Innovation changes and the traditional financial sector (original) (raw)

FINANCIAL INNOVATION, TECHNOLOGICAL IMPROVEMENT AND BANKS' PROFITABILITY: AN EMPIRICAL INSIGHT

An increasing trend of development in the financial system, with the use of information technology and the modernization of products and services, has led to financial innovation being considered one of the most important topics in the research community. The paper discusses the role of financial innovation and its importance in the modern financial system. We have proxied financial innovation in three dimensions, namely Fintech infrastructure, Fintech number of transactions, and Fintech amount of transactions; and we have tested the impact of these financial innovation variables, along with some control variables, on the profitability of the banking system. The study uses time series data from 2008 Q1 to 2021 Q4 and the ARDL Bounds test for analysis purposes. Using the ARDL model, a few proxies (latm, advtodep, cosstoinc, netpltonetloan, postram) of financial innovation demonstrate a positive and significant relationship in long run implying that financial innovation has an effect on the profitability of the financial sector in long run. _____________________________________________________________________ www.ijbms.org 88 their funds and other transactions (Fohlin, 2016), from a simple exchange between lenders and borrowers to the complex models and software-based transactions, it has traveled a great deal of innovation. Since the medium of communication keeps on changing, or to say, it keeps on advancing, therefore the problems related to the exchange of funds, transactions, market dynamism vary over time, the financial system has kept on evolving itself to meet the needs. A typical financial system involves Banks, financial institutions other than banks, financial markets, financial transactions, financial instruments, and financial services. The financial system, as a whole, and its components have a long history of innovation and evolution. When it comes to instruments and institutions, both can be understood from global, regional and local perspective. Today, the world has a global financial system, that includes, global financial institutions and instruments (Verdun, 2018), whereas every region has its own such systems as well (García-Herrero & Wooldridge, 2007). Similarly, every country has its local financial system including its all relevant components (Kendall, 2012). These three levels of financial systems have their innovation-based evolution. Pakistan has a local financial system. Not only globally, but in developing countries like Pakistan, financial innovation enlarges the financial sector and ultimately contributes to the growth and economic development. This makes financial innovation a high priority in countries like Pakistan which direly needs growth and development. Historical Background: Evolution of Financial System The main role of the financial system is to channel savings from ultimate lender to ultimate borrowers. Households and institutions i.e insurance companies, pension funds, and mutual funds. Some credit is provided directly from the lender to borrowers like corporate bonds, treasury securities, and municipal bonds, and other investments on behalf of households. The financial system has evolved through various stages from its beginning and therefore it is important to understand how it has been developed and changed up till now. Before industrialization, the medium of exchange and its development was the point of concern for finance. Methods of payments were the main factors in the development of the financial system and barter was inefficient. To discourse this need, two financial innovations evolveddeposit bank and bill of exchange. After the mid of nineteen century, when large scale industrialization was originated and urban society expanded, the role of finance was modified. Now, mobilizing resources for heavy capital investments and large scale infrastructure was the main role of finance. But due to fraud and mismanagement, this system suffered and experienced crises. Soon in the 1930s, after great depression governments

Theorems and Theories of Financial Innovation: Models and Mechanism Perspective

Innovation is basic need of the hour to attract new customers to the financial markets. "Financial Innovation" means finding new products and new features for existing financial products. Thus creating a new financial product or adding new features to existing financial product is the central theme of financial engineering. Hence, the innovative products should try to reduce financial risk and it should aim to reach "financial optimization". Innovation is mainly driven by modern Globalization and investors and government resulting in exposing to new and wider international risk, innovation becomes a new tool to solve, manage and transfer the entire extra burden. The deregulation of banking systems, in particular, promotes economic growth through improved allocation, efficiency and a reduction of financial service costs.

The Impact of Financial Innovation and Risk Management on Economic Performance

1998

The last 25 years have witnessed extensive financial innovation and this had led to revolutionary changes in the international financial system. It is true that financial innovation has been going on since the 17th century and most of the products developed during the last two decades, although mentioned as new, are only versions of much older products. When the history of financial innovation is studied, it is seen that the seemingly new instruments, such as options and futures are not entirely new. For example, organised futures exchanges were established in Chicago, Frankfurts and London in the 19th century. Options and futures-like contracts in Amsterdam and forward contracts in rice in Japan were traded in the 17th century. However, the proliferation of organised markets in derivatives securities around the world during the last two decades is unparalleled in history. Miller (1992) describes the 1970-1990 period as unique in history, in that “no 20-year in financial history has...

Is the progress of financial innovations a continuous spiral process

The paper examines the progress of financial innovations over the past 30 years, beginning with how they have influenced the financial system. The article adopts a framework of classification that provides an overview of previous findings to examine the continuity of financial innovations. The authors find that the progress of financial innovations is discontinuous and is characterized by isolation and limited research studies. Finally, the authors highlight the main reasons why the previous literature in this area is limited and how financial innovations have not yet reached the point of diminishing returns.

TECHNOLOGY AND FINANCIAL INNOVATION

This case study examines the global financial debacle of 2007–2008 to see the roles in which technology played in new financial schemes. It uses theory about social-technical systems and applications of technology to analyze the case. It identifies theoretical issues in which MOT can relate to classical economic theory.

Can we have a general theory of financial innovation processes? A conceptual review

Financial Innovation

Introduction: Since the financial crisis of 2008, the theory of financial innovation has been a focus at a time of re-evaluation and re-conceptualization. However, little has been done to evaluate the current state of research considering the increasing complexity of financial innovation. This paper examines the hypothesis of a general theory that encompasses increasing complexities in the financial innovation process. Methods: The paper begins with an overview of the definitions, the features, and the classification schemes of financial innovation. Additionally, the paper reviews the existing literature on the main objects of study in financial innovation and groups the findings under four main concepts. A conceptual analysis is presented that evaluates current approaches to the study of the financial innovation process and the difficulties inherent in constructing a single general theory. The paper proposes a framework based on a meta-theory of financial innovation as a better approach to understanding the inherent complexities and diversities affecting financial innovations. Discussion: (1) Financial innovations present diversities and complexities that make it infeasible to build a unifying general theory to explain their development. (2) The current state of research on financial innovation theories is limited and requires additional input. (3) A meta-theory that identifies, classifies, and connects theories of development for financial innovations is better suited to explaining the complexity of financial innovation processes.