Working Paper Series: Special Edition of 2016 to 2018 Interns

therefore, inefficient, and as a result financial institutions should put interest in innovation to improve market efficiency. He noted that “ financial innovation is viewed as the engine driving the financial system towards its goal of improving the performance of what economists call the real economy .” 3.2 Empirical Review The right kind of financial innovation encourages banks to invest in new technologies that can assist financial systems in achieving its role and consequently, deliver growth. According to Bara et Al (2016), financial innovation channels surplus from savers to more productive investments avenues, thereby, raising the rate of capital accumulation and thus economic growth. Levine (2010) 13 argued that technology and financial innovation are closely related and has developed together and that financial innovation is crucial for improving the wealth of nations. Overall financial innovation results in the venture of new financial technologies that enhances efficiency of capital, decreases transaction costs and hence stimulate higher levels of economic growth. Levine (1997) in his study of the relationship between financial development and economic growth, stated that financial development was a good indicator of economic growth, capital accumulation and technological change. He purported that financial development depends heavily on financial innovation. Levine stated that economic growth relies on financial systems and that there should be a functional approach to understand the role that the financial system plays in economic growth. Levine developed five functions of the financial system namely: mobilize Savings, allocate resources, exert corporate control, facilitate risk management and ease trading of goods, services and contracts. Theses function if performed efficiently, they will foster growth through capital accumulation and technological innovation (Levine 1997). Tufano (2003) did an excellent study into the review of Financial Innovation. He highlighted some purposes of financial innovation. He noted that financial innovations help reduce agency costs, facilitate risk sharing, complete the market, and ultimately improve allocative efficiency. For instance, in incomplete market, financial innovation can lead to improvement by providing

13 Cited in (Bara, et al., 2016).

67