Geopolitical Risk Emerges as Hidden Brake on Digital Financial Inclusion

Digital finance has been celebrated for years as the great equalizer of the modern economy, promising to bring banking, credit, payments, and insurance to billions of people who were previously locked out of formal financial systems. From mobile money accounts in sub-Saharan Africa to QR-code payment networks in South Asia, the spread of digital financial services has been one of the defining economic stories of the past decade. Yet a new study suggests that this progress is far more fragile than policymakers might like to believe. According to research published in Discover Sustainability by Mehak Sharma and Manju Singh of Malaviya National Institute of Technology Jaipur and Namrata Bhardwaj of Manipal University Jaipur, geopolitical risk is quietly undermining the momentum of digital financial inclusion across a wide panel of countries, and its effects are strongest precisely where inclusive finance is needed most.

The study, which analyzes panel data from 39 countries over the period 2016 to 2023, takes an interdisciplinary approach to a question that has become increasingly urgent amid rising global fragmentation. Wars, sanctions, trade disputes, and diplomatic ruptures do not merely dominate headlines; they reshape the plumbing of the global financial system. The researchers set out to quantify how this turbulence interacts with foreign investment ecosystems to shape financial inclusion outcomes in both developing and developed economies. Their dataset draws on some of the most authoritative sources available in the field, including the World Bank Global Findex Database, the IMF Financial Access Survey, the World Governance Indicators, the Geopolitical Risk Index, and UNCTAD investment data. By combining these sources, the authors constructed a picture of how digital financial inclusion evolves from year to year under shifting political and economic conditions.

Methodologically, the paper is notable for its careful handling of the short-run dynamics that most cross-country studies tend to smooth over. The researchers applied a first-difference fixed-effects panel approach, which examines how changes in digital financial inclusion from one period to the next respond to changes in the explanatory variables, effectively controlling for all time-invariant country characteristics. To guard against the biases that plague dynamic panel models, particularly those arising from the correlation between lagged dependent variables and country-specific error terms, they employed dynamic generalized method of moments estimation together with LSDVC bias-corrected robustness checks. These techniques are essential when the dependent variable is persistent, meaning that past levels of digital financial inclusion strongly predict current levels, and when the number of countries is modest relative to the number of time periods.

Perhaps the most striking finding of the study concerns persistence itself. The authors report that, beyond institutional quality and conditional macroeconomic factors, the persistence of digital financial inclusion over time is the main, if not the only, driver of the phenomenon in their short-run panel. In plain terms, countries that were already advancing digital financial access tended to keep advancing, while those lagging behind found it difficult to break out of their trajectory within the eight-year window. This inertia has profound implications. It suggests that digital financial inclusion behaves less like a policy dial that governments can simply turn up and more like a cumulative process in which early momentum, network effects, and established digital infrastructure compound over time. For countries seeking to accelerate inclusion, the message is sobering: waiting has a cost, because the gap between leaders and laggards tends to reproduce itself.

Foreign direct investment emerges as a second central character in the story, but with an important twist. The study finds that FDI exerts a significant positive effect on digital financial inclusion once its interaction with geopolitical risk is properly accounted for. This statistical nuance matters. In models that ignore the interaction, the apparent effect of foreign investment may be distorted, because the benefit of FDI is not constant across political environments. Instead, the researchers show that the positive effect of foreign investment weakens as geopolitical risk rises. Capital, technology, and expertise flowing across borders appear to nurture digital financial ecosystems most effectively in stable environments, while in turbulent ones that same investment delivers a diminished boost. The finding echoes a broader theme in development economics: foreign capital is not a substitute for stability but a complement to it.

The geographic pattern of these effects adds another layer of significance. The study finds that the FDI effect is concentrated in non-OECD economies, meaning that developing countries stand to gain the most from foreign investment in digital finance when conditions are favorable, and to lose the most when geopolitical risk surges. This asymmetry maps directly onto the global development agenda. The authors connect their findings to Sustainable Development Goal 8 on decent work and economic growth, SDG 9 on industry, innovation and infrastructure, SDG 10 on reduced inequalities, and SDG 16 on peace, justice and strong institutions. Digital financial inclusion sits at the intersection of all four: it enables economic participation, depends on digital infrastructure, determines who shares in growth, and requires trustworthy institutions to function.

Why should geopolitical tension interfere with something as seemingly domestic as whether a farmer can open a mobile wallet? The mechanisms are both direct and indirect. Directly, geopolitical crises can disrupt cross-border payment corridors, trigger capital flight, complicate compliance regimes through sanctions, and deter the foreign banks and fintech firms that often supply the technology and capital behind digital financial services. Indirectly, elevated risk raises uncertainty for households and firms alike, discouraging the formalization of savings and transactions that digital inclusion represents. The Geopolitical Risk Index used in the study captures the frequency of conflict, terrorism, and interstate tension as reported in major newspapers, providing a quantifiable proxy for the climate of uncertainty in which financial decisions are made. When that climate darkens, the study suggests, the machinery of inclusive digital finance grinds more slowly.

The institutional dimension of the analysis reinforces this interpretation. By disaggregating the World Governance Indicators and testing their individual and joint effects, alongside multicollinearity diagnostics, the researchers examined whether specific aspects of governance, such as regulatory quality, rule of law, or government effectiveness, carry distinct weight in shaping digital financial inclusion. The emphasis on institutions in their findings aligns with a growing consensus that technology alone cannot deliver financial inclusion. A mobile payment app requires a regulatory framework that permits agent networks, identity systems that verify customers, consumer protection rules that build trust, and courts that enforce contracts. Where these institutional foundations are weak or destabilized by political turmoil, digital finance struggles to take root regardless of how sophisticated the underlying technology may be.

For policymakers in developing economies, the study’s implications are pointed. First, because digital financial inclusion is highly persistent, early and sustained investment in digital ecosystems is likely to pay compounding dividends, while delays entrench exclusion. Second, attracting foreign direct investment remains a viable strategy for building inclusive digital finance, but its returns are contingent on managing geopolitical exposure. Countries that diversify their investment partnerships, strengthen governance, and insulate their financial infrastructure from external shocks are better positioned to capture the benefits of foreign capital even in a fragmented world. Third, the link to SDG 16 suggests that resilient governance is not merely a political aspiration but an economic prerequisite for equitable financial access. The authors argue that demonstrating how geopolitical instability constrains inclusive digital finance highlights the importance of resilient governance and sustainable digital ecosystems for achieving fair and widespread financial access.

The research arrives at a moment when the forces it measures are intensifying. Geopolitical fragmentation has deepened since the early 2020s, and the digitalization of finance has accelerated in parallel, making the question of how the two interact one of the defining policy puzzles of the decade. By showing that the benefits of global integration, in the form of foreign investment, are conditional on political stability, the study challenges both techno-optimists who believe digital finance will spread regardless of circumstances and skeptics who dismiss foreign investment as irrelevant to inclusion. The reality, the data suggest, is more conditional and more contingent. Digital financial inclusion can be a powerful engine of equitable growth, but its engine runs on a fuel mixture of persistent momentum, sound institutions, and foreign investment, and geopolitical risk drains all three. In a world where political shocks are increasingly frequent, building financial systems that can withstand them may be as important as building the systems themselves.

Subject of Research: The effect of geopolitical risk and foreign direct investment on digital financial inclusion across developing and developed economies

Article Title: Geopolitical risk and digital financial inclusion in short-run panel dynamics

Article References: Sharma, M., Bhardwaj, N., & Singh, M. (2026). Geopolitical risk and digital financial inclusion in short-run panel dynamics. Discover Sustainability. https://doi.org/10.1007/s43621-026-04514-w

Image Credits: AI Generated

DOI: 10.1007/s43621-026-04514-w

Keywords: digital financial inclusion, geopolitical risk, foreign direct investment, panel data, dynamic GMM, financial access, sustainable development goals, governance indicators, developing economies, fintech, World Bank Findex, economic growth