Examining the linear and non-linear effect of financial innovation on economic growth in Uganda

Abstract

Understanding the dynamics between financial innovation and economic growth is crucial for policymakers, financial institutions, and stakeholders to formulate effective strategies that can harness the benefits of financial innovation to drive sustainable economic growth in Uganda. Given that most studies in Uganda only centre at the linear approach to establish the effect of financial innovation on economic growth, this study examines both the linear and nonlinear effects of financial innovations on Uganda’s economic growth. Using quarterly data from 2004 to 2022 and five proxies of financial innovation —Automatic Teller Machines (ATMS) per 100,000 adults, Commercial bank branches, Mobile phone subscriptions as a proxy for mobile money, the ratio of broad money to narrow money, and domestic credit to private sector by banks, the study applies ARDL and NARDL models to assess symmetric and asymmetric effects. The NARDL findings reveal that in the long run, positive changes in ATMS, mobile subscriptions, and domestic credit significantly promote economic growth, while the effects of broad money to narrow money ratio and commercial bank branches are insignificant. The study highlights the need for policies that promote investment in human and physical capital, expand access to credit, and support international trade, while ensuring foreign direct investments aligns with Uganda’s development goals.