The Impact of Digital Financial Inclusion and Bank Competition on Bank Stability in Sub-Saharan Africa

Abstract

The last few years have witnessed a rapid development in digital finance that may threaten the manner in which traditional financial services are being used. It opens up new opportunities for low-income groups and small businesses that have limited or no access to formal financial services. Thus, digital financial inclusion plays a vital role in boosting a country’s financial inclusion, fulfilling some sustainable development goals and achieving higher economic growth. This study builds on a new measure of digital financial inclusion to examine the impact of digital financial inclusion and bank competition on bank stability in Sub-Saharan Africa for the period 2014 to 2020 using the two-step System Generalised Method of Moments. An index of digital financial inclusion, z-score, Herfindahl–Hirschman Index (HHI), and non-performing loans were used as data variables. The study findings reveal that digital financial inclusion has a significant positive relationship with bank stability (z-score) and a negative relationship with non-performing loans. The study also found a significant negative effect of bank competition (HHI) on bank stability in line with the competition-fragility view. Policymakers should ensure digital financial literacy for all since it feeds into bank stability and also reduces bank insolvency. They should also find ways of enhancing bank competition which reduces non-performing loans and bank insolvency. On practical implications, the study calls for strategic measures to preserve bank stability, such as complementing digital financial inclusion with financial literacy and enhancing bank competition.

The dynamics of the financial inclusion index for developing countries: lessons learned

“…The results corroborate those of Sarma (2016), Nguyen (2021) and Chinoda and Kapingura (2023), who demonstrated that financial inclusion is lower in Africa than in other continents and that financial inclusion has decreased slightly in developing countries from 2012 to 2018. Further, we find that the countries with the highest FII are those with the highest scores in the Doing Business 2020 business climate regulation ranking [Mauritius (81.5), Malaysia (81.5), Thailand (80.1), South Africa (67), Zambia (61.4) and Togo (62.3)] (World Bank, 2020).…”

Unveiling the drivers of Africa's digital financial inclusion journey

“…Previous literature on digital financial inclusion in Africa has increasingly utilized composite indices to assess its progress. However, these studies have been subject to several limitations (Al‐Smadi, 2023; Chinoda & Kapingura, 2023a, 2023b; Khera et al, 2022), underscoring the need for more comprehensive and nuanced evaluations of this critical development issue.…”

“…Moreover, the existing literature on digital financial inclusion in Africa has predominantly relied on either theoretical framework (Isukul & Tantua, 2021; Mhlanga, 2020; Telukdarie & Mungar, 2023), descriptive approaches (Agwu, 2021; Machasio, 2020) or macro‐level analyses (Beyene Fanta & Makina, 2019; Chinoda & Kapingura, 2023a, 2023b; Khera et al, 2022; Kouladoum et al, 2022; Tok & Heng, 2022). However, no study has successfully achieved the following three significant objectives in the realm of digital financial inclusion in Africa to date: (1) quantifying the level of digital financial inclusion in Africa in the post‐COVID‐19 era; (2) exploring the microeconomic determinants of the region's access and usage of digital financial services; and (3) identifying potential barriers that may impede African citizens from reaping the benefits of digital financial services.…”

Relationship between financial inclusion, monetary policy and financial stability: An analysis in high financial development and low financial development countries

“…In addition, findings indicate that investment is a very important variable for financial development and financial stability in Nigeria. Chinoda and Kapingura (2023) [ 9 ] conducted a study on the comprehensive relationship between digital financial inclusion, financial competition, and bank stability in the sub-Saharan African region during the period 2014–2020 by using the GMM regression. The research results show that digital financial inclusion has a significantly positive relationship with stability in the sub-Saharan African (SSA) region and there are both short-term and long-term relationships between financial inclusion, financial stability, and economic growth in SSA countries.…”

“…Lessons learned from the 2008 global financial crisis, high financial inclusion coupled with low interest rates providing a large amount of credit to the economy was pushed into the real estate market as the trigger for the financial system's collapse. Thereby, it can be seen that financial development is crucial when studying the linkage of financial inclusion, monetary policy and financial stability while previous studies has ignored this issue [ [6] , [7] , [8] , [9] , [10] , [11] ]. Therefore, this study adds to the gap of previous studies.…”