Effect of Financial Innovations on Banks’ Return on Assets and Equity: A Case of Commercial Banks in Kenya

Abstract

Purpose: The study sought to investigate the effect of financial innovation on banks’ return on assets and return on equity in Commercial Banks in Kenya. The main problem was that banks have implemented financial innovations, but the influence it has on financial performance has not been exhaustively and extensively evaluated especially in the emerging LDC markets. The effect it has on Return on Assets and Return on Equity remains unclear. Methodology: This study adopted Pragmatic research philosophy. The choice of philosophy was determined by the research problem. The study was based on correlational research design. The study area was Kenya, focused on its Commercial banks. The target population comprised of all of the 42 commercial banks licensed by the Central Bank of Kenya. Purposive sampling technique was used to obtain a sample of 12 CMA / NSE listed banks. Secondary data from individual bank level, CMA and the CBK for the period 2007 to 2017 was used. The data analysis was based on fixed effect, random effect models or pooled regression of panel data analysis. Results: The findings of the study indicated that financial innovations had higher correlation with, and influence on ROA as indicated by overall R-squared of 0.5134. This means that the financial innovations under study had 51.34% influences on return on assets, holding all other factors constant. The overall R-squared for ROE was 0.2077. This means that on financial innovations studied had 20.77% influence on return on equity. Thus, there is positive and significant effect between financial innovations and Return on Assets and Return on Equity. Positive effect is an indication that if commercial banks in Kenya increased their asset and equity levels, their profitability as measured by ROA and ROE would improve. The study therefore finds the relevance of technology in improving performance of commercial banks in the country. Based on the findings, the study concluded that it is important for commercial banks in Kenya to continue investing in cost- effective technology to remain competitive in the industry. Unique contribution to theory, practice and policy: The study recommended that Commercial banks should implement effective financial innovations that would positively influence ROA and ROE. The findings of this study shall assist commercial banks and related financial institutions to monitor outcomes including effects of financial innovations with projections for profits as well as higher returns on ROA, ROE. It shall guide academic reference and policy making.