The Impacts Of Financial Inclusion And Digital Finance Technology On Financial Stability Of The Banking System Of Developing Economies

The financial sector is considered an important component of the economic system.The economic sectors are highly dependent on the banking industry for working capital and investment funds hence disruption in the banking industry affects the economic sectors in a country.Both financial stability and financial inclusion are key on the agenda of regulators,policymakers and governments across the globe.There is a call by the G-20 for global commitments towards the advancement of both financial inclusion and financial stability(for example,the G20 Pittsburgh Summit in 2009,the 2011 Maya Declaration,the Global Partnership for Financial Inclusion,the Basel Ⅲ Implementation and Financial Stability Board among others).The call for financial stability is not surprising especially after the 2007/2008 economic crunch.However,many economies,particularly developing economies,have struggled to achieve financial stability.As economies around the world strive to increase financial inclusion(FI)as part of their strategy to develop the economic and financial sectors by providing access to financial services,they maybe exposing their financial systems to fragility especially when there are several digital finance technologies that financial inclusion thrives.Hence,efforts to establish a connection between the financial inclusion and financial stability of developing countries may produce empirical results that are helpful to academics and policy makers generally.The stability of the financial sector in developing economies is a linchpin for their socioeconomic development.In navigating this delicate balance between inclusion and stability,policymakers,regulators,and industry stakeholders must grapple with multifaceted questions.How can financial services be extended to those most in need without jeopardizing the stability of the financial system?What risks do digital finance technologies introduce,and how can these be mitigated to preserve financial stability?The answers to these questions are of paramount importance.This research seeks to delve deep into the impacts of financial inclusion and digital finance technology on the financial stability of developing economies.Thus,this study examines the impact of financial inclusion and digital finance technology on financial stability of developing countries.This study is a cross-country investigation that encompasses 55 developing nations selected from diverse regions around the world,with the selection primarily based on data availability.The dataset covers the period 2000 to 2020 for the selected developing economies.For the purposes of reducing geographical heterogeneity and fully exploring the subject under study,the dataset was divided into two.Firstly,the dataset encompasses all the 55 developing nations.The second set of data focused on the 55 selected economies sub-grouped based on regional groupings as classified by the World Bank.These regional groupings are East Asia and Pacific(EAP),Europe and Central Asia(ECA),Latin America and Caribbean(LAC),Middle East and North Africa(MENA)and Sub-Saharan Africa(SSA).In line with the objectives and hypotheses of the study and per the results of the preliminary analysis of the datasets,the study chose Panel Quantile regression with fixed effects(MMQREG),Pooled Driscroll and Kraay(XTSCC),Pooled Mean Group panel Autoregressive Distributed Lag(PMG panel ARDL)and Panel Dynamic Ordinary Least Square(DOLS).These are robust panel models and they allow for problems such as heterogeneity and endogeneity to be corrected in the course of estimation.Additionally,to check for robustness of the results of the various estimations,this study made use of Driscoll and Kraay with fixed effects,Bootstrap Quantile regression(BSQREG),Fully Modified Ordinary Least Squares(FMOLS),Pooled regression(POLS)and Hausman tests.Firstly,hypothesis one which examines the link between financial inclusion and financial stability was analysed.Using all selected developing economies as a whole sample,hypothesis la centered on analysing the impact of financial inclusion and financial stability.The empirical findings from the Driscoll-Kraay estimator shows that financial inclusion(FI)had negative effect on financial stability(FS)of developing economies all other things being equal.Thus,a 1%rise in financial inclusion will decrease financial stability of the developing countries by 0.1636.The negative effect of financial inclusion on the financial stability of the banking system of developing economies suggests that financial inclusion can undermine stability if it is extended to untrustworthy clients and uncharted territory,increasing credit risk due to a large number of hard-to-monitor borrowers,eroding credit standards,and posing a bad reputation risk.Hypothesis lb centered on analyzing the impact of financial inclusion financial stability of developing economies by regions.The panel DOLS results revealed that financial inclusion had a negative and significant impact on the financial stability of developing economies in ECA and LAC regions but no significant impact on financial stability of developing countries in the other regions.Secondly,the study analysed objective two by examining the impact of digital finance technology on financial stability.Hypothesis 2a of the study centered on analysing this very objective from the viewpoint of developing countries as a whole.The results shows that digital finance technology proxied by mobile phone subscription negatively influences financial stability of developing economies.The results from the MMQREG indicate that a percentage increase in mobile phone subscription will lead to a decrease in financial stability by 0.0028,0.0063,0.0093 and 0.0142 respectively for developing countries distributed along the low and moderate quantiles(25%and 50%)and high and very high quantiles(75%and 90%).On the other hand,digital finance technology proxied by internet usage significantly and positively affects financial stability(FS)of developing economies.The MMQREG shows that a 1%increase in internet usage will increase financial stability(FS)by 0.0023,0.0043,0.0070,and 0.011 for developing economies distributed along low and moderate quantiles(25th and 50th)and high and very high quantiles(75th and 90th)respectively.For the regional analysis,that is,hypothesis 2b,the PMG ARDL estimation results demonstrate that internet usage had significant and negative long-term effects on the financial stability of developing economies in the ECA and LAC regions while the impact on the financial stability of developing economies in the MENA and SSA regions was positive.This suggests that over time,an increase of 1%in internet usage will result in a reduction of 0.123 and 0.0043,respectively,in the long-term financial stability of developing countries in the ECA and LAC regions.However,an increase of 1%in internet usage will result in an increase of 0.003 and 0.466 respectively,in the long-term financial stability of developing countries in the MENA and SSA regions.In the short term,internet usage did not have any significant effect on financial stability of all the regional economies.Moreover,the results of the PMG ARDL estimation show that mobile phone subscription had positive impact on financial stability of developing economies in EAP and ECA regions but a negative impact on financial stability of developing economies in LAC and SSA regions in the long run.This suggests that a 1%increase in mobile phone subscription will enhance financial stability of developing economies in EAP and ECA region by 0.0031 and 0.0099 while it will decrease financial stability of developing economies in LAC and SSA by 0.0030 and 0.0216 in the long run.Mobile phone subscription had negative but statistically insignificant impact on financial stability of developing economies in MENA region.The results show varied impacts of mobile phone subscription on financial stability of regional economies in the developing world.In the short run,mobile phone subscription did not have any significant impact on financial stability.In general,the study discovered varied findings regarding the impacts of digital finance technology on financial stability of regional economies in the developing world.For instance,while digital finance technology proxied by mobile phones subscription decreases financial stability of developing economies in LAC and SSA regions,it increases financial stability of developing economies in EAP and ECA regions.Similarly,while digital finance technology proxied by internet usage increases financial stability of developing economies in MENA and SSA regions,it decreases financial stability of developing economies in ECA and LAC regions.The differing impact of digital finance technology on financial stability is largely due to regional variations in the level of digital finance technology and the efforts towards financial stability.Lastly,the study analysed objective three with a focus on aligning both financial inclusion and digital finance technology with financial stability.For this purpose,the study analysed the two sub-hypotheses:3a and 3b accordingly.From the results,financial inclusion and digital finance technology jointly influence financial stability of developing nations.Also,the study showed that the relationship between financial inclusion and digital finance technologies has a variety of effects on the financial stability of developing economies.When the topic was examined from regional perspective,financial inclusion had a negative impact on the financial stability of developing economies in the ECA and LAC region but a positive impact on developing economies in the MENA region.The findings indicate that while financial inclusion promotes financial stability in the MENA region,it undermines financial stability in developing countries in the ECA and LAC regions.In terms of digital finance technology,the results show that digital finance technology as measured by mobile phone subscription had positive long-term effects on the financial stability of developing countries in the EAP,ECA,and MENA areas,but negative effects on developing economies in the LAC and SSA regions.Digital finance(using Internet usage)had a positive impact on financial stability of developing economies in EAP and SSA regions while it had negative impact on financial stability of developing economies in ECA,LAC and MENA regions.According to the PIVREG FE outcomes,financial inclusion,as a consequence of digital finance technology significantly impacts financial stability of developing economies.Financial inclusion has a negative impact on financial stability,showing that financial inclusion makes the financial stability of the sampled developing economies worse.In summary,the results from this study are accurate and reliable considering the fact that panel econometric models used are best suited to the datasets and research hypotheses.Aligning financial inclusion,digital finance technology with financial stability in this study is way of verifying the theoretical argument that digital finance technology promotes financial inclusion,which in turn influences financial stability.