The Relationship Between Financial Innovations and Financial Performance of Commercial Banks in Kenya

Abstract

The current financial crisis in Kenya's banking sector, notably the collapse of Imperial Bank, followed by the problem of Chase Bank, may be related to the increased competition in the financial sector. Competition from Safaricom plc financial services (M-pesa and Mshwari) has resulted in a dramatic shift in the banking sector's profitability as a consequence of this new competition. Therefore, there in need for constant investment and innovations by banking institutions for them to retain and attract new customers while enhance their performance. Commercial banks in Kenya have improved their financial performance by implementing new financial innovations, according to this report. The research concluded that Kenyan banks' financial performance was affected by mobile banking, online banking, agency banking, and electronic payments transfers. In the model, the size of the bank was employed as a variable to regulate. This study made use of descriptive research methods. Banks in Kenya were the target audience. As of 2020, there were 41 banks in Kenya, and each one supplied the information requested. Financial innovation was studied via an in-depth survey that drew on information from the CBK as well as audited bank annual financial statements from 2016 to 2020. Hypotheses were investigated using regression and correlation analysis to uncover a connection between financial innovation and ROA. The R2 was 0.904, which suggested that the chosen independent variables were responsible for 90.4 percent of the variance in ROA variation. Moreover, the results show that even if all other variables remain constant, ROA will fall by 0.612 shillings. The ROA is increased by 0.523 shillings per unit of mobile banking usage while all other variables are maintained constant. ROA is increased by 0.543 shillings per unit usage of internet banking when all other circumstances are equal. While other conditions remain unchanged, a single usage of agency banking boosts the ROA by 0.506. The ROA rises by 0.601 shillings while the size of the bank remains unchanged. Financial performance has benefited greatly from the company's decision to make an investment in financial innovation. No significant influence on ROA was seen with EFT. The research advises that policymakers create an atmosphere that encourages banks to experiment with new financial products, which improves their financial performance. Managers and directors of commercial banks should also work on improving their financial innovations coverage in a bid to enhance their performance and to remain competitive in the ever changing environment.