Question

Discuss the causes, the roles and the types/forms of financial innovation in a country's financial development overtime

Answer 1

Definition:As the name ssuggests, Financial innovation is associated with advancement or development of the country's financial instruments, markets, institutions or any other elements associated with the financial system of a country. The biggest example is computerisation of the trading platforms which brought in more transparency into the system.

Causes of Financial Innovation:

1. ?The first cause of financial innovation can be said to be highly dynamic economic environment. Nowadays information flows in seconds and it is very sensitive. So there need to be an efficient financial system.
2. The needs of investors are changing everyday. So there need to an efficient financial system with totally dynamic and technologically up to date marrkets and really innovative financial instruments.
3. The technological revolution has already been started so with the changing technologies, financial innovation is required for the investors to be served better.
4. Now all markets over the world are affected by each other because of globalisation and they need to be really aligned. Eg. if the NASDAQ is following a better tactic, the other financial markets will have to adopt that.

Roles of Financial Innovation

• Financial innovation plays a major role in attracting investors towards the financial markets. Eg. If one has less money and still want to invest in the stock markets, he/she can invest with limited funds in the Options market.
• Financial innovations simplify the workings of financial markets and for the investors as well. Eg. If one is provided to trade through android or iOS apps, he/she will find it more convenient and its a type of financial innovation.
• Financial innovation makes economy growing faster as more people will invest.

Forms of Financial Innovations:

Product Innovations: Product innovation is related to the improvements in the product or advancement of new financial products such as Bonds, Debentures or financial schemes.

Process Innovations: Process innovation is related to the improvement in the process or to ugrade it to make it more efficient so the performance can be better.

Institutional Innovations: This kind of innovations are related to the whole financial system and affect the whole financial system. These are related to the financial structure or the financial intermediaries. Eg. Intruducing new financial intermediaries, introducing new payment compliances etc.