Financial Innovation and Demand for Money in Kenya

Abstract

Financial innovations have emerged in recent years, resulting in the launch of new quasi–money products. As a result, financial innovation may have an influence on money demand which cannot be overlooked, thus, highlighting the need of including it when evaluating the money demand function. Kenyans have increased their mobile money services usage and other forms of financial innovation in recent years. In this connection therefore, the primary aim of this study was to ascertain the short term and long term relationship connecting financial innovation and real money demand. The research used the ARDL approach in analyzing the money demand function for Kenya between the 1st quarter of 2000 (Q1: 2000) to the 4th quarter of 2019 (Q4: 2019). The empirical findings revealed that innovation had a long-run negative effect on real broad money demand. With innovations, financial technology gets better and transaction gets easier, which makes money substitutes easier to find and use, hence you would expect a negative relationship. That is financial innovation may alter behavior to hold money as it increases the availability and use of quasi-money products, which means that users have fewer liquid assets to manage. Other variables that had a negative influence on money demand included inflation and interest rates. Additionally, the CUSUM test revealed that, despite financial innovation, the money demand function remains stable, implying that the CBK monetary aggregate targeting remains effective.