The Impact of Digital Services on Interest Rate Risk in Commercial Banks

The recent rapid growth of digital financial services, which have changed the underlying business models and balance sheets of commercial banks around the world pervasive with interest rate risk the most systemically relevant of bank exposures in bank-based financial systems. The accelerated digital transformation of Uzbekistan's banking sector since 2017, in accordance with the government's Digital Uzbekistan 2030 strategy, goes hand in hand with simultaneous structural liberalisation reforms, which have deepened the risks and opportunities that digitalisation offers, but where the macro-financial implications remain poorly understood. All the recent empirical literature is mainly concentrated on developed and large emerging economies leaving the strict nexus between digital service penetration and interest rate risk in another under investigated phenomenon in transition economies, specifically Uzbekistan, where there has been no econometric research take place. This study examines the impact of digital financial services on the spread of interest rates across Uzbekistan's commercial banking system over the period     2015–2024 in terms of direction and magnitude, as well the time dynamics of this impact, with ATM density, internet user penetration and secure internet server infrastructure being considered digital proxies. Using the ARDL bounds testing framework, the results not only confirm a stable long-run cointegrating relationship but also confirm that all three digital measures have a statistically significant and negative impact on the interest rate spread, together representing an average cumulative reduction of 3.07 percentage point amounting to approximately 45 % relative to the 2015 baseline. We do, however, differentiate between short-run adjustment dynamics and long-run equilibrium effects, which is the first such econometric evidence for Uzbekistan on the nexus of digitalization interest rate risk across time. The findings suggest that continuous investment in digital infrastructure in the context of macroeconomic stability would put downwards risk to the bank risk premium, providing empirical evidence producing implications for banking supervisors and financial sector policymakers, expanding beyond Uzbekistan, to other transition economies.