Effect of Digital Credit on Financial Performance of Financial Sector in Kenya

Abstract

The financial sector is effective in mobilizing savings and distributing the finances across the board in credit form. The sector enables households and companies to well cope with uncertainties that arise at any given economy by way of pooling, sharing risks, hedging as well as pricing risks. On this regard, an efficient financial sector will minimize the risk and cost of production for goods and services, as a` result improve the standard of living. However, the performance of the financial sector has for some time been at stake. The objective of the research was to determine the effect of digital credit on the financial performance of the financial sector in Kenya. The design that was used here was descriptive. The target population was the 37 financial sector players as listed in the Kenya Banking Industry Report. Sampling was not done but a census for all the 37 financial institutions was used. The research gathered quantitative secondary data. The data for the total amount of digital credit extended to customers, the total number of transactions, and the interest rates charged on the credits, was collected to address the digital credit variable while data for the capital adequacy ratio and liquidity ratio formed the intervening variables. The financial performance data was collected in form of total ROA for all the 37 financial institutions. Data collected was on quarterly basis for a period of 6 years from 2015-2020. Statistics such as standard deviation and mean were employed to examine responses provided for the variables. Trend analysis was also conducted to show how digital credit has been changing from the year 2015-2020. Further, correlation and multiple linear regression analysis was conducted to show the association between digital credit and financial performance. The findings of the study found that the number of digital credit transaction, amount of digital credit, interest rates, total capital, total assets, total deposits, total loans and ROA for the players in the financial sector in Kenya experienced an increase for all the 24 quarters in the five years under study that is 2015-2020. The correlation results established a useful correlation between the research independent variables that is total amount of digital credit, total digital credit transactions, interest rates, liquidity ratio and ROA but a negative correlation between capital adequacy and ROA. The regression analysis results further showed that the variables total amount of digital credit, total digital credit transactions, interest rates and liquidity ratio positively and significantly relate with ROA. However, the relationship between capital adequacy and ROA was negative but significant. The research suggest that the financial sector players should use the strategies that will see to it that they continue to improve the amount of digital credit they extend to customers. The study also recommended the government through the financial sector regulator to come up with polices that will help the financial players to improve their performances in terms of digital credit.