Gauging the Impact of Digital Finance on Financial Stability in the Presence of Multiple Unknown Structural Breaks: Evidence from Developing Economies

The implications of digital finance for financial stability has come under serious scrutiny since the aftermath of the 2008 global financial crisis (GFC). Empirical evidence on this nexus are somewhat inconsistent and ambiguous. This study therefore attributes this puzzle to multiple structural breaks (MSBs) which were long neglected by previous studies. Consequently, this study aims to identify possible MSBs in the digital finance–stability nexus and examine if its impact is consistent/weakened in the presence of MSBs in a sample of 41 developing African economies for the 2004–2023 periods. Results from the PCA index generation report that instability is more susceptible to bank crisis/Z-score. Again, the panel extension of BP98 MSBs detection identified three breaks with their confidence intervals overlapping the periods of the 2006–2011 GFC/subprime mortgage crises, the 2012–2016 Br-exit referendum and the 2017–2021 COVID 19 pandemic/Ukraine war. The quantile regression methodology also shows that these breaks weaken the impact of digital finance (i.e., mobile banking and internet banking) on financial stability, particularly for economies at lower quantiles of financial stability but with marginal effects for economies at higher quantiles. The study concludes that digital finance can stabilize the financial system of developing economies when shocks from structural breaks are controlled. Therefore, the study contributes to knowledge by developing a new econometric model for BP98 panel extension of MSBs detection, calibrating an index for financial stability and detecting valid break dates for three major breaks. Structural and financial development through policy coordination to forestall the effects of structural breaks were recommended.