The Effect of Financial Innovation on Banks Performance: a Case Study of Listed Banks in Kenya

Abstract

Over the financial sector globally has seen tremendous revolution of how things are done. This have been derived by the need of satisfying the customers in a very competitive environment. Completion have been both local and international, we have also seen non financial institutions start to offer financial services and solutions (Ndungu 2012). It is therefore very important for banks to keep innovating new products and services for them to remain relevant to their customers especially at such a time when the world have experienced great technological breakthroughs. This study focused on the effect of financial innovation on banks financial performance. In particular it dealt with agency banking as a financial innovation in Kenyan banking sector focus being the listed bank. Three banks were studied and these are Equity bank, Kenya commercial bank and Cooperative bank of Kenya. An agency bank is a company/organization that acts in some capacity on behalf of another bank, it, thus, cannot accept deposits or extend loans in its own name; it acts as agent for the parent bank. Agency banking model requires commercial banks to rely on the existing infrastructure in terms of supermarkets, credit unions, hotels and petrol stations to reach out to customers. Agents can be limited liability companies, cooperative societies, parastatals, trusts, partnerships or individuals. Any stable and efficient agency banking system depends on technology that enables banks and customers to interact remotely. The study was done by collecting data on the total revenues that banks received from various outlet channels from where customers can do cash transactions; these channels are over the counter transactions at the branches, at the ATMs and at the agent's location. Also data was collected on the number of transactions done by an agent. Regression model was used to establish how the number if agents transactions influence the overall revenues from all the channels.