Effects of Financial Innovation on Performance of Commercial Banks in Kenya Case Study of Leading Commercial Banks in Kenya

Abstract

The core of this study was to assess the effects of financial innovation on performance of commercial banks in Kenya with reference to listed banks in Kenya from 2012-2017. The study is guided by three specific objectives; to determine the financial systems on the performance of commercial banks in Kenya; establish the process innovation on the performance of commercial banks in Kenya; and to realize the effects of product innovation on the performance of commercial banks in Kenya. The study is based on three theories; Merton’s Market Efficiency Theory of Innovation, Pecking Order Theory, and Diffusion of Innovation Theory. This study adapts a quantitative research approach with focus on panel data. The target population were commercial banks in Kenya and was limited to the leading listed commercial banks in NSE but the 6 public and private leading banks with the in terms of customer and assets base. The study through purposive sampling selected six leading commercial banks and included Kenya Commercial Bank, Cooperative Bank of Kenya, Equity Bank, Family Bank and Barclays Bank and The Standard Bank. Both primary and secondary data were used in this study. Primary data was drawn from the questionnaires that were collected from the respondents. On the other hand, secondary data was used in this study was obtained from the financial statements of the 6 sampled commercial banks. Secondary data were extracted to develop a panel data that included financial reports and calculated ratios collected for the 5 years, since 2012-2017. Descriptive analysis was used to analyze primary data collected from the questionnaires and was used to show the extent to which the three type of financial innovation (Financial systems innovations, Process Innovation, Product innovation) influence the performance of commercial banks in Kenya. Quantitative data analysis methods were done through SPSS software for the secondary data collected from the financial reports. After all data is collected, data was coded and keyed into the computer for analysis using the statistical packages for social sciences (SPSS). Partial correlation and linear regression analysis was used through regression analysis to determine whether financial innovation (financial systems innovations, process innovation, and product innovation) has an influence on the performance (ROE and ROA) of selected commercial banks in Kenya. The findings from primary data indicated that Y=1.777+.290X1+.148X2+.106X4+ε.This indicates that a .290 increase in Financial Systems, a .148 increase in Process Innovation while 086 in Product Innovation will have unit change in the performance of commercial banks. Product Innovation is the only financial innovation component that does not have a significance influence on the performance of commercial banks. The analysis on secondary data indicated that if all other factors remained constant at 0.487 there would have a 0.048519 change in financial innovation (financial systems, process innovation and product innovation) then there would be a unit change on the performance of commercial banks in terms of ROA. On the other hand if every other factors remained constant 0.487 and there 0.330825 change in financial innovation (financial systems, process innovation and product innovation) then there would be a unit change on the performance of commercial banks in terms of ROE.