Bank Innovations, Financial Inclusion, Institutional Characteristics and Performance of Commercial Banks in Kenya

Abstract

Evidence available from Kenya's main commercial banks shows a downward trend in investment revenue. There are a number of elements inherent to the banking industry that contributes to the aforementioned issues with banks' financial performance. This study's main goal was to investigate the aspects that contribute to the success of Kenya's commercial banking industry with respect to innovation, financial inclusion, bank characteristics, and overall financial performance. Three theories served as the basis for the research: the theory of transaction costs, the theory of finance and growth, and the Agency theory. The study combined quantitative and qualitative approaches, using a cross-sectional survey methodology. A total of 42 commercial banks in Kenya that were operational between 2009 and 2019 were analyzed for this report. These banks had all been licensed and registered under the Banking Act. The percentage of those that answered the survey was 83.3%. The research aimed to disprove five main hypotheses and six minor ones. It has been determined that mobile banking, automated teller machine banking, and agency banking significantly impact the performance of Kenya's commercial banks. Additionally, synergy between mobile banking and automated teller machine banking has a significant influence. It was found that mobile banking and agency banking significantly contribute to a boost in the profits financial performance of commercial banks, while ATM banking was found to be insignificant, in a test of the third hypothesis that used deposits and customer deposit accounts as intervening variables on the association between bank innovation and financial performance. The financial inclusion composite variable has been found to have a substantial effect on the financial performance of commercial banks in Kenya. When all factors were analysed jointly, mobile banking, deposits, deposit accounts, ATM banking, ownership, bank age, and Agency banking were found to have a significant effect on financial performance. However, ATM banking had no effect. The study concluded that the age and ownership of banks is a significant factor in determining the financial performance of all banks. Most commercial banks in Kenya's financial performance was affected by the advent of mobile banking and agency banking. To promote financial inclusion and bank profitability, the study suggests enacting regulatory changes that encourage commercially feasible innovations throughout the banking industry. This study adds to methodological discussions by reminding researchers that the works of Baron and Kenny (1986) should not be sightlessly trailed since previously irrelevant characteristics may take on new relevance if moderation and mediation are included. Theoretically, the contribution of this study is that bank innovation in Kenya has a beneficial influence on profitability and that institutions should continuously seek and execute durable business links to accelerate the diffusion of innovations and achieve the desired economic consequences.