The impact of Fintech penetration and governance quality on financial development

Lim, Cai Jie and Lim, Choo Ying and Leong, Mandy Pei Ying and Ng, Mei Xuan (2024) The impact of Fintech penetration and governance quality on financial development. Final Year Project, UTAR.

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Abstract

The importance of digital financial technology (FinTech) as a fundamental driver of advancing economic development is widely acknowledged. Nevertheless, salient questions on the roles of governance quality and fintech penetration in financial development remain unexplored. Through an investigation encompassing 64 lowincome and lower-middle-income countries spanning the period of 2011-2021, the findings reveal that: (1) fintech penetration fosters financial sector development, and (2) a politically stable environment creates a secure financial system that ultimately promotes financial growth. The positive impact is pronounced in countries with higher financial exclusion and higher financial institutions' efficiency. The measures of financial development, fintech penetration, and governance quality employed are private credit, ATM penetration, and political stability, respectively, obtained from the World Bank. Employing the two-step system GMM estimation method, the findings are robust to alternative proxies of fintech, accounting for the country heterogeneity and autocorrelation problems. These results have several policy implications: (1) the policymakers should prioritize reformations to create a stable political environment, and (2) the countries should expand their efforts in promoting fintech to drive financial development. Keywords: Financial Development, FinTech Penetration, Governance Quality

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