Does Financial Innovation Drive Growth? Empirical Analysis of the Nigerian Case

The goal of this study is to examine the effectiveness of financial innovation in driving growth in Nigeria using quarterly data from 2009:Q1-2014:Q4. The Least Squares (Gauss-Newton/Marquardt steps) based on vector autoregressive (VAR) system was used to estimate our system model whereas Johansen cointegration test was utilized to test for long-run relationship among our series. The Augmented Dickey-Fuller unit root test, descriptive statistics and diagnostic tests were also employed. The results showed that there is a long-run relationship between growth and financial innovation. The findings indicate that financial technological innovations (ATM transactions, Web/internet transactions, POS services and Mobile payments) do not jointly have positive effect on growth. However, the responsiveness of growth to the individual innovation channels varied. Value of transactions via ATM, the internet and mobile payments all have relative positive effect on growth, with the exception of POS channel which exerted a negative influence on growth. We therefore conclude that financial technological innovation has not had the desired effect on the Nigerian economy. This may be due to the fact that these innovative channels are yet to have significant depth required to drive growth. However, we recommend that investment in financial innovation be intensified, and must be accompanied with mass literacy which will aim at educating the citizenry on the need and benefits of effecting financial transactions through the various financial innovation channels. Effective regulations and adequate monitoring are very critical in ensuring security and healthy competitiveness in this area. Going forward, the positive effect of financial innovation will begin to be felt in real terms.