Bank digitalization and financial stability in Central Asia: Assessing risk and resilience

The digitalization of banking services is transforming financial institutions worldwide; however, its impact on financial stability remains a subject of debate, particularly in emerging economies. This study examines the relationship between bank digitalization and financial stability, focusing on commercial banks in Kazakhstan, Kyrgyzstan, and Uzbekistan from 2013 to 2023. Using a two-step system GMM approach, the findings reveal that bank digitalization significantly enhances financial stability by reducing risk exposure and improving resilience. Key digitalization components, such as electronic money, QR payments, and online platforms, contribute positively to stability by lowering operational costs, enhancing transaction efficiency, and strengthening risk management through real-time credit monitoring. Robustness tests reveal heterogeneity based on ownership structure, with private banks benefiting more from digitalization than government-controlled banks. The findings underscore the importance of digital adoption in strengthening banking systems and highlight the need for policies that foster a balanced and secure digital transition in emerging banking markets.