Rethinking digital finance: the interplay of inclusion and corruption control

Abstract Digital financial inclusion (DFI) is increasingly viewed as a potential governance-enhancing tool because digital transactions can improve traceability, reduce cash-based discretion, and expand participation in formal financial systems. Yet its anti-corruption effect is not automatic; rapid digital expansion may also create regulatory gaps, fraud, and opportunities for rent extraction where legal institutions are weak. This paper examines the dynamic andnonlinear relationship between DFI and corruption control and how it is conditioned by rule of law. Drawing on an unbalanced panel of 136 countries over 2004–2024, we construct a multidimensional DFI index from access, usage, and adoption indicators through multiple imputation, standardization, and principal component analysis. The empirical strategy combines panel vector autoregression (PVAR) for dynamic analysis with two-step System GMM for estimating nonlinear and institutionally conditional relationships. The PVAR results show that changes in DFI and, more strongly, changes in the DFI–rule-of-law interaction predict subsequent changes in corruption control, while reverse predictability from corruption control to DFI is limited. The System GMM estimates show that DFI alone does not automatically improve corruption control. However, when the interaction with rule of law is introduced, the squared DFI term becomes positive and the DFI–rule-of-law interaction is also positive, indicating that the marginal effect of DFI becomes governance-enhancing when it reaches sufficient scale and operates within credible rule-of-law institutions. Income-group analysis further shows that DFI becomes favorable at lower levels of adoption in middle- and high-income countries than in low-income countries. Robustness checks using the Corruption Perceptions Index confirm the central findings. Overall, DFI is not a stand-alone anti-corruption instrument; it becomes effective only when it reaches sufficient scale and is embedded in credible rule-of-law institutions.