The relationship between financial innovation and efficiency of Commercial Banks in Kenya

Abstract

This study examines the relationship between financial innovation and the efficiency of commercial banks in Kenya for the period between 2009 and 2012. The banking sector is one of the fastest growing sectors in the economy registering significance implementation of innovations. This study therefore seeks to establish the efficiency status with the view of establishing financial innovation types that can improve banks’ efficiency levels. Relationship between relative efficiency score and total assets admitted, age and ownership is noted. This study is designed as a descriptive study. The population comprised of 43 commercial banks out of which 21 were selected, forming the sample size. The DEA model was used using a DEA computer program. The objective of the study was to obtain the following information of each firm: Relative efficiency score, peer for each inefficient bank, objective output and input targets. The mean relative efficiency score for the selected banks was found to be approximately 80%. Large banks in terms of assets were found to be relatively more efficient than small and medium sized banks. Foreign banks were found to have a higher efficiency score than public and private-domestic banks in terms of ownership. Banks that had been operational more than 18 years were considered to be old. The old banks were found to be more efficient than the new ones. This paper concludes that lack of organizational innovation among banks is a major factor in inefficiency within the bank. Also, several recommendations both to the banks and researches are made. Small and medium banks, new and old banks, public and private-domestic banks need to compare themselves with their peers in terms of innovation implementation and operation. This would lead improved efficiency score through introduction of new and improved innovations, better innovation combination and optimal usage of assets and capital.