The Effect of Financial Deepening on Financial Performance of Financial Institutions in Kenya

Abstract

The objective of the finding was to determine the effect of financial deepening on the financial performance of financial institutions in Kenya. The findings comprised of 50 financial institutions operating in Kenya registered by Central Bank of Kenya. The findings used a secondary data covering from the period 2015 to 2016, this period indicated an era of development of financial institutions and financial liberalization in Kenya. Data was collected from Central Bank of Kenya, websites of licensed Commercial banks in Kenya, Kenyan Capital Markets Authority, Kenya National Bureau of Statistics, Insurance Regulatory Authority and Nairobi Securities Exchange. Descriptive statistics was used to analyse using descriptive statistics including mean and standard deviation by use of the relevant computer packages such as Microsoft Office Excel and Statistical Package for Social Sciences (SPSS) program. The Spearman’s Correlation Coefficient (Rsp) was used to establish the strength of the relationship between the variables, and the relationships’ linearity. The Spearman’s Correlation Coefficient used correlation coefficient (r) which is a measure of degree to which two variables are related and can range from 0 to +1 of positively correlated and 0 to -1 if negatively correlated. The significance value (0.00) of the F-test statistic is less than the level at which the hypothesis test was done. Regression model significantly predicted the finding. The findings indicated that financial innovations and credit accessibility explain a large part of the variation in the financial institutions’ return on assets; these two variables explain up to 39% of the variation in performance. Financial innovation and credit accessibility have a significant effect on the return on assets of financial institutions. Financial institutions that maintain high levels of investment in innovation have been able to exploit emerging market opportunities. Some opportunities allow for the reduction in the costs of operations, while others make it possible for financial institutions to serve their customers in new ways, or to meet needs that the market has not met before. The findings recommends that financial institutions should increase their investment in activities that spur financial innovation High investment in financial innovation will allow the financial institutions to serve their customers better, or to reach new market segments that have unmet needs.