The effect of financial innovations on non funded income of commercial banks in Kenya

Abstract

To better apprehend the financial innovation process within the banking firm, this study intend to study the two types of financial innovation most commonly cited by the literature review, namely: product innovation and financial services innovation. Financial innovation has been indicated to affect economic growth and financial inclusion as well as boost the non funded income of commercial banks (CBK, 2011). Studies on financial innovation have been based other financial markets with little emphasis on the banking sector. This study aims at investigating the effects of financial innovations on non funded income in commercial banks in Kenya This study adopted descriptive design. Descriptive research design portrays an accurate profile of persons, events, or situations. The population of study consisted of all the 43 licensed commercial banks that registered with Central Bank of Kenya. The study adopted a census study approach. Owing to the depth inquiry nature of the study, secondary data was collected. The bank consolidated non funded income and exceptional items were obtained from CBK’s annual bank supervision reports. Data to be collected was for 5 years from 2009 to 2013. Data was analyzed using the SPSS statistical package since it is best suited for providing a means of establishing quantitative association between variables. Given that the study, a multiple regression model of bank non funded income as the dependent variable versus independent variables of financial innovations such as online banking, mobile banking, automated cheques clearing and RTGs. The study established that there existed strong significance, positive correlation between financial innovation and non funded income (NFI) in commercial banks It can be concluded that adoption of these financial innovations had improved commercial banks income level and further improved their operations and earnings by increasing level of Non Funded Income. The financial innovations are not only adopted to increase their market coverage but also to improve the liquidity and also remain competitive in the market in the current turbulent business environment. This study also concluded that commercial bank investing in financial innovations has improve on new products development and technological innovations such as mobile banking, online banking, automated cheques clearing and agency banking increasing interest earnings, deposit interest increase and increase to a great extent level of Non funded Income. The study concluded that there existed a strong significant correlation between online banking, Mobile banking, Automated Cheques clearing and Value of sector RTGS commercial banks in Kenya. Based on the findings and conclusions of the study the following recommendations have been suggested in relations to financial innovations. There is need for commercial banks in Kenya to adopt new financial innovations such as Mobile banking, Online banking, since this has provided the benefit of constant access to certain core services reducing the need to interact with bank staff for many people