The relationship between financial engineering and financial performance of commercial banks in Kenya
Under modern business conditions, financial engineering activities are considered as the driving force behind business success. Universal trend such as globalization, liberalization and technological change has meant that banks have to continuously re-engineer themselves to remain competitive. The objective of this study was to investigate financial engineering and its effect on financial performance of commercial banks in Kenya. This study used a causal research design. The population of interest in this study comprised commercial banks in Kenya. There were 43 operating commercial banks in Kenya as of December 2009. Primary data was collected using a questionnaire with close ended and open ended questions administered to the management staff of the commercial banks. The targeted respondents were senior, middle and low management staff in the respective banks. Secondary data was obtained from annual reports of commercial banks as well as from the annual reports of the Bank Supervision Department of the Central Bank of Kenya. A descriptive analysis technique was employed. The findings were presented using tables and charts. The commercial banks in Kenya were found to have adopted various financial engineering strategies such as technological innovation, product innovation, process innovation as well as market innovation. The financial engineering strategies were found to have a positive impact on the financial performance of commercial banks in Kenya. The research established that that taking all other independent variables at zero, a unit increase in technological innovation will lead to a 0.205 increase in financial performance (Return on Assets). A unit increase in product innovation will lead to a 0.169 increase in thefinancial performance (Return on Assets); a unit increase in market innovation will lead to a 0.156 increase in financial performance (Return on Assets) while a unit increase in process innovation will lead to a 0.128 increase in financial performance (Return on Assets). This therefore technological innovation contribute more to the financial performance (Return on Assets) of the bank, while process innovation contributes the least to financial performance (Return on Assets). Financial engineering brings in various benefits; the most important being improved customer service, market expansion and increased return on investment. The study recommends that commercial banks in Kenya need to employ various financial engineering strategies to enable them to be more competitive grow faster and earn better return on investments.