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Sanderson Abel
Financial innovation can be defined as the act of creating and then popularising new financial instruments, technologies, institutions, markets, processes and business models including the new application of existing ideas in a different market context.
This can be further defined as advances over time in the financial instruments and payment systems used in the lending and borrowing of funds.

These advances include innovations in technology, risk transfer and credit and equity generation.

The creation of technological advanced products have increased the available credit for borrowers and given banks new and less costly ways to raise equity capital.

With the economic transformation that has taken place in Zimbabwe over the last decade, it seems the financial services sector and the stakeholders in the economy should embrace new innovations so that new economic structures (SMEs, new farmers, etc) can get adequate funding through innovative financing mechanisms, products and systems.

Motives of financial innovations
To provide ways of clearing and settling payments to facilitate trade (Credit and debit cards, PayPal, stock exchanges)

To provide mechanisms for the pooling of resources and for the subdividing of shares in various enterprises (Mutual funds, securitisation)

To provide ways to transfer economic resources through time, across borders and among industries (Savings accounts, loans)

To provide ways of managing risk Insurance (many derivatives)

The implementation of an online banking system that allows a user to instantly transfer money from multiple  accounts is considered as a very good example of financial innovation.

As seen with the global credit crunch sparked in 2008, which was triggered in part by innovative financial products, there will always be a need for careful scrutiny of innovative financial products and their risks. The reasons financial firms can be so beneficial to society, their links to the wider economy, leverage and interconnectedness magnify the economic and social effects of failures in innovation risk management.

It is not only the individual institution that will feel the effect of its failure but the wider economy through spillover effects. Besides the harm financial innovation can bring, research shows it has more benefits than costs.

Types of financial innovations
Financial innovation enhances sustainability of institutions and their outreach to the poor. Useful distinctions between different types of financial innovations include:
Financial system innovations

Such innovations can affect the financial sector as a whole, relate to changes in business structures, to the establishment of new types of financial intermediaries, or to changes in the legal and supervisory framework.

Important examples include the use of the group mechanism to retail financial services, formalising informal finance systems, reducing the access barriers for women, or setting up a completely new service structure.

Process innovations
Such innovations cover the introduction of new business processes leading to increased efficiency, market expansion, etc. Examples include office automation and use of computers with accounting and client data management software.

Product innovations
Such innovations include the introduction of new credit, deposit, insurance, leasing, hire purchase and other financial products. Product innovations are introduced to respond better to changes in market demand or to improve efficiency in the market.

Benefits of financial innovations
Financial systems provide vital services: they evaluate, screen and allocate capital, monitor the use of that capital, and facilitate transactions and risk management.

If financial systems provide these services well, capital flows to the most promising firms, promoting and sustaining economic growth.

Financial innovation, the creation of new securities, markets and institutions can improve financial services and thereby accelerate economic growth.

The question that come to the fore in the whole debate around financial innovation: is there scope for further financial innovation in the Zimbabwean Financial System and how can the economy leverage on this for economic development?

What is most disturbing in the Zimbabwean case is the low uptake of the few financial products on the market due to the supply side or demand side constraints.

Good examples will include internet banking. Given the time that has passed since internet banking was introduced on the market there seems to be low uptake in terms of volume of transactions and the value of transactions.

Despite the loud calls in the country for financial inclusion, this one innovation continues to be shunned by the public. It seems the majority of the Zimbabweans are accustomed to the use of cash. Hence innovations such as Automated Teller Machines (ATMs) and Point of Sale (POS) terminals are not being used fully with the banking public despite owning either debit or credit cards.

Volumes and values of transactions on a monthly basis as produced by the Reserve Bank shows that there is less interest in the these products despite the security of using these platforms and the problem of liquidity affecting the economy.

With the introduction of innovations such as mobile platforms such as Ecofarmer an insurance product, statistics still have to prove the acceptance and uptake of the product on the market.

With financial innovation, the economy should be moving towards paperless society hence the mobile platforms should be well received by the public.

In the next instalments, we will be look at financial innovation from the banking sector perspective.

We will also look at how banks can assist the public to increase their uptake of the various products on the market and leverage on them for economic development.

We would be glad to get your input on how the banks can assist the economy to grow through financial innovation.

• Sanderson Abel is an Economist. He writes in his capacity as Senior Economist for the Bankers Association of Zimbabwe. For your valuable feedback and comments related to this article, he can be contacted on [email protected] or on numbers 04-744686 and 0772463008