The Role of Innovating in Fintech in Enhancing the Financial Stability in the Iraqi Banking System

Abstract

This study aimed to examine the role of financial technology (FinTech) innovation in supporting the financial stability of the Iraqi banking system by investigating the relationship between FinTech innovation indicators and financial stability indicators using quarterly data covering the period from 2018 to 2025. The study employed modern time-series econometric techniques to analyze both the short-run and long-run relationships among the study variables.
The Augmented Dickey–Fuller (ADF) unit root test was first applied to examine the stationarity of the variables. The results indicated that some variables were stationary at level, I(0), while others became stationary after first differencing, I(1). Based on these findings, the Johansen cointegration test was conducted to determine the existence of a long-run equilibrium relationship among the variables. The Trace test confirmed the existence of five cointegrating vectors at the 5% significance level, indicating a stable long-run relationship between FinTech innovation and financial stability in the Iraqi banking sector.
Furthermore, the Vector Error Correction Model (VECM) was estimated to assess both the long-run and short-run dynamics. The empirical results revealed that several FinTech innovation variables exerted statistically significant long-run effects on financial stability, whereas the short-run effects were relatively limited. The error correction coefficient suggested a gradual adjustment of deviations toward the long-run equilibrium following economic shocks.
To ensure the reliability of the estimated model, the Vector Error Correction Residual Serial Correlation LM Test was performed. The results confirmed the absence of serial correlation in the residuals, indicating that the estimated model was statistically robust and suitable for interpretation and forecasting.
The findings suggest that promoting financial technology innovation contributes to improving banking efficiency, enhancing risk management, expanding financial inclusion, and strengthening the financial stability of the Iraqi banking system. Accordingly, the study recommends accelerating digital transformation within Iraqi banks, developing an effective regulatory framework for FinTech, expanding digital payment services, strengthening cybersecurity infrastructure, and encouraging investment in innovative financial technologies to enhance the resilience and long-term stability of the Iraqi banking sector.