The Impact of Financial Inclusion on Bank Performance: The Moderating Role of Digital Transformation in Jordanian and Palestinian Banks

Abstract

This study aims to investigate how financial inclusion influences the financial performance of banks in Palestine and Jordan. It further explores whether digital transformation serves as a moderating factor in the relationship between financial inclusion and the financial performance of banks. The period from 2015 to 2024 was selected to showcase the recent changes brought about by the digital transformation in the banking sector.

It adopted a descriptive, analytical quantitative approach to statistically represent the variables of the study. The analysis was based on the audited annual financial statements of all 21 banks operating in Palestine and Jordan. These include seven Palestinian banks and 14 Jordanian banks, where five are Islamic banks. The data were gathered from the audited annual reports of banks, publications of banking associations in Palestine and Jordan, and reports by the Palestinian Monetary Authority and Central Bank of Jordan. In addition, the macroeconomic indicators were sourced from the World Bank database.

The study covered several variables. Financial performance of banks was measured by return on assets (ROA) and return on equity (ROE), and financial inclusion indicators the independent variables were the number of bank branches, the number of automated teller machines (ATMs), the number of points, of, sale (POS) terminals, and the percentage of financing allocated to small and medium, sized enterprises (SMEs). Digital transformation was a moderating variable and was gauged by the frequency of its disclosure in annual reports. Also, a comprehensive list of control variables was added to the model, which consisted of bank size, leverage, economic growth, asset composition, Non-performing loans, inflation, bank type, and country.

The study results unveiled that financial inclusion positively impacts banks financial performance. This evidence was mostly reflected in the statistically significant and positive influence on financial performance through the number of ATMs, while other financial inclusion indicators showed no significant impact. Furthermore, the results showed a significant negative effect of digital transformation on financial performance. The major reason for this result was the substantial costs that come along with the initial phase of the adoption of new technologies. However, it is expected that digital transformation will take a leading role in enhancing financial performance, as theoretical argumentation points out that it leads to a significant improvement in the banks' operational efficiency and service quality. Besides, digitization also opens up multiple channels for banks to reach more segments of society in a more convenient and efficient way. Finally, the research found that digital transformation deepens the association between ATMs and banks financial performance.

Regarding the control variables, it was found that bank size, GDP, and inflation are the most significant factors affecting financial performance. As for the impact of country on financial performance, the results showed no statistically significant differences based on whether the country was Jordan or Palestine.

Based on the study's findings, several recommendations were made. Among the most prominent was the emphasis on the importance of expanding investment in digital infrastructure. Such investments would enable banks to enhance the financial services they offer and improve their operational efficiency. The study also recommended adopting a phased approach to implementing digital transformation strategies. This approach would allow banks to avoid the high costs of digital transformation in the short term while achieving sustainable returns in the long term.