Abstract
This study examined the impact of financial innovation on money demand in Nigeria, using quarterly time series for the period 2009-2019. The dependent variable was money demand, represented by broad money, while the independent variable was financial innovation represented by modern payment channels such as volume of Automated Teller Machines (ATMs) transactions, volume of Point of Sales (POS) transactions, volume of Internet banking transactions, and volume of Mobile banking transactions. The study employed the ordinary least squares (OLS) regression technique as the estimation method within the cointegration, granger causality, and error correction modeling. The result obtained showed that financial innovation has mixed impact on money demand in Nigeria during the period of analysis. For instance, financial innovation has positive impact on money demand through volume of ATM transactions in the current period, two periods lagged of volume of mobile banking transactions, current period and one period lagged of volume of internet banking transactions, and current period’s volume of Point of Sales (POS) transactions in Nigeria. On the other hand, financial innovation has negative impact on money demand through one period lagged of volume of point of sales in Nigeria. On the stability of the demand for money function, the result of the stability tests based on the CUSUM test and CUSUM of squares test showed that the demand for money function was stable during the evaluation period. The study recommended that monetary policy strategy of the central bank of Nigeria (CBN) should be fine-tuned to ensure it is well suited to deal with the challenges posed by financial innovation by way of proliferation of sophisticated payment channels.
Highlights
In Nigeria, the financial system has gone through series of reforms over the course of time, with the aim of positioning it to perform optimally and efficiently and contributes positively to economic growth and development
Theoretical literature has established that financial innovation by way of new financial products and services exert significant influence on the workings of the monetary policy and money demand function
This study was carried out to investigate this claim for Nigeria employing modern payment channels such as Automated Teller Machines (ATMs) transactions, Point of Sales (POS) transactions, Internet banking transactions, and Mobile banking transactions
Summary
In Nigeria, the financial system has gone through series of reforms over the course of time, with the aim of positioning it to perform optimally and efficiently and contributes positively to economic growth and development. Investigating the impact of financial innovation on money demand is very expedient because studying how financial innovation affects money demand function will help in the formulation of effective monetary policy in Nigeria. This study is significant in that its findings will provide information on the performance of the financial system in Nigeria and how the emergence of financial innovation by way of introduction of modern payment channels has fared in Nigeria. Such assessment will be beneficial to the government, the monetary authorities, and monetary economists when formulating policies to enhance the development of the financial sector in Nigeria.
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