An Analysis of the Impact of Digital Financial Inclusion on Financial Stability

Abstract

Over the last few years the world at large have witnessed a rapid development in digital finance providing a promise to accelerate financial and economic inclusion. This has led to an inclusive growth focused on financial inclusion as a policy issue. Digital financial services have allowed governments to disburse funds to those in need quickly and have opened up new opportunities to many households and firms that had limited or no access to formal financial services. The major objective of the study was to examine the impact of digital financial inclusion on financial sector stability. The study adopted a quantitative research design and used two-step Generalized Method of Moments for dynamic panel data to explore such a relationship in twelve selected banking institutions for the period 2013 to 2023. An index of digital financial inclusion, z-score, real GDP, loans to asset ratio as well as inflation were used as data variables. The results of this study suggest that digital financial inclusion has a significant positive relationship with bank stability (z-score). Economic growth has a marginal positive effect with bank stability. In order to achieve sustainable digital financial inclusion, the study calls for policymakers to ensure digital financial literacy for all since it feeds into bank stability and also reduces bank insolvency. They should also find ways of enhancing depositor confidence and trust in the banking industry.