The Effect of Financial Innovations on Risk Management by Commercial Banks in Kenya

Abstract

The rapid rate of change in the financial sector no doubt calls for an assessment of the efficacy of risk management systems of financial institutions on one hand and devising appropriate regulatory responses to the challenges that these changes may pose, on the other. Financial innovation means to change present financial system and adopt new financial tools in order to gain potential profits that cannot be obtained by present financial system and financial tools. It is a slowly-continued development process driven by a desire for profits. The research objective was to establish the effect of financial innovations on risk management of commercial banks in Kenya. The researcher adopted a descriptive research design in this study. The target population for this study constituted all the commercials banks in Kenya, a total of 43 in number. Secondary data was collected from official documentation with commercial banks for a period of 10 years from 2004 - 2014. The Statistical Package for Social Sciences (SPSS version 22.0) was used for the regression model. The research findings revealed that money transacted through agency banking and via mobile transactions had the greatest influence on the equity loan ratio. A positive relationship was noted between inflation rates, interest rates and value of money transacted through agency banking. The researcher concluded indeed banks in Kenya operate in a risky environment, however, they have managed to mitigate risks through investments in more secure money transfers for instance internet banking and mobile banking. The study recommends that the Kenyan government shoul promptly provide incentives towards research and development so that banks can continue to come up with more financial innovations. Additionally, Kenyan commercial banks should continue to make sustainable industry linkages with service providers in the mobile phones industry not forgetting internet service providers.