Digital Financial Development, Institutional Efficiency, and Bank Stability in Sub-Saharan Africa

This study examines the relationship between Digital Financial Inclusion (DFI) and bank performance in Sub-Saharan Africa using a balanced panel of 28 economies over 2004-2021. The empirical strategy employs two-way fixed effects with Driscoll-Kraay standard errors to address cross-sectional dependence. Robustness checks employ System-GMM to address endogeneity. Three findings emerge. First, DFI is positively and robustly associated with bank profitability (Net Interest Margin), but its effect on bank stability (Z-score) is weaker and sensitive to specification. Second, Financial Institution Efficiency (FIE) and Financial Market Access (FMA) proposed in the literature as moderators of digital finance effects do not robustly moderate the DFI relationship; instead, they operate as direct competitive forces that compress bank margins and shift risk-taking profiles. Third, macroeconomic regimes condition the DFI–performance relationship: DFI's profitability effect concentrates in high-interest-rate and low-inflation environments. These findings yield three policy implications: (i) regulators should frame DFI as a profitability tool rather than a stability tool, as the data do not support claims that digital inclusion automatically reduces bank insolvency risk; (ii) central banks should sequence digital-inclusion policy with monetary stance, since DFI's effect on bank earnings is asymmetric across interest-rate regimes; and (iii) development institutions should pair digital infrastructure financing with macroeconomic stabilization, as DFI's positive returns are concentrated in stable macroeconomic environments.