Financial innovation and banking performance: The role of banking regulations in SAARC Region

Abstract

The rapid proliferation of information and communication technology has accelerated innovation in financial instruments, resulting in a heightened transformation of the competitive landscape and regulatory framework within the banking sector. Despite ongoing policy debates regarding the role and significance of financial innovation and regulation, there is a scarcity of empirical studies investigating their implications in the context of South Asian Association for Regional Cooperation (SAARC). Therefore, this study seeks to bridge this gap by examining the impact of financial innovation and regulation on bank performance. Specifically, it assesses how financial innovation influences bank performance and how this interaction varies across different aspects of the institutional environment in relation to bank performance. To achieve the objectives of study, we employ panel regression methods, including fixed and random effect models, to analyze a dataset consisting of 88 banks from SAARC countries for the period 2007 to 2019. Our findings reveal a significant positive relationship between financial innovation and banking performance. In addition to this, bank regulation has a moderating role in the relationship between financial innovation and bank performance over the sample period. This indicates that both financial innovation and regulation help to improve the quality and efficiency of banking services.