Effect of Financial Innovation on Financial Performance of Tier iii Commercial Banks in Kenya

Abstract

The purpose of this study was to determine the effect of financial innovation on the financial performance of tier III commercial banks in Kenya. In doing so, the study was anchored by the diffusion of innovation theory, transactional cost innovation theory and agency theory. The research adopted a correlational research design. The study conducted a census of all the 22 tier III commercial banks in Kenya and obtained information from financial reports of tier III commercial banks over a scope of five years, between 2019 and 2023. The secondary data information was retrieved from Central Bank of Kenya reports and tier III banks’ financial reports. From the findings, the study concluded that internet banking, mobile banking and bank size were significant determinants of financial performance for the tier III commercial banks in Kenya. It also concluded that government regulation had negative significant effect on financial performance of the tier III commercial banks in Kenya. The study recommends that commercial banks should establish robust data protection measures that will be instrumental in maintaining customer trust and safeguarding the financial system. Policymakers should ensure that commercial banks are supported to develop and adopt current financial technologies by updating policies regularly to align with government regulations. Future studies can investigate qualitative aspects of financial technology such as customer views and beliefs towards new technology for financial processes, impact of uptake of fintech on companies’ market share and the hinderances to effective use of such processes. Future studies could similarly make use of the research design that this study adopted.