FINANCIAL INNOVATION, TECHNOLOGICAL IMPROVEMENT AND BANKS’ PROFITABILITY: AN EMPIRICAL INSIGHT

Abstract

An increasing trend of development in the financial system, with the use of information technology and the modernization of products and services, has led to financial innovation being considered one of the most important topics in the research community. The paper discusses the role of financial innovation and its importance in the modern financial system. We have proxied financial innovation in three dimensions, namely Fintech infrastructure, Fintech number of transactions, and Fintech amount of transactions; and we have tested the impact of these financial innovation variables, along with some control variables, on the profitability of the banking system. The study uses time series data from 2008 Q1 to 2021 Q4 and the ARDL Bounds test for analysis purposes. Using the ARDL model, a few proxies (LATM, ADVTODEP, COSTTOINC, NETNPLTONETLOAN, POSTRAM) of financial innovation demonstrate a positive and significant relationship in long run implying that financial innovation has an effect on the profitability of the financial sector in long run.