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Do Digital Financial Services Influence Banking Stability and Efficiency: An ARDL Analysis of a Developed and a Developing Economy

In: The New Digital Era: Digitalisation, Emerging Risks and Opportunities

Author

Listed:
  • Aamir Aijaz Syed
  • Ercan Özen
  • Muhammad Abdul Kamal

Abstract

Purpose:The advent of the fintech revolution has brought a tremendous increase in the dissemination of digital financial services. Although digital financial services increase financial inclusion through financial intermediation, it also increases the chances of systematic risk. Need:In the quest to satisfy the curious minds, the authors have examined the influence of digital financial services on banking stability and efficiency. Methodology:To achieve the above objectives, the authors have used the Auto-Regressive Distribution Lag (ARDL) estimation technique on the annual data set of India and the United States from 2004 to 2018. In addition, to estimate the long-run cointegration, the ARDL bound approach is also used. Findings:The empirical analysis concludes that in the short run, the expansion of digital financial services in India in the form of internet-based transactions and mobile money transactions creates a negative and significant impact on banking efficiency and stability. Meaning, banking sector efficiency and stability fall by 0.09% and 0.05% with a 1% increase in digital financial services. However, in the long run, digital financial services enhance banking stability and efficiency in India. Besides, the study also reveals that in a developed country like the United States, both in the short run and long run, expansion of digital financial services helps in improving banking efficiency and stability. Furthermore, in context to control variables, the findings suggest that in the short run, industrial productivity has a negative influence on the Indian banking sector efficiency and stability, compared to the positive impact in the long run. This is unlike the United States, where both in the long-run and short-run, industrial productivity has a positive influence on the banking sector’s efficiency and stability. Practical implication:The findings reveal several policy implications and suggest policy synergies between digital financial services, banking stability and efficiency.

Suggested Citation

  • Aamir Aijaz Syed & Ercan Özen & Muhammad Abdul Kamal, 2022. "Do Digital Financial Services Influence Banking Stability and Efficiency: An ARDL Analysis of a Developed and a Developing Economy," Contemporary Studies in Economic and Financial Analysis, in: The New Digital Era: Digitalisation, Emerging Risks and Opportunities, volume 109, pages 13-30, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:csefzz:s1569-37592022000109a002
    DOI: 10.1108/S1569-37592022000109A002
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    More about this item

    Keywords

    Digital finance; fintech revolution; banking efficiency; banking stability; developing economy; developed economy; G2; C5; O3; P3;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • P3 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions

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