The Impact of FinTech on Financial Inclusion and Financial Stability in Selected Developing Countries

Document Type : Research Paper

Authors

1 Ph.D. Candidate, Department of Financial Economics, Faculty of Economics and Management, Urmia University, Urmia, Iran.

2 Associate Prof., Department of Economics, Faculty of Economics and Management, Urmia University, Urmia, Iran.

10.22059/frj.2025.387002.1007676

Abstract

Objective
With the rapid expansion of digital financial services, FinTech has emerged as one of the key instruments for increasing access to formal financial services among different segments of society. However, alongside the positive effects of FinTech on the expansion of financial inclusion, concerns have been raised regarding its potential implications for financial stability, systemic risk, and the sustainability of the banking system. Accordingly, this study seeks to simultaneously investigate the dynamic and causal relationships among FinTech development, financial inclusion, and financial stability within a dynamic econometric framework. Its main focus is to identify the direction and magnitude of the effects of FinTech on financial inclusion and financial stability, to determine whether the development of digital financial services can improve the performance of the financial system in developing countries without generating structural risks.
 Methods
This study employs panel data from 38 developing countries over the period 2004–2023. To capture the dynamic and endogenous relationships among the variables, a Panel Vector Autoregression (PVAR) model is utilized. Prior to model estimation, panel unit root tests are conducted, and the results confirm that all variables are stationary at the 5% significance level. Based on standard information criteria, the optimal lag length of the PVAR model is selected as one period. The financial stability is measured using the banking Z-score, which is a widely accepted indicator of banking system resilience. Financial inclusion is constructed through Principal Component Analysis (PCA) using variables such as the number of bank branches, automated teller machines (ATMs), bank loans, and bank deposits. The FinTech index was measured using the extent of mobile-based digital payment utilization, reflecting the diffusion of digital financial technologies. To analyze the dynamic interactions and causal linkages among the variables, Granger causality tests, impulse response functions, and forecast error variance decomposition are employed.
 
Results
The results of the stability tests confirm that the estimated PVAR model is structurally stable. The Granger causality tests reveal a unidirectional causal relationship running from FinTech development to financial inclusion, indicating that the expansion of digital financial services plays a significant role in enhancing access to financial services. Moreover, a bidirectional causal relationship is identified between FinTech and financial stability, suggesting a mutual interaction between digital financial innovation and the resilience of the financial system. Additionally, a unidirectional causal relationship from financial stability to financial inclusion is observed, highlighting the importance of a stable financial environment in facilitating broader financial access. The impulse response analysis shows that positive shocks to FinTech development and financial stability have a positive and statistically significant effect on financial inclusion over a ten-period horizon. In contrast, inflation and exchange rate shocks exert a negative impact on financial inclusion in the long run. Furthermore, the response of financial stability to shocks in FinTech development and financial inclusion is positive in the short run but turns negative in the long run, reflecting the dynamic and potentially nonlinear nature of these relationships.
 
Conclusion
The findings of this study indicate that FinTech development can serve as an effective instrument for enhancing financial inclusion in developing countries without constituting a serious long-term threat to financial stability. Nevertheless, the impact of FinTech on financial stability is dynamic and requires continuous monitoring, as potential risks may emerge over time. Therefore, appropriate regulatory frameworks and prudent supervisory policies are essential to mitigate financial risks while maximizing the benefits of FinTech. Overall, the results emphasize the importance of designing smart and adaptive regulatory policies to harness the advantages of FinTech in promoting financial inclusion while safeguarding financial stability in developing economies.

Keywords

Main Subjects

References

 
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Financial Research Journal
Volume 28, Issue 1
2026
Pages 261-299

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