The Effect of Financial Innovations on Financial Performance of Commercial Banks in Kenya

Abstract

The increase in competition and changing business environment in banking sector is making banks to turn into financial innovation to improve their competitiveness. Financial innovation is proving to be the most suitable tool to unlock the potential of unpenetrated retail financial markets. When successfully implemented, these innovations can lead to cost savings, which can have a positive impact on a company's financial performance by increasing profitability. The banking sector registered decline in performance in 2020 with profit before tax decreasing by 29.5 percent to Ksh.112.2 billion in December 2020 from Ksh.159.1 billion in December 2019. The objective of the research was to determine the effect of financial innovations on financial performance of commercial banks in Kenya. The theoretical review focused on major theories that included Innovation Diffusion theory, Technology Acceptance Model, and the Resource-Based View theory. The method of descriptive research was employed in this study and data was collected in a form of panel data from the 39 commercial banks in Kenya. The research covered a 5-year period from the year 2018 to the year 2022 from which data was derived. The analysis of this data was conducted using SPSS version 27 and STATA. It was concluded that mobile banking had a positive effect on financial performance of commercial banks in Kenya. This is because mobile banking provides customers with convenient and accessible services improving overall customer satisfaction and loyalty. ATM banking had a positive effect on financial performance of commercial banks in Kenya. This is because ATM operate 24/7 without the need for extensive staff, significantly reducing overhead costs related to staffing, utilities and maintaining physical branches. Agency banking had a positive effect on financial performance of commercial banks in Kenya. This is because agency banking enables banks to reach customers in remote or underserved areas where establishing physical branches may not be feasible or cost-effective. Internet banking had a positive effect on financial performance of commercial banks in Kenya. This is because online banking encourages banks to continually improve their digital platforms, introducing new features, functionalities, and innovative services. Bank size had a positive effect on financial performance of commercial banks in Kenya. This is because larger banks might have more resources to invest in advanced risk management technologies and processes contributing to better risk mitigation and financial stability. The study recommends that commercial banks in Kenya should collaborate with Fintech companies and technology partners to leverage innovative solutions. Commercial banks in Kenya should integrate advanced features such as mobile-based authentication for smoother and faster transactions. Commercial banks in Kenya should focus on expanding the network of agents to reach more remote or underserved areas. The commercial banks in Kenya should continuously update and innovate the internet banking platform by incorporating new features, services, and technologies. The commercial banks in Kenya should ensure that they enjoy economies of scale, and this can be achieved through merges and acquisitions as this will enhance synergy and which in turn may reduce operational costs of the banks.