladesh, has regulatory and supervisory jurisdiction over the entire banking and
NBFI sectors. The insurance industry is controlled by the office of the Chief Controller of Insurance.21
The financial system in Bangladesh is mainly controlled by the banking sector where NBFIs and
insurance companies have limited roles in the capital markets.22 Approximately 95% of the assets of
the financial system are under the control of the banking sector.23 Furthermore, banking firms
represent approximately 15.35% of the total market capitalisation and approximately 58% of the total
market capitalisation of financial institutions of the Dhaka Stock Exchange (DSE) as of 31 December
2014, which is the highest percentage compared to all other sectors except the telecommunications
sector.24 Corporate social responsibility, including financial inclusion disclosure, is not mandatory
under the existing laws in Bangladesh. Firms can voluntarily disclose such information. However, by
introducing a directive, entitled “Mainstreaming Corporate Social Responsibility in banks and
financial institutions in Bangladesh” reference no DOS Circular No 01, dated 1 June 2008, the central
bank of Bangladesh directed all banks and financial institutions in Bangladesh to include social
activities, including financial inclusion, in their operations and to disclose such information through
their annual reports. Bangladesh Bank emphasised the adoption of social activities in management
approaches and operations, and argued that the inclusion of stakeholder engagement will bring
strategic and competitive advantages in the long run for banks and financial institutions in Bangladesh.
In that directive, Bangladesh Bank also stated that banks and financial institutions can make a major
social contribution through ensuring the financial inclusion of the large socially disadvantaged rural
and urban population segments. Financial institutions can help socially disadvantaged segments by
developing an appropriate financial service packages and innovatively designed financing programs
that will generate new employment, output and income.
While the adoption of social and financial inclusion activities is voluntary and not mandatory, the
Bangladesh Bank considers it an additional indicator of assessing the banking firm’s management
efficiency.25 Thus, it is expected that issuing this directive will positively influence financial inclusion
activities undertaken by the Bangladeshi banking firms. However, to date, no research has been
performed to examine the present status of financial inclusion activities of Bangladeshi banking firms
in relation to this directive, as it is also relatively new for Bangladeshi banking sectors. This situation
motivates the authors to conduct research on financial inclusion in the Bangladeshi banking firms.
THEORETICAL FRAMEWORK
Financial inclusion activities can be broadly categorised as social activities.26 Prior literature on a
firm’s disclosure of social activities has taken various theoretical perspectives. The common theories
used in this type of research include agency theory, signalling theory, legitimacy theory, stakeholder
theory, and institutional theory.27 Furthermore, each theory can provide only a partial explanation of
20
Bangladesh Bank, Annual Report 2013-2014 <http://www.bangladesh-bank.org/pub/annual/anreport/ar1314/index1314.php>.
21
SA Shah, Bangladesh Financial Sector: An Agenda for Further Reforms (Asian Development Bank, Philippines, 2009).
22
H Bahar, Financial Liberalization and Reforms in Bangladesh (UNESCAP, UNDP and Royal Monetary Authority of Bhutan,
December 2009).
23
Bahar, n 22.
24
Dhaka Stock Exchange, DSE Monthly Reviews & Graphs – 2014 (Dhaka Stock Exchange, 2015)
<http://www.dsebd.org/mrg.php>.
25
Bangladesh Bank, n 14.
26
Bangladesh Bank, n 14.
27
M Jensen and W Mecklin, “Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure” (1976) 3(4)
Journal of Financial Economic 305-360; M Spence, “Job Market Signaling” (1973) 87(3) Quarterly Journal of Economics
355-374; J Dowling and J Pfeffer, “Organizational Legitimacy: Social Values and Organizational Behavior” (1975) 18(1) Pacific
Sociological Review; RE Freeman, Strategic Management: A Stakeholder Approach (Boston: Pitman, 1984); PJ DiMaggio and
WW Powell, “The Iron Revisited: Institutional Isomorphism and Collective Rationality in Organizational Fields” (1983) 48(2)
American Sociological Review 147-160.

50 (2016) 27 JBFLP 47
Dynamics of firm-level financial inclusion: Empirical evidence from an emerging economy

the phenomenon; to obtain more complete information, it is useful to use different theoretical
perspectives.28 Thus, we consider both agency theory and institutional theory in this study. Both of
these theories appear particularly relevant in our context, as the costs and benefits of financial
inclusion activities disclosure are often determined by owners and managers who are generally in a
principal-agent setting. Additionally, the rapidly evolving regulatory and socio-economic develop-
ments within the Bangladeshi banking sector are likely to place various pressures on banking firms to
conform and legitimise their financial inclusion activities. Moreover, institutional theory is more
appropriate for voluntary social activities disclosure research because it is complimentary to both
legitimacy and stakeholder theory to explain the organisations’ understanding and responses to
changing social and institutional pressures and expectations.29
Agency theory focuses on the principal-agent relationship between the management of a company
(agent) and capital providers who can be either shareholders or debtholders (principal). This
relationship gives rise to agency conflicts due to the separation of ownership and control, the
conflicting incentive of shareholders (debtholders) and corporate managers, and the information
asymmetry between the shareholders (debtholders) and corporate managers, which also raises the
potential for agency costs.30 The principals may utilise bonding or monitoring mechanisms to reduce
the information gap although both mechanisms involve costs. The publication of accounting reports by
management, the appointment of outside directors, the use of boards and board committees, are
different bonding or monitoring mechanisms that align the interests of principals and managers and
thereby reduce the agency costs relevant to the reduction of the firm value.31 Prior studies on both
voluntary disclosure and social disclosure have documented that different board characteristics such as
board independence, CEO duality, board diversity and audit committee characteristics (such as audit
committee size and audit committee independence) have a role in influencing voluntary disclosure and
social disclosure.32 Overall, it is established that managers use voluntary disclosure to reduce agency
costs.33 Similarly, this study applied the agency theory to determine the effects of corporate
governance mechanisms at the level of financial inclusion disclosures.
According to institutional theory, organisational action depends on the presence and type of
external pressures, and organisations must be receptive to external demands for maintaining their
legitimacy.34 DiMaggio and Powell assert that firms come to exhibit a common set of values, norms
and rules to produce similar practices and structures across organisations that share a common
organisational field as a result of isomorphic pressures from three sources: coercive (law or regulatory
enforcement-based), mimetic (stakeholder and general societal driven) and normative (professional
community-related).35 Coercive isomorphism arises when organisations change their institutional
practices due to the pressure exerted by stakeholders upon whom the organisation is dependent.36
Mimetic isomorphism arises when an organisation within a particular industry seeks to emulate (or
28
C Deegan, Financial Accounting Theory (McGraw Hill, 3rd ed, 2009).
29
Deegan, n 28.
30
R Leftwich, R Watts and J Zimmerman, “Voluntary Corporate Disclosure: The Case of Interim Reporting” (1981) 19 Journal
of Accounting Research 50-77.
31
Jensen and Meckling, n 27.
32
LL Eng and YT Mak, “Corporate Governance and Voluntary Disclosure” (2003) 22(4) Journal of Accounting and Public
Policy 325-345; G Michelon and A Parbonetti, “The Effect of Corporate Governance on Sustainability Disclosure” (2012) 16(3)
Journal of Management & Governance 477-509; S Bose and S Hossain, “Female in Decision-Making Roles and Corporate
Social Responsibility Performance” (Working Paper, 2016).
33
PM Healy and KG Palepu, “Information Asymmetry, Corporate Disclosure, and the Capital Markets: A Review of the
Empirical Disclosure Literature” (2001) 31(1-3) Journal of Accounting and Economics 405-440.
34
DiMaggio and Powell, n 27; J Pfeffer and GR Salancik, The External Control of Organizations: A Resource Dependence
Perspective (Stanford Business Books, 2003); JW Meyer and B Rowan, “Institutionalized Organizations: Formal Structure as
Myth and Ceremony” (1977) 83(2) American Journal of Sociology 340-363; C Oliver, “Strategic Responses to Institutional
Processes” (1991) 16(1) Academy of Management Review 145-179.
35
DiMaggio and Powell, n 27.
36
Deegan, n 28.

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Bose, Bhattacharyya and Islam

copy) similar policies and procedures as those adopted by other leading organisations in that sector.37
Organisations may have the affinity to mimic another organisation due to competitive advantages in
terms of legitimacy or due to facing uncertainty.38 Normative isomorphism results from
professionalism for adopting a particular institutional practice, where professionalism is defined as the
collective struggle of members of an occupation for defining the conditions and methods of their
work.39 In general, these pressures motivate firms to gain legitimacy and show their commitment
through formal disclosures through different channels.
By applying an institutional perspective to the Bangladeshi banking sector, the authors predict
that the coercive pressures derived from the directive issued by the Bangladesh Bank are likely to play
a strong role in how the banking firm-specific financial and governance factors may influence the level
of disclosure of financial inclusion activities. This is because financial inclusion is encouraged by the
central bank of Bangladesh (a regulator) through releasing its formal directive. It is also true that
according to the central bank the adoption of this directive is voluntary. However, the performance in
this respect will be monitored and considered as an additional dimension of the banking firms’
management performance. Therefore, it is expected that the central bank’s directive may, directly or
indirectly, create pressure on banking firm’s behaviour to include financial inclusion activities in
Bangladesh.

LITERATURE REVIEW
The extant literature on financial inclusion shows that financial inclusion is defined from the viewpoint
of financial exclusion, which is defined in the context of a larger issue of social exclusion of certain
groups of people from the mainstream of the society.40 According to Conroy, “financial exclusion is a
process that prevents poor and disadvantaged social groups from gaining access to the formal financial
systems of their countries”.41 A number of studies have investigated the level of financial inclusion
and the factors that may affect it.42 Most of the studies in this domain are based on macro-level
factors, ie, researchers have investigated this issue from a country’s point of view. For example, Sarma
and Pais examine the relationship between country-specific factors and the level of financial inclusion
based on 49 countries. The authors find that the levels of human development, income inequality,
literacy, urbanisation and physical infrastructure for connectivity and information are important
determinants of the level of financial inclusion. The authors did not find the impact of the health of the
banking sector on the level of financial inclusion, where an ownership pattern seems to matter.
Similarly, Singh and Kodan find that financial inclusion is significantly positively associated with
socio-economic development.43 The authors also report that per capita net state domestic product
(NSDP) and urbanisation are significant determinants of financial inclusion, while literacy,
employment and sex-ratio are not statistically significant predictors of the financial inclusion. Kumar
shows that branch density is positively associated with the financial inclusion in India. The author also
reports that the level of industrialisation and the prevalence of an employee base are found to have a
beneficial impact on financial inclusion.44 Likewise, Johnson and Noni-Zarazua examined the patterns
of access and socio-economic, geographic and demographic variables associated with access to
37
J Unerman and M Bennett, “Increased Stakeholder Dialogue and the Internet: Towards Greater Corporate Accountability or
Reinforcing Capitalist Hegemony?” (2004) 29(7) Accounting, Organizations and Society 685-707; Deegan, n 28.
38
Deegan, n 28; DiMaggio and Powell, n 27.
39
DiMaggio and Powell, n 27.
40
Sarma and Pais, n 1.
41
J Conroy, “APEC and Financial Exclusion: Missed Opportunities for Collective Action?” (2005) 12(1) Asia-Pacific
Development Journal 53-79, p 53.
42
Sarma and Pais, n 1; Amidzic, Massara and Mialou, n 4; Beck, Demirguc-Kunt, Soledad and Peria, n 9.
43
K Singh and S Kondan, “Financial Inclusion, Development and Its Determinants: An Empirical Evidence of Indian States”
(2012) 53(1) The Asian Economic Review 115-134.
44
N Kumar, “Financial Inclusion and Its Determinants: Evidence from India” (2013) 5(1) Journal of Financial Economic Policy
4-19.

52 (2016) 27 JBFLP 47
Dynamics of firm-level financial inclusion: Empirical evidence from an emerging economy

finance based on financial access national survey data for Kenya and Uganda.45 The authors find that
age, employment, education and gender are key factors explaining access to formal financial services.
They also find that an informal financial sector contributes substantially to access to finance. Beck et
al investigate barriers to bank access using information from 193 banks in 58 countries.46 The authors
show that bank size and physical infrastructure are the most robust predictors of barriers to bank
access. In addition, the authors find that more competition, open and transparent economies, and better
contractual and information networks are associated with lower barriers to bank access. Furthermore,
Beck et al examined the measurement of financial sector outreach and its determinants based on
aggregate data provided by bank regulators from 99 countries. The authors found that outreach is
positively associated with the factors of the overall level of economic development, the quality of the
institutional environment, the degree of credit information sharing, the level of initial endowments,
and the development of the physical infrastructure. Additionally, outreach is negatively associated with
the cost of enforcing contracts and the degree of government ownership of banks.
The above studies examined the financial inclusion from the country-level perspectives and used
macroeconomic indicators for examining the level of financial inclusion. However, this study is the
first that examines financial inclusion from the organisational perspective. Furthermore, financial
inclusion activities can be linked to a firm’s social activities.47 As there is a dearth of research from
the organisational perspective of financial inclusion, this study focuses on studies relating to firms’
social activities to identify the factors that may affect the level of a banking firm’s financial inclusion
activities disclosure. Prior studies in the area of a firm’s social activities show that different factors
may affect a firm’s engagement and disclosure of social activities, such as firm size, profitability,
growth opportunities, institutional investors, foreign investors, and the structure of the board of
directors. For example, Belkaoui and Karpik examined the factors associated with the corporate
decision to disclose social information of 23 US firms in 1973 using an agency theory framework.48
The authors reported that social disclosure of the firm is positively associated with social performance
and political visibility (using size and systematic risk as a proxy). These findings are consistent with
the size hypothesis and negatively associated with financial leverage, which is in line with the
debt/equity hypothesis. The authors argue that social disclosure very rapidly captures the incremental
social performance for creating an impression of sensitivity to important non-market influences that
can be in the shareholders interest in the long run. Branco and Rodrigues examine social responsibility
information disclosure on the internet by Portuguese banks in 2004 and compare it to the internet and
2003 annual reports as disclosure media.49 The results show that banks with a higher visibility among
consumers seem to exhibit greater concern for improving the corporate image through social
responsibility information disclosure. Haniffa and Cooke examined the potential effects of culture and
corporate governance on social disclosures. The researchers found a significant relationship between
corporate social disclosures and the boards dominated by Malay directors, boards dominated by
executive directors, chair with multiple directorships and foreign shareholder ownership.50
Regarding the impact of gender diversity on corporate social disclosures, Boulouta examined the
effect of female board directors on corporate social performance by drawing on social role theory and
feminist ethics literature based on a sample of 126 firms drawn from the S&P 500 over a five-year
45
S Johnson and Nino-Zarazua, “Financial Access and Exclusion in Kenya and Uganda” (2011) 47(3) Journal of Development
Studies 475-496.
46
T Beck, Demirguc-Kent and M Peria, “Banking Services for Everyone? Barriers to Bank Access and Use around the World”
(Working Paper No 4079, World Bank, 2006).
47
Bangladesh Bank, n 20.
48
A Belkaoui and PG Karpik, “Determinants of the Corporate Decision to Disclose Social Information” (1989) 2(1)
Accounting, Auditing & Accountability Journal 36-51.
49
M Branco and L Rodrigues, “Communication of Corporate Social Responsibility by Portuguese Banks” (2006) 11(3)
Corporate Communications: An International Journal 232-248.
50
RM Haniffa and TE Cooke, “The Impact of Culture and Governance on Corporate Social Reporting” (2005) 24 Journal of
Accounting and Public Policy 391-430.

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Bose, Bhattacharyya and Islam

period.51 The results suggest that board gender diversity significantly affects corporate social
performance. Another important area of research investigated by researchers is the association of
firms’ social activities and earnings management practices. For example, Prior et al examined the
association between social activities and earnings management based on 593 firms from 26
countries.52 The authors concluded that managers who manipulate earnings for private benefit are
more likely to engage in a higher level of social reporting.
A few studies investigate a firm’s social activities disclosure in Bangladesh. Bose et al investigate
the relationship between philanthropic giving and firm performance of Bangladeshi banks over 2007
to 2013.53 The results suggest that the level of philanthropic giving is positively associated with firm
performance. The authors also document that there is a positive relationship between philanthropic
giving and institutional shareholdings in Bangladeshi banking firms. The authors also show that firms
with higher level of philanthropic giving involve in lower tax aggressiveness activities and more likely
to have higher loan growth and customer deposits. Khan et al examine the relationship between
corporate governance and the extent of corporate social responsibility disclosures in the annual reports
of Bangladeshi companies. The study found that corporate social responsibility disclosures generally
have a negative association with managerial ownership, and such a relationship becomes significant
and positive for export-oriented industries. The authors also find that public ownership, foreign
ownership, board independence and the presence of audit committee have a positive significant effect
on social responsibility disclosures. Furthermore, Sobhani et al examine the disclosure practices of
corporate sustainability information in the annual reports and corporate websites of the banking
industry in Bangladesh.54 The results show that Islamic banks in Bangladesh disclose more
sustainability information compared to conventional banks. They also found that younger banks
perform better in comparison to older banks in the area of sustainability disclosures.
From the above discussion, it can be concluded that there is no study examining the financial
inclusion activities from an organisational perspective. Thus, this study is exploratory in nature. In
light of the theoretical arguments and prior literature regarding firms’ disclosures of social activities,
the authors propose banking firm size, leverage ratio, profitability, growth opportunities, liquidity,
banking firm’s age, institutional investors, audit committee size, audit committee independence, board
size, board independence, percentage of female directors, religion-based operations, and firm’s
earnings management practices would be significant factors that may influence firm’s engagement and
disclosure of financial inclusion activities.

RESEARCH METHODOLOGY
This study focuses on the banking industry because the financial inclusion concept is only applicable
to the financial industry. Our sample comprised all banking firms in Bangladesh from 2008 to 2013.
The authors chose 2008 as the initial study year due to the issuance of the directive by the central bank
of Bangladesh regarding the banking firms’ engagement into financial inclusion activities, and 2013 is
the latest year in which data were available. The banking industry in Bangladesh included 56 banking
firms in the year 2013, whereas it included 48 firms in the year 2008 and 2009, and 47 firms from
2010 to 2012. However, the authors exclude 113 observations due to non-availability of audited
annual reports and share price data. Furthermore, the authors exclude 23 observations due to missing
financial and governance data. Table 1, Panel A shows the sample selection procedure. The final
51
I Boulouta, “Hidden Connections: The Link between Board Gender Diversity and Corporate Social Performance” (2013)
113(2) Journal of Business Ethics 185-197.
52
D Prior, J Surroca and JA Tribó, “Are Socially Responsible Managers Really Ethical? Exploring the Relationship between
Earnings Management and Corporate Social Responsibility” (2008) 16(3) Corporate Governance: An International Review
160-177.
53
S Bose, KK Biswas and J Podder, “Philanthropic Giving, Market-Based Performance and Institutional Ownership: Evidence
from an Emerging Economy” (Working Paper, 2016).
54
FA Sobhani, A Amran and Y Zainuddin, “Sustainability Disclosure in Annual Reports and Websites: A Study of the Banking
Industry in Bangladesh” (2012) 23(1) Journal of Cleaner Production 75-85.

54 (2016) 27 JBFLP 47
Dynamics of firm-level financial inclusion: Empirical evidence from an emerging economy

sample includes 157 banking firm-year observations. The authors collect the financial inclusion data
from the various sections of the banking firm’s audited annual reports, eg, directors’ report,
chairman’s statement, corporate governance disclosures, corporate social responsibility disclosures,
and notes to the financial statement. Financial and governance data are collected from the audited
annual reports of the sample banking firms, and the share market data are collected from the
Compustat database.

TABLE 1 Sample Description


Panel A: Sample size

Number of banking firm-year available in the banking industry from 2008 to 2013 293

Less: Non-availability of annual reports and share price data 113

Less: Missing financial/governance data 23

Total banking firm-year observations 157

Panel B: Year-wise distribution

Year No of banking firms in the No of banking firms in the Percentage of sample firms
banking industry sample representing banking
industry

2008 48 23 47.92

2009 48 26 54.17

2010 47 27 57.45

2011 47 26 55.32

2012 47 28 59.57

2013 56 27 48.21

Total 293 157 53.58

Financial Inclusion Index (FII)


The financial inclusion index (FII) used in this study was developed based on the Bangladesh Bank’s
(2008) authoritative guidance regarding the banking firms’ engagement of financial inclusion
activities.55 Most of the studies in this domain used macro-level indicators for measuring the financial
inclusion activities.56 For example, the number of bank branches or ATMs per 1000 square kilometres,
the number of bank branches or ATMs per 100,000 people, the number of loan accounts per 1,000
people, and the number of deposit accounts per 1,000 people.57 However, Bangladesh Bank (2008)
provides guidance to banks and financial institutions in Bangladesh about what type of financial
inclusion activities they should be engaged in at the individual bank level.58 The authors used this
guidance as a basis for the construction of FII. This index includes 13 items relating to banking firm’s
engagement into financial inclusion activities. Table 3 presents the items in the FII.
The authors applied the technique of content analysis to measure the level of financial inclusion
by the sample banks. Content analysis is defined by Budd et al as “a systematic technique for
55
Bangladesh Bank, n 14.
56
United Nations, Building Inclusive Financial Sectors for Development (New York: The United Nations Department of Public
Information, 2006); A Demerguc-Kunt, T Beck and P Honahan, Finance for All – Policies and Pitfalls in Expanding Access (A
World Bank Policy Report, Washington DC, 2008); Sarma and Pais, n 1.
57
Sarma and Pais, n 1.
58
Bangladesh Bank, n 14.

(2016) 27 JBFLP 47 55
Bose, Bhattacharyya and Islam

analysing message content and message handling – it is a tool for observing and analysing the overt
communication behaviour of selected communications”.59 The content analysis was performed in
three stages as suggested by Krippendorff and Neuendorf.60 In the first stage, the document to be
analysed was determined to be the audited annual reports of sample banking firms in this study. In the
second stage, a means of measuring the level of financial inclusion activities was determined. To
measure the banking firms’ financial inclusion activities quantitatively, a scoring scheme was
developed. A dichotomous procedure developed by Cerf (1961) was used to measure the financial
inclusion activities.61 A score of 1 was awarded if an item was reported; otherwise, a score of 0 was
awarded. In the third and final stage, a checklist instrument was developed (Table 3). The directive by
the central bank of Bangladesh was consulted to develop the checklist. Attempts were made to
construct an exhaustive checklist. The checklist instrument contains 13 items. Consequently, a firm
could score a maximum of 13 points and a minimum of 0. The formula for calculating the financial
inclusion reporting score/index by using these 13 items looks as follows.

Total score of each bank

Financial Inclusion Score/Index (FII) = ––––––––––––––––––––––––––––––––– x 100

Total items in the Financial Inclusion index


A higher value of the FII implies a higher level of financial inclusion because it captures multiple
occurrences of information relating to financial inclusion activities. The authors use an un-weighted
approach to construct the FII. With this approach, each item of disclosure is considered equally as
important as the others.62 In addition, Cooke argued that an un-weighted approach covers all users of
corporate annual reports rather focus on one particular user group.63 The focus of this study is to
reflect the standing of all users of corporate annual reports, which is why the authors use the
un-weighted approach to formulate our index. Furthermore, in the case of content analysis, the coder
reliability is an important concern. To ensure reliability, two coders, including one of the authors,
completed the content analysis independently. For example, the first coder reviewed the entire sample
of a banking firm’s annual reports and performed the coding process. Then, the second coder
compared the coded data. All disagreements between the coders were ultimately solved through
re-analysing the annual reports.
Furthermore, to identify the factors that may affect the level of a banking firm’s disclosure of
financial inclusion activities, the authors regress the probable factors on their FII. The authors select
these factors based on their theoretical linkage with the level of financial inclusion disclosure because
this study is exploratory in nature. Hence, the dependent variable is the FII. The independent variables
are banking firm’s size (SIZE), leverage ratio (LEV), profitability (ROA), growth opportunities
(GOP), liquidity (LIQUID), institutional investors (INST), banking firm’s age (BAGE), audit
committee size (ACSIZE), audit committee independence (ACIND), board size (BSIZE), female
director (FDIR), board independence (BIND), religion-based operation (REL), and banking firm’s
earnings management practices (EM). Due to the exploratory nature of the study, the authors have
used both financial and governance characteristics to identify the possible factors that may affect the
level of financial inclusion disclosures. The measurement of the variables is as follows:

59
R Budd, R Thorp and L Donohew, Content Analysis of Communications (London: The Collier-McMillan Limited, 1967) p. 2.
60
K Krippendorf, Quantitative Content Analysis: An Introduction to Its Method (Beverly Hills: Sage Publications, 1980);
K Neuendorf, The Content Analysis Guidebook (Thousand Oaks, CA: Sage Publications, 2002).
61
AR Cerf, Corporate Reporting and Investment Decisions (Berkeley: The University of California Press, 1961).
62
TE Cooke, “Voluntary Corporate Disclosure by Swedish Companies” (1989) 1(2) Journal of International Financial
Management & Accounting 171-195.
63
Cooke, n 62.

56 (2016) 27 JBFLP 47
Dynamics of firm-level financial inclusion: Empirical evidence from an emerging economy

SIZE : The natural logarithm of the banking firm’s total assets.


LEV : The ratio of total liabilities divided by total assets.
ROA : The ratio of income before extraordinary items divided by total assets.
GOP : The ratio of market value of equity to book value of equity.
LIQUID : The average monthly trading volume relative to total number of shares
outstanding.
BAGE : The natural logarithm of the number of years since the banking firm’s inception.
INST : The percentage of ownership holdings by the institutional investors.
AC SIZE : The natural logarithm of the total number of members in the audit committee.
ACIND : The percentage of independent members in the audit committee.
B SIZE : The natural logarithm of the total number of members on the board.
BIND : The percentage of the independent directors on the board.
FDIR : The percentage of female directors to total directors on the board.
REL : If the banking firm has an Islamic banking operation, then the authors assign a
value of one (1), otherwise zero (0).64
EM : The natural logarithm of the banking firm’s total amount of loan-loss provision.

RESULTS AND DISCUSSION

Descriptive analysis
Table 2 reports the descriptive statistics for the variables used in this study. The mean value of the
financial inclusion score (FII) is 0.309, which implies that on average banks have disclosed
approximately 30.90% of financial inclusion activities stated in the index. The minimum percentage of
a firm’s disclosure in financial inclusion activities is 0%, whereas the maximum is 100%. The mean
(median) size of the sample firms, as measured by the natural logarithm of the total assets is 11.531
(11.562), implying average total assets of BDT 118,435 million higher than the firm size reported by
Bose et al.65 The average (median) value of leverage is 0.920 (0.917). This higher-level leverage ratio
is not surprising, as banking firms are highly leveraged. The mean (median) value of profitability, as
measured by the return on assets (ROA) is 1.40 (1.30)%, which is closer to the mean value of the
ROA reported by Bose et al in the context of banking firms in Bangladesh.66 The mean value of
growth opportunity (GOP) is 2.139, implying that the sample firm’s future growth opportunities are
higher. The mean (median) value of liquidity (LIQUID) is 0.042 (0.005). The mean (median)
institutional investors’ ownership (INST) is 13.60 (13.50)%, which is also closer to the value of

64
In Bangladesh, there are 6 full-fledged Islamic Banks. Among the remaining 24 banks, some are purely conventional banks
(such as Eastern Bank Ltd) and some has incorporated Islamic banking in their operations (such as Arab Bangladesh Bank Ltd)
in addition to conventional banking operations. In this study, religion-based operation refers to both full-fledged Islamic banks
and banks with Islamic banking operations in addition to conventional banking operations.
65
Bose, Biswas and Podder, n 53.
66
Bose, Biswas and Podder, n 53.

(2016) 27 JBFLP 47 57
Bose, Bhattacharyya and Islam

13.20% reported by Bose et al.67

TABLE 2 Descriptive Statistics


N Mean Median Std. Dev Min Max Skewness Kurtosis

FII 157 0.309 0.308 0.277 0.000 1.000 0.336 1.867

SIZE 157 11.531 11.562 0.547 9.568 13.218 0.000 3.865

LEV 157 0.920 0.917 0.062 0.846 1.653 10.435 123.864

ROA 157 0.014 0.013 0.008 -0.048 0.036 -2.272 22.142

GOP 157 2.139 1.805 1.541 -0.434 11.789 2.958 15.812

LIQUID 157 0.042 0.005 0.064 0.000 0.361 1.999 7.478

BAGE 157 2.773 2.708 0.399 1.946 3.434 0.195 1.832

INST 157 0.136 0.135 0.115 0.000 0.562 0.779 3.841

ACSIZE 157 1.269 1.099 0.222 1.099 1.609 0.670 1.646

ACIND 157 0.220 0.333 0.172 0.000 0.667 -0.085 2.024

BSIZE 157 2.636 2.639 0.319 1.609 3.296 -0.492 3.318

BIND 157 0.075 0.067 0.076 0.000 0.400 1.516 6.154

FDIR 157 0.114 0.091 0.126 0.000 0.933 2.239 13.086

REL 157 0.541 1.000 0.500 0.000 1.000 -0.166 1.028

EM 157 6.200 6.129 0.900 3.213 8.195 -0.188 3.321

Variable definitions: FII is the financial inclusion index, SIZE is the banking firm size, measured as the natural logarithm of
the banking firm’s total assets, LEV is the leverage ratio, measured as the ratio of total liabilities divided by total assets, ROA
is the return of assets, measured as the ratio of income before extraordinary items divided by total assets, GOP is the growth
opportunities, measured as the ratio of market value of equity to book value of equity, LIQUID is the liquidity, measured as
the average monthly trading volume relative to total number of shares outstanding, BAGE is the banking firm’s age which
is measured as the natural logarithm of the number of years since the banking firm’s inception, INST is the percentage of
ownership holdings by the institutional investors, ACSIZE is the audit committee size, measured as the natural logarithm of
the total number of members in the audit committee, ACIND is the audit committee independence, measured as the percentage
of the independent member in the audit committee,, BSIZE is the board size, measured as the natural logarithm of the total
number of members on the board, BIND is the board independence, measured as the percentage of the independent directors
on the board, FDIR is the percentage of female directors to total directors on the board, REL is the banking firm’s
religion-based operations which is measured if the banking firm has an Islamic banking operations, then the authors assign
a value of one (1), otherwise zero (0), EM is the earnings management, measured as the natural logarithm of the banking
firm’s total amount of loan-loss provision.

The natural logarithm of the age of banking firms (BAGE) is 2.773. The natural logarithm of the
audit committee size (ACSIZE) is 1.269, implying that the average number of the audit committee
size is 3.64. The natural logarithm of the board size (BSIZE) is 2.636, implying that the average size
of the board is 14.65. The average (median) 11.40 (9.10)% female directors (FDIR) is closer to the
value of 10.20% reported by Bose et al in the Bangladeshi context.68 The average percentage of
independent members on the board and in the audit committee is 7.50 and 21.90, respectively.
Approximately 54.15% of the sample banking firms have a religion-based banking operations ie,

67
Bose, Biswas and Podder, n 53.
68
Bose, Biswas and Podder, n 53.

58 (2016) 27 JBFLP 47
Dynamics of firm-level financial inclusion: Empirical evidence from an emerging economy

following Islamic banking policy (REL). The natural logarithm of the loan-loss provisions (EM) of the
sample firms is 6.200, implying the average total amount of loan-loss provisions of BDT 722 million.
Level of financial inclusion activities
Table 3 presents the level of financial inclusion activities disclosure by banking firms in Bangladesh
over a six-year period from 2008 to 2013. In 2008, only 10% of banking firms disclosed the financial
inclusion activities relating to programs that support small and medium enterprises (SME) with a
particular focus on collaboration with micro finance institutions (MFIs) and business ideas that aim to
solve a social problem (FII-1). In 2013, that figure rose to 63.33%, a 6.33 times higher than 2008 This
upward trend reflects an increase in firms’ commitment of engagement with financial inclusion
activities. Further, banking firms started to report their engagement regarding providing facilities to
support the above activities such as collateral free loans and low interest rates from (FII-2) in 2009.
Only 10% of firms disclosed this activity in 2009, while 20% of banking firms disclosed this activity
in 2013. This factor, therefore, also shows an upward trend.

TABLE 3 Financial Inclusion Index


Code 2008 2009 2010 2011 2012 2013

1. Programs that support small and FII-1 10.00 13.33 26.67 40.00 53.33 63.33
medium-sized enterprises (SMEs) with
a particular focus on collaboration with
micro finance institutions (MFIs) and
business ideas that aims to solve a
social problem.

2. Organisations that support the FII-2 0.00 10.00 10.00 16.67 16.67 20.00
programs mentioned in item 1 and
provide them with unique facilities,
such as collateral-free loan and low
interest rates.

3. Financing programs for installation FII-3 3.33 10.00 26.67 36.67 70.00 70.00
of biomass processing plants (eg,
biogas plants).

4. Financing programs for installation FII-4 0.00 6.67 36.67 53.33 66.67 86.67
of solar panels in rural households.

5. Financing programs for waste FII-5 0.00 0.00 0.00 0.00 6.67 13.33
recycling plants in locations populated
by urban poor.

6. Financing programs for effluent FII-6 3.33 10.00 16.67 40.00 63.33 73.33
treatment plants (ETPs) in manufactur-
ing establishments.

7. Financing program to support FII-7 20.00 20.00 46.67 66.67 60.00 63.33
agricultural activities (ie, crops,
oilseeds, spices, vegetables, fruits etc).

8. Financing program to support FII-8 6.67 16.67 26.67 46.67 53.33 53.33
farming activities (ie, milk production,
fish and cattle farming) with particular
focus on co-production activities (eg,
fish/duck farming with rice of
deepwater variety in low lying fields).

9. Financing programs to support FII-9 3.33 6.67 13.33 13.33 20.00 20.00
traditional handicraft businesses, folk
musical and performing arts activities
that are carried out with a view to
income generation and employment for
the population groups involved.

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Bose, Bhattacharyya and Islam

TABLE 3 continued
Code 2008 2009 2010 2011 2012 2013

10. Additional banking facilities to the FII-10 0.00 6.67 16.67 20.00 23.33 30.00
financial inclusion target groups (eg,
low-cost or free bank account, reduced
initial deposit and low ongoing deposit
maintenance requirements).

11. Campaign to introduce bank’s FII-11 3.33 3.33 10.00 10.00 30.00 46.67
financial inclusion program. Introducing
different schemes through which
microfinance is channeled to the target
group.

12. Incorporate rural population in FII-12 16.67 23.33 23.33 53.33 76.67 86.67
mobile banking activities and they
provide any extra facilities to encourage
them for using this facilities (eg,
training program on how to use mobile
banking etc).

13. Special program in place to help FII-13 13.33 16.67 26.67 36.67 43.33 33.33
remote rural household receiving
remittance from family members reside
overseas.

In 2008, only 3.33% of firms disclosed activities regarding financing programs for the installation
of biomass processing plants (eg, biogas plants) (FII-3), while 70% of firms disclosed this activity in
2013. Similarly, a banking firm’s engagement with financing programs for the installation of solar
panels in rural households (FII-4) shows an upward trend over the sample period. Only 6.67% of the
sample firms disclosed this activity in 2009, whereas it was 86.67% in 2013. Likewise, banking firms
started to disclose financial inclusion activities regarding financing programs for waste recycling
plants in locations populated by urban poor (FII-5) from 2012 onward. Only 6.67% of sample firms
disclosed this type of activity in 2012, whereas the number of firms disclosing this activity doubled in
2013. In 2008, only 3.33% of our sample firms disclosed the financial inclusion activity on financing
programs for effluent treatment plants (ETPs) in manufacturing establishments (FII-6), whereas in
2013, it was 73.33%. In 2008, approximately 20% of our sample banking firms disclosed their
financial inclusion activity on financing programs to support agricultural activities (ie, crops, oilseeds,
spices, vegetables, fruits, etc) (FII-7), the level rose to 63.33% of sample firms in 2013. With regard to
financial inclusion activity on financing programs to support farming activities (eg, milk production,
fish and cattle farming) with a particular focus on co-production activities (eg, fish/duck farming with
rice of deepwater variety in low lying fields) (FII-08), only 6.67% of sample firms disclosed this
activity in 2008, whereas in 2013, 53.33% of sample firms disclosed financing of these activities.
Additionally, in 2008, approximately 3.33% of firms disclosed the financial inclusion activity of
financing programs to support traditional handicraft businesses, folk musical and performing arts
activities that are carried out with the goals of income generation and employment for the population
groups involved (FII-09), whereas 20% of firms disclosed their engagement in this activity in 2013.
With regard to activities promoting additional banking facilities to the groups targeted by increased
financial inclusion (eg, low cost or free bank account, reduced initial deposit and low ongoing deposit
maintenance requirements) (FII-10), no firms disclosed their engagement in 2008. However, banking
firms started to engage these activities in 2009, and in 2013, approximately 30% firms disclosed their
engagement. In 2008, approximately 3.33% of sample firms disclosed their financial inclusion
activities on a campaign to introduce a bank’s financial inclusion program to the target group,
including introducing different schemes through which microfinance is channelled to the target group
(FII-11). In 2013, the percentage was 46.67%. With regard to the incorporation of the rural population
in mobile banking activities and if banks provide any extra facilities to encourage the rural population
to use these facilities (eg, training programs on how to use mobile banking, etc) (FII-12), only 16.67%
of sample firms disclosed their engagement in these activities in 2008. In 2013, 56.67% of firms

60 (2016) 27 JBFLP 47
Dynamics of firm-level financial inclusion: Empirical evidence from an emerging economy

disclosed their engagement in these activities, which also shows an upward trend. In 2008,
approximately 13.33% of sample firms disclosed their engagement in special programs in place to
help remote rural households receiving remittance from family members residing overseas (FII-13),
whereas 33.33% of firms disclosed their engagement in these programs in 2013.
The authors analyse banking firms’ engagement in financial inclusion activities in light of the
directive given by the central bank of Bangladesh, which was released in 2008. The authors also
analyse the financial inclusion activities listed in Table 3 for the year 2007. However, the authors
found a small number of firms engaged in these activities before releasing the directive. Hence, it is
apparent that the regulators indirect pressure pushed banking firms to engage in more financial
inclusion activities, consistent with the tenets of the institutional theory that is clearly evidenced from
the data in Table 3.

Correlation analysis
Table 4 reports Pearson’s correlation matrix among variables. Financial inclusion score (FII) is
significantly and positively correlated with banking firm size (SIZE). However, financial inclusion
score (FII) is negatively and significantly correlated with growth opportunities (GOP) and the liquidity
(LIQUID). Financial inclusion score (FII) is also positively and significantly correlated with
institutional investors (INST), audit committee size (ACSIZE) and board independence (BIND). The
correlation between a religion-based operation (REL) and financial inclusion score (FII) is also
significant and positive. FII is also significantly and positively correlated with banking firm’s earnings
management (EM).
TABLE 4 Correlation Matrix

***, **, * represent significance levels at the 1%, 5%, and 10%, respectively.

Variable definitions: FII is the financial inclusion index, SIZE is the banking firm size, measured as the natural logarithm of
the banking firm’s total assets, LEV is the leverage ratio, measured as the ratio of total liabilities divided by total assets, ROA
is the return of assets, measured as the ratio of income before extraordinary items divided by total assets, GOP is the growth
opportunities, measured as the ratio of market value of equity to book value of equity, LIQUID is the liquidity, measured as
the average monthly trading volume relative to total number of shares outstanding, BAGE is the banking firm’s age which
is measured as the natural logarithm of the number of years since the banking firm’s inception, INST is the percentage of
ownership holdings by the institutional investors, ACSIZE is the audit committee size, measured as the natural logarithm of
the total number of members in the audit committee, ACIND is the audit committee independence, measured as the percentage
of the independent members in the audit committee, BSIZE is the board size, measured as the natural logarithm of the total
number of members on the board, BIND is the board independence, measured as the percentage of the independent directors
on the board, FDIR is the percentage of female directors to total directors on the board, REL is the banking firm’s
religion-based operations which is measured if the banking firm has an Islamic banking operations, then the authors assign
a value of one (1), otherwise zero (0), EM is the earnings management, measured as the natural logarithm of the banking
firm’s total amount of loan-loss provision.

(2016) 27 JBFLP 47 61
Bose, Bhattacharyya and Islam

Factors affecting the level of financial inclusion in Bangladesh


This study also examines the factors that may affect the level of the disclosure of financial inclusion
activities undertaken by commercial banks in Bangladesh. These factors include bank size (SIZE),
leverage ratio (LEV), profitability (ROA), growth opportunities (GOP), liquidity level (LIQUID),
bank age (BAGE), institutional investors (INST), audit committee size (ACSIZE), audit committee
independence (ACIND), board size (BSIZE), board independence (BIND), percentage of female
directors (FDIR), religion-based operations (REL) and earnings management practices (EM). To find
the association of these factors with the extent of financial inclusion, the authors use ordinary least
squares (OLS) regression method. The mean variance inflation factor (VIF) of variables in our
research model is 2.61, with the lowest and highest VIF is 1.20 and 4.49, respectively. Table 5 reports
the regression results of the determinants of financial inclusion activities disclosure. The regression
model is highly significant (p<0.01), suggesting that the explanatory variables strongly explain the
variations of the dependent variable. The explanatory power (R2) of the model is 56.90%. The main
findings are discussed below.

TABLE 5 Regression results of the financial inclusion activities disclosure and its
determinants
Dependent Variable = FII

Coefficient t-statistics p-value

SIZE 0.138 2.340 0.021**

LEV -0.022 -0.058 0.954

ROA -1.753 -0.432 0.667

GOP 0.022 2.081 0.039**

LIQUID 0.352 1.328 0.186

BAGE -0.224 -4.948 0.000***

INST 0.468 2.969 0.004***

ACSIZE 0.252 2.529 0.013**

ACIND 0.123 0.695 0.488

BSIZE -0.107 -1.544 0.125

BIND -0.182 -0.392 0.695

FDIR -0.369 -2.537 0.012**

REL 0.066 2.047 0.043**

EM 0.007 0.249 0.804

Constant -1.001 -1.219 0.225

Year Fixed Effects YES

Observations 157

R-Square 0.569

Adjusted R-Square 0.509

F-statistic 20.840***

62 (2016) 27 JBFLP 47
Dynamics of firm-level financial inclusion: Empirical evidence from an emerging economy

***, **, * represent significance levels at the 1%, 5%, and 10%, respectively. All t-statistics are heteroskedasticity-robust
t-statistics with standard errors clustered by firm.

Variable definitions: FII is the financial inclusion index, SIZE is the banking firm size, measured as the natural logarithm of
the banking firm’s total assets, LEV is the leverage ratio, measured as the ratio of total liabilities divided by total assets, ROA
is the return of assets, measured as the ratio of income before extraordinary items divided by total assets, GOP is the growth
opportunities, measured as the ratio of market value of equity to book value of equity, LIQUID is the liquidity, measured as
the average monthly trading volume relative to total number of shares outstanding, BAGE is the banking firm’s age which
is measured as the natural logarithm of the number of years since the banking firm’s inception, INST is the percentage of
ownership holdings by the institutional investors, ACSIZE is the audit committee size, measured as the natural logarithm of
the total number of members in the audit committee, ACIND is the audit committee independence, measured as the percentage
of the independent members in the audit committee, BSIZE is the board size, measured as the natural logarithm of the total
number of members on the board, BIND is the board independence, measured as the percentage of the independent directors
on the board, FDIR is the percentage of female directors to total directors on the board, REL is the banking firm’s
religion-based operations which is measured if the banking firm has an Islamic banking operations, then we assign a value
of one (1), otherwise zero (0), EM is the earnings management, measured as the natural logarithm of the banking firm’s total
amount of loan-loss provision.

Bank size (SIZE)


The results show that size of the bank is positively associated with a banking firm’s disclosure of
financial inclusion activities. This is not surprising, as larger firms are more visible and attract greater
public and government scrutiny.69 Such scrutiny by various groups in society creates pressure on
larger firms for more social engagement and disclosures. Thus, it is expected that these firms would be
engaged in more financial inclusion activities and disclose this information as well because larger
firms have more stakeholders interested in the social activities of their firms. Banking firms in
Bangladesh are more visible in terms of size, which attracts greater regulatory pressures. One piece of
evidence of this is from the directive for financial inclusion activities issued by the central bank of
Bangladesh.70

Leverage ratio (LEV)


The analysis shows that the leverage ratio does not have any impact on the disclosure of financial
inclusion activities. This finding is consistent with the arguments of agency theory. According to the
agency theory literature, highly levered firms are more likely to have higher contracting costs that
increase monitoring by creditors. This is due to the incremental risk of bankruptcy or liquidation
associated with higher debt levels.71 Debtholders could demand unscheduled audits, liquidity tests or
investment restrictions to continue their financial support and protect themselves from such risks.72
Thus, managers in highly levered firms are more interested in reducing discretionary expenditures to
maintain liquidity than maintaining it through engagement into financial inclusion activities. Instead,
they focus on servicing their debt to ensure their firms receive the continuous support of creditors,
thereby reducing potential risks. Banking firms in Bangladesh are highly levered. It is evident from the
recent reports by Bangladesh Bank73 that the leverage ratio of the majority of banking firms in
Bangladesh was higher compared to those of other sectors. The reports shows that Bangladeshi banks
tend to acquire more assets through borrowing with a view to increasing their return on equity instead
of engaging into financial inclusion activities.

69
R Roberts, “Determinants of Corporate Social Responsibility Disclosure: An Application of Stakeholder Theory” (1992)
17(6) Accounting, Organizations and Society 595-612; RL Watts and JL Zimmerman, “Towards a Positive Theory of the
Determination of Accounting Standards” (1978) 53(1) The Accounting Review 112-134.
70
Bangladesh Bank, n 14.
71
Belkaoui and Karpik, n 48.
72
JR Booth, “Contract Costs, Bank Loans, and the Cross-Monitoring Hypothesis” (1992) 31(1) Journal of Financial Economics
25-41.
73
Bangladesh Bank, Financial Stability Report 2012 (Bangladesh Bank, 2013)
<http://www.bangladesh-bank.org/pub/annual/fsr/final_stability_report2012.pdf>.

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Profitability (ROA)
The analysis shows that profitability is not significantly associated with the disclosure level of
financial inclusion. This implies that there is no relationship between profitability and a banking firm’s
engagement and disclosure of financial inclusion activities. The average profitability of the sample
banking firms’ was 1.40%, ranging from -4.8% to 3.6% over the period from 2008 to 2013. One
possible reason of this insignificant relationship may be attributed to the high variation of profitability.
Furthermore, this finding is consistent with findings from studies relating to a firm’s engagement and
disclosure of social activities.74 Karim et al argue that a firm’s disclosure of social activities is
unrelated to financial performance (profitability) because firms make decisions about disclosure of
social activities in advance of reducing transaction costs.75
Growth opportunities (GOP)
The analysis indicates that there is a positive relationship between a banking firm’s growth
opportunities and the disclosure level of a banking firm’s engagement in financial inclusion activities.
This implies that banking firms with higher growth opportunities are more likely to undertake and
disclose more financial inclusion activities to reduce information asymmetry problems.76 Furthermore,
this finding is not surprising for the banking industry in the context of Bangladesh because the growth
opportunities of the Bangladeshi banking industry are higher, as evidenced by the nine more new
banking firms recently approved in Bangladesh.77
Liquidity level (LIQUID)
The analysis shows that liquidity is not significantly related to the level of financial inclusion
activities. This implies that there is no relationship between liquidity and a banking firm’s engagement
and disclosure of financial inclusion activities. Dhaliwal et al argued that one way to increase liquidity
is to improve transparency and supply more information, including social activities to investors.78
However, our finding contradicts the argument of Dhaliwal et al.
Bank age (BAGE)
The results show that bank age is negatively associated with the banking firms’ engagement and
disclosure of financial inclusion activities. This implies that older banking firms in Bangladesh invest
comparatively fewer resources for financial inclusion activities than their younger counterparts due to
older firms’ long-standing presence in the market. This finding is consistent with Sobhani et al who
find that younger banking firms outperform older banking firms in relation to social activities in
Bangladesh.79
Institutional investors (INST)
The analysis shows that banks with greater levels of institutional investors are positively related to the
level of financial inclusion disclosures. This result implies that banks with more institutional investors
are engaged in more financial inclusion activities because institutional investors deem firms with a
74
Belkaoui and Karpik, n 48; K Karim, M Lacina and R Rutledge, “The Association between Firm Characteristics and the Level
of Environmental Disclosure in Financial Statement Footnotes” (2006) 3 Advances in Environmental Accounting &
Management 77-109.
75
Karim, Lacina and Rutledge, n 74.
76
JM Prado-Lorenzo and IM Garcia-Sanchez, “The Role of the Board of Directors in Disseminating Relevant Information on
Greenhouse Gases” (2010) 97 Journal of Business Ethics 391-424.
77
The newly approved nine banking firms in Bangladesh are Union Bank Ltd, Modhumoti Bank Ltd, The Farmers Bank Ltd,
Meghna Bank Ltd, Midland Bank Ltd, South Bangla Agricultural and Commerce Bank Ltd, NRB Bank Ltd, NRB Commercial
Bank Ltd and NRB Global Bank Ltd.
78
DS Dhaliwal, LO Zhen, A Tsang and YY George, “Voluntary Non-Financial Disclosure and the Cost of Equity Capital: The
Initiation of Corporate Social Responsibility Reporting” (2011) 86(1) The Accounting Review 59-100.
79
Sobhani, Amran and Zainuddin, n 54.

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higher level of social activity as a less risky investment.80 These firms can avoid a considerable level
of pressures resulting from adverse regulatory actions, judicial decisions, or consumer retaliation due
to their engagement with social activities.81 This finding is also consistent with the findings of Bose et
al who show that banking firms with higher levels of institutional investors are more likely to engage
into social activities.82
Audit committee size (ACSIZE)
The analysis shows that audit committee size is positively related to the disclosure level of financial
inclusion activities, implying that banks with larger audit committee sizes are more likely to engage in
financial inclusion activities and to disclose such activities. Firms with a greater size of audit
committee allocate more resources to monitoring the reporting process that influences firms to engage
into more social activities.83 This finding is also consistent with the findings that larger audit
committees are related to higher levels of disclosures and financial reporting quality.84
Audit committee independence (ACIND)
The results indicate that there is no significant relationship between audit committee independence and
the level of financial inclusion activities disclosures. This finding contradicts the findings of Bronson
et al.85 However, this finding can be interpreted as the number of independent members in the audit
committee in Bangladesh. The average audit committee size for the sample banking firm is 3.487,
while the average number of independent member in the audit committee is 0.623. It indicates that
many banking firms do not have independent members on their audit committees, which could be the
reason for the insignificant relationship between audit committee independence and the level of
financial inclusion activities.
Board size (BSIZE)
The results show that there is no significant relationship between board size and the level of banking
firm’s financial inclusion activities in Bangladesh. This insignificant result suggests that it is not
effective in the banking firms in Bangladesh to increase the number of board members to increase the
level of financial inclusion. The average board size of the banking firms in Bangladesh was 14.65.
However, this insignificant result indicates that the quality of board monitoring is based on efficiency
rather than size. John and Senbet argue that the more directors added in the board there is an increase
the board’s monitoring capacity. However, the benefit may be outweighed by the incremental cost of
poorer communication and decision-making associated with larger groups.86 The insignificant
relationship between board size and the level of financial inclusion can be attributed to this
explanation considering the size of the boards in Bangladesh banking firms.
Board independence (BIND)
The data analysis indicates that there is no significant relationship between board independence and
the level of financial inclusion. This implies that the size of independent directors on the board does
not have any influence into the level of financial inclusion activities. However, this finding contradicts
the finding of de Villiers et al who argue that firms with a higher concentration of independent
80
SB Graves and SA Waddock, “Institutional Owners and Corporate Social Performance” (1994) 37(4) Academy of
Management Journal 1034-1046.
81
Graves and Waddock, n 80.
82
Bose, Biswas and Podder, n 53.
83
Bose and Hossain, n 32.
84
H Aldamen, K Duncan, S Kelly, R McNamara and S Nagel, “Audit Committee Characteristics and Firm Performance during
the Global Financial Crisis” (2012) 52 Accounting and Finance 971.
85
S Bronson, J Carcello, C Hollingsworth and T Neal, “Are Fully Independent Audit Committees Really Necessary?” (2009) 28
Journal of Accounting and Public Policy 265.
86
K John and LW Senbet, “Corporate Governance and Board Effectiveness” (1998) 22 Journal of Banking & Finance 371-403.

(2016) 27 JBFLP 47 65
Bose, Bhattacharyya and Islam

directors on the board are more likely to engage in more social activities.87 This inconsistency in
results may be attributed to the variation in the effectiveness and the roles of independent directors.
Ezzamel and Watson argue that independent directors’ effectiveness on the board depends on their
expertise in terms of their skills, knowledge, and experience.88 Thus, the insignificant relationship
between board independence and the level of financial inclusion in Bangladeshi banking firms
suggests that the independent directors may not have sufficient relative experience in banking
operations.
Female directors (FDIR)
The results show that the percentage of female directors has a significantly negative association with
the level of financial inclusion. This implies that the level of banking firm’s financial inclusion
activities decreases as the proportion of female directors increases. This finding is consistent with
recent studies by Ferreira, Smith and Smith et al.89 The researchers argue that the more gender
diversity the board faces, the more the board experiences disagreement and conflict. It creates
prolonged discussions that are considered a serious problem when a company needs to react quickly to
market shocks.90 In addition, more gender diversity could also create communication problems if the
executives of the company are unwilling to share key information with demographically dissimilar
directors, which could limit the efficiency of the board.91 The negative relationship documented in this
study is in line with this argument.
Religion-based operations (REL)
The results show that a banking firm’s religion-based operation is positively associated with the level
of financial inclusion activities disclosures. This implies that banks with Islamic operations in
Bangladesh are more engaged in the financial inclusion activities compared to conventional banks.
This finding is consistent with Sobhani et al where the researchers show that Islamic banks engage in
more social activities compared to conventional banks in Bangladesh based on corporate websites and
on annual reports of 29 listed banking firms for 2009.

Earnings management (EM)


The analysis shows that there is no relationship between banking firm’s earnings management and the
level of financial inclusion. This contradicts earlier research by Prior et al where the researchers show
that managers who act in pursuit of private benefits by distorting earnings information are more
motivated to engage in social activities to protect their positions.92 However, Grougiou et al argue that
certain banks actively invest in social activities to provide a signal about their superior social
performance to the market through which these banks obtain benefits that are difficult for the rest of
the industry to imitate. These acts of signalling superior performance are a central managerial motive
that makes a bank’s engagement with social activities unrelated to the advancement or degradation of

87
C de Villiers, V Naiker and CJ van Staden, “The Effect of Board Characteristics on Firm Environmental Performance” (2011)
37 (6) Journal of Management 1636-1663.
88
M Ezzamel and R Watson, “Boards of Directors and the Role of Non-Executive Directors in the Governance of Corporations”
in K Keasey, S Thompson and M Wright (eds), Corporate Governance: Accountability, Enterprise and International
Comparison (Wiley, 2005).
89
D Ferreira, “Board Diversity” in R Anderson and HK Baker (eds), Corporate Governance (Hoboken, NJ: John Wiley & Sons,
2010) 225-245; N Smith, “Gender Quotas on Boards of Directors” IZA World of Labor, <http://wol.iza.org/articles/gender-
quotas-on-boards-of-directors>; N Smith, V Smith and M Verner, “Do Women in Top Management Affect Firm Performance? A
Panel Study of 2500 Danish Firms” (2006) 55(7) International Journal of Productivity and Performance Management 569-593.
90
Ferreira, n 89; Smith, n 89.
91
Ferreira, n 89; Smith, n 89.
92
Prior, Surroca and Tribó, n 52.

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Dynamics of firm-level financial inclusion: Empirical evidence from an emerging economy

the firm’s financial reporting quality measured by earnings management. The insignificant association
between earnings management and the level of financial inclusion is attributed to this explanation.93

SENSITIVITY ANALYSES
We test the robustness of our results using two additional analyses. First, in our determinants model,
we use alternative proxies for our variables of interest. We include one for firm size (SIZE) which is
the natural logarithm of the market value of equity. Further, we use an alternative proxy for
profitability (ROA) which is the ratio of profit before tax and total assets. We replace growth
opportunities (GOP) proxy by Tobin’s Q (TOBINQ). We also use a different proxy for banking firm
age (BAGE) which is based on the number of years listed on the stock exchange (FLISTING). We also
test whether any relationship exists between the presence of female directors on the board and the
level of financial inclusion disclosures using a dummy variable for FDIR. In this case, FDIR takes a
value of 1 if a board has female members and 0 otherwise. Second, we use the raw score of financial
inclusion index instead of un-weighted approach. Overall, we find qualitatively similar results with
these alternative proxies to those contained in Table 5.

CONCLUSIONS
The objective of this study was to analyse the present status of the financial inclusion activities by
commercial banks in Bangladesh. It also explored the factors that may affect the banking firm’s
engagement and the level of disclosure of financial inclusion activities. This study develops an index
of financial inclusion in the light of the directive released by the central bank of Bangladesh in 2008.
The results show an upward trend of banking firm’s engagement and disclosure of financial inclusion,
and the level has significantly increased during the period examined. Furthermore, the level of
financial inclusion disclosure is positively associated with a banking firm’s size, growth opportunities,
institutional investors ownership, audit committee size, religion-based operations and negatively
associated with the percentage of female directors and the banking firm’s age.
This study contributes to the existing literature on financial inclusion in a number of ways. One
significant contribution is the development of financial inclusion index from the organisational
perspective that captures multidimensional aspects of financial inclusion. The upward trends of the
level of disclosure of financial inclusion suggest that firms face coercive isomorphism from the
regulators that influence them to disclose this information. Thus, the findings of this study support the
predictions of the institutional theory. In addition, the study documents both banking firm-specific
financial and governance factors that may affect the level of financial inclusion disclosures. These
findings enhance our understanding of the dynamics of financial inclusion. The relationship between
corporate governance factors and the level of financial inclusion suggests that good corporate
governance is vital for improving the level of financial inclusion. Similarly, the positive relationship
between institutional investors and the level of financial inclusion signifies that this type of
information is crucial to institutional investors for their investment decision making. Thus, firms need
to be strategic and address this type of information.
The results of this study have several implications for managers, regulators and policy makers in
Bangladesh. Managers may find the relationship of financial inclusion activities with institutional
shareholding interesting because they can use financial inclusion activities to access finance from
institutional investors. Regulators may find this study useful to assess the present status of financial
inclusion in Bangladesh. Policy makers may use the results of this study in formulating future policies
with respect to financial inclusion and use the results to promote overall CSR of the Bangladeshi
banking industry.
The results of this study have several limitations that may be addressed in future research. First,
this research focuses only on the level of financial inclusion of listed banking firms in Bangladesh.
Future research may extend this to non-listed banking firms in Bangladesh to examine how they
93
V Grougiou, S Leventis, E Dedoulis and S Owusu-Ansah, “Corporate Social Responsibility and Earnings Management in US
Banks” (2014) 38 Accounting Forum 155-169.

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Bose, Bhattacharyya and Islam

address financial inclusion in their business strategies. The study also opens a number of avenues for
future research. Future research could examine the impact of financial inclusion on a banking firm’s
performance. Other research could be conducted to address both the investors and stakeholders’
sentiment because an important empirical question is how both the investors and stakeholders evaluate
corporate activities in relationship to financial inclusion.

68 (2016) 27 JBFLP 47

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