Effect of Financial Innovation on the Financial Performance of Commercial Banks in Kenya

Abstract

This study aimed to examine the influence of financial innovations on the financial performance of commercial banks in Kenya. This research used descriptive design since helped in the description of the phenomena under study. The study population encompassed the 43 registered Kenyan commercial banks CBK (2016). This research relied on the secondary data sourced from the printed financial reports in the websites of the commercial banks because the secondary data is readily available. Secondary data was collected, coded and tabulated according to each dependent and independent variable and analyzed using the descriptive statistics in terms of the mean values. For the appropriateness of data for the key assumptions of classical linear regression model the following diagnostic test was carried out; Kurtosis as well as Skewness of the distribution of data was used to test for normality, multicollinearity was established by variance inflation factor and correlation coefficient, heteroscedasticity was measured by the weighted generalized least square to establish the relationship. An F- test at 5% significance level was done to determine how strong the model is, and the influence of financial innovation on the financial performance of commercial banks. The objective of the research aimed at establishing the influence of financial innovation on the financial performance in Kenyan Commercial Banks. The section was important to understand how the Kenyan Commercial Banks performed due to changes in their financial innovation. The study evaluated the impact of changes in intangible asset ratios and financial expenditure on research and development as an indicator of financial innovation with organizational size being the control variable and correlated the changes with the changes on ROA. The analysis on the aggregate summary the average intangible asset ratio, return on assets, and R&D ratio with the organizational size measured in terms of log of total assets being the control variable for the Commercial Banks in Kenya for the 10-year period. The research was a comparative study that compares the performance of the Kenyan Commercial Banks and financial innovation. A trend analysis of the growth rate of financial performance indicators was undertaken to establish the change in financial performance and correlated with the changes in Research and Development and growth in intangible assets for Commercial Banks in Kenya. The variables measured included changes Intangible asset ratio, total changes in ROA, changes in Research and Development ratio and change in size of individual organization for Commercial Banks in Kenya. A comparison of the mean and annual growth rates financial performance in comparison with Research and Development ratio for appropriate was undertaken to determine the change in financial performance. The study findings indicate that because of the improvement in financial innovation; financial performance of the Kenyan Commercial Banks have improved. Chi-square test was employed to establish the degree and nature of link between independent variable and the dependent variable. The chi-square test and the regression suggested that the variables in the model are key in establishing the financial performance of Kenyan Commercial Banks. The results indicate that improvement in financial innovation positively enhances finance performance therefore, we conclude that an improvement in financial innovation enhances the financial performance of Kenyan Commercial Banks.