Digital Financial Inclusion, Institutional Quality, And Banking Sector Performance: Evidence From High-Income Economies

Abstract

This study investigates the impact of digital financial inclusion (DFI) on banking sector performance (BSP) in high income economies, with a focus on the moderating role of institutional quality. Using a balanced panel dataset of 45 high income economies over 2011–2021, the study constructs composite indices for DFI, BSP, and institutional quality via Principal Component Analysis (PCA). The two-step System GMM estimator is employed to address endogeneity, dynamic persistence, and unobserved heterogeneity. The findings reveal that DFI significantly enhances BSP, while institutional quality does not significantly moderate this relationship, indicating that strong governance in advanced economies already supports effective digital financial adoption. Foreign bank presence also positively contributes to performance, whereas macroeconomic controls are largely insignificant. These results highlight the central role of DFI in promoting efficiency, profitability, and stability in mature banking systems.