Effect of Financial Innovation on Economic Growth: a Case of Mobile Telephony Firms in Kenya

Abstract

The study investigated the effect of financial innovation on economic growth: a case of mobile telephony firms in Kenya. The key research concern was whether financial innovations by these firms could have an impact on Kenya’s economy. Financial innovation was determined through mobile banking, mobile money transfer and mobile money agency, whereas interest rate and public expenditure were control variables for the study. Secondary data was obtained from repositories from Central Bank of Kenya, Communications Authority of Kenya and Kenya National Bureau of Statistics. The data covered the last 10 years, 2011 to 2020. The descriptive data analysis computed the mean, standard deviation, skewness and kurtosis of the data. In order to visualize the data changes over time, trend analysis was employed by representing the data graphically. Correlation analysis on the other hand assessed the level of association between financial innovation measures and economic growth as measured by percentage change in GDP. Regression analysis was used to determine whether financial innovations influence economic growth. Significant findings emerged. Mobile banking (r=0.472, p=0.006), Interest rate (r=-0.316, p=0.004) and public expenditure (r=.435. p=0.013) are significantly associated with economic growth. The regression results indicated that mobile banking is one of the financial innovation proxies that enhance economic growth (β=0.233, p=0.000). Interest rates significantly suppress economic growth (β= -.157, p=0.015), while public expenditure supports economic growth to a significant extent (β= 0.201, p=0.034). Thus financial innovation tools are potential drivers for economic growth in Kenya. The significant variables in the study account for 18.9% (R2=0.189) of Kenya’s Economic fluctuations. The study suggests that mobile telephony firms in Kenya should scale up their operations in mobile banking, mobile money transfer and mobile money agency services to spur growth. There is also need for more budgetary allocations to the ICT sector by giving incentives to innovators in the mobile telephony sector.