The Influence Of Firm Internal Environment On The Innovative Capacity Of Commercial Banks In Kenya

Abstract

The banking sector has of late been considered as one of the least competitive sectors in the economy of Kenya considering the number of commercial banks in operation against the market size. Introduction of new capital adequacy ratio by the CBK to be observed by commercial banks brought about several mergers and acquisitions. To add on to this, the introduction of the interest rate capping laws by the government in September 2016 saw a reduction of revenue sources by banks since they were required to cover the cost of operation through thin margins. Commercial banks have to device innovative ways to meet the ever-changing user needs by investing improving their innovative capacity in order to beat competition and stay relevant in the market. The study examined how variables in the firm internal environment comprising of firm networks, human capital and absorptive capacity influenced the innovative capacity of commercial banks in Kenya. The theories that informed the study included Social capital theory, Social Network theory, the Knowledge based view theory of the firm and the open innovation paradigm theory. The study adopted a descriptive research design to understand the happenings regarding innovation in the banking industry in Kenya. The census sampling method was applied since the target population of 43 was not huge and the target banks are all headquartered in Nairobi. The study used primary data collected by use of a structured questionnaire. Data was analysed using regression method and yielded descriptive statistics including frequency, percentage, mean and standard deviation. Hypotheses were tested using ANOVA. The study established that whereas both Firm networks, Human Capital and Firm absorptive capacity had a great influence on the innovative capacity of commercial banks in Kenya, knowledge creation and sharing through collaborative networks was the key driver of innovation in commercial banks. The study concluded that Firm Networks, Human capital and Firm absorptive capacity had a great influence on bank innovation since they both facilitated acquisition and sharing of new knowledge which is the most vital resource in the innovation of new products, services, processes and procedures. The study concluded that banks needed to intensify collaboration through networks, motivate their workforce through creation of a knowledge culture and putting in place effective reward and recognition systems and finally development and implementation of knowledge management systems to facilitate knowledge creation, processing, sharing, application and storage for use by future generations.