Abstract
The advancement in fintech technological development in emerging countries has accelerated the role of digital finance in economic development. Digital finance assists in financial inclusion; however, it may also increase the chances of financial instability due to systematic risks. Emerging countries are also in the clutches of shadow economic growth, which reduces taxable income revenue and creates pressure on financial inclusion prospects. The current study attempts to measure the impact of digital finance on the shadow economic growth and financial stability among the selected South Asian emerging countries. We have used the CUP-FM and CUP-BC estimation methods to measure the above relationship on two model frameworks from 2004 to 2018, with the former measuring the influence of digital finance on the shadow economy and the latter examining the relationship between digital finance and financial stability. In addition, the second-generation unit root test, and the Westerlund cointegration analysis are also employed to confirm the stationarity and cointegration among the variables. The result of the Westerlund’s cointegration confirms a long cointegration between the explanatory and outcome variables. Furthermore, the long-run estimation results conclude that an increase in digital finance helps in reducing the growth of the shadow economy among the selected sample countries. However, it also increases the likelihood of systematic risks and increases financial instability. The study also reveals that the control variables like unemployment and industrial productivity also have a significant influence on financial stability and the shadow economy. The findings will assist readers in comprehending how digital finance influences the shadow economy and promotes financial inclusion and stability in emerging nations.
Highlights
Digital finance involves the unification of financial services and digital technologies.The advancement in big data analysis, artificial intelligence, and information technology has made a remarkable contribution toward digitalization [1]
The excessive use of digital payments and digital platforms may increase unethical activities and create financial sector instability. Based on these technological spillover effects, this study investigates the impact of digital finance on the shadow economy and financial stability among the panel of selected
The nonperforming loans average in the sample countries is 9.27%; on the contrary, the average NPL in other developed countries is less than 4%
Summary
Digital finance involves the unification of financial services and digital technologies. The excessive use of digital payments and digital platforms may increase unethical activities and create financial sector instability Based on these technological spillover effects, this study investigates the impact of digital finance on the shadow economy and financial stability among the panel of selected. The untapped financial market, high level of shadow economy, and ongoing transition in digital finance further motivate us to investigate the above relationship in the context of South Asian countries. These countries have a high proportion of shadow economy compared to other countries of the world These countries are taking drastic measures to improve financial inclusion through fintech technologies and digital finance. The paper further proceeds as follows; Section 2 covers a literature review and theoretical framework; Section 3 focuses on methodology and variable description; Section 4 covers data analysis, and Section 5 includes the concluding remarks and discussion
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