The Role of Digital Financial Inclusion in Shaping Bank Stability Within a Dual Banking Framework: Examining the Moderating Influence of Financial Literacy
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This study investigates the interplay between digital financial inclusion (DFI), financial literacy, and the stability of both conventional and Islamic banks across 15 countries over the period spanning 2011 to 2020. The empirical evidence reveals that DFI substantially enhances the stability of conventional banks, primarily through heightened customer engagement with digitally delivered financial services, improved asset quality, and reduced exposure to financial risks. In contrast, the association between DFI and the stability of Islamic banks is found to be either statistically negligible or negative in direction, a pattern attributable to constraints imposed by Shariah compliance requirements, structural product mismatches, and intensifying competitive pressures from conventional banks and financial technology firms. Furthermore, although DFI contributes positively to the resilience of conventional banks, it simultaneously exposes these institutions to novel vulnerabilities, including the risk of digitally enabled bank runs, as illustrated by the collapse of Silicon Valley Bank in 2023. The evidence further indicates that high financial literacy positively moderates the DFI-stability relationship in conventional banks, whereas its effect on Islamic banks is negative. This divergence stems from the propensity of financially literate customers to resist digital financial products that fail to fully satisfy Islamic financial principles. The findings collectively underscore the imperative for tailored institutional strategies within the Islamic banking sector, encompassing the development of Shariah-compliant digital products, the strengthening of financial literacy programs grounded in Islamic finance principles, and the adoption of robust risk governance frameworks designed to mitigate vulnerabilities associated with rapid digital deposit withdrawals.
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