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

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.

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