Effect of Financial Innovation on Firm Performance of Microfinance Banks in Kenya

Abstract

The study sought to determine the effect of financial innovation on firm performance of microfinance banks as they are banking sector key players for low and medium income earners in Kenya. The research consisted of 3 departments from 13 microfinance banks regulated by the CBK. Both primary and secondary data were employed in the study. The predictor variables were product, process and institutional innovation; response variable was firm performance of the MFBs while the control variable was the size of the firm. The annual performance publications for the years 2015-2017 constituted the secondary data, while primary data was gathered through questionnaires.The summary of data collected was done by descriptive statistics while the T and F tests were performed to measure the accuracy of the data. Correlation and regression analysis were conducted to establish the association between financial innovation, size and firm performance. According to the findings, product innovation indicated that respondents were in agreement with all the constructs of product innovation. On Customers using online loans in the MFB had a mean of 4.28; the microfinance bank having Forex Services had a mean of 4.23, Customers using money transfers had the highest mean of 4.72. Respondents also indicated that their customers pay utility bills using bank products with average mean of 4.49. On process innovation, the research findings indicated that the respondents agreed with all constructs of process innovation. Implementation of ATM transactions had a mean of 4.62, agent banking transaction implementation had a mean of 4.46 while mobile and internet banking implementation by microfinance had mean of 4.36 and 4.36 respectively. Therefore,on the basis of the results, it is clear that microfinance banks have implemented various process with latest technologies. Respondents in regards to institutional innovation indicated that the indicator of having an active agency banking platform had a mean of 3.8 while the respondents indicated that banks had increased branches in strategic places had mean of 3.79. Utilization of Credit reference bureau services had a mean of 3.9, offering Islamic banking services had the least mean of 3.69 which was an indication that this service is not fully implemented by MFB. Lastly, the respondents’ findings indicated that MFB offer products to specific market niche with a mean of 4.13. According to these findings, financial innovation indeed affects firm performance of micro finance banks.The ANOVA model also revealed an adjusted R2 of 19.2% which was coefficient determination. The adjusted R-square implied that 19.2% of the total variance of firm performance is explained by the model. This means that 80.8% of the total variance of firm performance cannot be explained by the model.