Is Financial Innovation At Risk?

The financial sector of any economy is one if not the most important sector that drives the economy into growth and prosperity. With the changing phases of the sector among its players such as markets, competitors and customers it becomes imperative the sector move in the direction in which the global financial business move. In order words, while the sector’s players are getting sophisticated, innovative and improving, it will be prudent for the sector to rather be spearheading these growth and development. And one vehicle that helps to moving the sector in the trend is financial innovation.

Innovation can be technology driven or modality driven. Technology-driven innovation grows when the application of technology results in a better way of doing business. The ATM may be the best example in the business of banking. On the other hand, modality-driven innovation aims at rearranging or creating new business processes for the better.

Innovations have given rise to new financial intermediaries such as venture capitalists and private equity firms, new types of instruments like collateralized/non-collateralized loan obligations and credit derivatives, new services or techniques such as e-trading (GSE e-trading platform). At their best, these creations can overcome a variety of risks in a global economy.

In their book Financing the Future; Market-Based Innovations for Growth Allen and Yago defined financial innovation as the act of creating and then popularizing new financial instruments as well as new financial technologies, institutions and markets. This also includes institutional, products and process innovation.

The three main classifications of financial innovation include;

1. Institution Innovation: This relates to the creation of new types of financial firms such as specialized institutions, the expansion of financial firms and internet banks. In Ghana today, institutional innovations include the creation of specialized financial firms like the brokerage firms, microfinance companies, investment banks etc. All of these were not available some years ago but have sprung up due to financial innovations which seeks to serve customers well.
2. Product Innovations: This relates to the creation of new products and the modernizing others to meet current demand. In times past, we have moved and continue to move from bank current account, savings account, government of Ghana treasury bills, bonds, etc to derivatives, hedge funds, mutual funds, venture capital funds, crowd funding, peer-to-peer, commodities trading, insurance, pension funds, etc.
3. Process Innovations: Process innovation is not different from the other classified financial innovations. It relates to the creation and streamlining of ways and means of doing financial business. Online banking, telephone banking, social media banking, virtual branch networks, etc are some of the modern process innovations that have characterized the Ghanaian banking space. But the field also encompasses developments that make the allocation of capital more efficient and operational methods that reduce transaction costs, whether in primary markets where equity and debt originate or in the secondary market where those products are traded.

Many financial specialist and analysts have tried to give date and time to when the idea of financial innovations became prominence in the global business space, but I find these arguments hollow. I believe financial innovation has been in existence as long as knowledge has been in existence. The global financial business is where it is today because of the continuous innovations that have been brought to it. The phase of global financial business has significantly changed since day one. Financial innovation is synonymous to man seeking improvement in his ways and so long as this persist; institutional, product and process innovation will even get much more prevalent in the global financial space. However, like it was revealed to Daniel in the bible of an increase in knowledge in the last days, the application of this knowledge thrives in well-regulated economies.

What happens if innovation increase but there are no rules regulating it? In this time and age, financial regulators have a duty of keeping their regulations in sync with the continuous improvement in financial innovations. A good regulatory environment should be able to keep and make innovation thrive. As long as man live, the way its businesses are done today will be different from how they will be done tomorrow. This is all due to the power of innovation. Institutions will change, products will change, and processes will change. However, in the face of all these changes its operating or regulatory environment should be able to contain all these dynamics.

In Ghana today, Banks and finance houses who have hitherto been innovative by creating a service that allow them mobilize funds for a third party for a fee (facilitation fee) have been called to stop the service. Mengold has been suspended because it is not clear who regulates their activities. Who do you blame, the people behind these innovative ideas or the lack of proper regulations? Therefore, I ask ‘’Is Financial Innovation at Risk’’?

God bless Ghana!!
Abraham Radson Arhin
Investment Analyst ||Msc Economics- Money, Banking and Finance

Regulation. Many product innovations in financial services have been subject to detailed review by public regulatory agencies. While certainly such reviews are not unknown in manufacturing (e.g., pharmaceuticals), the prevalence of the regulatory scrutiny is greater here. These reviews may raise the barriers to innovation, particularly for younger and inexperienced firms that may find that such reviews strain their resources. But such regulatory changes may also serve as incentives for financial innovation, as firms seek to find their way around such constraints.