Effect Of Financial Innovations On Non – Interest Income Of Commercial Banks In Kenya

Abstract

The study sought to investigate the effect of financial innovations on the non – interest income of commercial banks in Kenya. The study sought to examine how agency banking, mobile banking and online banking as a key financial innovation by commercial banks influenced non – interest income of commercial banks in Kenya. In carrying out the study, descriptive research design was adopted since the main objective was to obtain ideas and insights on the causal – effect relationship between financial innovations and the bank non – interest income. By making use of statistical analysis tools, I performed panel econometric analysis mainly pooled regressions since the study was made up of panel data. The target population of the study was 39 commercial banks that have adopted agency banking in Kenya by year 2020. The study adopted a census in its undertaking. The study period was 2011 – 2020. The study utilized secondary data. The data on the bank non – interest income was collected from the audited financial statements of commercial banks and the Central Bank of Kenya. For the data analysis, STATA software was used. The analysis entailed computation of measures of central tendency as well as the measures of dispersion. In addition to the descriptive statistics, correlation analysis among other model variables were computed to examine the relationship among the variables. To determine the effect of agency banking innovation on the bank non – interest income, the agency banking variables were regressed on the bank non – interest income while controlling for exogenous factors such as bank market share. In this case, an empirical model was relied on. Therefore, a linear empirical model was estimated using a multivariable Pooled Ordinary Least Squares method. In addition to empirical analysis, several diagnostic tests were conducted namely: correlation analysis, heteroscedasticity, multicollinearity, and autocorrelation tests. The model selection test found that fixed effects was the most appropriate model for the study. Based on the fixed effects model, it was evident that agency banking had a positive and significant effect on bank non – interest income. The moderating effect of the bank market share on agency banking had insignificant effect on the bank’s non – interest income. Regarding the mobile banking, the results found that based on the fixed effects model, mobile banking had a positive and significant effect on bank non – interest income. The moderating effect of the bank market share on mobile banking had a positive and significant effect on the bank’s non – interest income. Regarding the internet banking, the fixed effect model results indicated that internet banking had a positive effect on the bank’s non – interest income. At 5 percent level of significance, the effect was found to be significant. However, the moderating effect of the bank market share on internet banking though positive, it was found to be insignificant.