Financial inclusion and bank risk-taking in Southeast Asia: A comprehensive analysis of traditional and digital dimensions

Abstract

This paper aims to examine the impact of both traditional financial inclusion (FI) and digital financial inclusion (DFI) on bank risk-taking, particularly in the context of Southeast Asia, where this relationship remains ambiguous. Financial inclusion plays a crucial role in advancing the 17 UN Sustainable Development Goals by enhancing livelihoods, reducing poverty, and stimulating economic growth. However, its implications for financial stability are still under debate, especially with the rapid emergence of digital financial services. This research collected data from 76 commercial banks across Southeast Asian countries. The research team applied the methodology of Principal Component Analysis (PCA) to construct composite indices for both traditional (FI) and digital dimensions (DFI) of financial inclusion, followed by regression analysis to investigate their respective effects on bank risk-taking behavior. The key results are: (i) traditional financial inclusion tends to reduce bank risk-taking, whereas digital financial inclusion initially increases risk; (ii) however, this positive relationship is projected to reverse as digital ecosystems mature and regulatory frameworks strengthen. Based on these results, the recommendations are: first, governments and central banks should continue to promote both traditional and digital financial inclusion initiatives. Second, they must remain alert to potential risks during the digital transition. Third, commercial banks should enhance digital financial literacy and improve institutional quality to ensure that financial inclusion contributes to reduced bank risk-taking in the long term.