Is the Relationship between Financial Technology and Credit Risk Monotonic? Evidence from the BRICS Economies

Abstract

This study employed the panel ARDL (1, 1) pooled mean group, mean group and dynamic fixed effect estimators to investigate the relationship between financial technology (Fintech) and bank credit risk measured in terms of nonperforming loan to total loan (NPL) among the BRICS (Brazil, Russia, India, China and South Africa) economies over the 1995-2018 period. The study made a novel contribution to Fintechs’ data series by generating an indicator for Fintech using the principal component analysis. The findings reveal a consistent result with previous studies that both macroeconomic and bank-specific factors drive credit risk. We also found a non-linear relationship between Fintechs and credit risk. The U-shaped relationship between Fintechs and NPL revealed that BRICS economies face a dampening impact of Fintech on NPL to a certain threshold after which further adoption of Fintechs will significantly raise credit risk. The robustness checks of the dynamic panel Generalized Methods of Moments (GMM) and the fixed effect models also revealed a consistent conclusion. We recommend the optimization of the right Fintech adoption with bank collaboration among the BRICS economies.