Financial Innovation and Its Effects on Bank Financial Performance: Evidence from Ethiopian Commercial Banks

Abstract

The objective of this study is to evaluate financial innovations and their impact on the financial performance of commercial banks. To this end, descriptive and diagnostic research designs with a qualitative approach were used. To collect primary data, the researcher used a questionnaire. The questionnaires were prepared in Likert-scale format. The study examined the validity of the data collection instruments by testing content, convergent, and discriminant validity. Content validity was ensured by reviewing the relevant literature and conducting pilot tests with the data collection instruments. By testing the value of factor loadings, Cronbach's alpha, composite reliability, and average variance extracted (AVE), convergent validity was established. The Fornell-Larcker criterion, heterotrait-monotrait ratio (HTMT), and cross loadings were used to test discriminant validity. The study used purposive sampling techniques to select 18 commercial banks that have a high reputation and have invested heavily in financial innovation. On the other hand, convenience sampling was used to select 1,249 branches of commercial banks. Pearson correlation, analysis of variance, and multiple regression analysis were performed to determine both the nature and strength of the relationship between financial innovation and financial performance. Findings indicate that mobile banking, online banking, and agency banking have positive and statistically significant effects on the financial performance of commercial banks. This implies that financial innovations have positive and significant effects on the financial performance of commercial banks.