Financial Literacy, Financial Innovation, and Financial Inclusion as Mitigating Factors of the Adverse Effect of Corruption on Banking Stability Indicators

Abstract

The purpose of this study is to examine the ability of financial literacy, financial innovation, and financial inclusion to mitigate the adverse effect of corruption on banks’ credit risk, profitability, and financial stability, with this joint inclusion being the novelty explored. Furthermore, we aim to compare the results across four different groups of countries, namely African, Asian, American, and European countries. The Feasible Generalized Least Squares (FGLS) estimation results indicate that corruption increases credit risk, reducing profitability and bank stability, being these effects mitigated by financial literacy, financial innovation, and financial inclusion. Furthermore, we find that financial literacy, financial innovation, and financial inclusion reduce credit risk while increasing bank profitability and stability. These results enable policymakers and managers to promote inclusion, innovation, and financial literacy to achieve banking sector stability while combating corruption.