Digital Transformation, Monetary Policy Transmission, and Inflation Persistence in Nigeria: Evidence from Fintech Penetration (1990-2025)

Abstract

This study analyses the evolving link among fintech penetration, monetary policy transmission, and inflation persistence in Nigeria from 1990 to 2025. It examines whether the swift proliferation of digital financial technologies has fundamentally impacted the efficacy of traditional monetary policy tools, in light of Nigeria's ongoing inflation crisis, which reached a nearly 30-year peak of 34.8% in December 2024, despite the Central Bank of Nigeria's (CBN) stringent monetary tightening measures. This study utilises a time series framework based on the Structural Vector Autoregressive (SVAR) model, enhanced by a Fintech Penetration Index (FPI) derived from Principal Component Analysis (PCA) of POS transaction volumes, mobile payment values, digital transfer volumes, and internet banking usage, to identify structural shocks to monetary policy and analyse their impulse responses within the fintech-enhanced financial system. The empirical findings indicate three primary outcomes: first, fintech penetration has substantially undermined the conventional interest rate and money supply transmission channels, establishing a parallel digital monetary circuit that is somewhat insulated from CBN policy directives; second, inflation persistence in Nigeria, as indicated by the AR(1) coefficient of the inflation series, has intensified during the fintech era, with policy shocks demonstrating prolonged lags before affecting price level. The results of the Forecast Error Variance Decomposition (FEVD) reveal that fintech shocks contribute roughly 18.4% to the inflation forecast error variance at the 12-quarter horizon, a significant rise since 2015. These findings have significant implications for the CBN's inflation targeting framework established in late 2023, indicating an urgent necessity to incorporate a digital monetary indicator into the policy toolset. The study enhances the emerging literature on the fintech-macroeconomics relationship in Sub-Saharan Africa and establishes an empirical connection between digital finance innovation and the effectiveness of monetary policy in oil-dependent economies.