The Impact of Financial Innovation on Enhancing Banking Efficiency: An Analytical Study of Iraqi Commercial Banks (2017-2024)

Ahmed Risian; Afnan Fattah Imran Ali

doi:10.64190/abj.1.2.2026.23

Ahmed Risian ⁽¹⁾ , Afnan Fattah Imran Ali ⁽²⁾

(1) University of Basra, Iraq,

(2) University of Basrah, Iraq

https://doi.org/10.64190/abj.1.2.2026.23

Issue
Vol. 1 (2026): Early View - 2026

Submitted
January 20, 2026

Accepted
February 26, 2026

Published
February 26, 2026

Keywords:

Financial Innovation, Banking Efficiency, Liquidity, Digital Transformation, Iraqi Commercial Banks

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Abstract

This study aims to analyze the impact of financial innovation on improving banking efficiency through an analytical examination of a sample of Iraqi commercial banks during the period 2017-2024. The study employed a set of financial innovation indicators, namely the ratio of expenditure on financial innovations, the number of innovative products, and the number of digital transactions. Banking efficiency was measured using profitability indicators represented by Return on Assets (ROA), Return on Equity (ROE), and Return on Deposits (ROD). The study incorporated a mediating variable represented by the liquidity ratio to explain the nature of the relationship between financial innovation and banking efficiency. An advanced econometric approach was utilized, including Autoregressive Distributed Lag (ARDL) models using EViews 9, to measure the relationship between study variables in both the short and long term. The results demonstrated a statistically significant positive impact of financial innovation indicators on banking efficiency, in addition to a partial and significant mediating role of the liquidity ratio. This confirms the importance of adopting financial innovation as a strategic tool for enhancing banking performance and strengthening operational efficiency in Iraqi commercial banks.

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References

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Authors

Ahmed Risian

University of Basra, Iraq

https://orcid.org/0009-0002-8579-1288

ahmed.risian@uobasrah.edu.iq (Primary Contact)

Afnan Fattah Imran Ali

University of Basrah, Iraq

Author Biography

Ahmed Risian, University of Basra

Ahmed Risan Alawi Al-Bahadli, Assistant Professor, Department of Financial and Banking Sciences, College of Administration and Economics, University of Basrah - Iraq, ahmed.risian@uobasrah.edu.iq, https://orcid.org/0009-0002-8579-1288.

Risian, A., & Ali, A. F. I. (2026). The Impact of Financial Innovation on Enhancing Banking Efficiency: An Analytical Study of Iraqi Commercial Banks (2017-2024). Arado Business Journal, 1, 167–198. https://doi.org/10.64190/abj.1.2.2026.23

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Introduction

The world is witnessing accelerated transformations resulting from technological development, digital transformation, and increased competition, which have made innovation a necessity for institutions to confront challenges and changes (Vărzaru & Bocean, 2024). Financial innovation has emerged as one of the fundamental pillars assisting financial institutions in collecting and processing data to meet customer needs and deliver banking services more efficiently and effectively (Koththagoda & Weerasiri, 2017).

Theoretical Framework

Concept and Importance of Financial Innovations

Financial innovation is considered one of the fundamental pillars of the contemporary financial system’s development, representing a direct response to technological progress and the accelerating structural transformations witnessed by global financial markets. Recent developments in information and communication technologies, such as artificial intelligence, big data analytics, blockchain technology, and digital payment and settlement systems, have brought about fundamental changes in the nature of banking services and their delivery methods. This has enabled banks and financial technology institutions to provide innovative solutions characterized by efficiency, speed, and reduced costs (Tangl & Desalegn, 2022; Frame & White, 2020).

The concept of financial innovation is not entirely new to economic thought; Schumpeter pointed out in the 1930s the pivotal role of innovation in stimulating economic growth and developing credit and capital markets. However, financial innovation in its modern form has become closely linked to digital transformation and now encompasses the introduction or development of technology-based banking products, services, processes, and business models, which directly contribute to improving the financial and operational performance of banks and enhancing their competitiveness (Schumpeter, 1934; Choudhary & Chauhan, 2022).

From an institutional perspective, financial innovation is viewed as an integrated process that includes the development and adoption of new financial products and services, alongside the modernization of operational processes, organizational structures, and supporting technologies. This collectively leads to improved resource utilization efficiency, reduced operational costs, and enhanced quality of banking services provided. In this context, financial innovation is no longer merely a supporting technical tool but has become a strategic option on which banks rely to face increasing competition and rapid changes in customer preferences (Mashali & Nazaritehrani, 2020; Arthur & Khraisha, 2018).

The importance of financial innovation in the banking sector lies in its ability to achieve a set of positive effects at multiple levels. At the individual level, digital banking services have facilitated individuals’ access to financial services and improved their banking experience. At the corporate level, financial innovations have provided effective tools for improving liquidity and risk management and simplifying financial operations, particularly for small and medium enterprises (Dongol, 2021; Zulfiqar & Fareed, 2023). At the macro level, financial innovation plays an important role in promoting financial inclusion and improving resource allocation by expanding the base of beneficiaries of banking services and reducing dependence on traditional channels, in addition to supporting economic growth by improving the efficiency of financial intermediation and increasing the flexibility of the banking system in facing economic shocks (Gonzalez et al., 2023; Wahyudi & Tristiarto, 2020).

Financial innovations in the banking sector take multiple forms that can be classified into three main categories. The first category consists of institutional innovations, which include the development of payment and settlement systems and the use of advanced technologies such as artificial intelligence and blockchain. The second category represents financial product innovations, which focus on developing banking services to meet changing customer needs. The third category includes operational or organizational innovations, which aim to redesign processes and banking business models, contributing to cost reduction and increased efficiency (Kraugusteeliana & Triwahyono, 2023; Opiyo, 2023).

In the applied context, manifestations of financial innovation in the banking sector have been embodied through the spread of a range of innovative banking services, such as automated teller machines (ATMs), mobile banking services, internet banking services, electronic point-of-sale systems, and electronic clearing and settlement systems. These services have contributed to reducing dependence on traditional branches, accelerating transaction completion, and improving operational efficiency (Muraina, 2019; Onunka et al., 2023). Thus, it can be said that financial innovation represents one of the decisive factors in improving banking performance and enhancing operational efficiency and profitability, provided it is employed within a clear strategic vision that balances achieving returns and managing risks, supporting financial sustainability in a banking environment characterized by change and increasing competition (Arthur & Khraisha, 2018; Gonzalez et al., 2023).

Banking Efficiency

Concept of Banking Efficiency

Banking efficiency is considered one of the central concepts in analyzing the performance of financial institutions, due to its direct role in determining banks’ ability to utilize their available resources—financial, human, and technological—in the best possible manner to achieve the highest level of returns at the lowest operational cost. The concept of efficiency generally reflects the relationship between inputs and outputs, where a bank’s success is measured by transforming its resources into tangible financial and operational results that enhance its sustainability and competitiveness (Oyegbade, 2022; Hamzah, 2022).

Economic thought distinguishes between the concepts of efficiency and effectiveness, where efficiency refers to “doing things correctly” in terms of optimal resource utilization, while effectiveness means “doing the right things” in terms of achieving ultimate objectives. Thus, an efficient bank does not only focus on achieving profits but seeks to maximize its productivity through allocating its resources rationally within an environment characterized by cost and risk constraints (Najar, 2020; Rathore, 2021).

In the banking context, the concept of banking efficiency is not measured solely by the level of profits achieved but by the bank’s

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The Impact of Financial Innovation on Enhancing Banking Efficiency: An Analytical Study of Iraqi Commercial Banks (2017-2024)

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