The impact of digital finance and financial inclusion on banking stability: International evidence

Authors

DOI:

https://doi.org/10.24136/oc.3046

Keywords:

banking stability, digital finance, financial inclusion, quantile regression, sustainable finance, transmission channel

Abstract

Research background: Achieving a jointly stable and inclusive financial system represents an important pillar of the call for action among Sustainable Development Goals. Considerable attention from previous research has been given to traditional financial inclusion (FI) and its implications on financial stability and overall development, but the findings are mixed. Furthermore, there is limited evidence related to the implications of digital financial inclusion on banking system stability. Therefore, the present study tends to address two main research questions, as follows: Can traditional financial inclusion protect banking stability? Can digital finance inclusion become a new driving force to promote banking stability?

Purpose of the article: The paper aims to assess the influence of both traditional and digital financial inclusiveness on banking stability, using quantile regression, across a panel of 81 countries. We also examine the potential transmission channels through which financial inclusiveness influences banking stability.

Methods: We construct three different financial inclusion indices, which capture the degree of access and usage of financial services, based on a three-stage Principal Component Analysis. Next, based on quantile analysis, we test the role of these financial inclusion indices in shaping banking stability.

Findings & value added: We provide international evidence on the non-linear relationship between traditional and digital FI and banking stability, respectively. Our empirical findings suggest that FI indices are negatively related to banking stability until a certain threshold, after which, increases in financial inclusiveness have a positive effect on banking stability. The magnitude of the impact is more sizeable for low-range quantiles, meaning that the effect of digital inclusiveness is more pronounced in countries with excessive risk-taking tendencies. We find support for operational efficiency transmission channels and uncover new evidence on the association between digital FI and banking stability.

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Author Biography

Anca Elena Afloarei Nucu, Alexandru Ioan Cuza University of Iasi

AFLOAREI NUCU Anca Elena Ph. D. is Lecturer at the Alexandru Ioan Cuza University of Iași, Faculty of Economics and Business Administration. She graduated a master’s program in Banks and financial markets and holds a PhD in Finance since 2013. Her research interests include, inter alia, corporate finance, renewable energy, financial stability, and empirical finance. She has widely published in peer-reviewed international journals, such as Renewable Energy, Baltic Journal of Economics, Emerging Markets Finance and Trade, Economic Systems, Entropy, E&M Ekonomie A Management, Ekonomicky Casopis, and others.

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Published

2024-06-30

How to Cite

Anton, S., & Afloarei Nucu, A. E. (2024). The impact of digital finance and financial inclusion on banking stability: International evidence. Oeconomia Copernicana, 15(2), 563–593. https://doi.org/10.24136/oc.3046

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