Financial Innovation And Commercial Banks Performance In Ghana

International Journal of Research and Innovation in Social Science (IJRISS) | Volume V, Issue XII, December 2021 | ISSN 2454–6186

 Financial Innovation And Commercial Banks Performance In Ghana

Benedict Afful Jr ^{1 3}, Prince Kofi Mensah Kuwornu ^{2 4}, Joseph Kwasi Asafoa ¹

¹Department of Economic Studies, University of Cape Coast, Cape Coast, Ghana² Services Integrity Savings and Loans Limited, Ghana³ Network for Socioeconomic Research and Advancement (NESRA), Accra, Ghana⁴Institute of Chartered Accountants, Ghana

Abstract

The study sought to investigate the effect of financial innovation on performance of commercial banks in Ghana. The study used balance panel data over the period of 2009-2018 from 16 registered and licensed commercial banks. Fixed and random effect models were applied to the data. The findings show that financial innovation and the age of a bank have a significantly positive effect on banks financial performance. However, inflation had a negative effect on financial performance. The study also revealed that asset quality and bank size have a negative effect on net interest margin and return on equity. Share of industry deposit and number of branches have a positive effect on net interest margin. Based on these findings, it was recommended that commercial bank management should introduce more cost-effective products or services to improve bank performance. Management of commercial banks should deploy the services of credit reference bureau to foster reduction in impairment allowance hence improvement in financial performance.

 Keywords –Financial, Innovation, Bank, Commercial, Ghana

1. Introduction

Innovations in the banking industry have transformed the financial sector resulting in novel delivery channels of financial products and services such as Automated Teller Machines (ATMs), mobile phone banking, online banking, and Agency banking (Gichungu, & Oloko, 2015). For example, e-banking has been very instrumental in improving the quality of service and financial performance of banks (Beck, Demirgüç-Kunt, & Levine, 2007). Studies have shown that innovations have the ability to place businesses and organisations on a competitive edge over their competitors (Weber, Gerke & Worms, 2008; Im, Bayus & Mason, 2003; Rogers, 1995). Indeed, financial innovation in the banking sector cannot be over emphasised as the level of innovative products and services in the banking sector could positively affect overall performance of the banks in the face of high competition.

Frame and White (2002) grouped financial innovations under “new products (e.g., adjustable-rate mortgages; exchange-traded index funds); new services (e.g., on-line securities trading; Internet banking); new production processes (e.g., electronic record-keeping for securities; credit scoring); or new organizational forms (email e.g., a new type of electronic exchange for trading securities; Internet-only banks)” (p. 2). It thus, encompasses new ways of reducing risks and provides enhanced services or products or systems that adequately satisfy the customer (Frame & White, 2002). Financial innovation is therefore essential as improvement in the financial sector will have substantial effect on the economy as it will ensure that people save and invest more to enhance the growth of the economy.

In Ghana, advancement in financial innovation has been witnessed over the years where banks mostly confer with the telecommunication sector players to provide technologically innovative products to enhance their service delivery (Asante, Agyapong & Adam, 2011). Some of these innovations comprise mobile banking, internet banking, SMS banking among others, where customers can conduct banking activities via these channels in a convenient manner. These innovations in the Ghanaian banking industry are helping to improve financial intermediation.

Currently, it seems every commercial bank one way or the other has financially innovated yet many are collapsing. The question is: “does financial innovation affect financial performance of commercial banks in Ghana?” This study aims at examining the relationship between financial innovation and bank performance with reference to commercial banks in Ghana.

The rest of the paper is organized as follows: section two provides the literature review; section three describes the research methodology that includes source of data and analytical techniques; section four presents the empirical results; finally, the conclusions and recommendations are presented in section five.

2. Literature Review

This section is divided into two, thus the theoretical and empirical literature review to help us better ground our work and also get empirical support for our findings.

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