Sustaining and Stabilizing During Covid-19: Effective Management of Bank Financial Behavior through Digital Financial Inclusion

Abstract

Digital financial inclusion is critical for achieving higher economic growth, sustainable development, and a more financially inclusive nation. Additionally, digital financial inclusion is vital for stabilizing the Islamic banking industry during the COVID-19 epidemic, leveraging its resistance to financial shocks, and fostering financial inclusiveness. Islamic banks are usually considered because of their significant ability to counter financial crises and their prominent contribution to financial landscape. This study investigated the digital financial inclusion and Islamic banking stability nexus using unbalanced panel data from 65 Islamic banks from six countries from 2010 to 2021. This study uses a GMM approach and a Z score. The finding implies that the default risk of the banks in the analyzed area is reduced due to the increased stability of Islamic banking brought about by the broader application of digital financial inclusion. Digital financial inclusion is more strongly correlated with banks' financial soundness. Access to banking services, made possible by digital financial inclusion, also dramatically improves banking stability and makes banks more resilient. Moreover, incorporating digital financial inclusion into Islamic banking promotes inclusive economic development, which may help the industry weather crises like the present COVID-19 epidemic. This study lays out the policy implications that increasing bank stability, bolstering financial literacy, and combining digital financial inclusion with other strategies to keep banks viable.