📈 economics

The Mediating role of Digital Financial Inclusion on the relationship between Green Finance and Carbon Emission in Africa

This study analyzes data from 48 African countries using Partial Least Squares Structural Equation Modeling to demonstrate that digital financial inclusion partially mediates the relationship between green finance and reduced carbon emissions, thereby amplifying the environmental benefits of green finance through technological innovation.

Original authors: Amina Abdallah, Joseph Tezaamaabo, Ezekiel Davies

Published 2026-07-13

📖 4 min read☕ Coffee break read

CC BY 4.0

Original authors: Amina Abdallah, Joseph Tezaamaabo, Ezekiel Davies

Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). ✨ This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer

Imagine Africa as a giant, bustling city trying to fix a smoggy sky while simultaneously trying to build a better road system for everyone to get around. For a long time, people thought the city needed two separate teams: one to hand out "Green Money" for clean energy projects, and another to make sure everyone had a bank account. But this new study, looking at data from 48 African countries, suggests those two teams actually need to be holding hands, or better yet, riding the same bicycle.

Here is the big picture: The researchers found that Green Finance (money invested in things like solar power and clean air projects) acts like a powerful wind that pushes carbon emissions down. But here's the twist: that wind blows even harder when it fills up Digital Financial Inclusion (the use of mobile phones and apps to send money and pay bills).

Think of Green Finance as a massive water tower full of clean water (sustainable money). Think of Carbon Emissions as a dirty swamp you want to drain. The study shows that simply building the tower helps drain the swamp, but it's not the whole story. The real magic happens when you build a network of pipes and sprinklers—this is Digital Financial Inclusion. When the water from the Green Finance tower flows through these digital pipes, it reaches more houses and small shops that were previously too far away to get a hose.

The paper explicitly rules out the idea that these are just two separate things happening at the same time. It argues against the notion that Green Finance works best on its own or that Digital Inclusion is just about making life easier for people without considering the environment. Instead, the data suggests that Digital Financial Inclusion is the secret sauce that makes Green Finance work better. It's not just a side effect; it's a bridge.

How sure are the authors? They didn't just guess; they ran a complex statistical simulation called PLS-SEM on data from 2024. The numbers are pretty loud and clear:

Green Finance has a significant negative effect on carbon emissions (meaning more green money equals less pollution).
Green Finance significantly boosts Digital Financial Inclusion (more green money leads to more people using digital money).
Digital Financial Inclusion significantly reduces carbon emissions on its own.
Most importantly, the study confirms that Digital Financial Inclusion partially mediates the relationship. This is a fancy way of saying: Green Finance reduces pollution directly, but it also reduces pollution indirectly by helping more people use digital money, which then helps them buy clean tech.

The study measured this using specific indicators. For example, they looked at things like "Green bond issuance (USD millions)" and "Mobile money account penetration (% of adults)." They found that the relationship between Green Finance and Digital Financial Inclusion is incredibly strong, with a path coefficient of 0.859. That's a huge number, suggesting that as green money grows, digital money usage skyrockets.

When it comes to the final result, the model explains about 86% of the variation in carbon emissions (an R-squared of 0.860). That's a massive chunk of the puzzle solved by just these two factors. The study also noted that Digital Financial Inclusion has a "very large effect" on carbon emissions, with an effect size (f²) of 0.625.

However, the authors are careful not to call this a magic wand that fixes everything overnight. They admit that because they looked at a snapshot of time (cross-sectional data from 2024) rather than watching the story unfold over many years, they can't prove strict cause-and-effect in the way a time-traveling scientist could. They also note that their findings are specific to the African context, where mobile money is already a huge part of daily life, so the results might look different in places with older banking systems.

So, the takeaway for a curious teenager is this: If you want to clean the air in Africa, you can't just throw money at solar panels. You have to make sure that money can travel through the digital pipes to the people who need it. The study suggests that the future of a clean sky depends on the synergy between the wallet and the smartphone. It's not about choosing one or the other; it's about realizing that the digital phone is the delivery truck that brings the green money to the front door.

Technical Summary: The Mediating Role of Digital Financial Inclusion on the Relationship between Green Finance and Carbon Emission in Africa

Problem Statement and Context
Climate change presents a critical challenge for developing regions, particularly Africa, which faces disproportionate environmental risks despite contributing minimally to global emissions. The continent simultaneously grapples with development constraints, including limited access to energy and financial services. While green finance (investments in environmentally sustainable projects) and digital financial inclusion (access to financial services via digital technologies) have emerged as mechanisms for sustainable development, their combined effect on environmental outcomes remains underexplored. Existing literature often examines these constructs in isolation or focuses on traditional financial systems, neglecting the mediating role of digital financial inclusion in the relationship between green finance and carbon emissions within the African context.

Methodology
This study employs a quantitative research design using a cross-sectional approach with secondary data from 48 African countries for the year 2024. The sample represents approximately 89% of the African continent, ensuring broad geographical coverage.

Data Sources: Data were aggregated from reputable international databases, primarily the World Bank (WDI).
Constructs and Indicators:
- Green Finance (GF): Measured by green bond issuance, renewable energy investment, environmental tax revenue (% of GDP), and public environmental expenditure (% of GDP).
- Digital Financial Inclusion (DFI): Measured by mobile money account penetration, transaction value (% of GDP), agent density, digital payments usage, and mobile broadband subscriptions.
- Carbon Emissions (CE): Measured by CO₂ emissions per capita, emissions intensity, total CO₂ emissions, and emissions from fuel combustion.
- Control Variables: GDP per capita, population size, urbanization rate, industrialization, renewable energy share, and institutional quality.
Analytical Technique: The study utilizes Partial Least Squares Structural Equation Modeling (PLS-SEM). This method was selected for its suitability in handling complex models with mediation effects and its ability to produce reliable estimates with the given sample size.
Validation Procedures: The analysis followed a two-stage approach:
1. Measurement Model Assessment: Evaluated for indicator reliability (outer loadings > 0.708), internal consistency (Cronbach's alpha and Composite Reliability > 0.70), convergent validity (AVE > 0.50), and discriminant validity (Fornell-Larcker criterion, cross-loadings, and HTMT ratio < 0.90).
2. Structural Model Assessment: Evaluated for collinearity (VIF < 3.3), path coefficient significance (bootstrapping with 5,000 resamples), effect size ( $f^2$ ), predictive relevance ( $Q^2$ ), and coefficient of determination ( $R^2$ ).

Key Results
The structural model analysis yielded strong empirical support for all hypothesized relationships:

Green Finance and Carbon Emissions: Green finance has a significant negative effect on carbon emissions ( $\beta = -0.383$ , $p < 0.01$ ). This confirms that increased allocation of financial resources to environmentally friendly projects directly reduces emissions.
Green Finance and Digital Financial Inclusion: Green finance has a significant positive effect on digital financial inclusion ( $\beta = 0.859$ , $p < 0.001$ ). This indicates that the expansion of green finance initiatives drives the adoption and development of digital financial infrastructure.
Digital Financial Inclusion and Carbon Emissions: Digital financial inclusion has a significant negative effect on carbon emissions ( $\beta = -0.578$ , $p < 0.001$ ). Access to digital financial services facilitates investment in clean technologies and reduces transaction-related resource waste.
Mediation Effect: Digital financial inclusion significantly mediates the relationship between green finance and carbon emissions. The indirect effect is significant ( $\beta = -0.496$ , $p < 0.001$ ). The study identifies this as partial mediation, meaning green finance reduces emissions both directly and indirectly by enhancing digital financial inclusion.
Model Fit and Explanatory Power: The model demonstrated excellent fit (SRMR = 0.026). The explanatory power ( $R^2$ ) was substantial, with green finance and digital financial inclusion explaining 86.0% of the variance in carbon emissions and 73.8% of the variance in digital financial inclusion. Effect size analysis ( $f^2$ ) revealed that digital financial inclusion has a very large effect on carbon emissions, while green finance has an extremely large effect on digital financial inclusion.

Theoretical Framework
The study integrates two theoretical perspectives:

Financial Intermediation Theory: Explains how financial systems allocate capital efficiently to reduce transaction costs and information asymmetries, directing funds toward sustainable investments.
Diffusion of Innovation Theory: Explains how digital financial technologies spread across populations, enabling broader access to green financial products and facilitating behavioral change toward sustainable practices.

Key Contributions and Significance
The authors claim the study makes several original contributions to the literature on sustainable finance and environmental economics:

Integrated Framework: Unlike prior studies that treat green finance and financial inclusion in isolation, this study develops a unified framework examining their simultaneous interaction and impact on carbon emissions.
Mediating Mechanism: The study introduces digital financial inclusion as a mediating variable, offering deeper insights into the transmission channels through which green finance influences environmental sustainability. This addresses a gap in literature regarding developing economies.
Theoretical Integration: By combining Financial Intermediation Theory and Diffusion of Innovation Theory, the study provides a comprehensive explanation of how financial capital and technological delivery mechanisms jointly drive environmental sustainability.
Methodological Rigor: The application of PLS-SEM with extensive validation techniques (mediation analysis, multi-group analysis, bias diagnostics) strengthens the reliability and generalizability of the findings.
Contextual Evidence: The study provides empirical evidence from 48 African countries, a region often underrepresented in sustainability finance literature despite its high climate vulnerability and rapid digital expansion.

Significance of Findings
The paper concludes that the environmental impact of green finance is significantly amplified through digital financial inclusion. This finding shifts the policy narrative from isolated interventions toward integrated strategies. The authors assert that financial capital alone is insufficient without efficient technological delivery mechanisms. Consequently, achieving sustainable environmental outcomes in Africa requires a synergy between financial sustainability and digital innovation, where digital systems act as critical transmission channels for green finance to reach underserved populations and facilitate the adoption of low-carbon technologies.

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