Effect of financial innovations on economic growth in Eastern Africa: A panel data analysis

Abstract

This study investigates the effect of financial innovations on economic growth in Eastern Africa using panel data obtained from World Development Indicators over the period 2004 to-2018. Panel Autoregressive Distributed Lag (ARDL) approach is employed based on the order of integration of the study variables to explore the short run and long run effects of financial innovations on economic growth. The findings divulge the presence of the short and long run relationship between financial innovations and economic growth. Specifically, the results present a strong and significant short and long run relationship between electronic banking and economic growth. Furthermore, the interaction between investment and financial innovation positively affects economic growth because traditionally investment influences the growth of an economy. The study recommends policies that are engineered towards promoting electronic banking such as creative conducive climate for investors aimed at reaching out to unbanked financial resources and simultaneously promoting financial depth, access and convenience to already banked financial resources. More so, policies to promote financial innovations and intermediation should be emphasized and strengthened. Finally, in formulating policies, the Eastern African countries’ governments should balance the distinguished policy priorities of enhancing financial sector development, financial innovations and financial inclusion while simultaneously minimizing the risks to the financial sector instability. Keywords: Eastern Africa; Panel ARDL; Financial Innovations; Economic Growth