EFFECT OF FINANCIAL INNOVATION ON FINANCIAL PERFORMANCE IN COMMERCIAL BANKS IN KENYA

Abstract

Despite the undeniable importance of financial innovation in explaining banking performance, 
the impact of innovation on performance, is still misunderstood for two main reasons, first, there 
is inadequate understanding about the drivers of innovation and secondly innovations‟ impact on 
bank‟s performance remains lowly untested. Kenyan commercial banks have continued to deploy 
huge investments in technology-based innovations and training of manpower to handle the new 
technologies. The main objective of this study was to establish the effect of financial innovations 
on financial performance of commercial banks in Kenya. The specific objectives were: To 
determine the effect of financial process innovation on the financial performance of commercial 
banks in Kenya; To evaluate the effect of financial market innovation on the financial 
performance of commercial banks in Kenya; To assess the effect of financial product innovation 
on the financial performance of commercial banks in Kenya; To ascertain the effect of financial 
institution innovation on the financial performance of commercial banks in Kenya.A descriptive 
survey design was used while a questionnaire was used to gather primary data. Secondary data 
was used to validate the communicative and pragmatic validity of primary data. The target study
units for this research were 126 randomly selected staff of commercial banks. Descriptive 
statistics, Pearson correlation and multiple regression analysis methods will be applied. Statistical 
analysis will be done with the aid of Statistical Package of Social Sciences (SPSS v.23) software.
On financial process innovation the study results showed that asset securitization improves 
profitability and assets quality for commercial banks in Mombasa County. That commercial 
banks in Mombasa County have innovated risk mitigating instruments to reduce assets risk 
exposure and this increase returns on investment from better assets. On financial institution 
innovation, the study findings revealed that agency banking improves banking efficiency by 
increasing customers deposits while keeping operational cost at a minimum low. Similarly, 
internet banking and mobile banking helped commercial banks to leverage on operational 
efficiency with a great customer experience. On financial product innovation, the study findings 
established that innovations around banking products such as mortgages and mobile banking 
helps in deepening relationships with existing customers as well as the new one for use of other 
bank products such as loans applications thus increasing revenues and profits. On financial 
market innovations the study results revealed that commercial banks that blended their products 
with those of capital markets were more likely to have an increased profitability and returns on 
investment because they would be holding as deposits monies used to buy shares and other 
instruments. Concluded that financial process innovation, financial institution innovation and  financial markets innovations have no effect on financial performance of commercial banks in 
Mombasa County. Recommended that commercial banks shall innovate processes that will 
reduce operating costs; that commercial banks shall innovate processes that are user friendly and 
that commercial banks shall innovate and blend products that can give clients wider uses such as 
insurance and capital markets.