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

Abstract

Purpose: The study sought to investigate the effect of financial innovations on financial performance of commercial banks in Kenya. The main problem was that there is an increase in the number of financial innovations, but whether the innovations in banking industry are the main determinants of financial performance is a hard to tell. Despite the significance of financial innovation, the effect of innovation on financial performance is still misunderstood.Methodology: The study adopted an explanatory research design. The population of the study was all the 43 commercial banks operating in Kenya in the study period. The study conducted a census on all the 43 commercial banks. The study used primary data. An ordinary linear regression model was used. The regressions were conducted using statistical package for social sciences (SPSS) version 20.Results: The study findings indicated that there is a negative and significant relationship between product innovation and ROA. The relationship between service innovation and ROA and also organizational innovation and ROA was found to be positive and significant. Based on the findings, the study concluded that commercial banks in Kenya in the study period had unsteady trends in ROA despite the fact that more financial innovations were taking place in the sector. The study also concluded that the relationship between product innovation and financial performance of commercial banks is negative and significant. Based on the study findings, the study also concluded that the relationship between service innovation and ROA and also organizational innovation and ROA is positive and significant.Unique contribution to theory, practice and policy: The study recommended that Commercial banks should implement effective product innovation strategies that won’t increase their operational risks which in turn affects their financial performance. The study also recommended that commercial banks should focus more and invest more in both service and organization innovation as the two will lead to better financial performance.