The impact of financial innovations on financial deepening in Africa: implications for household consumption expenditure

This paper used annual data for the period 2012–2019 to examine the impact of financial innovations on financial deepening in 34 African countries. Adding novelty to the literature, we also sought to investigate whether the perceived financial deepening instigated by financial innovations actually steered Household Final Consumption expenditure. Five financial innovation indicators namely the Africa Infrastructure Development Index, Automated Teller Machines, bank branches, mobile cellular subscriptions & secure internet servers were used. Financial deepening was proxied by three indicators namely bank deposits, domestic credit to private sector, and broad money. The Panel Corrected Standard Error estimates revealed that all five innovation indicators significantly increased domestic credit to the private sector. Equally, and only with the exception of mobile cellular subscriptions and secure internet servers (for the bank deposit model) & mobile phone subscriptions (for the broad money model), financial innovations significantly increased financial deepening in Africa. Secondly, the effect of financial deepening on consumption expenditure produced mixed results. While domestic credit to the private sector significantly increased the expenditure, bank deposits substantially impeded the same suggesting that financial deepening may not always promote household consumption. Based on the findings, it is apparent that African governments and the financial sector players can indeed leverage on the proliferation of financial innovations in reducing information asymmetry and boosting the access to and affordability of financial products. This widened provision of financial products, notably credit facilities by the financial institutions provides a robust and certain channel for optimizing household consumption and subsequently economic growth.