Digital financial inclusion and bank stability Nexus: International evidence
Professor Kabir Hassan from the University of New Orleans
The global financial crisis, technological innovation, and the current COVID-19 pandemic results in interest for various initiatives to stabilize the banking sector and advance digital financial inclusion (DFI) for global policymakers and standard setters. Yet, we know the long-term impact of DFI on bank stability. Using a sample of 1371 banks from 53 countries from 2011 to 2019, this study aims to investigate whether any synergies or trade-offs exist between DFI and bank stability in a global perspective. Notwithstanding the early stage of digital finance, our empirical evidence finds that a wider level of DFI, with proper supervision and regulation, stabilizes the banking sector, subsequently bringing the overall financial sustainability in the global context. Our robust results also suggest banks’ responses regarding the DFI-bank stability nexus are heterogeneous among different regions, different income levels, different bank sizes, and different bank types. Further evidence suggests by focusing on disadvantaged people and including them under formal financial services in the form of account opening and digital financial services, gaps in DFI are reduced which ultimately brings a higher level of bank stability in the form of diversification benefits. Our study recommends specific policies for the policymakers.
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