Does It Pay for Banks to be Different? Evidence from a Developing Economy

Abstract

Financial innovations are bringing about significant changes in the design and delivery of banking services in both developed and developing countries. Despite the fact that studies have looked at the connection between innovation and bank performance, no known empirical study has attempted to investigate this relationship using micro-level data in Ghana. Using dataset obtained from 31 banks from 2011 to 2017 and the generalized method of moments regression technique, we find that: first, banking innovations positively impact their profit levels. Second, the effect of innovation is consistent in the long run but much larger than in the short run. Third, being innovative improves firm profits just as improvements in profitability enhance banks’ innovativeness, albeit this conclusion may vary depending on the measure of innovation used. We recommend that banks in the country deploy sufficient resources to develop innovative products that will make banking more affordable and convenient, in that the profit benefits will be enjoyed in the short to the long run. We further suggest that policies should speed up digitization efforts and lay the appropriate information technology infrastructure base required by the banks to develop various innovations that will spur the country’s financial inclusion agenda.