Effect of Financial Innovations on Financial Performance of Commercial Banks in Kenya

Abstract

The use of financial innovations by the financial sector has increased drastically around the world. Bank processes including trading stocks, offering new products, handling the internet and electronic payments, and incurring costs have all benefited from the enhancement. Consequently, the quality of banking services given globally has improved. This research sought to bring out the effect of financial innovations on the financial performance among commercial banks in Kenya. The research established the effect of mobile banking, internet banking and agency banking on financial performance among banks in Kenya. Capital adequacy, asset quality and bank size were used as the control variables in the model. Descriptive research design was used. The target population was the banks in Kenya. There are 38 banks in Kenya as at 2020 but only 37 provided complete data set. Research variables data were derived from CBK and audited bank's annual financial statements from 2016 to 2020 for all 37 banks making 185 observations. Regression and correlation analysis were used to test the study hypotheses by establishing the relationship between financial innovations and ROA. The study found that mobile banking (β=0.113, p=0.000), internet banking (β=0.133, p=0.000), agency banking (β=0.106, p=0.008) and bank size (β=0.411, p=0.000) had a positive and significant relationship with ROA among banks in Kenya. Asset quality has a significant negative effect on ROA (β=-0.506, p=0.000) while capital adequacy was not statistically significant. The results also indicated R2 of 0.447 which implied that the selected independent variables contributed 44.7% to variations in ROA. The study recommends the need for policy makers to provide a conducive environment for banks to undertake financial innovations as this enhances their financial performance. Managers and directors of commercial banks should also work on improving their financial innovations coverage in an attempt to enhance their performance and to remain competitive in the ever changing environment.