Financial Innovation and Economic Growth: Evidence from IFC Islands

Abstract

Purpose: International Financial Centre (IFC) Islands offer a plethora of financial services to international clients with primary purpose of expanding their foreign direct investment and growing their economy, both at a micro and macro level. Over the years, IFCs have been implementing innovative products and services to build their stance including IFC islands such as Mauritius, Singapore, Seychelles, Antigua & Barbuda and Bahamas. Financial innovation has been the theme of these islands with creative instruments surfacing their financial markets including Crowd-funding, Sustainable Bonds, Variable Capital Companies and many more. Hence, this paper demonstrates the impact of Financial Innovation on the Economic Growth of IFC islands.

Design/Methodology/Approach: A quantitative approach has been used for this study. The Auto Regressive Distributed Lag (ARDL) model have been implemented to assess the influence of financial innovation on economic growth of IFC Islands. There have been over 200 observations made from a sample of 5 IFC islands over 40 years. The variables proxying financial innovation adopted are Domestic-credit-to-private sector (DCP), Broad money (BM) and Trade Openness (TO) where the former two were adopted by () and the latter by (). Furthermore, the Non-linear ARDL model has been used to reveal the asymmetries in data, while analysing how truly variables impact GDP per capita, which is the variable proxying Economic Growth.

Findings: Results suggests that although in the short-run, only broad money has noteworthy impact on economic growth as the circulation and volume of money is a constant financial innovation to be present in the short-run. DCP and BM have greater influence than TO in the longer run. The NARDL also supports the conclusion that long-run relationship does exist between Financial-Innovation and Economic-growth. It can be inferred that there is asymmetric relationship between them and that financial innovation is directly linked to GDP per capita, implying that its positive change will bring greater economic growth and negative change bring adverse effects on the latter.

Limitation of the study: Few data were missing when compiling data for the study. Missing values have been interpolated. Interpolated data is not as accurate as the rest which could have brought a different Descriptive statistic.

Practical Implications: The outcomes of the study suggest that innovation in finance does impact the growth of economy for IFC islands.

Originality: This is the first known study to explore how financial innovation impacts economic growth of IFC islands.