Digital Financial Inclusion and Economic Growth: The Moderating Role of Institutions in SADC Countries

Abstract

The purpose of this research is to examine the relationship between digital financial inclusion and economic growth in the SADC countries, while exploring the crucial moderating role of institutions. The digital financial inclusion (DFI) and institutional quality indices were constructed via Principal Component Analysis (PCA) to overcome the issue of multicollinearity. Using annual data from 2010 to 2023 and employing the system GMM technique, the findings of this study have persuasively supported the existence of a positive relationship between digital financial inclusion and economic growth in SADC countries, which signals that DFI is vital for boosting economic growth. The interaction term between the DFI index and institutional quality index also suggests a positive relationship, highlighting the need for the establishment of robust institutions and sound macroeconomic policies to ensure growth in the regional bloc. On the policy front, the findings indicate that efforts to expand digital financial inclusion in SADC countries should be complemented by institutional reforms aimed at improving governance, regulatory frameworks, rule of law, and legal protections. More specifically, this study suggests that SADC countries should focus on strengthening governance and regulatory frameworks to ensure transparency, security, and effective management of digital financial services. Improving legal protections, particularly around data security and consumer rights, is crucial to building trust in digital finance. Policymakers should also prioritize expanding digital infrastructure, especially in underserved areas, and addressing issues like limited technology access and digital literacy. Furthermore, fostering innovation in the fintech sector and implementing inclusive policies targeting marginalized groups will help drive wider adoption of digital financial services. By combining these reforms with institutional strengthening, SADC countries can create a conducive environment for sustainable economic growth through enhanced digital financial inclusion.