Effect of Financial Innovation on the Profitability of Public Commercial Banks in Kenya

Abstract

The study was aimed at assessing the effect of financial innovation on the profitability of public commercial banks in Kenya as key contributors to the economy, covering a 12-year period. The Kenyan financial sector has experienced fast-paced financial innovations accelerated by technological advancements. However, the contribution of such efficient financial systems towards bank profitability is not always positive due to some cases of reverse causality between financial innovation and profitability. The research study employed a causal research design, with the population of study being the entire 3 public commercial in Kenya as at 30th June 2018. Sampling was not applied due to the small population size. Secondary data was obtained from CBK’s published annual reports. Dependent variable was consolidated profitability while the independent variable was consolidated financial innovations within the banks. Study results revealed that some financial innovations positively impact on the profitability of public commercial banks in Kenya. There is a positive correlation between profitability of public commercial banks and Automatic Teller Machines and Real Time Gross Settlements. However Mobile banking is negatively correlated to bank profitability. Some financial innovations are adopted by the banks for reasons of customer retention due to the efficiency and cost saving they provide to customers, not necessarily for bank profitability purposes. This is explained by the increasing provision of mobile banking services despite the negative effect on bank profitability. Mobile banking comes with less bank income as compared with traditional payment systems. Over time, the use of mobile banking has steadily increased, reducing and replacing the less efficient legacy financial systems; ATMs and RTGS as evidenced by the negative correlation between ATM / RTGS transactions and Mobile Banking. Development and implementation of even more efficient financial payment systems should be advocated for, but with the necessary regulatory frameworks in place. This will accelerate improved profitability, general financial performance in the banks hence contribute to increased economic growth.