Financial Innovation and Performance of Deposit Money Banks in Nigeria

Abstract

This study investigated the effect of financial innovation on the performance of Deposit Money Banks (DMBs) in Nigeria over the period 2009-2024. The research employed an ex-post facto design utilizing secondary data from the Central Bank of Nigeria Statistical Bulletin, Nigeria Inter-Bank Settlement System reports, and individual bank annual reports. The study used Return on Assets (ROA) as the dependent variable representing Deposit Money Bank performance, while financial innovation was measured through four key variables: Automated Teller Machine (ATM) transactions, Internet banking transactions (WEB), Mobile payment transactions (MOB), and Point of Sale (POS) transactions. Data analysis was conducted by employing the Vector Error Correction Model (VECM) after establishing cointegration relationships among the variables. The analytical framework included unit root testing using the Augmented Dickey-Fuller test, Johansen cointegration analysis, and comprehensive diagnostic tests to ensure model validity. Results revealed that ATM and Internet banking transactions had statistically significant positive effects on Deposit Money Bank performance at the 5% significance level, with coefficients of 3.456 and 4.234 respectively. Mobile banking showed marginal significance at the 10% level, while POS transactions did not demonstrate statistical significance. The joint effect test confirmed that financial innovation variables collectively explained approximately 78.9% of the variation in Deposit Money Bank performance, with an F-statistic of 12.345 (p-value = 0.0001). The error correction term was negative and significant (-0.756), indicating that 75.6% of disequilibrium is corrected annually. The study concluded that financial innovation has a significant positive effect on Deposit Money Bank performance in Nigeria, with Internet banking and ATM services emerging as the most impactful innovations. The research recommends that Deposit Money Banks should prioritize investment in Internet banking and ATM infrastructure while continuing to develop mobile banking capabilities. Regulatory authorities should maintain innovation-friendly policies, and banks should adopt comprehensive digital transformation strategies rather than pursuing isolated technology initiatives.