Financial stability and its impact on enhancing confidence in the banking system amid digital transformation in Iraq for the period (2004-2022)
Abstract
Background This study aims to explore the effect of financial stability on boosting confidence in the Iraqi banking sector during the digital transformation process over the period (2004-2022). Specifically, it examines the relationship between inflation rate, exchange rate stability, and bank liquidity as independent variables, and the volume of bank deposits as the dependent variable and an indicator of banking confidence. Methods The study employs the Autoregressive Distributed Lag (ARDL) model to analyze the impact of financial stability indicators on banking confidence. Annual time-series data for the study period were used to estimate the relationship between the selected variables and bank deposits. Results The empirical findings reveal that inflation exerts a significant negative effect on bank deposits by reducing real purchasing power and increasing economic uncertainty. In contrast, exchange rate stability enhances depositor confidence and contributes to higher deposit inflows. Bank liquidity demonstrates a dual impact, as adequate liquidity strengthens banks’ ability to meet obligations and increases depositor confidence, whereas liquidity constraints reduce confidence and lead to lower deposit levels. The results confirm that achieving financial stability is essential for strengthening banking confidence and increasing deposit volumes. Conclusions The study concludes that maintaining financial stability is a key requirement for enhancing confidence in the banking sector. It recommends the implementation of effective monetary policy measures aimed at controlling inflation, improving exchange rate stability, and strengthening liquidity conditions. Furthermore, integrating digital transformation initiatives with financial stability policies can support sustainable banking confidence and contribute to the long-term development of the banking system.