Does Digital Finance Drive Growth Conditionally? Institutional Quality as a Threshold Catalyst in Sub-Saharan Africa

This study examines whether digital financial inclusion drives economic growth conditionally on institutional quality across 45 Sub-Saharan African economies between 2000 and 2024. Unlike earlier contributions to this literature, the empirical strategy opens with a full battery of second-generation panel diagnostics, comprising the Pesaran cross-sectional dependence test, the Pesaran panel unit root test, and the Pesaran-Yamagata slope homogeneity test. These diagnostics establish that the panel exhibits strong cross-sectional dependence and that several macroeconomic controls are non-stationary in levels, conditions that the first-generation panel methods common in this literature do not accommodate. A digital financial inclusion index and an institutional quality index are constructed through principal component analysis from five and six underlying indicators respectively, and estimation proceeds through Driscoll-Kraay fixed-effects regression, Hansen panel threshold regression, system generalized method of moments, and fixed-effects quantile regression. The results show that institutional quality exerts a robust, unconditional, positive effect on growth in every specification, while the growth effect of digital financial inclusion is conditional on institutional quality. The interaction between the two indices is positive and significant, and the marginal growth dividend from digital finance becomes statistically significant only above the median of institutional quality. A Hansen threshold test corroborates this pattern, locating a break near the 25th percentile of institutional quality below which digital finance is associated with significantly lower growth and above which it becomes significantly growth-enhancing. Channel analysis attributes this moderating role specifically to regulatory quality, rule of law, government effectiveness, and control of corruption, rather than to political stability or voice and accountability. The findings caution against the unconditional promotion of digital finance in weak-institution settings and argue for sequencing digital financial expansion with governance reform.