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

Abstract

The purpose of the study was to assess the impact of product innovation on commercial bank’s financial performance as the key players in the banking sector over a period of 4 years. Kenya’s financial sector has undergone significant transformation in the last few years. Many new more efficient and real time financial systems have come into place. Despite the undeniable importance of financial innovation, its effect on financial performance is not always obvious since there are reported cases of reverse causality between innovation and performance. The descriptive research design was used to carry out this study. The population of study was all the 43 commercial banks in Kenya as at 30th June 2011. The study used secondary data from published central banks’ annual reports. The independent variable was product innovations unique to commercial banks while dependent variable was consolidated financial performance of all banks. A cross sectional regression model was adapted. The regressions were conducted using statistical package for social sciences (SPSS) version 21. Regression results indicate that there is a positive and significant relationship between innovated products Ratio and ROA. The study concludes that product innovations positively affect financial performance. Based on these results, the study recommends that product innovation information should be available particularly to regulatory and advisory bodies for guidance to the commercial banks on the need to craft and employ sound strategies geared towards continuously embracing innovativeness since innovation leads to improved financial performance. In addition, the study also recommends that firms should create an enabling environment for the employees to be innovative in their operations in order to utilize its competitive advantage so as to increase financial performance and growth of the sector.