Financial innovation and the performance of small and medium scale enterprises in Nigeria

Abstract

The liberalization of the Nigerian financial sector inevitably resulted in the phenomenon of financial innovation. While studies exist that investigate the effect of financial innovation on economic growth in Nigeria, only a few have addressed its impact on the performance of SMEs. Yet, the few existing ones are micro studies that emphasize more on specific regional firms. The dearth of empirical studies at the economy-wide level, therefore, mandates this study, which fills this gap in the literature. This study employs autoregressive distributed lag methodology on quarterly data of financial innovation measures. Our findings indicate that financial innovation has a positive and significant effect on SMEs’ productivity in Nigeria. In particular, of the seven financial innovation instruments used (Automated Teller Machine, Point of Sales, Web or Internet Banking, Cheques, Nigeria Inter-bank Settlement System Electronic Fund Transfer, Nigeria Inter-Bank Settlement System Instant Payment, and Mobile Money Operations), all but one turned out in both the short run and long run as significant predictors of SMEs’ performance in Nigeria. Furthermore, the Toda-Yamamoto causality test reveals unidirectional causation running from financial innovation instruments to SMEs’ performance. These results have implications for SMEs’ growth and the current cashless policy of the Central Bank of Nigeria.