Effect Of Financial Innovation On Performance Of Commercial Banks In Kenya

Abstract

With the increased competition in the banking industry and the introduction of the interest rate capping following the concerns of the public on the increased cost of credit in Kenya, which minimized credit access by a large segment of the population, the structure of earnings for the banks have begun to move away from the revenue from the interests. In order to offset the loss on interest income and survive in the highly competitive financial industry, most commercial banks have embarked on innovation and digital channels as a method to generate revenue. This study will search for to determine the effect of financial innovation on the performance of commercial banks in Kenya. There exists several studies on this but fewer studies have been done on the recent innovation and due to their current penetration in the Kenyan markets, there is need to understand their effect on performance of commercial banks. Also, despite most banks in the financial sector adopting the digital financial services which are aimed at increasing performance, there have been several cases of banks going under receivership and others totally closing their operations in Kenya. The study specifically aimed at establishing how internet banking, credit cards, Pesalink and mVisa introduction affect the performance of commercial banks in Kenya. The study was guided by constraint induced financial theory, Diffusion innovation theory, Circumvention theory, Regulation innovation theory. The study population was 41 commercial banks currently operational in Kenya. The target population was the 41 commercial banks currently in service in Kenya. The study adopted a descriptive research design. Semi-structured questionnaires were the tools of data collection and were administered face to face by the researcher to the respondents. Data analysis was done by the use of multiple regression method done by assistance of SPSS software. Analyzed data was then presented in the form of tables and charts. The results of study showed that variations on total customer base of the financial institutions could be explained by changes in financial innovations and in particular; internet banking, Pesalink, credit cards and mVisa which means that internet banking, Pesalink, credit cards and mVisa all affected the performance of commercial banks in Kenya. The study thus recommends that it is important for commercial banks to prudently adopt financial innovations as it has positive effects on performance of commercial banks in Kenya.