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Impact of FinTech on Financial Stability

Alexandria University
Faculty of Commerce
Business Administration Department
Philosophy of Doctorate Degree
Impact of FinTech on Financial Stability
A Proposal Submitted in Partial Fulfillment of the Requirements of
Financial Institutions and Markets
Submitted by
Amina Shaker Elsayed Atta Bedeir
Fall 2020
Table of Contents
Research Problem
Research Objectives
Research Plan
Research Importance
 Academic Importance
 Practical Importance
Theoretical Framework
 The Economic Theory of Innovations
 The Actor Network Theory (ANT)
 The Expectation Confirmation Theory of Information System
Continuance (ECT-IS)
 The Self-Efficacy Theory
Literature Review
 Influences of FinTech on Financial Inclusion
 Impact of Fintech on Financial Stability
Research Framework
Research Methodology
 Variables & Measures
 Population, Sampling and Data Collection
 Statistical Methods
1. Introduction
Over the last two to three decades, there has been an extensive growth in digital
innovation, particularly on financial technology (FinTech). Fintech's growth presents many
regulatory challenges, especially to emerging and developed markets, where regulators
typically have limited resources and so technology-led developments bring increased strain
(UNSGSACCAF, 2019). Nonetheless, traditional financial institutions have moderately
started getting engage in the new technological innovation (Brandl and Hornuf, 2017).
Fintech as a concept has received a huge attention by majority of scholars and researchers in
an attempt to investigate and illustrate such area in finance. Fintech emerged as technology
and innovation that resulted from financial innovation aspiring to compete and overcome
obstacles of traditional financial instruments. Moreover, the emergence of Fintech is due to
the fact that we are living in the era of digitization; in addition to, the dynamic advancement
in computer technology as well as information technology.
The digitization and the advancement in information technology has resulted in a shift
that occurred in financial industry, and the provided product and services; in addition to, a
change in the consumer behavior, regulation, as well as the role of IT. With regards to
financial industry and services, a shift occurs apparently in the traditional product and
services provided by financial intermediaries and institutions resulting in the newly founded
ones being based mainly on information. Furthermore, the shift has occurred in the processes
as well Puschmann (2017) argue that processes almost entirely implemented without any
physical interaction.
Since its emergence and foundation, traditional banking activities helped in gaining
economic and financial stability. In most global financial systems, banks have been playing a
crucial rule in the stability, growth, and sometimes decline of the financial system in crisis
period. Thus, banks proved to be the most powerful and successful institutions among
financial intermediaries not only due to its ability to attract savings and channeling them
among successful investment, but to their ability to survive, overcome and maneuver
restricted regulation and financial innovation as well.
Simply Fintech can be defined as an industry comprised of firms that utilize technology
in making financial systems and the delivery of financial services more efficiently. There
have been several definitions of fintech, the most widely common and agreed upon definition
is, according to Financial Stability Board (FSB, n.d.);
“FinTech is a technologically enabled innovation in financial services that could result
in new business models, applications, processes or products with an associated material
effect on financial markets, financial institutions and the provision of financial services”.
According to Leong and Sung (2018); FinTech can further be defined as:
"A cross-disciplinary subject that combines Finance, Technology Management and
Innovation Management". Also, “any innovative ideas that improve financial service
processes by proposing technology solutions according to different business situations, while
the ideas could also lead to new business models or even new businesses”.
Accordingly, several businesses can be considered as a Fintech. For instance, Uber
which provides non-traditional transportation services through the utilization of technology
and mobile application to improve ordering (financial services) taxi services might be
regarded as Fintech business.
The development of financial markets, intermediaries and financial services has proved
to be beneficial across countries. There has been a comprehensive agreement on the
association between Fintech and financial stability and economic growth in literature.
Although Fintech in short-term may be found to be less beneficial due to financial crises, in
long-term it is more advantageous (Ayadi et al., 2018). Although the application of
technologies in financial services is not new, fintech represents a paradigm shift. For
centuries, banks have utilized technology enabled revolutions designed to support bank
operations, like Automatic Teller Machines (ATMs), electronic banking, international
transfers, etc. Contrarily, Fintech emerged to challenge and substitute traditional financial
institutions and processes and drives the emergence of new business models.
Figure 1: Architecture of the Fintech Industry
The Board of Governors of The Federal Reserve System certifies that global investment
in FinTech companies hit US$24.7 billion across 1076 deals in 2016; while the total
cryptocurrency market capitalization has increased more than 3 times since early 2016,
reaching nearly US$25 billion in March 2017 (Ancri, 2017). While in 2019, the total
investment in fintech topped $8.3 billion the second quarter of 2019, which was an increase
of 24% compared with the previous quarter (CB Insights, 2019).
The increased investment in the technology-based solutions by banks and other firms is
one of several key factors that enhance the growth of the Fintech market. Additionally, the
advancement in the technological infrastructure in order to match the growing development
in technology is not shaping the future of the financial services industry but also is assisting
in the growth of the global Fintech market. Likewise, the cost reduction in the delivery of
financial services and production resulted from the boost in financial technology is also
leading factor for the growth of the global Fintech market.
According to Alt et al. (2018), the insurance industry has been facing an identical
development although at a smaller scale as a result of the less interactivity of the insurance
field. Overall, the phase of digital financial technology illustrated that products and services
in the entire financial industry may be supported by IT (Alt et al., 2018).
Fintech in emerging markets and developing countries represents a great challenge to
investigate its importance, impact, and even its determinants. This challenge occurs due to the
problem of scarcity and lack of data as well as information which in turn limitations to
determining the influence and importance of FinTech implications to financial stability (FSB,
2017). In order to emphasize the significance of FinTech expansion to financial services the
International Monetary Fund and the World Bank launched the Bali Fintech Agenda aiming
to promote international cooperation and help member states to channel benefits and
opportunities of fast development in financial technology and mitigate potential risks (IMF,
Misati et al. (2017) in studying the evolution of Fintech and digital financial services
complementary to bank performance in Kenya, illustrate three main advantages for the
pervasiveness of Fintech. First, Fintech improves competition in financial markets through
providing services that cannot be efficiently available by traditional financial institutions.
Second, Fintech incur lower transaction costs implied by digital technological advancements,
and the lighter regulatory burden. Third, evaluation of the key bank functions against fintech
reveal that the latter have an advantage in their ability to operate on big data, conduct
machine learning/ and standardize information besides matching borrowers and lenders
directly, unlike banks that rely on soft data and relationship based information, (Giorgio et
al., 2017).
Nasr et al. (2018) argue that digitization of payment systems and other financial
services face several ongoing challenges, including Egypt’s strong cash culture, expansive
geography and limited accessibility and acceptance of digital financial services. These
challenges have been the main catalyst to paving the way to a cashless society through digital
financial services.
This paper is organized as follow; in the next section presents the research problem,
followed by two sections illustrating the research objectives and the research importance. In
section five and section six, theoretical background and literature review are presented.
Research framework and research methodology are covered in sections seven and eight, and
finishing up with the research plan in section nine.
2. Research Problem
The recent financial crisis have resulted in more strict regulations in a way to improve
the performance of traditional financial institutions and hence the financial stability. Aside
from that, a rapidly growing niche in financial services that depends mainly on technology
and information called FinTech has influenced and resulted in the creation of new financial
services and products that add more pressure on policymakers and supervisors for example;
peer to peer lending, crowd funding, digital exchange platforms, etc. and hence, impact
financial stability.
Despite considerable literature on the topic, the major problem here is the lack of data
availability especially concerning the emerging markets. This research focuses on the
Egyptian’s case of Fintech strategy. Egypt has applied several steps to undertake and to be
engaged in the global Fintech strategy. However, these actions and procedures are new
compared to the application of developed countries of such strategies. Therefore, the data are
limited. Moreover, according to the Central Bank of Egypt CBE and the World Bank (2019);
67% of Egypt’s populations are still unbanked and rely on cash.
Furthermore, according to the CBE (2020), limited technology savviness, 44% mobile
internet users as a percentage of total population, low financial literacy (27%) and limited
trust in digital financial services remain barriers to adoption. For this largely untapped
customer base to become material, Egypt will have to invest extensively to improve financial
literacy and digital savviness. Some of the incentives to spur FinTech adoption and address
identified barriers have been defined as part of the Strategy.
Figure 2: Egypt’s unbanked population
3. Research Objectives
The main objective of this research is to discover potential impacts of Fintech
innovations on financial stability, through explaining Fintech influences on financial
inclusion. Furthermore, the paper offers a highlight on the importance of Fintech innovation
on enhancing the performance of financial institutions.
4. Research Importance
Over the past decades, digital financial services represented in Fintech innovations have
become a major driver in interrupting and revolutionizing traditional financial services
globally. The prior literature exhibit the importance of studying Fintech globally, how it has
emerged, what are major shifts in traditional financial services resulted from it, and how it
impacted and influenced the performance of financial institutions as well as the financial
stability. However, there have been differences in its impact due to the distinctions in culture,
behavior and preferences and mainly due to disparities in financial literacy and the level of
development among countries.
4.1 Academic Importance
In recent years there has been a tremendous focus on digital finance and is the academic
publication and the research of financial scholars. The academic importance of the present
proposed study lies in the following:
1- It contributes to the existing literature on Fintech, specifically to its impact on
financial stability literature, through providing evidence from Egypt.
2- It links the influence of Fintech on financial inclusion with its impact financial
3- It highlights the advantage and the potential risks that are outcome of Fintech
innovation and its potential benefits and threats.
4.2 Practical Importance
The practical importance of the present proposed study lies in the following;
In line with the country’s national vision 2030, Fintech is important force in supporting
the improvement and modernization of the financial sector in Egypt. The study is thus
important, as it comprehend financial innovation and how it crucial in the transformation of
Egypt’s financial industry. This is critical according to CBE (2019) in promoting financial
inclusion and for further establishing the Egyptian financial services sector as a leader in
MENA and Africa.
Furthermore, the growth in Fintech in Egypt will enhance its regional role within the
MENA region and will help in attracting further potential foreign investment, hence will
enhance the economic stability as a result of enhancing the financial stability.
5. Theoretical Background
The use of Fintech innovation through the development of the delivery of financial
services imposes challenges on traditional business models and causes a shift in several
aspects of the financial system. Fintech has proven to boost experience with financial services
faced by customers through increasing transparency, cutting costs eliminating middlemen,
enhancing risk management and making financial information accessible (Lee and Shin,
Several theories explain and illustrate the phenomena of Fintech and its evolution and
development. For instance, Suryono, Budi, and Purwandari (2020) in their study of
challenges and trends of Fintech, they provide a theoretical basis fintech research from an
information systems perspective, including the formulation of fintech technology concepts
and their development. Furthermore, Shiau et al. (2020) argue that the expectation
confirmation theory of information system continuance (ECT-IS) is one of the most popular
theoretical frameworks used to understand users’ continuance intentions. They integrate
ECT-IS with self-efficacy theory in order to consider the impact of users’ intrinsic
motivations on their intentions to continuously use fintech for wealth management.
This section aims at illustrating the most prevailing theories that describes and explain
the Fintech phenomenon. Both the ECT-IS theory and the self-efficacy theory presented
below focus on the demand side of the Fintech, and how it affect its continuance as well as its
growth, expansions and development of new innovations. On the other hands, the economic
theory as well as the actor network theory describes the process of innovation from the
supply side.
5.1. The Economic Theory of Innovations
Zaleska and Kondraciuk (2019), claim that interest in technological development and its
influences on the production process were the earliest concern of the economic perspective
on innovation. These attempts have been obvious as the early proponents of classical
economics tried to clarify the effective results of the use of machines and other new options
in the production process. For instance, Adam Smith remarked the importance of the division
of labor in boosting the production level and hence, the nation’s wealth as well as supporting
the creation of new inventions; more specifically those who are highly specialized. Several
theorists followed and supported this point of view, although some have shown a little
concern of the negative impact of innovation.
On the 20th century, Schumpeter published a research on economic growth in 1939
demonstrating the importance of innovations as one of the key elements of this theory.
Schumpeter not only has separated the term invention from innovation, he also has defined
the specific determinants of economic development caused by innovations that could occur in
one of the five proposed combinations:
Introducing a new product or service.
Opening a new market.
Utilization of new manufacturing methods.
Acquisition of new or more efficient production sources or materials.
Introducing new organizational structures.
Since the work of Schumpeter, several theorists continue to build on this theory some
supporting and strengthening Schumpeter’s view while others disagree. For instance, for
Schumpeter the economic changes result from entrepreneurial activities; whereas, Peter
Drucker argue that, economic changes occur as an opportunity for entrepreneurs to promote
better and new solutions (Zaleska and Kondraciuk, 2019).
Furthermore, the European Commission and the Organization for Economic
Cooperation and Development (OECD) has adopted the definition of innovation as the
practical application of a new or significantly improved product or service, process or even
improvement at the marketing or organizational level. There are two types of indicators that
are used to measure innovativeness:
a. Input Indicator: the human effort and the money capital invested in the research
and development activities.
b. Output Indicator: the number of patents or implemented innovations.
These two indicators have shown an influence on the economic growth, which explains
the reason behind innovation becoming a key aspect of economic growth across several
5.2. The Actor Network Theory (ANT)
This theory has been founded in science and technology during the period of 1980s. It is
mainly designed to help understanding the processes of technological innovation; while
aiming at the integration of technology into social processes through an interpretative actor
network lens (McBride, 2003). Although this theory doesn’t explain why network exists
(Latour, 1987), it focuses on how network are formed, held together and fall apart. Shim and
Shin (2016), assert that ANT designed to explain how heterogeneous actors come together to
form networks. Therefore, “actors” in ANT are not just humans but non-human such as
individuals, groups, texts, and technical artifacts. ANT involved with the development of a
new technology consists of all non-human and human actor that influence action and
decision-making in the development process.
The main assumption of ANT is technologies contain a variety of political, social and
economic elements. The main advantage of this theory is that it provides a very powerful tool
for better understanding complexities and dynamics of technologies. However, other theories
limit its focus on the behavioral aspect of human, through attempting to understand human
participation in business.
Methodologically, ANT prefers “science and technology in the making” to “ready-made
science and technology. Two major approaches used in ANT: follow the actor and
inscription. The former uses interviews and ethnographic research, while the latter uses texts
and communications form all forms of media (Shin, 2010). Under ANT; research evidence,
technologies, financial resources, institutions, and regulation act together to produce the
innovation. Although several studies have applied ANT to investigate the convergence of
ICT, only few have analyzed the fintech industry and fintech policy (Shim and Shin, 2016).
One main drawback to the ANT related to its descriptive characteristic which is short of
enough explanations (or interpretations). Therefore, a number of researches have tried to
combine ANT with other theories, in order to enhance explanatory power(Shim and Shin,
5.3. The Expectation Confirmation Theory of Information System Continuance (ECTIS)
The ECT theory has been mainly in the marketing domain in order to measure
customers’ satisfaction and post-purchase behavior (Shiau and Yuan et al., 2020).
Bhattacherjee (2001a) has extended the ECT to build ECT-IS continuance by comparing the
users’ continuance intentions with repurchase decisions of customers. According to ECT-IS,
an individual’s continuance intention of IS usage is dependent on three variables: the users’
level of satisfaction with IS, the extent of the users’ confirmation of expectations and the
perceived usefulness. Shiau and Yuan et al. (2020), analyze previous research on the ECT-IS
and show that constructs and findings depend on the context and objective of each study
these are summarized in table 2.
Furthermore, Shiau and Yuan et al. (2020) argue that the ECT-IS theory has been
criticized for overlooking the role of users’ intrinsic motivation in IS usage, which might also
be a key user belief that affects users’ continuance intentions.
Source: Shiau and Yuan et al. (2020)
Table1: ECT-IS related research
5.4. Self-Efficacy Theory
Bandura (1991) defines self-efficacy as a judgment of a person on his/her own ability to
perform a set of action required to attain his/her desired performance. Thus, it means that
human behaviors are affected by self-beliefs about one’s future ability and performance. Selfefficacy is not concerned at all by past performance but rather it makes judgments based on
the individuals’ perceptions of themselves about what they can do in the future and their
ability to compete not their existing skillset.
Self-efficacy has been treated as one of the main factors that affect the continuance
intentions of users in the financial services industry either directly or indirectly (Schneider
and Chein, 2003). Self-efficacy theory is flexible that it can be applied to various contexts,
such as electronic-based services and web-based IS use (Shiau and Yuan et al. 2020). Some
studies have directly used self-efficacy while it is not a measurable concept at a general level
since abilities are domain specific. Thus, Cassar and Friedman (2009) recommended the use
of domain-specific self-efficacy rather than general self-efficacy because domain-specific
self-efficacy has been shown to have greater predictive power when describing a specific
phenomenon. Domain-specific self-efficacy has been developed in a wide variety of research
contexts (Chen, 2017; Shim et al., 2019; Yes¸ilyurt et al., 2016).
6. Literature Review
This section presents the literature review of Fintech innovation and its impact on
financial stability through exploring how it enhances financial inclusion, while reviewing
previous empirical studies that examined the association between Fintech and financial
stability. Afterwards, the researcher presents the research framework and the research
The recent most studies on Fintech innovation and development have shown that, in
several areas of the financial services Fintech have potentially enhanced, transformed and
disrupted business models, regulatory oversight, process or products (Gray and Leibrock,
2020). Over the past few years, investments in Fintech innovations have grown tremendously
and across multiple sectors leading in some cases to economic growth and financial stability,
whereas in some cases the impact of these investment have been observed to be negative. In
order to measure and evaluate the impact of Fintech development on financial stability, Gray
and Leibrock (2020), argue that this must be done on a case-by case basis, taking into
consideration how each individual application may affect the various dimensions of systemic
The growth in Fintech can be attributed to several factors like, the ability to deliver
financial services faster at competitive price and with more convenience, the lower barriers of
entry for start-ups and non-financial firms resulted from the technological advances, and
more importantly the continued cost pressure on banks which induced them to create new
ways to attract savings. The IMF Deputy Managing Director Tao Zhang (2019), argues that
Fintech will not only boost competition in the financial sector, mainly in payment aspects but
also will enhance financial inclusion. On the other hands, Fintech may also bring more risks
to the economy. Since regulations and monitoring are still limited, governance frameworks
must be developed (Zhang, 2019).
Expansion of Fintech increases the need for closer international cooperation, especially
in the areas of cyber security, anti-money laundering and fighting against financing terrorist,
the creation of regulatory and supervisory framework, payment and securities settlement
processes and cross-border payments. Despite the several differences among countries the
IMF Bali Agenda brought together main issues for policymakers and the international
community to consider when formulating their policies (Zhang, 2019).
The growth of Fintech innovations, its development as well as the resulting benefits
and/or risks from its expansion differs from a country to another depending on several
factors; these factors also differ from one country to another. However, countries within the
same region as well as those of similar economic, political and social systems may share
same factors.
Lukonga (2018), in her working paper published the IMF (2018) on Fintech, Inclusive
Growth and Cyber Risks, countries of the MENAP and CCA regions share similar
reinforcing factors with regards to the growth of Fintech. These factors include high
consumer demand for digital products, increased investments in ICT, government support,
and other idiosyncratic factors. Whereas for the case of the UAE the comparatively stronger
performance reflects the rapid growth of e-commerce and the increase in venture and private
capital have provided additional stimulus (Lukonga, 2018). Similar factors have been
reported by the CBE in its report highlighting Fintech and innovations in Egypt (2019), these
drivers are:
The demand for FinTech in Egypt which is driven by the needs of individual
consumers, SMEs & corporates and financial institutions.
The available funding represented in investment in technology and innovations.
Regulations imposed by the government such as those demonstrated by new mobile
wallet rules such as introduction of e-KYC, increasing limits, digital lending and
spending and new payment regulations such as digital authentication.
Talent represented in reservoir of students exists, and several enablers are already in
place to support FinTech entrepreneurs.
Governance around FinTech regulatory related matters is not clearly defined and
communicated today.
On the other hands, Fintech may also face obstacles and challenges that restrict its
growth and development. Like the factors that drive Fintech growth and expansions, these
obstacles are also identical among countries within the same regions. The key constraints
faced Fintech that limit its expansion in the MENAP and the CCA regions are the gaps in
regulations, talent, and private capital coupled with demand factors, including lack of trust
(Lukonga, 2018). Figure 3 summaries these constraints.
Source: Lukonga, IMF Working Paper (2018).
Figure3: Key Challenges Facing Fintech Firms in the MENA and CCA Regions
Furthermore Shim and Shin (2016), have used ANT to analyze China’s Fintech
industry, they have utilized the ANT to explore success and failure of technological
innovation through the focus on case studies and empirical observation. They have found
that, in a way to achieve a balance between global competitiveness in the Fintech industry
and techno-nationalist strategies, the Chinese government has permitted the participation of
private and other non-governmental firms (Shim &Shin, 2014).
As Fintech expands, it takes several forms and imposing a fierce competition on banks
and other financial institutions. The increased innovation in the financial firms has been taken
several forms and shapes in some cases it affect the market structure. From mobile payment
apps to insurance and investment companies, fintech has disrupted traditional financial and
banking industries table 1 illustrates the Fintech in the Middle East regions.
* UAE Financial Free Zones
Table 2: FinTech in The Middle East
Payment Gateways: Electronic payment systems had been around even before ecommerce was born. These online payment gateways have revolutionized payment,
making it convenient, easy, and highly accessible for all. The most notable
contribution of payment gateways is that by removing the expensive bank fees,
payment gateways have given consumers considerable benefits and savings.
Mobile Payments: With 5.11 billion unique mobile users worldwide, it’s not
surprising global mobile payment transactions will be worth over $1 trillion in 2019.
By 2023, that figure is expected to exceed US$4.3 trillion.
Blockchain and Cryptocurrency: blockchain and cryptocurrecny are the purest fintech
innovations that truly stand out from the rest. This is because these new technologies
are offering great potential to significantly improve various industries. Blockchain
uses encryption technology to create cryptocurrencies, a promising new medium of
exchange that is more secure and better than cash. In effect, blockchains offer vast
possibilities to disrupt and change conventional business models.
6.1. Influences of FinTech on Financial Inclusion
Fintech innovations are reshaping the financial services; although the occurrence of
Fintech is not new globally, its emergence in emerging markets and developing countries are
considered to be relatively recent. Fintech has been facing an endless process of innovation
and evolution over time. However, rapid technological advances and consumer preferences
for digital channels have facilitated new business models (Lukonga, 2019).
The expansions of Fintech services and the financial inclusion are closely related since
both serve the same purpose. Financial inclusion and the digital financial services
“commonly known as Fintech” utilize the technology in order to expand the financial
coverage of the population, in a way that people who are excluded from and/or don’t have
access to the financial services can easily use financial services.
According to FSB (2017), the access to digital financial services via mobile and other
identical devices encourage those who are excluded for being poor, have low financial
literacy, or even located far away that prevent them from reaching financial services, to
become included again in the system. Furthermore, a survey conducted by GSMA (2014)
showed that Fintech services have been launched in almost 80 countries through providing
digital financial services via mobile phones. This in turn not only encourages these excluded
populations to use financial services, but it enables them to carry out basic financial
transactions remotely. If the excluded population understands and can be persuaded about the
intended benefits of digital financial inclusion, an effective digital financial inclusion
program should be suited to meet the needs of the excluded and underserved population, and
should be delivered responsibly at a cost that is sustainable to providers and affordable to
customers (Ozili, 2018).
There are several benefits of the Fintech on the financial inclusion that have been
addressed in the published research, and working papers. The major benefit that has been
extremely highlighted in the majority of literature is that, Fintech enhances the financial
inclusion as it allows larger proportion of those excluded population who own mobile devices
with the provision of financial services via mobile phones and other technological devices
(World Bank, 2017). This in turn means that, there’s a positive relation between Fintech and
financial inclusion, as the expansion in the Fintech services enhance the accessibility of the
excluded population to financial services. Furthermore, those who are already included in the
financial system under the Fintech they enjoy a better delivery of financial services that is
more affordable and quickly accessed. In sum, greater supply of Fintech services is often
predicted to have positive effects for financial inclusion, all other things being equal;
implying a positive correlation between the use of digital finance and access to formal
financial services (The World Bank, 2017).
On the other hands, the positive association between Fintech and financial inclusion
varies among countries based on several demographic factors. For instance, the application of
Fintech services to low-income and poor people can improve their access to basic services,
thereby leading to greater financial inclusion in rural areas, while at the same time it may
cause risk in case of poor regulatory system as well as high cyber risks (Ozili, 2018).
Furthermore, the bias in the provision of Fintech can be geographically since providers of
services may be reluctant to locate their business in high risk regions or areas with poor
infrastructure, thereby leading to lower financial inclusion (Ozili, 2018).
In sum, Fintech innovation and expansion has positively impacted the financial
inclusion, as it helps in the provision of financial services to the excluded population which
serves to enhancing the financial inclusion. On the other hands, some challenges may reverse
the effect of the growth digital financial services on financial inclusion these challenges can
be in form of low financial literacy of the excluded population, their low trustiness in the
Fintech service, poor financial and regulatory policy, high cyber risk and even the poor
infrastructure (World Bank 2014).
H1: Fintech Innovations has a Positive Influence on Financial Inclusion.
6.2. Fintech and its Impact on Financial Stability
The development of Fintech has been observed globally, it results in several influences
on the financial stability as well as in many regulatory challenges especially in case of
emerging markets and developing economies. The lack of data poses a huge obstacle on the
ability to determine the influences and the importance of Fintech development to financial
stability (FSB, 2017). The IMF and the World Bank have launched the Bali Fintech Agenda
to stress out an importance of FinTech expansion to financial services with the aim to foster
international cooperation and help member states to harness benefits and opportunities of fast
development in financial technology and mitigate potential risks (IMF, 2018).
Weller and Zulfigar, (2013) argue that developing Fintech services may enhance the
macroeconomic stability through lowering constraints, resulting in faster economic growth,
less poverty and lower income inequality but on the opposite, it also could be a source of
instability. Therefore, when considering the benefits of developing Fintech services to
financial stability, ones should also take into consideration its potential risks and the
instability it may promote. In that context the FSB has created Financial Innovation Network
which monitors at FinTech innovations from the perspective of financial stability (FSB,
Furthermore, in some situations tradeoffs occur between financial stability and other
regulatory approaches in regards to consumer and investor protection, market integrity,
competition and financial inclusion (FSB, 2017). Financial innovations and higher
competition could support more efficient, convenient and lower-cost delivery of financial
services (FSB, 2017). However, if innovations lead to new imbalances or contagion channels
they could endanger financial stability and create potential space for systemic risk (FSB,
With regards to the benefits of the Fintech innovation, as mentioned by the FSB main
benefits that technology-enabled innovations in financial services bring to financial stability
are decentralization and diversification, efficiency and transparency. Decentralization may
result in lowering the probability of occurrence as well as the effects of financial shocks
(FSB, 2017). Moreover, decentralization may also affect operational risks thus if properly
secured those systems could be more resilient to cyber risks compared to centralized systems
especially in terms of record-keeping and service availability (FSB, 2019). Fintech supports
decentralization through technological developments on lending such as big data processing
and automation of loan originations led to lower barriers to entry. Robo-advice is another
example where smaller companies can function at alongside bigger firms with less barriers
and fixed costs (FSB, 2017).
On the other hands, efficiency in operations enhances the stability business models of
financial institutions and leads to overall efficiency improvements in the financial system and
real economy (FSB, 2017). According to EBA (2019) conducted surveys, institutions have
significant expectations that number of customers will increase based on the benefits of
FinTech such as lower prices, improved convenience and simplified experience.
Furthermore, the increase in the Fintech services and its expansions enhance the
transparency which in turn decreases the asymmetry of information and enable more accurate
risk assessments (Vucinic, 2020). The recent financial crisis proved that more transparency
would lead to lower probability of default and lower number of days of illiquidity.
Securitization, known as financial innovation of recent decades, and was considered a key
source of problems that led to financial crisis in 2008 (FSB, 2017). The increase in
transparency provided by new technologies has increased the amount of information
available that central banks produce and communicate (Lehtimäki and Palmu, 2019).
Most importantly, Fintech innovations increases and eases the access to financial
services and influences financial inclusion of households, and SMEs which in turn supports
sustainable economic growth and provides diversification of investment risk exposure (FSB,
2017). Improvement in access to financial service across all of the economic functions is
especially visible in the regions with unbanked population and with financial systems in early
stages of development where very often cell phone ownership share equals or surpass the
share of population with an access to bank account. Cell phone users have not only access to
mobile banking which allows them to obtain credits and make purchases, but they are also
able to make several transactions without even having a bank account such as: money
transfer, online payment, etc. (FSB, 2017).
Despite the enormous benefits of the Fintech to financial stability, we can’t simply
ignore its potential risks and the adverse impact; it could seriously result in a negative effect
and endanger the economy. Fintech in some cases might negatively impact the financial
stability through the creation of micro and macro-financial risks to financial stability (FSB,
According to the FSB, the micro-financial risks refer to those coming from single firms
or sectors that are vulnerable to shocks. Those shocks could have a potential to trigger the
situation which can cause systemic impacts to financial system. Micro-financial risks occur
from financial and operational sources (FSB, 2017). These operational sources are similar to
those faced by traditional financial institutions such as:
Maturity mismatch happens when a loan is extended for the period longer than the
period financing is related for, which further creates rollover risk. FinTech lending is
considered the main FinTech activity referring to maturity mismatch (FSB, 2017).
Liquidity mismatch occurs when assets and liabilities have different liquidity features
that could create “run” risk and the need to quickly liquidate illiquid assets, so called
fire sale. As an example holders of digital wallets tend to pull payments from bank
accounts or credit card accounts.
These operational risks are resulting from poor governance, lack of process control,
high cyber risks, higher legal risks and increased business risks of critical financial market
infrastructure (FSB, 2019).
On the other hands, the macro-financial risks endanger the stability of entire financial
system. The extent to which financial innovation could have impact and become a source of
financial risk depends on the type of innovation and its potential to evolve over time. Macrofinancial risks refer to contagion, pro-cyclicality, excess volatility and systemic importance
(FSB, 2017).
In sum, Fintech create and produce several benefits and opportunities to the economy
and the market players but on the other hands, FinTech could pose threats to financial
stability in terms of micro and macroeconomic risks. In that regards international and national
bodies are taking FinTech into considerations when assessing potential risks and creating
regulatory frameworks. International institutions such as the FSB, IMF and WB are calling
for international cooperation among national and international institutions with the aim to
address and reduce regulatory gaps, prevent occurrence of potential risks and mitigate the
likelihood the risks develop posing systemic risks which could further jeopardize financial
stability on local levels and potentially spread to the global level.
Fintech offers support to financial stability through the reduction in banks’ operational
costs and the improvement in risk management. IMF (2019) asserts that same technologies
that offer efficiencies and opportunities for fintech firms and banks, such as AI/advanced data
analytics, Distributed Ledger Technology (DLT), and cloud computing, can automate
processes and improve risk management in banks as well as improve supervisory efficiency
and effectiveness. According to the published paper work by the IMF (2019); with few
exceptions (Armenia and Georgia) growth in the Fintech services and innovation has resulted
in improvements to performance of financial institutions and has enhanced the financial
stability of majority of emerging markets. Furthermore, Fintech can also improve financial
integrity, support financial stability and financial inclusion, and possibly contribute to
solutions for declining Correspondent Banking Relationships (CBRs).
H2: Fintech Innovations has a Positive Impact on Financial Stability.
7. Research Framework
The research framework is built upon the proposed framework by Gray and Leibrock
(2020), as they proposed that examining the impact of Fintech on financial stability must be
analyzed based on case-by-case basis. Gray and Leibrock (2020) have developed a
framework that is based on nine key factors that must be considered when measuring how
Fintech may affect financial stability. However, this research will focus only on three factors
from those nine factors due to the lack of data availability as well as the newness of the
application of Fintech.
The number of fintech start-ups firms is expanding in Egypt, guided by the Egyptian
Government and the CBE intention to upgrade payment systems in a way to move towards a
cashless economy. The most mature sector is the provision of payment services, mobile cash
and smart wallets. In addition, in April 2018, Egypt’s first blockchain-focused incubator
opened in collaboration with Egyptian firms BM, Novelari and zk Capital. The Egyptian
Government and the CBE are working closely with ministries and other governmental
authorities to develop and encourage fintech companies to integrate into the financial system.
In February 2017, the President issued legislation setting up the National Council for
Payment. Its members include the President, the head of the CBE and the head of the
Financial Supervisory Authority. Its role is to promote the move towards cashless payments.
An e-commerce law has been under discussion, and a wave of financial regulatory reform to
respond to the growth in digital credit lending and crowdfunding is expected to be
Factor1: The provision of core banking functions by fintech firms
This refers to shadow banking activities, Fintech companies that provide core banking
functions (i.e., credit, liquidity and maturity transformation) could enhance financial stability
to the extent that these activities might diversify credit and liquidity risk within the financial
system. According to the CBE (2018), there are 39 banks and more than 2,800 branches
across Egypt. Sixteen of these banks offer full service e-banking and mobile financial
services with 133,651 mobile payment agents (including branches as of May 2018). Further,
by the end of 2018, mobile payments in Egypt operate on a bank-led model and mobile
network operators (MNOs) have the greatest market share of the Fintech services.
Source: CBE (2018), Case Study
Mobile money services in Egypt, as per the new regulations, include cash-in/cash-out,
person-to-person (P2P), person-to-merchant (P2M), merchant-to-merchant (M2M), ATM
cash-in/cash-out, international money transfers (IMT), virtual card number (VCN) and
account value load (AVL) from bank to wallet accounts (CBE, 2018).
Source: CBE (2018), Case Study
Factor2: The degree of financial inclusion
Financial inclusion means that individuals and businesses have access to useful and
affordable financial products and services that meet their needs in terms of transactions,
payments, savings, credit and insurance. In theory, these services should be delivered in a
responsible and sustainable way. Financial inclusion efforts focus on the large outreach of
financial services to all households and businesses, in particular women and the young
through financial literacy training programs and promoting access to financial services,
particularly payment services, savings and insurance products.
CBE has been increasingly engaged in Alliance for Financial Inclusion (AFI) activities
and services, since 2014, to hosting the 2017 GPF in Sharm El Sheikh. Representatives from
CBE have been active participants in AFI’s capacity building programs and regional
initiatives, and after an initial focus on the financial inclusion data work stream, CBE now
has representatives in all six AFI working groups.
According to the CBE (2018), 32.4 % of adults (21+ years) reported having a formal
account with a bank or Egyptian National Postal Organization (ENPO), while 48% use some
type of financial service, such as an insurance policy or ATM. However, women in Egypt are
more excluded from the financial system than men, with 10% fewer women on average
having transactional accounts. Meanwhile, the vast majority of MSMEs do not have access to
or use formal financial services and products, forcing most to rely on a range of informal
mechanisms. The survey data also suggests that financial inclusion is driven by direct salary
transfers, indicating that financial inclusion is characterized more by passive use of financial
services (e.g. salary and cash transfers) than active use.
Source: CBE (2018), Case Study
Figure 6: Financial Inclusion Usage in Numbers
Factor3: The evolution of the regulatory environment
Regulators around the world have noticed the increased importance of Fintech. A global
survey by the Financial Stability Board’s Fintech Issues Group in February 2017 shows that
20 of 26 jurisdictions contacted have already taken some measures to respond to fintech, with
five additional jurisdictions planning to follow suit (Gray and Leibrock, 2020). Policy
decisions and regulatory actions will directly determine to what extent fintech will impact
financial stability for years to come. Additionally, regulations are also bound to have a very
significant, albeit indirect, impact as they will play a crucial role in shaping the evolution of
each of the other factors described above.
According to the published highlights reports by the CBE (2018); “Creating crossborder regulatory bridges is also one of the key initiatives of the Strategy”. CBE has already
signed Memorandum of Understanding with some foreign regulators and FinTech hubs. CBE
will continue to expand its international cooperation agreements with regulators and relevant
stakeholders to enable joint work and knowledge sharing.
Furthermore, CBE is planning to establish a one billion pound (EGP) innovation fund to
finance “innovative ideas and projects”. The CBE Fund will focus on investing in financial
technology companies, from venture backing to funding companies that are growing and in
mature stages of development. The CBE Fund will target companies that are either profitable
or have a clear path to profitability, but need additional expertise to turn around or restructure
their operations to create more value.
8. Research Methodology
A comparative approach method is recommended in order to the study of the processes
of forming a new model of financial intermediation under the influence of FinTech
(Pantielieieva et al., 2018). To study the impact of digital wallets, mobile payment, and
virtual card numbers, on the financial stability, the use of linear regression model is
suggested. To estimate the model parameters, we use a standard OLS regression (Misati et
al., 2017).
8.1. Variables and Measures
This section presents the variables to be measured, i.e. the constructs proposed in the
research framework, where; the dependent variable “financial stability” is assessed using data
available from two indices: the Financial Stability Index (CERT) and the Financial Stability
Index (FSI) established by the World Bank.
On the other hand, the main independent variable of interest is “Fintech innovations” is
assessed using the monthly change in the usage of these products and services namely:
Digital Wallet: financial accounts that allow users to store funds, make
transactions, and track payment histories by computer. These pieces of software
may be included in a bank's mobile app, for example: Flous, MobiCash, and
Mobile Payment: a money payment made for a product or service through a
portable electronic device such as a tablet or cell phone. Mobile payment
technology can also be used to send money to friends or family members, such
as with the applications like: Vodafone Cash, Fawry, Orange Cash, etc.
Virtual Card Number: a convenient way to make credit card purchases online.
They're sometimes called virtual credit cards or virtual cards. And they allow
you to shop online without giving vendors your actual card number for example:
Meeza card.
8.2. Population, Sampling and Data Collection
This study will depend mainly on three sources of data namely, the World Bank, CBE,
and The National Telecom Regulatory Authority in Egypt (NTRA). Specifically, data on the
use of the mobile payment and the electronic wallets (E-Wallets) over a 7-year period (20132020) will be obtained from NTRA. Data of the financial inclusion in Egypt will be obtained
from the Global Findex established by the World Bank as well as CBE. Finally with regards
to data of Egypt’s financial stability will be obtained the Financial Stability Index (CERT)
and the Financial Stability Index (FSI) established by the World Bank. The interest in this
study is on how both financial inclusion and financial stability are affected by the
development of Fintech and the growth and pervasiveness of the use of Fintech innovation.
8.3. Statistical Methods
To estimate the hypotheses, this study relies on time series analysis. The regression
models used in this study are adopted and modified based on prior studies by Misati et al.
(2018) and Pantielieieva et al., 2018. There are two models to check the hypotheses; a
separate model will be constructed to each of these hypotheses. A proposed structural
equation model will be tested using SPSS software (Statistical Package for the Social
Descriptive statistics will be used to calculate and describe the data in terms of mean
scores and standard deviations among other parameters. Correlation coefficient “Pearson
Correlation” will be used to measure the strength among the study main concepts
(Pantielieieva et al., 2018). The significance level and p-value could be used to assess the
overall strength of relationships between study variables. In order to examine the effect of
cross-listing on share revenues, independent t-test was employed to test the differences
between share returns before and after cross-listing.
9. Research Plan
The research plan elaborates a theoretical framework and is further divided into the following
Chapter One: Introduction
An introduction will describe the main theme of the study, its objectives as well as the academic and
practical importance.
Chapter Two: Theoretical Background
The theoretical background will cover the on the most widely used theories of Fintech and innovation
in the financial product and services. These theories will be categorized into traditional and modern
Chapter Two: Literature Review
The literature review will cover the different conceptions of Fintech innovations as well as presenting
previous literature and empirical studies of how technological innovations could direct greater
financial inclusion and enhance financial stability.
Chapter Three: Methodology and Research Design
This chapter will cover the proposed framework of the study, the variables included and their
measures, the sample and population of interest, the statistical methods used to capture major
Chapter Four: Analysis of Research Findings
This chapter will include a presentation of data analysis and findings.
Chapter Five: Discussion and Conclusion
This chapter will present an overview and general discussion of results in addition to some
recommendations for further future research.
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