DIGITAL FINANCIAL SERVICES AND ECONOMIC GROWTH: EVIDENCE FROM EIGHT DEVELOPING COUNTRIES

Abstract

This study examines the relationship between digital financial services (DFS) and economic growth in eight developing countries Bangladesh, India, Pakistan, Sri Lanka, Indonesia, the Philippines, Kenya, and Nigeria over the period 2005 to 2023. It also investigates whether financial development mediates this relationship and whether institutional quality moderates it. Using an unbalanced panel dataset of 152 country-year observations and employing a rigorous econometric framework that includes cross-sectional dependence tests, second-generation panel unit root tests (CIPS and CADF), panel cointegration tests (Pedroni, Kao, Westerlund), slope heterogeneity tests, fixed and random effects models, mediation analysis, moderation analysis, and robustness checks, the study provides robust empirical evidence. The baseline results show that DFS has a positive and statistically significant direct effect on economic growth, a finding that remains robust when using an alternative proxy (internet users). However, the mediation analysis reveals that financial development does not serve as a positive transmission channel, as the effect of DFS on domestic credit to the private sector is negative and significant, suggesting a substitution effect rather than complementarity. The moderation analysis indicates that institutional quality does not significantly moderate the DFS-growth relationship, as the interaction term between DFS and government effectiveness is statistically insignificant. These findings contribute to the digital finance and growth literature by demonstrating that DFS promotes growth directly, not through traditional financial development channels, and that its growth effect does not depend on institutional quality. Policy implications include continued investment in digital infrastructure, regulatory frameworks that integrate digital lending with conventional banking, and recognition that DFS can drive growth even in environments with moderate governance standards.