Bank Performance, Risk and Economic Growth: Role of Financial Innovation

Muhammad Usman

doi:10.24212/2179-3565.2016v7i3p3-22

Abstract

The purpose of study is to examine the impact of financial innovation on bank performance, risk and economic growth in Pakistan. To test study hypotheses, bank level and country level variables are used. Time period of study is 14 years from 2000 to 2013. Data are collected from World Bank, Global Economy, State Bank of Pakistan, Bank Scope databases and Economic Survey of Pakistan. We use correlation matrix and ordinary least square techniques for evaluation. According to hypotheses, we also develop three econometric models to test relationship between depend and independent and control variables. By controlling different variable in model 1, we found positive and statistically significant impact of financial innovation on bank performance. Moreover in model 2 after controlling various bank level indicators we found that financial innovation minimize the risk of bankruptcy. Farther we utilize model 3 to evaluate the relationship between financial innovation and economic growth. Results indicate positive and statistically significant relationship between financial innovation and economic growth.

Highlights

Banks are the backbone for financial system in any country around the world
According to regression analysis 1% increase in financial innovation will increase in return on assets (ROA) by 0.48%
According to the results mentioned in the table (5) after controlling different variables we find positive relationship between financial innovation and Z-Score

Summary

Introduction

Banks are the backbone for financial system in any country around the world. The nonstop alteration of competitive atmosphere, globalization, rule of law, privatization and economics variations, needs financial institution to remain efficient and effective by continuous innovation. Financial innovation like electronic payment, ATM, wire transfer, cards etc. Discourage robbing and other crime related to cash, because while using these means customers require less physical cash (Armey et al, 2014). Financial innovation is beneficial for vendor as it reduce operation cost, increase efficiency and increase revenue

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Conclusion