What are the links between financial technology and economic growth?

HIBAPRESS-RABAT-IMF

Financial technology (fintech) is changing the financial landscape across the world, with a new range of products and companies using innovative technologies to improve and automate financial services. There is no doubt that financial technology has the transformative potential to make financial systems more efficient and expand financial inclusion, argues a study by the International Monetary Fund (IMF). But has it really become an engine of economic growth, as Schumpeter predicted in 1912?

There is an extensive literature that explores how financial development and innovation affect economic growth, but it is also worth noting that excessive credit growth and new financial products can cause financial instability and, therefore, undermine growth dynamics. Furthermore, studies focusing on the relationship between fintech and economic growth remain rare, mainly due to cross-national data constraints.

The IMF study uses a new dataset of direct measures of financial technology and implements dynamic modeling to analyze the empirical relationship between it and real GDP per capita growth rates in a set of 198 countries over the period from 2012 to 2020.

Addressing potential endogeneity, dynamic analysis based on the system generalized method of moments provides interesting insights into the links between fintech and economic growth across countries and over time.

First, the magnitude of impact and statistical significance of financial technology on real GDP per capita growth depends on the type of instrument (digital lending or digital capital mobilization). While as a percentage of GDP digital lending has a statistically significant positive effect on economic growth, digital capital mobilization has a large but statistically insignificant effect.

Second, the overall impact of fintech across all instruments is positive and statistically significant due to the overwhelming share of digital lending in total. In other words, an increase in this technology is associated with an increase in economic growth. These results support the Schumpeterian prediction that financial innovation can promote economic growth by increasing financial intermediation and providing financial resources for fixed capital formation, but not all types of financial technologies become accelerators.

Fintech remains modest compared to traditional financial institutions, but can still have notable effects on growth. Although the magnitude of this effect depends on the type of technology instrument, its overall impact is statistically significant, even at a stage where the average volume of fintech instruments amounts to 0.1% of GDP, compared to 55% of GDP in domestic credit granted to the private sector.

Therefore, in the future, fast-growing financial technology is likely to have a greater impact on economic growth. In this context, maintaining financial stability is a sine qua non condition for sustainable growth, and this requires, in particular, strong regulatory institutions.

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