Financial Innovation and the Performance of Commercial Banks in Kenya

By: Osman Noor Ahmed, Dr. Lucy Wamugo


There has been slow growth in the profitability of commercial banks as a result of increased operating expenses as these banks transition to more innovative products. Local banks have been experiencing great losses and have not been able to realize more earnings as a result of competition from local mobile service transfer services like Mpesa and Airtel Money hence lowering their performance through low returns to investments action errors have reduced banks’ credibility hence profitability. This study therefore sought to investigate the effect of financial innovation on the performance of commercial banks in Kenya. The study was founded on the resource based theory, the transaction cost innovation theory and the constraint-induced financial innovation theory. The study adopted a descriptive research design. The study targeted all the 16 commercial banks which have embraced all the financial innovations under the study in Kenya. The study used primary data collected using structured questionnaires which were administered to the senior management employees and secondary data obtained from the Central Bank of Kenya Bank Supervision reports. Descriptive statistics were used to describe the quantitative data. Pearson’s correlation, analysis of variance and multiple regression analysis were used to establish the relationships among the study variables. The study found that agency banking, mobile banking, internet banking as well as ATM banking had a positive and statistically significant effect on the performance of commercial banks in Kenya. Based on the study findings, the study concluded that financial innovations namely agency banking, mobile banking, internet banking as well as ATM banking affected the performance of commercial banks positively and significantly through various channels such as increased profitability, reduced costs of banking and other infrastructural costs, increased productivity and efficiency, increased customer outreach and customer relationship management, increased accessibility to services as well as quality of services. The study recommends that commercial banks should expand the number of ATM outlets even as they expanded their bank branches; they should increase customer sensitization on the use of internet banking through making the aware of the benefits and how they can use them in making their banking transactions safely; they should increase the number of bank services and products provided by agency outlets since the number of customers using these outlets had continued to increase significantly over the years and that banks should invest adequate capital and knowledge resources towards improving existing financial innovations.

Key Words: Financial Innovation, Innovations, Financial Performance, Commercial Banks in Kenya

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This is an open-access article published and distributed under the terms and conditions of the  Creative Commons Attribution 4.0 International License, United States unless otherwise stated.

About the Authors:

  • Osman Noor Ahmed– Correspondent Author, School of Business, Kenyatta University
  • Dr. Lucy Wamugo-Lecturer: Accounting and Finance Department, School of Business, Kenyatta University