Digital finance needs structural support to stabilize fragile economies

Digital finance, while capable of fostering financial stability in developing economies, becomes significantly less effective in the face of global structural shocks such as financial crises, geopolitical conflicts, and pandemics, reveals a new peer-reviewed study published in Economies (Volume 13, Issue 7, 2025).

Titled “Gauging the Impact of Digital Finance on Financial Stability in the Presence of Multiple Unknown Structural Breaks: Evidence from Developing Economies,” the study uniquely models the nonlinear and asymmetric impacts of digital finance, measured through mobile and internet banking, on financial stability in 41 African nations from 2004 to 2023, incorporating major structural shocks. Using an extended Bai and Perron (BP98) panel data methodology for detecting multiple unknown breaks, and quantile regression to capture effects across levels of stability, the findings challenge prior assumptions about the resilience of fintech in vulnerable economies.

Do structural breaks disrupt financial stability in developing economies?

The study identifies three distinct structural breaks over the 20-year period that significantly impaired financial stability: the 2006–2011 global financial crisis (GFC) and subprime mortgage collapse, the 2012–2016 Brexit referendum phase, and the 2017–2021 COVID-19 pandemic coupled with the Ukraine conflict.

Across these episodes, the research finds a consistent weakening in the stabilizing effects of digital finance, especially in economies operating at higher quantiles of financial stability. During the GFC, for instance, mobile banking initially had a strong positive effect on stability, but its influence deteriorated markedly post-crisis. Notably, internet banking showed delayed but increasing relevance after the first break, reflecting its slower adoption curve.

By contrast, the COVID-19 period showed the most severe destabilizing effect, with financial stability indices dropping significantly in the upper quantiles. This suggests that more developed financial systems, which are often more integrated and digitally reliant, are also more susceptible to systemic contagion during global shocks.

Importantly, the findings validate the hypothesis that structural breaks introduce asymmetric impacts not just in real economic indicators like growth and inflation, but also within financial technology ecosystems.

How does digital finance perform across varying levels of financial stability?

To assess performance variation, the study deployed quantile regression, which allowed for examining impacts across the financial stability spectrum, low (10th quantile), medium (50th), and high (90th). Digital finance indicators demonstrated stronger positive effects at higher quantiles under normal conditions. For instance, at the 90th quantile, mobile banking was associated with up to 0.4% increase in financial stability, compared to 0.1% at the 10th.

However, these gains were offset or even reversed once structural breaks were introduced. The effect of digital finance on financial stability became ambiguous and volatile at lower quantiles, suggesting that poorer, less financially developed economies experience erratic benefits from fintech initiatives during turbulent times.

Furthermore, the study found that financial development, proxied by private sector credit-to-GDP, had a consistently positive and stable influence across all quantiles and break periods. Conversely, GDP growth consistently registered a negative association with financial stability, implying that growth in African economies remains non-inclusive and potentially disconnected from financial sector robustness.

The data-driven insight: digital finance can play a transformative role, but only when structural vulnerabilities are addressed and economies reach a certain threshold of financial development and institutional maturity.

What are the policy implications for African economies?

The study concludes with stark policy recommendations. First, digital finance alone cannot safeguard financial systems in developing economies unless the structural fragilities, like underdeveloped institutions, inadequate digital infrastructure, and lack of regulatory preparedness, are remedied. The research strongly advocates for supply-side interventions, including:

• Technology skill development and digital literacy programs.
• Reforms in financial markets and legal systems to support fintech innovation.
• Pro-poor policy targeting to increase financial inclusion at the grassroots level.

Second, macroeconomic policy must pivot toward integrating real-sector performance with financial digitalization. The persistent negative correlation between GDP growth and financial stability underscores the disconnect between headline growth figures and equitable, stability-enhancing development.

Third, policymakers should use quantile-sensitive tools, like those deployed in this study, to formulate financial policy that is context-aware. For example, economies at lower quantiles may need foundational investments in digital infrastructure, while those at higher quantiles might require contingency buffers against external shocks.

The study also highlights a significant limitation in prior models: the failure to account for multiple structural breaks in panel settings.