Uptake of Digital Organizational Innovations on Financial Performance of Commercial Banks in Kenya

Abstract

The rapid evolution of digital innovations has globally transformed the banking sector, with commercial banks in Kenya experiencing significant operational changes driven by these advancements. Despite the substantial benefits associated with digital innovations, there remains a gap in understanding the precise influence of organizational innovations on the financial performance of commercial banks. This gap is exacerbated by a lack of comprehensive empirical studies that systematically examine the relationship between digital organizational innovations and financial performance within the Kenyan banking sector. Navigating the dynamic regulatory landscape poses a significant challenge as the industry strives to balance innovation with compliance, thereby potentially dampening the enthusiasm of commercial banks to fully embrace transformative digital initiatives. This study aimed to assess the influence of digital organizational innovations on the financial performance of commercial banks in Kenya, the Evolutionary Theory of Economic Change was used to assist in explaining the objective. Adopting a positivist philosophy, the study targeted a population of 1,470 employees across 39 commercial banks in Kenya, utilizing a stratified random sampling technique to select a sample size of 315 participants, including senior management, supervisory management, and junior officers. A descriptive research design was employed, using structured questionnaires to collect primary data, while secondary data was sourced from banking sector supervisory and innovation survey reports. A pilot test was conducted to estimate reliability using Cronbach’s Alpha, and content validity was assessed with the Kaiser-Meyer-Olkin measure and Bartlett’s test of sphericity. Descriptive analysis was presented using frequency tables and bar graphs. A panel linear regression model was applied, revealing that 76% (R²=0.761, F=822.691, P˂0.0001) of the variations in return on equity (ROE) for commercial banks were explained by digital organizational innovations. The findings demonstrated a positive and significant correlation between the adoption of digital innovations and the financial performance of commercial banks (P˂0.05). The study recommends that commercial banks explore new business models through access to innovative technologies, foster strategic collaborations, and remain aligned with regulatory requirements to enhance financial performance significantly. Embracing a culture of experimentation and agile management policies can help flatten hierarchies that inhibit innovation. Policymakers are encouraged to provide clear guidelines and a harmonized regulatory environment to foster enthusiasm for transformative digital initiatives. The study's findings may not generalize to other industries or geographical contexts due to variations in regulatory frameworks, market structures, cultural norms, and technological infrastructure. Consequently, the study proposes comparative research across diverse contexts to assess the generalizability of these findings.