ISSN: 1204-5357

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Review Article Open Access

QUANTIFYING THE RISK ON BANKS’ RETURNS ARISING FROM FINANCIAL TECHNOLOGY ADOPTION: AN ASYMMETRIC GARCH APPROACH TO VALUE-AT-RISK

Abstract

The rapid global technology revolution has raised serious concerns on what could be its long run impact on banks, especially with its attendant technological unemployment. The on-going debate in literature whether and to what degree financial technology adoption will emit risk to bank profitability is examined in this study. The trade-off analysis and a family of symmetric and asymmetric GARCH approach to Value-at-Risk (VaR-GARCH) based on the camel and value at risk theoretical framework were used to determine potential risk and estimate the conditional variance of bank returns in a panel of thirty-four African countries for the period 2002-2018. The Kupiec log likelihood ratio test and mean relative scaled bias used to evaluate the models’ accuracy and efficiency levels respectively found that the best model to estimate the conditional variance of bank returns is the exponential GARCH (1, 1) with student-t distribution. The worse expected loss on banks’ return due to FinTechs adoption will not exceed 3.01% at 95% confidence interval. Therefore, with a higher FinTechs’ risk/standard-deviations than that of banks’ return and a high VaR value of bank returns, it implies that aside banks, FinTechs also emits risks to other sectors, therefore this study recommends that African economies will benefit from FinTechs diffusion through improved financial service delivery only when a substantial level of collaboration between bank financial institutions and FinTechs companies is reached.

TOCHUKWU TIMOTHY OKOLI, DEVI DATT TEWARI

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