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 Agency Theory. This study adapts a quantitative research approach with focus on panel data. The target population were 6 leading commercial banks in Kenya in terms of customer and assets base and are listed commercial banks in NSE .Purposive sampling was used to select the 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 (a panel data from 2012-2017) used was obtained from the financial statements of the 6 sampled commercial banks. Descriptive analysis was used to analyze primary data that showed extent to which the three type of financial innovation (Financial systems innovations, Process Innovation, Product innovation) influence the performance of commercial banks in Kenya. Partial correlation and linear regression analysis were used for both primary and secondary data. The findings of the study from primary data indicated that financial innovation (P<0.045) has a stronger positive consideration influence on the commercial banks performance.The results also shows that: Y=1.777+.290X1+.148X2+.086X3+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 achievement of commercial banks. Product Innovation is the only financial innovation component that does not have a significance influence on the performance of commercial banks. Results from analysis of secondary data indicated that financial innovation factors has no significant effect on the performance factors(Return on Equity(ROE);Return on Asset (ROA);Returns on Capital(ROC);Return on Investment(ROI)) of commercial banks in Kenya. The results also indicated a low correlation between financial innovation and financial performance of commercial banks in Kenya of between r =0.189342 and r =0.182058 for all the performance indicators (Return on Equity (ROE); Return on Asset (ROA); Returns on Capital (ROC); Return on Investment (ROI)) which indicated that although there was a relation between financial innovation and financial performance of commercial banks in Kenya, the correlation was very low.