The Impact of Fintech Risk on Bank Performance in Africa: The PVAR Approach

Abstract

This paper presents an empirical investigation into the role of Fintech risk, measured by the Fintech Financial Stress Indicator (FFSI), in shaping the dynamic behavior of bank performance by employing a panel vector autoregressive (PVAR) methodology on a dataset comprising 41 banks across 11 African economies over the semi-annual period from June 2004 to December 2020. The findings reveal that bank performance, measured by return on equity (ROE), exhibits a negative and short-lived response to FFSI shock, while the effects on bank stability, cost efficiency, and return on assets (ROA) are statistically insignificant. In addition, an increase in FFSI significantly enhances both ROA and ROE, with negligible impacts on cost efficiency and stability. In contrast, a decline in FFSI has a significant negative effect on ROE and stability but remains insignificant for ROA and cost efficiency. These results indicate that FFSI shocks have asymmetric effects on ROA, cost efficiency, and bank stability but a symmetric effect on ROE. The findings suggest that engagement in financial innovation initiatives may yield performance benefits for banks, provided such strategies are pursued within a sound regulatory framework to mitigate potential excessive risk-taking.