Digital financial inclusion and leadership quality as determinants of banking system stability in Somalia

Abstract This study examines the association between digital financial inclusion, leadership quality, and banking system stability in Somalia, focusing on the moderating role of institutional governance. Using annual macro financial data for 2019–2024 and ordinary least squares estimation with robust standard errors, the study investigates how mobile money penetration and governance quality are associated with the inverse non performing loan ratio as a stability proxy. The positive interaction term suggests that governance quality may condition the association between digital financial inclusion and banking system stability (coefficient = 15.185; p = 0.003), indicating that mobile financial service expansion is linked to stronger financial system performance. More importantly, the interaction between digital financial inclusion and leadership quality is positive and significant (coefficient = 6.308; p = 0.003), suggesting that governance effectiveness conditions the stabilising association of digital finance. These findings underscore the conditional nature of digital financial innovation: institutional quality is a necessary complement rather than an optional add on. Crucially, the short time dimension ( n = 6) limits statistical power and precludes causal inference; all results are therefore explicitly exploratory and associational. This study contributes to the literature on digital finance and financial stability by offering evidence from a fragile post conflict economy rarely examined in mainstream research. Findings carry practical implications for policymakers in economies undergoing rapid digital financial expansion alongside institutional development.