INFLUENCE OF FINANCIAL INNOVATION ON PROFITABILITY OF COMMERCIAL BANKS IN KENYA

Abstract

The main purpose of this study was to examine the influence of financial innovation on profitability of commercial banks in Kenya. Commercial banks are engaging in financial innovation as a response to the complexity of the ever-changing business environment characterized by uncontrollable events and technological advancement. The general objective of the study was to examine the influence of financial innovation on profitability of commercial banks in Kenya. The specific objectives were to determine the influence of financial product innovation, financial process innovation, financial marketing innovation and organizational innovation on the profitability of commercial banks in Kenya. Theories applied in the study were Transaction Cost theory, Abernathy and Utterback theory, Diffusion of Innovation theory and Financial Intermediation theory. The study adopted descriptive design, with a target population of 102 respondents and sampling size calculated using Krejcie and Morgan formula to determine the sample size of 77. Primary data was collected by administering structured questionnaires on senior management whereas secondary data was obtained from published CBK’S annual reports for a five-year period between 2018 and 2022. The reliability of data collection instrument was accepted at Cronbach’s reliability coefficient of 0.8. All the diagnostic tests done including normality test, autocorrelation test, multicollinearity test, linearity and heteroscedasticity test confirmed the reliability of the regression model. Statistical analysis was carried out using SPSS Statistics for Windows, version 27 and data presented using tables and graphs. Hypothesis testing was done using multiple regression with the results revealing that all the four innovation factors have a positive and significant influence on profitability. The R square results of .746 indicated that independent variables explain 74.6% of the variations in dependent variable. The study therefore recommended that there is need for bank managers to continuously invest in developing new products and processes as they increase bank incomes. Additionally, financial experts to use the study findings in advising managers on the ideal business model and structures that greatly reduce costs hence increasing profits.