Effect of Financial Innovations on Banks’ Loan Portfolio: A Case of Commercial Banks in Kenya

Abstract

Purpose: The study sought to investigate the effect of financial innovations on loan portfolio of Commercial Banks in Kenya. The main problem was that even though banks have implemented financial innovations, the level of loans uptake in terms of volume and quality remains unclear as indicated by opposing findings by different studies. Most past studies on Kenya have covered relatively shorter study periods which may not reliably capture the financial trends, more so given the short shelf life of financial studies caused by rapid changes in the financial sector.   Methodology: This study adopted Positivism philosophy. It was based on correlational research design. The target population for the study comprised of all of the 42 commercial banks licensed by the Central Bank of Kenya to provide financial and other banking services in Kenya. Purposive sampling technique was used to select the sample of 12 CMA / NSE listed banks. Secondary data was used. They were obtained from audited financial reports of listed commercial banks, CMA and the CBK in the period 2007 to 2017. The data was analyzed using fixed effect and pooled regression of panel data analysis. Results: The findings of the study indicated that there is positive and significant effect between financial innovation and loan portfolio of commercial banks. The findings indicated that the overall R-squared was 0.5928. This means that on average, 59.28 percent of all variations in loans are explained by financial innovation, holding all other factors constant. This indicates that if the banks in Kenya implemented more financial innovations, the financial performance measured by loan portfolio would increase. Based on the findings, the study concluded that commercial banks have implemented technological innovations in various areas such as EFT, Branch networking and Mobile banking which have improved the banks’ loan portfolios. Unique contribution to theory, practice and policy: The study recommended that Commercial banks should adopt financial innovations that would positively influence loan portfolio. It shall signal the government, policy institutions, industry players and stakeholders to re-strategize finance-oriented innovations with the view to improve policy framework in order to streamline the financial sector, especially banking. The study offers literature and data for academic reference as well as guidance for investment by banks and other investors