THE MODERATING ROLE OF ESG SCORES ON THE RELATIONSHIP BETWEEN FINTECH ADOPTION AND FINANCIAL PERFORMANCE: EVIDENCE FROM PAKISTANI COMMERCIAL BANKS

Abstract

This research focuses on the moderation effect of the Environmental, Social, and Governance (ESG) scores on the association between Financial Technology (FinTech) adoption and the financial performance of Pakistan commercial banks. The paper utilizes panel data of 140 bank-years made up of 28 scheduled commercial banks on the Pakistan Stock Exchange (PSX) through the resources based view (RBV) and Stakeholder Theory and the data collection was conducted between 2018 and 2022. Endogeneity and sample selection issues are overcome by the use of fixed effects panel regression, which is complemented with the two-stage least squares (2SLS) estimation, Heckman correction; and propensity score matching (PSM). The results indicate that the use of FinTech will have adverse impact on short-term financial performance and ESG moderation has an additional negative impact on FinTech of market-based performance measures. These findings can indicate that within the changing regulatory context in Pakistan the congruence of digital innovation and sustainability goals creates compliance costs and transitional inefficiencies that suppress profitability in the short term. The research paper has added to the existing body of limited literature on FinTech-ESG relationships in the South Asian emerging market that has limited actionable implications to the regulators, bank managers, and the investors working in the banking industry of Pakistan.