Effect of Financial Innovations on Efficiency of Commercial Banks in Kenya

Abstract

Kenyan banks have embraced ATMs, POS, mobile banking, internet banking, agency banking and card business. Financial innovations are being used as a tool to cut cost, increase efficiency, deliver product varieties, and increase flexibility or for the mere purpose of being perceived as technology leader. Today, bank customers’ enjoy efficient, convenient and fast banking services conveyed through financial innovations such as mobile banking, online banking and ATMS. This study sought to determine the effect of financial innovations on efficiency of commercial banks in Kenya. The study’s population was all the 42 commercial banks operating in Kenya. Financial innovation in this study was the independent variable and was measured by the natural logarithm of total value of transactions through financial innovations (mobile banking, internet banking and agency banking). The control variables were liquidity as measured by the current ratio, firm size as measured by natural logarithm of total assets and capital adequacy as measured by ratio of loans and advances to assets total per year. Efficiency was the dependent variable which the study sought to explain and it was measured by the ratio of total revenue to total assets. Secondary data was collected for a period of 5 years (January 2013 to December 2017) on an annual basis. The study employed a descriptive cross-sectional research design and a multiple linear regression model was used to analyze the association between the variables. Data analysis was undertaken using the Statistical package for social sciences version 21. The results of the study produced R-square value of 0.172 which means that about 17.2 percent of the variation in the Kenyan commercial banks’ efficiency can be explained by the four selected independent variables while 82.8 percent in the variation of efficiency of commercial banks was associated with other factors not covered in this research. The study also found that the independent variables had a weak correlation with efficiency (R=0.415). ANOVA results show that the F statistic was significant at 5% level with a p=0.000. Therefore the model was fit to explain the relationship between the selected variables. The results further revealed that liquidity produced positive and statistically significant values for this study. The study found that financial innovations, capital adequacy and bank size are non-statistically significant determinants of efficiency of commercial banks. This study recommends that measures should be put in place to enhance liquidity among commercial banks as this will improve their efficiency.