Effect Of Financial Innovations On Financial Performance Of Commercial Banks In Kenya

Abstract

Innovation sets an organization on the path of transformation, growth and prosperity in the context of changes in the external environment and internal environment. This also applies to banking organisations. The banking industry has been transforming radically in recent times due to innovations made by the commercial banks on their business models, services, products, regulation, processes, technology, systems and governance. This study’s main research objective wasto investigate the influence that financial innovations have onKenyan commercial banks’ financial performance. Specifically, the study pursued objectives to determine the effect that product innovations have on Kenyan commercial banks’ financial performance; to investigate the effect that service innovations have on Kenyan commercial banks’ financial performance and to investigate the effect that organizational innovations have on Kenyan commercial banks’ financial performanceand to evaluate whether firm size has a moderating effect on financial innovations and Kenyan commercial banks’ financial performance.The study adopted an explanatory research since the objective of the study was to determine the mechanisms and characteristics evident in the dependent- independent variables’ relationship. The study focused on all the 40 commercial banks in Kenya by the year 2016. Data spanning five years from 2012 to 2016 was used. Panel data analysis was also used to achieve the study objectives. The study findings indicated that product innovation has a positive significant effect on financial performance of commercial banks in Kenya. Both organizational and service innovations had positive insignificant effect on financial performance of commercial banks in Kenya. Firm size was established to have significant moderating effect on financial performance of commercial banks in Kenya.The study recommends that commercial banks should consider revising their investment and decisions and invest more in product innovations such as ATMS, Mobile money transfer products and Credit Cards. This is following the results that product innovation will significantly influence their financial performance. Since firm size (Assets base) has a significant moderating effect on how financial innovations relates to financial performance of commercial banks, the study suggests that the commercial banks should be keen to evaluate their firm size whenever they are pursuing financial innovations strategy to improve their financial performance