Digital fiscal transfers, macroeconomic stability, and credit risk in frontier financial systems: evidence from Uganda’s microfinance deposit-taking institutions

The expansion of digital fiscal transfers across developing economies since the COVID-19 pandemic has transformed access to finance for marginalized communities, yet their macro financial implications for institutional risk remain underexplored. This study provides novel empirical evidence on how macro financial dynamics and digital fiscal transfers jointly influence credit risk in Uganda’s microfinance deposit-taking institutions (MDIs) using monthly data from September 2022 to July 2025 and an Autoregressive Distributed Lag model. Results show that, in the short run, higher MDI capital, customer deposits, and E-money inflows reduce credit risk, highlighting the stabilizing role of institutional liquidity buffers and digital fiscal inflows, while increased loan loss provisions signal heightened portfolio vulnerability. Inflation temporarily eases credit risk by lowering real debt burdens. In the long run, the system exhibits cointegration, but only economic activity exerts a significant influence on credit risk. Stronger economic activity is associated with higher credit risk, implying procyclical risk behavior, with 14.7 percent of disequilibrium adjusted monthly. The evidence suggests that Uganda’s MDIs benefit from strong institutional liquidity, digital fiscal inflows, and moderate inflation as short-term stabilizers, but remain vulnerable to procyclical risk taking during periods of economic expansion. This highlights the importance of digitally sound, forward-looking, countercyclical risk-sensitive prudential regulation and coordinated oversight among fiscal, monetary, and digital finance authorities to ensure digital innovation supports inclusive and resilient financial systems in the post-pandemic era. These insights show that fiscal digitalization can enhance financial stability and foster inclusive, sustainable credit growth in frontier markets.