DIGITAL BANKING, ENERGY CONSTRAINTS, AND FINANCIAL STABILITY: EVIDENCE FROM NIGERIA

Abstract Digital banking has expanded rapidly in Nigeria over the past decade, yet concerns about recurring liquidity pressures in the banking system have persisted. This raises a key question: to what extent can digitalisation strengthen financial stability in an environment where electricity supply remains unreliable? This paper examines how energy conditions shape the relationship between digital banking activity and bank liquidity. The analysis combines monthly data on digital transactions and liquidity indicators (2009–2024) with annual measures of electricity access and reliability. To account for the mixed-frequency nature of the data, a MIDAS framework is employed, allowing energy constraints to influence high-frequency financial dynamics without resorting to aggregation. The results indicate a clearly conditional relationship. While digital banking is generally associated with improved liquidity, the magnitude of this effect depends on the energy environment. High transmission and distribution losses tend to weaken the liquidity-enhancing effect of digital banking, reflecting disruptions to the underlying digital financial infrastructure. In contrast, broader access to electricity strengthens the positive contribution of digital banking to liquidity conditions. Further results from the interaction terms show that improvements in electricity supply reinforce the stabilising role of digital finance, whereas persistent energy constraints dampen its effectiveness. Overall, the findings suggest that the contribution of digital banking to financial stability is closely tied to the reliability and reach of electricity supply. In contexts where power infrastructure remains weak, digitalisation alone is unlikely to fully deliver the expected stability gains. Contribution/Originality: Existing work on digital banking has paid limited attention to the role of energy conditions in shaping financial outcomes. This study shows that electricity reliability captured through access and system losses conditions the liquidity effects of digital banking. By adopting a mixed-frequency approach, it offers new evidence on how energy constraints influence financial stability in Nigeria. JEL Codes: G21, G28, O33, Q43, C22