The effects of product innovation on financial performance of commercial banks in Kenya

Abstract

This project research is concerned with product innovation and its effects on financial performance of commercial banks in Kenya. Although studies have shown that financial performance of commercial banks is influenced by bank-specific factors and industry specific factors, locally very few studies have been done to determine the key factors that influence the financial performance of commercial banks. Moreover, reforms in banking industry have brought about many structural changes in the sector and encouraged competition. As results, banks adopted competitive strategies including products innovation. The study purposively looked into how core products innovation, formal product innovation and augmented product innovation affected the financial performance of commercial banks in Kenya. This study adopted explanatory research design in which a population sample of 106 senior and branch managers from nine commercial banks was taken using the census method. Data was collected using research questionnaires and face-to-face interviews and secondary data was obtained from 2013 audited annual financial statements of commercial banks. Analyses were conducted through descriptive statistics and Ordinary Least Square technique to estimate a multiple regression equation. Findings suggested that 6.5 percent (R2=0.065) of the variance in financial performance may be explained by core product innovation, formal product innovation and augmented product innovation. The regression results indicated that core product innovation and augmented product innovation do not have any relationship with the financial performance of banks. However, the results revealed a negative relationship between formal product innovation and the financial performance of commercial banks in Kenya with β value of -4.758 and a t value of -2.022 implying a statistical significance at 5 percent level. The study also yielded conclusive information in product innovation that all commercial banks have innovated and implemented products of each type even though there was a negative or no effect at all on their financial performance and a certain amount of time might be necessary in order to observe the reflection of positive effects of innovative products on financial performance. The study also concluded with a suggestion of further and extended future research in product innovation and financial performance of commercial banks in order to establish other useful findings that this particular study may have been unable to determine