Digital Financial Stability in Africa: Index Construction, Regulatory Effects, and Heterogeneous Dynamics

Purpose This study develops a novel Digital Financial Stability (DFS) Index to assess the interplay between financial sector vulnerabilities and regulatory quality across 41 African countries, categorized into emerging, frontier, and fragile economies over the period 2004–2024. Design/methodology/approach The Principal Component Analysis (PCA) and the dynamic panel System Generalized Method of Moments (GMM) were employed. While the PCA was used to construct the DFS index using indicators that reflects digital financial risks (internet banking, mobile finance, automated transactions, etc.) alongside conventional financial and macroeconomic variables, the system GMM is utilized to address endogeneity and cross-country heterogeneity in investigating the study’s objective. Findings Results indicate that DFS in Africa is predominantly driven by cyber-related risks, with internet and mobile banking contributing significantly to index variation. Substantial heterogeneity exists across country groups, with emerging economies exhibiting higher DFS levels and stronger regulatory effectiveness than frontier and fragile economies. While regulatory quality enhances stability across all groups, its marginal effect is weaker in frontier economies due to structural and institutional constraints. Originality The construction of a comprehensive DFS index that integrates digital risk dimensions with traditional financial stability indicators is part of the study’s novel contribution to literature. The study also offered a novel framework for assessing digital financial stability among the heterogeneous African economies.