Forecasting green financial innovation and its implications for financial performance in Ethiopian Financial Institutions: Evidence from ARIMA and ARDL model

Abstract

Green innovation is the creation of new and competitive products, services, processes, procedures and systems designed to use natural resources at a minimum level and to provide better quality of life on behalf of all that respects sustainability of the nature and of the future generations. The study objective was to examine the relationship between green innovation and financial performance. The study used an explanatory research design and a quantitative research approach to achieve the study's objective. Secondary time series data collected quarterly during the study period (2014–2020) was utilized to run the regression model. Autoregressive moving average (ARIMA) was used to forecast the growing level of green financial innovation transactions, and autoregressive distributed lag model (ARDL) was used to examine the effect of green financial innovation transactions on financial performance. According to forecasted results, on average green financial innovation transaction is expected to grow by 11 percent each quarter, and its impact on financial performance is found positive and significant in the short run. However, the long-run estimation of ARDL shows the positive and insignificant effect of green financial innovation on financial performance. Based on the study's findings, we recommend that the banking sector focuses on adopting green financial innovations to improve financial performance by taking into account both the short-run and long-run benefits of the products. At the same time, we suggest that the sector focus on those green financial innovations which have the lowest adoption and development costs compared to others since the long-run effect affects the overall financial performance of the sector. The main contribution of this study is to provide future indication on the relationship between the two variables in order to provide proper decision making in a bid to make green innovation investment.