Financial Innovation and Financial Fraud in Some Selected Countries in Africa

Abstract

ABSTRACT The banking industry is witnessing a revolution as a result of financial innovations that have become a common feature of banking in the contemporary business environment. The increasing activities of the internet and the proliferation of mobile telecommunication companies in financial activities present both an opportunity and a challenge to banks on the continent. The surge in fraud activities in the finance sector, despite recent convenience, has raised questions as to whether one should use and trust these innovations. The purpose of this research is to identify the effect of financial innovations (product and process) on financial fraud in some selected African countries. This study is a quantitative research (explanatory design) of 17 countries in Africa over a seven-year period (2013-2019). The study explored the fixed effect and random effect models in order to solve heterogeneity issues in the panel data and the Generalised Method of Moments. The study found that domestic credit to private sector by banks, the number of automated teller machines and research and development expenditure had negative relationship with fraud loss (dependent variable). On the other hand, broad money (M3) and the number of patent applications had a positive relationship with fraud loss. Also, unemployment, as a control variable, had a positive relationship with fraud loss. The study concludes that product and process innovations have both positive and negative implications on financial fraud. The study recommends that domestic credit to private sector and research and development expenditure should be increased in countries. In addition, patent application process should ensure that security features are secure and the number of ATMs in the countries are increased