3. Table of contents
1. Introduction of Financial Innovation
2. Benefits of Financial Innovation
3. Drawbacks of Financial Innovation
4. How to promote Financial
Innovation in Pakistan
4. 1. Introduction of Financial Innovation
The term ‘financial innovation’ means the inclusion of new
financial instruments in financial markets through new
technologies. It includes process, product and institutional
innovation.
• Process innovation such as mobile banking, ATM, etc.
• Product innovation includes new financial products such as
securitized assets, derivatives, weather derivatives, foreign
currency mortgages, etc.
• An institutional innovation such as discount internet banking,
specialist credit card firms, etc.
5. 2. Benefits of Financial Innovation
• Reduction in transaction costs.
• Moving funds across time.
• Managing risks and the pooling of funds.
• Boosting economic growth and development.
• Facilitating the sale and purchase of goods and services
through a payment system.
6. 3. Drawbacks of Financial Innovation
1.Increased complexity:
Financial innovation can often lead to the creation of complex financial products, which can be
difficult for consumers and investors to understand. This can make it harder for people to
make informed financial decisions, and can also increase the risk of fraud and abuse.
2. Greater risk:
Financial innovation can also increase the risk of financial crises and systemic instability. This is
because new financial products can create new channels for risk and can also increase the
interconnectedness of the financial system:
3. Lack of regulation:
Financial innovation can sometimes outpace the ability of regulators to keep up, which can
create regulatory gaps and loopholes that can be exploited by unscrupulous actors.
7. 4. How to promote Financial innovation in
Pakistan
By promoting financial innovation, developing and low income countries can improve their financial
infrastrcture, increase access to financial services, and promote economic growth and development.
1. Encouraging digital financial services
Encouraging digital financial services can help to bring financial services to people who are
currently underserved. Digital services can include online banking and other digital payment
methods can be accessed via mobile devices.Government can provide incentives for business to
invest in digital infrastructure and promote digital literacy among citizens
1. Encourag investment
Government can encourage investment in financial innovation by creating policies and regulations
that are conducive to investment. This can include tax incentives, subsidies, and other incentives
for businesses that invest in financial innovation.
