Financial Stability and Digitalization: Does Financial Inclusion Matter? Baron and Kenny's Approach Analysis

ABSTRACT This paper aims to investigate the mediating role of financial inclusion in the relationship between digitalization and financial stability. To test the hypotheses of the present study, the authors performed linear regressions on panel data from the World Bank, the Financial Access Survey (FAS), and the World Governance Indicators (WGIs) database, covering the period from 2004 to 2023 and a sample of 84 countries. The results show that digital services increase financial stability within the sample. Furthermore, the authors found that financial inclusion partially mediates this relationship. To ensure the reliability of our results, we used the generalized method of moments (GMMs) to verify whether the relationship between digitalization and financial stability differs according to the level of financial inclusion. These findings have important implications for academics, practitioners, and regulators who are interested in digitalization, financial inclusion, and stability as major challenges for ethical and responsible finance. They also provide insights into future growth opportunities for countries. To the authors' knowledge, this is the first study to examine the mediating role of financial inclusion in the relationship between digital practices and financial stability. While several studies have closely examined the causal links between digitalization, inclusion, and stability, none have clearly and empirically proven the mediating role of financial inclusion between digitalization and financial stability.