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