Money demand and financial innovation: evidence from Africa

Abstract

The study investigates money demand and financial innovation with evidence from African. We employed system GMM estimation technique and found a significant negative relationship between financial innovation inform of bank concentration, mobile phone concentration and private sector credit with real money demand in Africa. On the other hand, we found no evidence of any significant effect of Automated teller machines per 100,000 people as well as internet usage on real money demand. While the opportunity cost of holding money proxied by inflation was found adversely associated with real money demand, the scale variable proxied by income was observed to have a significantly positive relationship with the real money demand for the African countries. Similarly, the CUSUM and CUSMUQ stability tests show that the majority of African countries totalling to 36 portrayed a stable money demand function. Our findings call for the African governments to account for financial innovation in money demand models if the latter are to be well specified and produce unbiased estimates. The evidence provided necessitates putting in place policies to further promote financial innovation so as to encourage more people to be savers and investors. Policies to spur increased bank concentration, mobile phone concentration as well as private sector credit ought to be fully implemented, albeit with appropriate regulatory framework and enhanced supervisory oversight to avert the risks, without stifling the productive innovation. Relatedly, African policy makers ought to strengthen financial depth by enhancing private sector credit, as doing so would result into a stable money demand function required for the success of monetary policy and perhaps for the eventual success of the African Monetary Union once in place. On the other hand, policies that focus on driving economic growth and exchange rate stability are critical. Moreover, evidence provided point to the prioritization of macroeconomic stability in policy-making and implementation.