The Effect of Financial Product Innovation on Financial Performance of Commercial Banks in Kenya

Abstract

Banking services in Kenya have evolved over time in order to introduce a set of innovations. It has evolved from the conventional banking to a high tech model of banking business. This has been due to the changing needs of the clients and the move towards a global economy and its associated demands. The objective was to determine the effect of financial product innovation on financial performance of commercial banks in Kenya. Descriptive design was used and the study population was 42 commercial banks. One commercial bank was under statutory management and two banks were in receivership. Secondary data was gathered from bank annual supervision reports from CBK as well as the audited financial records for 39 commercial banks for 5 years (2013-2017). The independent variable was financial product innovation where as the dependent variable was financial performance. The control variables were asset quality and capital adequacy. Regression analysis was conducted using SPSS. The findings revealed an insignificant negative relationship between ROA and the proportion of revenues from cheques and EFTs cleared through ACH to total bank revenue. The findings also revealed an insignificant negative relationship between ROA and agency banking. The findings further revealed an insignificant and negative relationship between ROA and Asset quality and finally, a significant and positive relationship between ROA and capital adequacy was also revealed. The researcher concluded that financial product innovation had a meager contribution on commercial banks’ performance during 2013-2017. The study recommended that information about financial product innovations should be availed to the regulators who can use it to carry out in-depth analyses of the relationship between banks’ performance and the financial product innovations that are introduced or modified from time to time in the financial sector in order to offer guidance to commercial banks together with other financial institutions in regard to the effect of these innovations on the banks’ performance.