Modeling the Interactions Between Interest Rate Suppression Risk and Financial Inclusion on Bank Financial Robustness using Simultaneous Equations

Abstract

Research shows that interest rate suppression in the economy has adverse effects on bank performance. These conditions lead to increased risk, reduced banks’ ability to provide loans, reduced core banking activities, and decreased operating profit margins. In contrast, financial inclusion has been considered as an important policy for increasing access to financial services in recent years. By expanding the scope of bank customers, especially among people who were previously deprived of banking services, this policy can increase deposits and create more diverse and stable financial resources for banks. Given the functional conflict between interest rate suppression and financial inclusion, it is necessary to evaluate the simultaneous effects of these two factors on the banking system. In this study, information on 15 banks and financial institutions active in the Tehran Stock Exchange over a 9-year period (2014 to 2022) was examined. Data were collected through a library method and document mining. To test the research hypothesis, after constructing indicators related to financial inclusion, multiple regression and simultaneous equations method using mixed data were used. The results show that in the conditions of interest rate suppression, the financial behavior of banks is highly dependent on financial inclusion. Financial inclusion in this situation has improved indicators such as equity ratio, capital adequacy, and loan-to-deposit ratio and has had a significant positive impact on the stability and stability of banks and the financial soundness of the bank in general.