The effect of financial innovations on financial performance of micro finance institutions in Kenya

Abstract

Financial innovation is considered to be a critical requirement for the growth and profitability of organizations. One of the ways to achieving growth and sustaining performance is to encourage and foster financial innovative practices and creativity internally within the institution. Microfinance institutions (MFIs) play a vital role in the economic development of many developing countries like Kenya. Most of the previous studies done by various authors have shown that microfinance institutions play a vital role in the economic development of many developing countries through the provision of a wide range of financial products and services to the poor, low-income households and micro and small enterprises. Unfortunately, most of these studies have concentrated on the growth of the MFI institutions and specific financial innovations. This study investigated the effects of financial innovations on the financial performance of MFIs in Kenya and so as to fill-up the academic gap on financial innovation left by previous researchers. The study targeted all the 47 microfinance institutions regulated by the Microfinance Act of 2006 and operating in Kenya and covered the period 2011 to 2013. Data was collected by using questionnaires administered to the respondents and analyzed by applying both descriptive and inferential statistics. Descriptive statistics was used to summarize qualitative data and the results presented in tables. The SPSS Version 17 was used to analyze primary data. Through regression analysis, the researcher was able to formulate an analytical model that shows the effect of financial innovations on financial performance of MFIs in Kenya. The research findings indicated that the level of financial innovations adopted by Micro Finance Institutions in Kenya is a key determinant of financial performance though there are few challenges in their implementation. Therefore the researcher recommends exploration of the challenges that MFIs face on implementation of innovative products and services and ways of addressing such challenges.