Financial innovation and money demand in Nigeria: Exploring the impact of banking innovations, fintech developments and digital payment channels on the money demand

The paper contributes to the frontier of knowledge by examining the role of banks and Fintech innovations across the different financial innovation platforms on four money-demand models. Quarterly data from Q1 2009 to Q4 2022 were adopted by employing the Feasible Quasi Generalized Least Squares technique, the CUSUM and CUSUMSQ techniques, and the Granger causality methods due to their suitability for running this type of regression. The results indicate that the value and volume of payments within the banking industry have a significant positive impact on the demand for reserve money. In contrast, the value of payments had adverse effects on the demand for narrow money, broad money, and total money. The significant positive impact of payment value and volume on the demand for reserve money indicates that as transactional activities increase, banks require more reserves. The negative impact of payment value on the demand for narrow, broad, and total money suggests a substitution effect where higher transaction volumes reduce the need for holding other forms of money. Furthermore, the findings demonstrated that money demand is unstable, implying that the monetary authorities should provide the transition framework for a proper inflation-targeting strategy to achieve its key objective of attaining low and stable inflation. The instability in money demand suggests that traditional monetary aggregates may not be reliable indicators for monetary policy. Therefore, the central bank should adopt a more flexible and responsive framework, such as inflation targeting, which focuses directly on achieving price stability rather than relying on intermediary targets.