1. Home
  2. Volume 8 - Number 1
  3. Impact of digital financial innovation on financial system development in Common Market for Eastern and Southern Africa (COMESA) countries
New submission
Issues
Journal Information
Aims and ScopeEditorial BoardEditorial Advisory BoardJournal Policies
Resources
For Readers
For Authors
For Editors
For Reviewers
Publication EthicsCall for Special Issue
ISSN
ISSN 2615-9821
ISSN(Previous) 2588-1396

Volume 8 - Number 1 | March 2024

Impact of digital financial innovation on financial system development in Common Market for Eastern and Southern Africa (COMESA) countries

Charles O. Manasseh, Ifeoma C. Nwakoby, Ogochukwu C. Okanya, Nnenna G. Nwonye, Onuselogu Odidi, Kesuh Jude Thaddeus, Kenechukwu K. Ede, and Williams Nzidee

25/03/2024 9 0 0
Like Buy now 20.000 đ
Digital financial innovation Financial system development.

Abstract:

Purpose
This paper aims to assess the impact of digital financial innovation on financial system development in Common Market for eastern and Southern Africa (COMESA). This paper evaluates the dynamic relationship between digital financial innovation measures and financial system development using time series data from COMESA countries for the period 1997–2019.

Design/methodology/approach
A dynamic autoregressive distributed lag model (ARDL) was adopted and the mean group (MG), pooled mean group (PMG) and dynamic fixed effect (DFE) of the model were estimated to evaluate the short- and long-run impact. In addition, the dynamic generalized method of moments (DGMM) was adopted for a robustness check. The Hausman test results show PMG to be the most consistent and efficient estimator, while the coefficient of lagged dependent variable of different GMM is less than the fixed effect coefficient, and, as such, suggests system GMM is the most suitable estimator. Data for the study were sourced from World Bank Development Indicator (WDI, 2020), World Governance Indicator (WGI, 2020) and World Bank Global Financial Development Database (GFD, 2020).

Findings
The result shows that digital financial innovation significantly impacts financial system development in the long run. As such, the evidence revealed that automated teller machines (ATMs), point of sale (POS), mobile payments (MP) and mobile banking are significant and contribute positively to financial system development in the long run, while mobile money (MM) and Internet banking (INB) are insignificant but exhibit positive and inverse relationship with financial development respectively. Further investigation revealed that institutional quality and a stable macroeconomic environment including their interactive term are significantly imperative in predicting financial system development in the COMESA region.

Practical implications
Researchers recommend a cohesive and conscious policy that would checkmate the divergence in the short run and suggest a common regional innovative financial strategy that could be pursued to incentivize technology transfer needed to promote financial system development in the long run. More so, plausible product and process innovations may be adapted to complement innovative institutions in the different components of the COMESA financial system.

Social implications
Digital financial innovation services if well managed increase the inherent benefits in financial system development.

Originality/value
To the best of the authors’ knowledge, this paper presents new background information on digital financial innovation that may stimulate the development of the financial system, particularly in the COMESA region. It also exposes the relevance of digital financial innovation, institutional quality and stable macroeconomic environment as well as their interactive effect on COMESA financial system development.

References:

  1. Aayale, J. (2017), “The impact of financial innovations on the financial industry's performance: a study of BRICS and G6 nations”, International Journal of Economics, Commerce and Management, Vol. 5 No. 11, pp. 138-152.
  2. Achieng, O.C., Karani, K.P. and Tabitha, N. (2015), “Financial innovation and the future of financial intermediation”, International Journal of Education and Research, Vol. 3 No. 5, pp. 1218-1224.
  3. Al-Malkawi, H.N., Marashdeh, H.A. and Abdullah, N. (2012), “Financial development and economic growth in the UAE: empirical assessment using ARDL approach to Co-integration”, International Journal of Economics and Finance, Vol. 4 No. 5, pp. 105-115.
  4. Allen, F. and Carletti, E. (2006), “Credit risk transfer and contagion”, Journal of Monetary Economics, Vol. 53 No. 1, pp. 89-111.
  5. Alvarez, F. and Francesco, L. (2009), “Financial innovation and the transactions demand for cash”, Econometrica, Vol. 77 No. 2, pp. 363-402, doi: 10.3982/ECTA7451.
  6. Amore, M., Schneider, C. and Zaldokas, A. (2013), “Credit supply and corporate innovation”, Journal of Financial Economics, Vol. 109 No. 3, pp. 835-855.
  7. Arellano and Bond (1991), “Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations”, The Review of Economic Studies, Vol. 58 No. 2, pp. 277-297, doi: 10.2307/2297968.
  8. Arellano, M. and Bover, O. (1995), “Another Look at the Instrumental Variable Estimation of Error-Component Models”, Journal of Econometrics, Vol. 68, pp. 29-52, http://dx.doi.org/10.1016/0304-4076(94)01642-D.
  9. Asteriou, D. (2009), “Foreign aid and economic growth: new evidence from a panel data approach for five South Asian countries”, Journal of Policy Modeling, Vol. 31 No. 1, pp. 155-161.
  10. Azimova, T. and Mollaahmetoglu, E. (2017), “Innovation in financial markets and its impact on savings”, Journal of Business Economics and Finance, Vol. 6 No. 2, pp. 147-154.
  11. Batiz-Lazo, B. (2018), Cash and Dash: How ATMs and Computers Changed Banking, Oxford University Press, Oxford.
  12. Beck, T., Demirgüç-Kunt, A. and Levine, R. (2000), “A new Database on the structure and development of the financial sector”, World Bank Economic Review, Vol. 14 No. 3, pp. 597-605.
  13. Beck, T., Chen, T., Lin, C. and Song, F.M. (2016), “Financial innovation: the bright and the dark sides”, Journal of Banking and Finance, Vol. 72, pp. 28-51.
  14. Bernanke, B.S., Gertler, M. and Gilchrist, S. (1999), “The financial accelerator in a quantitative business cycle framework”, Handbook of Macroeconomics, Vol. 1, pp. 1341-1393.
  15. Błach, J. (2011), “Financial innovations and their role in the modern financial system-identification and systematization of the problem”, e-Finanse: Financial Internet Quarterly, Vol. 7 No. 3, pp. 13-26.
  16. Blundell, R.W. and Bond, S.R. (1998), “Initial condition s and moment restrictions in dynamic panel data models”, Journal of Econometrics, Vol. 87, pp. 115-143.
  17. Boz, E. and Mendoza, E.G. (2014), “Financial innovation, the discovery of risk, and the US credit crisis”, Journal of Monetary Economics, Vol. 62, pp. 1-22.
  18. Cavanna, H. (1992), Financial Innovation, Routledge.
  19. CGAP (2015), “What is digital financial inclusion and why does it matter? 10 March 2015”, available at: http://www.cgap.org/blog/what-digital-financialinclusion-and-why-does-it-matter
  20. Cherotich, K.M., Sang, W., Shisia, A. and Mutung'u, C. (2015), “Financial innovations and performance of commercial banks in Kenya”, International Journal of Economics, Commerce and Management, Vol. 3 No. 5, pp. 1242-1265.
  21. Choi, I. (2001), “Unit root tests for panel data”, Journal of International Money and Finance, Vol. 20, pp. 249-272.
  22. Choong, C.K.Z., Yusop, S.H.L. and Liew, V.K.S. (2005), “Financial development and economic growth in Malaysia: the perspective of stock market”, Investment Management and Financial Innovations, Business Perspectives, Vol. 2 No. 4, pp. 105-115.
  23. Demetriades and Law. (2006), “Finance, institutions and economic development”, International Journal of Finance & Economics, 2006, Vol. 11 No. 3, pp. 245-260.
  24. Diaz-Rainey, I. and Ibikunle, G. (2012), “A taxonomy of the ‘dark side’ of financial innovation: the cases of high frequency trading and exchange traded funds”, International Journal of Entrepreneurship and Innovation Management, Vol. 16 Nos 1-2, pp. 51-72.
  25. Duygun, M., Sena, V. and Shaban, M. (2013), “Schumpeterian competition and efficiency among commercial banks”, Journal of Banking and Finance, Vol. 37 No. 12, pp. 5176-5185.
  26. Engelen, E., Erturk, I., Froud, J., Leaver, A. and Williams, K. (2010), “Reconceptualizing financial innovation: frame, conjuncture and bricolage”, Economy and Society, Vol. 39 No. 1, pp. 33-63.
  27. Engle, R.F. and Granger, C.W.J. (1987), “Cointegration and error correction representation: estimation and testing”, Econometrica, Vol. 55, pp. 251-276.
  28. Faure, A.P. (2013), Financial System: an Introduction, Quoin Institute (Pty) and bookboon.Com.
  29. Finnerty, J.D. (2001), Debt Management, Harvard Business School Press.
  30. Frame, W.S. and White, L. (2012), “Technological change, financial innovation, and diffusion in banking”, in Berger, A.N., Molyneux, P. and Wilson, J.O.S. (Eds), The Oxford Handbook of Banking.
  31. Gomber, Koch and Siering (2017), “Digital finance and FinTech: current research and future research directions”, Journal of Business Economics, Vol. 87 5(2), pp. 537-580.
  32. Greenwood, R. and Scharfstein, D. (2013), “The growth of finance”, Journal of Economic Perspectives, Vol. 27 No. 2, pp. 3-28.
  33. Gregory, A.W. and Hansen, B.E. (1996), “Tests for cointegration in models with regime and trend shifts”, Oxford Bulletin of Economics and Statistics, Vol. 58 No. 3, pp. 555-560.
  34. Gutierrez, E. and Singh, S. (2013), “What Regulatory Frameworks Are More Conducive to Mobile Banking? Empirical Evidence from Findex Data”, World Bank Policy Research, Working Paper N0. 6652.
  35. Hall, B. and Kahn, B. (2003), “Adoption of New Technology”, National Bureau of Economic Research, Cambridge Massachusetts, NBER Working Paper 9730.
  36. Hausman, A. and Johnston, W.J. (2014), “The role of innovation in driving the economy: lessons from the global financial crisis”, Journal of Business Research, Vol. 67 No. 1, pp. 2720-2726.
  37. Henderson, B.J. and Pearson, N.D. (2011), “The dark side of financial innovation: a case study of the pricing of a retail financial product”, Journal of Financial Economics, Vol. 100 No. 2, pp. 227-247.
  38. Im, K.S., Pesaran, M.H. and Shin, Y. (2003), “Testing for unit roots in heterogeneous panels”, Journal of Econometrics, Vol. 115 No. 1, pp. 53-74.
  39. Johansen, S. (1988), “Statistical analysis of cointegrating vectors”, Journal of Economics and Dynamic Control, Vol. 12, pp. 231-254.
  40. Johansen, S. and Juselius, K. (1990), “Maximum likelihood estimation and inference on cointegration: with applications to the demand for money”, Oxford Bulletin of Economics and Statistics, Vol. 52, pp. 169-210.
  41. Johnson, S. and Upadhyaya, R. (2015), “Transformation of Kenya's banking sector 2000-2012”, in Heyer, A. and King, M. (Eds), Kenya's Financial Transformation in the 21st Century, Financial Sector Deepening Kenya, p. 17.
  42. Jonathan, D. and Camilo, T. (2008), “Mobile banking and economic development: linking adoption, impact and use”, Asian Journal of Communication, Vol. 18 No. 4, pp. 318-322.
  43. Kanga, D., Oughton, C., Harris, L. and Murinde, V. (2022), “The diffusion of fintech, financial inclusion and income per capita”, The European Journal of Finance, Vol. 28 No. 1, pp. 108-136.
  44. Kao, C. and Chiang, M.-H. (1999), “On the estimation and inference of a cointegrated regression in panel data”, Econometric Theory, Under Revision.
  45. Khraisha, T. and Arthur, K. (2018), “Can we have a general theory of financial innovation processes? A conceptual review”, Financial Innovation, Vol. 4 No. 4, pp. 1-27.
  46. King, R.G. and Levine, R. (1993), “Finance and growth: schumpeter might be right”, Quarterly Journal of Economics, Vol. 108 No. 3, pp. 717-737.
  47. Konheim, A.G. (2016), “Automated teller machines: their history and authentication protocols”, Journal of Cryptographic Engineering, Vol. 6 No. 1, pp. 1-29.
  48. Lashitew, A.A., van Tulder, R. and Liasses, Y. (2019), “Mobile phones for financial inclusion: what explain the diffusion of mobile money innovations?”, Research Policy, Vol. 48 No. 5, pp. 1201-1215.
  49. Lee, S., Buxton, O.M., Andel, R. and Almeida, D.M. (2020), “Bidirectional associations of sleep with cognitive interference in employees' work days”, Sleep Health, Vol. 44 No. 2010, pp. 4678-4734, doi: 10.1016/j.atmosenv.2009.06.005.
  50. Lerner, J. and Tufano, P. (2011), “The consequences of financial innovation: a counterfactual research agenda”, Annual Review of Financial Economics, Vol. 3, pp. 41-85.
  51. Levin, A., Lin, C.F. and Chu, C. (2002), “Unit root tests in panel data: asymptotic and finite-sample properties”, Journal of Econometrics, Vol. 108, pp. 1-24.
  52. Levine, R. (2005), “Finance and growth: theory and evidence. Handbook of economic growth”, in Philippe, A. and Steven, D. (Ed.), Handbook of Economic Growth, Elsevier.
  53. Maddala, G.S. and Wu, S. (1999), “A comparative study of unit root tests with panel data and a new simple test”, Oxford Bulletin of Economics and Statistics, Vol. 61 No. S1, pp. 631-652.
  54. Manasseh, C.O., Mathew, T.E. and Ogbuabor, J.E. (2017), “Investigating the nexus between institutional quality and stock market development in Nigeria: an autoregressive distributed lag (ARDL) approach”, African Development Review, Vol. 29 No. 2, pp. 272-292, doi: 10.1111/1467-8268.12256.
  55. Manyika, J., Lund, S., Singer, M., White, O. and Berry, C. (2016), Digital Finance for All: Powering Inclusive Growth in Emerging Economies, McKinsey Global Institute.
  56. Meisel, L. and Mvogo, J.P. (2007), Quelle politique de development financier en zone franc?, Agence Française de development (AFD), No. 23.
  57. Miller, M.H. (1986), “Financial innovation: the last twenty years and the next”, The Journal of Financial and Quantitative Analysis, Vol. 21 No. 4, pp. 459-471, doi: 10.2307/2330693.JSTOR2330693.
  58. Mminele, D. (2008), Financial Innovation in Emerging Markets: Possible Risks and Benefits: Opportunities for Growth vs. Risks for Financial Stability, German Federal Ministry for Economic Cooperation and Development, pp. 26-29.
  59. Mugane, C. and Ondigo, H. (2016), “The effect of financial innovations on the financial performance of commercial banks in Kenya”, International Journal of Finance and Accounting, Vol. 1 No. 1, pp. 16-29.
  60. Ndebbio, J.E.U. (2004), “Financial deepening economic growth and development: evidence from selected SSA countries”, African Economic and Research Consortium, Vol. 17 No. 142, p. 3.
  61. Nguena, C.L. (2012), “Rethinking pro-growth monetary policy in Africa: monetarist versus Keynesian approach”, Africa Economic Brief, Vol. 4 No. 6, pp. 1-8.
  62. Nguena, C.L. (2015), “Boosting investment and business environment in Africa today: mobile banking as an optimal strategy for financial inclusion”, available at: http://nguena.blogspot.com/2015/02/boosting-investment-and-business_13.html
  63. Nguena, C.L. (2019), “On financial innovation in developing countries: the determinants of mobile banking and financial development in Africa”, Journal of Innovation Economics and Management, Vol. 29 No. 2, pp. 69-94.
  64. Nguena, C.L. and Tsafack-Nanfosso, R. (2014), “On the sensitivity of banking activity shocks: evidence from the CEMAC sub-region”, Economics Bulletin, Vol. 34 No. 1, pp. 354-372.
  65. North, D. (1990), Institutions, Institutional Change and Economic Performance, Cambridge University Press, Cambridge.
  66. Nzioka, O.M. and Kamakia, M. (2017), “Financial innovations development and its impact on financial performance of listed banks in Kenya”, African Development Finance Journal, Vol. 1 No. 1, p. 1, available at: http://journals.uonbi.ac.ke/index.php/adfj/article/view/1651
  67. Odhiambo, N.M. (2009), “Stock market development and economic growth in South Africa: an ARDL-bounds testing approach”, World Business Institute, pp. 1-13, available at: www.wbiconpro.com/2.Nicholas.pdf
  68. Ondiege, P. (2010), “Mobile banking in Africa: taking the bank to the people”, Africa Economic Brief, Vol. 1 No. 8, pp. 1-16.
  69. Ozili, K.P. (2018), “Impact of digital finance on financial inclusion and stability”, Borsa Istanbul Review, Vol. 18 No. 4, pp. 329-340.
  70. Pedroni, P. (2004), “Panel Cointegration: Asymptotic and Finite Sample Properties of Pooled Time Series Tests with an Application to the PPP Hypothesis”, Econometric Theory, Vol. 20 No. 3, pp. 597-625.
  71. Pesaran, M.H., Shin, Y. and Smith, R.J. (1999), “Pooled mean group estimation of dynamic heterogeneous panels”, Journal of the American Statistical Association, Vol. 94, pp. 621-634.
  72. Pesaran, H.M., Shin, Y. and Smith, R. (2001), “Bounds testing approaches to the analysis of level relationships”, Journal of Applied Econometrics, Vol. 16, pp. 289-326.
  73. Qamruzzaman, M. and Wei, J. (2019), “Financial Innovation and financial inclusion nexus in South Asian countries: evidence from symmetric and asymmetric panel investigation”, International Journal of Financial Studies, Vol. 7 No. 4, pp. 1-27.
  74. Rahman, M.M. and Salahuddin, M. (2012), “The determinants of economic growth in Pakistan: does stock market development play a major role?”, Economic Issues, Vol. 15 No. 2, pp. 69-86.
  75. Rogers, E.M. (2003), Diffusion of Innovations, 5th ed., Free Press, New York.
  76. Sakanko, M.A., Abu, N. and David, J. (2019). Financial Inclusion: A Panacea for National Development in Nigeria. Proceedings of 2nd National Conference of the Faculty of Social Sciences, Federal University Lafia, Nigeria, captioned: “Emerging SocioEconomics and Political Challenges and National Development” held on Sept. 22–24, 2019.
  77. Scott, S.V., Van Reenen, J. and Zachariadis, M. (2017), “The long-term effect of digital innovation on bank performance: an empirical study of SWIFT adoption in financial services”, Research Policy, Vol. 46 No. 5, pp. 984-1004.
  78. Shiller, R.J. (2013), “Capitalism and financial innovation”, Financ Anal Journal, Vol. 69 No. 1, pp. 234-249.
  79. Silber, W.L. (1983), “The process of financial innovation”, American Economic Review, Vol. 73 No. 2, pp. 89-95.
  80. Tahir, S.H., Shah, S., Arif, F., Ahmad, G., Aziz, Q. and Ullah, M.R. (2018), “Does financial innovation improve performance? An analysis of process innovation used in Pakistan”, DANS Journal of Innovation Economics and Management, Vol. 3 No. 27, pp. 195-214.
  81. Van Horne, J. (1985), “Of financial innovations and excesses”, Journal of Finance, Vol. 40, pp. 621-636.
  82. Wang, J., Xu, J., Zhu, Y., Hu, D., Lu, N., Cui, D. and Guo, P. (2022), “Properties of AgSnO2 contact materials doped with different concentrations of Cr”, Materials, Vol. 15 No. 14, p. 4793.
  83. WGI (2020), World governance indicator report.
  84. Williamson, O.E. (1985), The Economic Institutions of Capitalism, Free Press, New York, available at: web.missouri.edu/-sykutam/CEU/Williamson1.pdf
  85. WDI. (2020), World development bank indicator report.

Related articles