Comparison of banking innovation in low-income countries: A meta-frontier approach

Abstract

Abstract Financial innovation is a crucial factor behind many of the improvements in the financial sector that directly affect the economy in a positive way. Financial innovation may also alter financial intermediation and increase reliability and transparency. Research has demonstrated that levels of financial innovation are similar among high-income countries; however, research has shown that financial development differs substantially in low income countries regardless of the economic size, suggesting that financial innovation may also differ. This study evaluated the levels of financial innovation and the determinants of innovation within the low-income countries. In particular, a new two-step meta-frontier approach was constructed to estimate technology gap ratios, and a censored model was built to establish their determinants. The results show that low-income countries do in fact vary greatly in terms of financial innovation. Competition, financial inclusion and banking access constitute major determinants of financial innovation.