Effect of Financial Innovations On Financial Perfomance of Commercial Banks

THE EFFECT OF FINANCIAL INNOVATION ON FINANCIAL PERFORMANCE:
A CASE OF COMMERCIAL BANKS IN KAKAMEGA COUNTY.
RESEARCH PROJECT SUBMITTED TO THE DEPARTMENT OF ACCOUNTING

AND FINANCE, MASINDE MULIRO UNIVERSITY OF SCIENCE AND
TECHNOLOGY IN PARTIAL FULFILMENT FOR AWARD OF THE DEGREE OF
BACHELOR OF COMMERCE, FINANCE OPTION.
MAY,2022.
DECLARATION
We declare that this research proposal is our original work and free from all forms of writing
misconducts and has never been produced in any institution.
MEMBERS Signature
BRONIX ONYANGO BCM/B/01-00371/2018 ………….
VICTOR SWAKA BCM/B/01-00226/2018 ………….
MUTUKU J KUMBU BCM/B/01-00195/2018 ………….
HANNAH WANJIKU BCM/B/01-00279/2018 ………….
SHARON WASWA BCM/B/01-00332/2018 ………….
NDINDA TABITHA BCM/B/01-00238/2018 …………
BENEDETA MBUTE BCM/B/01-00185/2018 ………….
MUTISYA JULIUS BCM/B/01-02456/2018 ………….
This research project has been submitted for examination with approval of the university
supervisor.
SIGNATURE: .................... DATE: ……………
DR MULI W. MAINGI
SCHOOL OF BUSINESS AND ECONOMICS
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DEDICATION
Special dedication to Masinde Muliro University Fraternity for all the knowledge and skills
imparted on us in research and all areas of learning. To our classmates and friends for their
cooperation and support academically while conducting the research. Not forgetting, this
proposal is dedicated to our beloved parents, who have been our source of inspiration,
finances and emotional support all through. Their prayers kept us moving when we thought
we couldn't make it.
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ACKNOWLEDGEMENT
The completion of this research could not have been possible without the participation and
Input of so many joint forces whose names may not all be documented. Their contribution is
sincerely appreciated and gratefully acknowledged. However, the group would like to express
their deep gratitude and indebtedness particularly to the following; we acknowledge the work
of our lecturer Dr. Muli W. Maingi for guiding us in writing this research proposal. We also
acknowledge our fellow classmates for providing conducive learning environment all
through. We cannot express enough thanks to our parents for their continued support
financially, encouragement and motivation throughout the period.
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TABLE OF CONTENTS
DECLARATION....................................................................................................................... i
DEDICATION..........................................................................................................................ii
ACKNOWLEDGEMENT ..................................................................................................... iii
ABSTRACT .......................................................................................................................... viii
CHAPTER ONE ...................................................................................................................... 1
1.1 Background of the study ................................................................................................... 1
1.1.1 Financial innovation ...................................................................................................... 2
1.1.3 Financial Innovation and Financial performance .......................................................... 4
1.1.4 Commercial banks in Kenya ......................................................................................... 5
1.3 Research Objectives .................................................................................................... 7
1.3.1 General Objective .................................................................................................... 7
1.5 Scope of the Study....................................................................................................... 7
1.6 Significance of the Study ................................................................................................. 7
CHAPTER TWO ..................................................................................................................... 9
2.1 Introduction ....................................................................................................................... 9
2.2 Theoretical Literature Review .......................................................................................... 9
2.2.1 Constraint Induced Financial Innovation theory............................................................ 9
2.2.2 Transaction cost innovation theory ................................................................................ 9
2.2.3 Regulation innovation theory ....................................................................................... 10
2.2.4 Schumpeter theory of innovation ................................................................................. 10
2.2.5 Location innovation theory .......................................................................................... 11
2.2.6 Circumvention innovation theory ................................................................................ 11
2.3 Empirical Literature Review .......................................................................................... 12
2.3.1 Internet banking and financial performance ................................................................ 12
2.3.2 Mobile banking and financial performance ................................................................. 13
2.3.4 Credit cards and financial performance ....................................................................... 14
2.3.5 Agency banking and financial performance ................................................................ 15
2.4 Conceptual framework ................................................................................................... 16
CHAPTER THREE ............................................................................................................... 18
3.1 Introduction ..................................................................................................................... 18
3.2 Research Design.............................................................................................................. 18
3.3 Population of the study ................................................................................................... 18
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3.4 Sampling Design ............................................................................................................. 18
3.5 Data Collection ............................................................................................................... 19
3.6 Data Analysis .................................................................................................................. 19
3.7 Data validity and reliability ............................................................................................ 21
CHAPTER FOUR: DATA ANALYSIS AND INTERPRETATION ................................ 22
4.1 Introduction ..................................................................................................................... 22
4.2 Response Rate ................................................................................................................. 22
4.4 Descriptive Statistics ....................................................................................................... 26
4.5 Regression results ........................................................................................................... 30
4.5.3 Analysis of Variance and F-Test Results ..................................................................... 33
CHAPTER FIVE ................................................................................................................... 37
5.3 Conclusions .................................................................................................................... 38
5.4 Recommendations for policy and practice ..................................................................... 38
5.5 Study Limitations ........................................................................................................... 38
5.6 Suggestion for further studies ........................................................................................ 39
APPENDIX I: LETTER OF INTRODUCTION ................................................................. 46
APPENDIX II: SAMPLE QUESTIONNAIRE ................................................................... 47
SECTION A: GENERAL INFORMATION .................................................................... 47
SECTION B: INTERNET BANKING............................................................................. 48
SECTION C: MOBILE BANKING ................................................................................. 49
SECTION D: CREDIT CARD ......................................................................................... 49
SECTION E: AGENCY BANKING ................................................................................ 50
SECTION F: FINANCIAL PERFOMANCE................................................................... 50
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OPERATIONAL DEFINITION OF TERMS
Financial Innovation - The process of equipping financial institutions in new, improved

capabilities or increased utility. (Drucker, 1985)
Commercial Banks - Financial institutions carry out business operations such as the
acceptance and protection of deposits, Provision of business loans and car loans, mortgage
loans and fundamental investment items such as savings accounts and certificates of deposit
Performance The attainment of a task calculated against preset known criteria and calculated
in ROA and ROE terms.
Internet Banking - An electronic payment system enabling customers of a bank or other

financial institutions to make payment using credit card, loan request, account transfer or an
online payment bill in conducting various financial transactions through the Institution’s
website.
Mobile Banking - Subset of electronic banking in which customers access a range of

banking products such as variety of savings and credit instruments, via electronic channels.
(Porteous, 2016)
Agency Banking - Refer to contracting of a retail or postal outlet by a financial institution or

a mobile network operator to process bank clients’ transactions. Banking agents help
financial institutions divert existing customers from crowded branches providing often a
more convenient channel. (Mwachofi, 2013)
Credit Card - A credit card is a card that gives the holder the right to deal with many shops
that are consistent with the issuer of the card to accept the granting of the credit for the card
holder to pay off purchases , who will repay the value of purchases to the bank through 25
days from the date of purchase. (Al-zubaidi, 2002)
Financial performance - function of the ability of an organization to gain and manage the
resources in several different ways to develop competitive advantage. (Iswatia and Anshoria,
2007)
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ABBREVIATIONS/ACRONYMS
ANOVA-Analysis of Variance
ROA-Return on Assets
SPSS-Statistical Package for Social Sciences
ROE-Return on Equity
CBK-Central bank of Kenya
ROAE-Return on average Equity
ROAA-Return on average assets
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ABSTRACT
Commercial banks in Kenya have adopted alternative banking platforms that, because
alternative banking has become synonymous with commercial banks in Kenya, reflect a
change in the delivery of banking and financial services. Although banks have been able to
exploit available technology to provide customers with alternative avenues for banking
services, the challenge facing them today is to maximize the use of these channels in order to
enhance their performance. The study investigated the effect of financial innovations on
Kenyan commercial banks’ performance. The study’s specific objectives were to examine
how internet banking, mobile banking, agency banking and Credit card usage influenced
Kenyan commercial banks’ performance. The study was guided by Constant induced
financial innovation theory, transaction cost innovation theory, regulation innovation theory,
Schumpeter theory of innovation, Location innovation theory and Circumvention innovation
theory. Descriptive research design was employed and 7 commercial banks in Kakamega,
Kenya that, from 2013 to 2022 were targeted, adopted all four financial innovations. In each
of the selected banks, the sample size was 14 respondents, consisting of senior management
staff. Using simple random sampling, the officials were selected. To gather primary data from
the respondents, this study used a questionnaire. The content analysis approach was used to
analyze qualitative data collected and reported from open-ended questions in narrative form.
Descriptive statistics were used in order to measure the quantitative data. Multiple regression
analysis was used to display the relationship between independent variables against the
dependent variable. It was found out that internet banking, mobile banking and Credit cards
had no influence on performance of the commercial banks in Kenya while Agency had a
positive influence on the commercial banks’ performance.
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LIST OF FIGURES
Figure 2.1 Conceptual framework............................................................................................18
Figure 4.2: Pie chart for gender………………………………………....................................25
Figure 4.3: Bar graph for respondents’ education level...........................................................26
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LIST OF TABLES
Table 3.1 Independent Variables..............................................................................................22
Table 4.1 Response rate……………………………………....................................................24
Table 4.2: Gender of the respondents………………...............................................................25
Table 4.3: Age of the respondents………………………………………………....................27
Table 4.4: Duration of working in the organization……………………….............................28
Table 4.5: Job description of the respondents..........................................................................28
Table 4.6 Performance and internet banking……………………………………....................29
Table 4.7 Mobile banking and performance……………………………………....................30
Table 4.8 Credit card usage & performance………………………………….........................32
Table 4.9 Performance and agency banking………………………………………................33
Table 5.0 Performance and agency banking………………………………………................34

Table 5.10 financial performance of commercial banks…………………………..................35
Table 5.2 Multicollinearity Test using variance inflation factors (VIF)…..............................37
Table 5.3 Reliability test results…………………………………………………...................38
Table 5.4 Coefficient of determination results……………………………….........................38

Table 5.5 Analysis of variance and F-test results………………………………….................40
Table 5.6 Pearson Correlations...................................................................................40

Table 5.7 Regression Model………………………………….................................................41
Table 5.8 Regression coefficients……………………………………....................................42
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CHAPTER ONE
INTRODUCTION
1.1 Background of the study

Business environment in Kenya is dynamic and constantly evolving. Banks, just like any
other organization must therefore innovate regularly to ensure they are par with the
technology, deliver products and services that enable households and firms to participate in a
broader economy. This will ensure greater revenue; embark on cost saving opportunities and
growth. Financial innovation is an area of economics that has attracted significant research
interest in academia as well as in corporate circles (Lerner, 2006; Lopez and Roberts, 2002).
New financial arrangements have historically emerged following the successful introduction
of technological innovations (Levine and Michalopoulos, 2015). According to Frame and
white (2014), technological developments have significantly changed commercial banking
business in the past 30 years.
Financial innovation is the anticipated improvement in the array of financial products and
instruments that are stimulated by an expected change in customer needs and preferences, tax
policy, technology and regulatory impulses (Bhattacharyya and Nanda, 2000). Tufano (2002)
defines financial innovation as the act of creating and then popularizing new financial
instruments as well as new technologies, institutions and markets. Allan and Gate (2014)
contend that financial innovation can be described in terms of introducing new instruments of
finance, services, introduction of new uses for money, discovering new channels of funds,
introducing new ways of handling daily operations, or coming up with a new organization
with all these endeavors are becoming part of existing financial institutions and the
emergence of phenomenal growth of new institutions of finance and new markets. These
innovations may include products or process variants.
According to white and frame (2010) financial innovation is something new that reduces
costs, reduces risks or provides improved products, services and instruments that satisfy
financial system participants’ demand. Beaver (2002) argues that financial innovation is the
process of designing, developing and applying innovative financial instrument to provide
solution to business challenges.
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Innovation has considerable impact on corporate performance by producing an improved
market position that conveys competitive advantage and superior performance (walker,
2004). According to Rodgers (2003) innovation generally means a new way of doing
something. It can be an idea, practice or object that is perceived as new by a unit of adoption.
Lawrence (2010) finally argues that financial innovation involves the design, the
development, and the implementation of innovative financial instruments and processes and
formulating of creative solutions to problems in finance.
Performance is defined as meeting a goal (Boru, 2011). Financial performance is defined as a

quantitative measure of how a company uses the business asset and generates revenues.
According to Heremans (2007), financial performance is the employment of financial
indicators to measure the extent of objective achievement opportunities.
Innovation generally does seem to have positive effects in raising the financial performance
of an organization (Boot, A & Thaker, 2007). Innovation has a considerable impact on
corporate performance by producing improved market positions that conveys competitive
advantage and superior performance. (Walter, 2004). According to Adhiambo (2014)
financial innovation is used by commercial banks to be able to compete in financial markets
and as a result it can improve their performance and maintain their effectiveness in the
market. Modern Commercial banks are trying to improve their financial performance by
innovating in products, governance and services among other innovations. Gordon and
Metric (2010) state that the main reason that have led to an increase in the innovations and
reduction in bankruptcy costs, tax advantages, reduction in moral hazard, reduced regulatory
costs, transparency and customization.
This research was motivated by technological advancements which has greatly impacted the
delivery of financial services electronically. There were few studies previously carried out in
the field of the effects of financial innovation on the performance of commercial banks
despite innovation having existed over a long period of time and as such, this research will
therefore enable banks to know whether the current financial innovation mechanism are
beneficial or detrimental to them to achieving their goals.
1.1.1 Financial innovation

This study will focus on financial innovation as adopted by commercial banks in Kenya and
how it affects their performance. Financial innovation has contributed go efficiency and
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diversification in many of the commercial banks by making funds and financial products
more available and at a reduced cost. There are two main types of financial innovation i.e.
process innovation and product innovation. Process innovation refers to ways of operating a
business and implementing information technology. Modern examples of process innovation
includes; SWIFT (Society for Worldwide Interbank Financial Transfer) network for foreign
exchange payments, ATMs (Automated Teller Machine) which was introduced in the early
1970s to enhance retail bank account access and value by providing customer with around the
clock access to funds (Rakesh, 2006), mobile and internet banking introduced to enable banks
to respond better to changes in market demand and improve efficiency.
A Real Time Gross Settlement (RTGS) system known as Kenya Electronic Payment and
Settlement system (KEPSs) introduced by the Central Bank of Kenya in July 2005 to
modernize Kenya’s payments system in line with global trend (Oloo, 2007) and introduction
of online account opening.
Product innovation includes financial products such as securitized assets, derivatives, foreign
currency Mau gage, hedge funds, private equity and exchange traded funds. Other examples
of product innovations are Airtel and Safaricom, mobile phone money transfer services, M-
pesa and zap to enable small scale transactions at reasonable costs.
1.1.2 Financial performance

Financial performance is the function of the ability of an organization to gain and manage the
resources in several different ways to develop competitive advantage. (Iswatia and Anshoria,
2007)
According to Walter ,2001, performance is evaluated in three dimensions; company’s

productivity i.e. how efficient they convert inputs into outputs, profitability dimension i.e.
earnings are better than the costs, market premium or the level of which company’s market
value exceeds its book value.
Financial performance indicator can be measured in financial and non-financial terms

(Bagorogoza and Waal, 2010; Baker and Ahmad, 2010). Most firms however, prefer to adopt
financial indicators to measure their performance. Rate on assets (ROA), Average annual
occupancy rate, Net profit after tax and Return on Investment (ROI) are commonly used
financial and accounting indicators by firms (Tavitiyaman et al., 2012). Some common
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measures are profitability, growth, stakeholders’ satisfaction, market share and competitive
position (Bagorogoza and Waal, 2010).
Firm performance is a multidimensional construct that consists of four elements (Alam et al.,
2011). Customer focused performance, including customer satisfaction and product or service
performance; Financial and market performance, including revenue, profits, market position,
cash to cash cycle time, and earnings per share; Human resource performance including
employee satisfaction and organizational effectiveness including time to market, level of
innovation and population and supply chain flexibility.
1.1.3 Financial Innovation and Financial performance

Lyons, Chatman and Joyce (2007) argue that the relevant aspects of technological change
include innovations that reduce costs related to collection, storage, processing and
transmission of information as well as innovations that transform the means by which
customers’ access bank services. They cite ATMs, telephone banking, internet banking and e-
money as being among the significant innovations affecting the banking distribution system
that influence banking performance significantly.
Mansury & Love (2008) add that client relation management systems, bank management
technologies and various other technologies are among the major changes in internal banking
systems that also have exercised a positive influence on banking performance and
profitability.
According to Rosebushal (2011), innovative products enable small & medium sized
enterprises to compete with large and established firms. He argues that innovative products
enable small firms to avoid price competition and also create new demands which contribute
to the firm’s growth.
(Abor, 2005) argues that product, innovation and process innovation improve payment
system used in the borrowing and lending of funds, which ultimately opens a quick way of
dealing with customers. In addition, they include innovation in the technology, equity
generation and risk transfer which increase the available credit for borrowers and provide
financial institutions with new and low - cost way to raise capital.
Innovation has a considerable impact on corporate performance by producing an improved

market position that conveys competitive advantage and superior performance (Walker,
2004). Jiménez-jiménez and Sanz-valle's (2011) work finds a positive relationship between
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innovation and firm performance. The authors argue that strength of the relationship between
innovation and firm performance is higher for bigger and older firms in the manufacturing
sector. Recent studies observe a link between innovation and firm performance. For instance;
Aduda and Kingoo (2012) study of the relationship between electronic banking and financial
performance of commercial banks in Kenya finds a strong positive relationship between bank
performance and e-banking innovations. They found that innovation contributes to
performance of large firms as well as small and medium enterprise.
1.1.4 Commercial banks in Kenya

According to central bank of Kenya (2014) supervision report as at December 2014, there are
43 commercial banks in Kenya. The performance of commercial banks is portrayed in the
level of asset base, revenue growth and level of customer satisfaction. (Adhiambo and
Memba, 2012)
The commercial banks in Kenya are governed by the banking Act cap 488, companies act,
the Central Bank of Kenya act and the various important guidelines issued by the CBK. The
CBK is responsible for formulating and implementing monetary policy and fostering the
liquidity, solvency and proper functioning of the financial system (Central Bank of Kenya,
2011). Commercial banks are adopting new strategies to increase profitability and reduce the
operating costs.
Financial provider in Kenya especially commercial banks are classified into three on basis of
composite average that include resources in terms of operating capital, customer deposits and
other performing assets. Any commercial banks with weighted average of five or more is
ranked more superior while the ones with average of one to five is ranked medium and
commercial bank with less weighted average which is less than one is recognized as a small
bank.
With the emergence of the coronavirus pandemic (COVID-19), bank operations like other
businesses were greatly impacted leaving innovation a critical point in adapting to the new
“business usual”. According to a survey carried out by the CBK in 2019, the COVID-19
pandemic saw banks accelerate their digital strategies. 56 percent of the institutions identified
their drive for uptake and utilization of digital channels especially mobile and internet
banking as a key strategy in the COVID-19 era. The survey further unveils that 79 percent of
the banks introduced a new Fintech product between January 1, 2020 and December 31,
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2020. Financial Technology (Fintech) enabled business continuity and rapid scaling up of
support to vulnerable groups. During this time, 58 percent of the banks innovated a product
specialized to curb the effects of COVID-19 while 56 percent experienced COVID-19 impact
on their pre-existing innovations. Application Programming Interfaces (APIs), Big Data and
Data Analytics, and Cloud Computing continue to be the major innovations whose
developments are considered important by financial institutions.
1.2 Research problem
Due to changing times and apparent competitive markets, commercial banks have found it
necessary to change the game plan. Initially commercial banks were restricted to just deposit
taking, paying out money and issuance of loans, currently commercial banks have now
engaged in provision of a wide variety of financial services. Techniques of banking have
changed significantly due to advances in telecommunication and information technology.
Miller (2001) stated that that most firms seek technological innovation to gain competitive
advantage in their market.
The emergence of new technologies, products, processes markets and competitor banks;
demands any commercial banks in Kenya to apply any skills necessary to remain competitive
and achieve competitive advantage. Previous long lines, transaction errors, queuing,
insecurities and network failures have been the most frequent problems while using banking
services. This lowers customer perception on the quality of services offered thereby reducing
the banks credibility hence lower profit. Though there are other previous studies under
financial innovation. For instance, (Mbogoh, 2003) carried out a study on effect of financial
innovations on financial performance on insurance companies. Kinuthia (2010) carried out a
study on analysts of financial innovations in Kenyan banking sector; Githakwa (2011) carried
a study on the relationship between the financial innovation and profitability of commercial
banks in Kenya. The objective of this study was to evaluate the effects of financial
innovations on the financial performance of commercial banks.
Few studies have been based on the effects of financial innovations on financial performance
in the Kenyan banking sector. The study was intended to fill in the gap by answering the
question; does financial innovation have any effects on the financial performance of the
commercial banks in Kenya?
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1.3 Research Objectives
1.3.1 General Objective

The main aim of this study was to determine the effect of financial innovations on financial
performance of commercial banks in Kakamega.
1.3.2 Specific Objectives

i. To determine the effect of mobile banking on the financial performance of the
commercial banks.
ii. To establish the effect of Internet Banking on the financial performance of listed
commercial banks.
iii. To determine the effect of credit cards on financial performance of commercial
banks in Kenya.
iv. To determine the influence of Agency banking on financial performance of
commercial bank in Kenya.
1.4 Research Hypotheses

HO1: Mobile banking does not significantly affect the financial performance of commercial
banks in Kenya
HO2: Internet banking does not significantly affect the financial performance of commercial
banks in Kenya
HO3: Credit cards do not significantly affect financial performance of commercial banks in
Kenya
HO4: Agency banking does not significantly affect financial performance of commercial
banks
1.5 Scope of the Study

This study is limited to commercial banks geographically located in Kakamega County. The
study is specifically limited to financial innovations of the commercial banks and the effects
they have on financial performance of the commercial banks. The study is also limited to
licensed commercial banks under regulation of CBK.
1.6 Significance of the Study

This study will significantly enable the CBK to better understand how to mitigate the risks
that are involved in the banking industry in Kenya. The study will also enable the government
to understand the types of financial innovations in the banking industry and ensure that the
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regulations that cover all the innovations and no gaps exist. This study will be a source of
literature review and empirical reference to the scholars; the study will help the commercial
banks to see where more innovations are needed so as to ensure their competitiveness.
The study will also enable the shareholders to increase their knowledge on deciding whether
to diversify or focus to boost their overall wealth. The study will benefit the future resources
in that it will increase their field knowledge and give them opportunity to re-examine the area
of study and use the findings of the study as a source of reference.
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CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
This chapter discusses various theories of innovation, a critical review of the related literature
or empirical studies and summary of the research gaps.
2.2 Theoretical Literature Review

Dawson (2009) defines a theory as a systematic explanation of the relationship among
phenomena and provides a generalized explanation to an occurrence. There are many theories
in the literature of financial innovation that have been developed by different scholars. The
theory of financial innovation and financial performance includes; constraint induced
financial innovation theory, transaction cost innovation theory, regulation innovation theory,
financial intermediation theory, innovation diffusion theory and lastly Schumpeter theory of
innovation. These theories are explained below;
2.2.1 Constraint Induced Financial Innovation theory

This theory was advanced by American economist Silber in 1983. This theory holds that the
purpose of profit maximization of financial institution is the key reason of financial
innovation. There are some restrictions for instance External handicaps such as policy and
internal handicaps such as organizational management and leadership style in the process of
pursuing profit maximization in an organization.
According to Silber, these restrictions and limitations not only guarantee the stability of
management, they reduce efficiency of financial institution, and so financial institutions
strive towards casting them off. Constraint induced innovation theory discussed the financial
innovation from economic, so it is originated and representative, but it emphasized
“innovation in adversity” excessively so it can express the phenomenon of financial
innovation increasing in the trend of liberal finance commendably.
2.2.2 Transaction cost innovation theory

This theory was advanced by Hicks and Niehans (1983) in the research on innovation. They
thought that the dominant factor of financial innovation is the reduction of transaction cost,
and in fact, financial innovation is the response of the advance in technology which caused
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the transaction cost to reduce. The reduction of transaction cost can stimulate financial
innovation and improvement in financial services.
This theory studied the financial innovation from the perspective of microscopic economic
structure change, it thought that the motive of financial innovation is to reduce the transaction
cost and the theory explained from another perspective that the radical motive of financial
innovation is the financial institution’s purpose of earning benefits.
2.2.3 Regulation innovation theory

Regulation innovation theory was advanced by Scylla in 1982. This theory explains financial
innovation from the perspective of economy development history. The theory proposes that
financial innovation connects with social regulations closely and it is a regulation
transformation which has mutual influence and mutual causality with economic regulation.
Scylla et al (1982) thought that it is very difficult to have space of financial innovation in the
planned economy with strict control and in the pure free market economy, so any change led
by regulation reform in financial system can be regarded as financial innovation. The Omni-
directional finance innovative activities can only appear in the market economy controlled by
government. When government intervention and management have hindered the finance
activities, there will be many kinds of financial innovation which intend to circumvent or get
rid of government controls. The game between the market and government finally form the
spiral development process namely, “control-innovate controls again-innovates again”.
In this theory which expanded the scope of financial innovation, government activities are
also regarded as the origin of financial innovation, but it regards regulations innovation as
one part of financial innovation especially, it regards rules and regulations which are used to
control as financial innovation. The financial control is the obstructive force of financial
innovation, so rules and regulations which are regarded as the symbol of financial control
should be the direction of financial reform and innovation (Scylla et al., 1982).
2.2.4 Schumpeter theory of innovation

Schumpeter (1934) argued that entrepreneurs can create opportunity for new profits with their
innovations. Schumpeter (1934) emphasized the role of entrepreneurship and the seeking out
of opportunities for novel value generating activities which would expand and transform the
circular flow of income, but it did so with reference to a distinction between invention or
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discovery on one hand and innovation, commercialization and entrepreneurship on the other
hand.
The theory distinguished between the entrepreneurs whose innovations create the conditions
for profitable new enterprises and the bankers who create credit and construction of the new
returns (Schumpeter, 1939). Financial innovation is involved in creating new opportunities
for more profits while at the same time shouldering the hazards linked to its existence. New
dimensions present risks and thus banks must be mitigating measures. Innovations are
enhanced by entrepreneurs who are independent and willing to take risks as an act of will.
This theory is important to this study since it helps in explaining why commercial banks are
involved in new innovations and also discusses on the causes of innovation.
2.2.5 Location innovation theory

This theory was developed by Desai and Low (1987), they thought that financial innovation
is the method which can make integrity of financial market come true, according to this
theory; they advanced the financial innovation microscopic economic model. Desai and Low
used the theory to confirm and measure the gap in the scope of acquirable product in financial
market, which indicates the potential opportunity of the new products innovation and
promotion. Chen (1995) built the financial intermediary model in which new security secured
by old security is created. In the period of decomposing the old securities and opening new
market, innovators play an influential economical role. For example, investors can obtain the
consumption at lower cost; investors can realize a better share of risks.
Chen’s model indicated that even when introducing the surplus securities which are
distributed yet, the innovators can also play these roles. In other words, although these
innovations have not changed the scope of acquirable financial tools, it makes investors trade
at lower expected cost. The main focus is on security designing in incomplete financial
markets.
2.2.6 Circumvention innovation theory

Circumvent innovation theory was developed by Kane in 1981. He postulated that many
forms of government regulations and controls, which have the same property of implicit
taxation, embarrass the profitable activity engaged by the company and the opportunity of
earning profit, so the market innovation and regulation innovation should be regarded as the
continuous fighting process between independent economic force and political force. Because
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financial industry is special, it has the sticker regulations. Financial institutions deal with the
status such as the reduction of profit and failure of management induced by government
regulations in order to reduce the potential loss to the minimum. Therefore, financial
innovation is mostly induced by the purpose of earning profit and circumventing government
regulations.
Kane (1981) stated that theory is different from reality. The regulation innovation he assumed
is always towards the direction of reinforcing regulations, however, the regulations
innovation in the reality is always towards the direction of liberal markets innovation, the
result of the game is release of financial regulations and markets become more liberalized.
2.3 Empirical Literature Review

2.3.1 Internet banking and financial performance
Internet banking offers more convenience and flexibility to customers coupled with a
virtually absolute control over their banking. A number of empirical studies have been carried
out to assess the impact of internet banking on the performance of commercial banks. A study
by Malhatra (2015) on the power of internet banking on bank profitability in Indian banking
sector sought to examine the power of internet banking on banks’ profitability. The data was
sourced from a survey of 85 scheduled commercial banks website, in the year 2013; the
outcomes proved that 57% of Indian commercial banks are delivering transactional internet
banking services. The analysis indicates that internet banking is larger banks and has better
working effectual ration and profitability unlike non-internet banks.
De Young et al. (2006) observed the change in financial performance of the internet
community banks in US. The results found that internet adoption improved community banks
profitability, particularly through increased revenues from deposit service charges. Internet
adoption was also associated with movements of deposits from checking accounts to money
market deposit accounts, increased use of brokered deposits and higher average wage rates
for bank employees. The findings suggested that internet adoption was associated with an
economically and statistically significant improvement in bank profitability.
Ciciretti et al. (2008) evaluated the performance of Italian banks, which employ multichannel
commercial strategy versus those that do not. They found that offering internet banking
services influenced the performance of the banks, measured by Return on Average Assets
(ROAA) and Return on Average Equity (ROAE). Similarly, Hernando and Nieto (2007)
12
analyzed the impact internet banking has on the performance of Spanish banks. They found
out that Internet banking services as an alternative distribution channel reduced overhead
expenses and improved both ROA and ROE over time.
Malhotra and Singh (2009) in their study on the impact of internet banking on bank
performance and risk found out that on average that internet banks are larger, more profitable
and are more operationally efficient. They also found that internet banks have higher asset
quality and a better managed to lower the expenses for building and equipment and that
internet banks in India rely substantially on deposits. They further found out that smaller
banks that adopt internet banking have been negatively impacted on profitability.
Cheruiyot (2010) did a study on impact on internet banking on financial performance of

commercial banks in Kenya. He measured the internet variable using banking intensity as
derived from a web feature data collected from bank websites. He measured performance
using ROA and ROE variables. He observed from the multiple regression results that the
profitability and offering of internet banking does have a small significant association. This
study seeks to measure performance using four variables; return on average equity, return on
average assets and, cost to income ratio and the profits before tax ratio.
2.3.2 Mobile banking and financial performance

A number of empirical studies have been conducted to assess the impact of mobile banking
on financial performance. According to Aker and Mbiti (2010), there is a significant
relationship between mobile phone coverage, services rendered, cost for the service and
organizational performance and is of the view that firms with markets which has fewer stiff
competitors and profit maximization need to give scarce service at inflated costs. Rayhan et
al. (2012) while looking into the issue of mobile banking in Bangladesh wrap up the study
and stated that mobile banking brings about the prospective to increase low cost virtual bank
accounts to a large number of currently un-banked individuals.
Mobile phone leads to enhanced ability of offering solutions in regard to e-banking answers
which give clients a wide variety of service options at a cheaper price. M-banking is
explained as to it being a real time online banking, available anytime and anywhere
throughout the country and its importance include; convenience, affordability, secure and
encourages efficient savings thus raising bank deposits. M-banking helps in easy and quick
13
accessibility to bank services at lower charges. The positive aspect of mobile phones is that
mobile networks reach remote areas at an affordable cost for both the consumer and the bank.
Mugane and Njuguna (2019) carried out a study on mobile banking and established that Short
Message Services had an above average positive correlation with financial performance of
the commercial banks and was statistically significant while bill payments had a strong
positive correlation with financial performance of commercial banks and was statistically
significant. The study concluded that short message service which has not only improved
service delivery but has had a positive impact on financial performance. Commercial banks
have experienced large revenues from different activities.
Kithaka (2014) also evaluated the effects of mobile banking on the financial performance of
commercial banks in Kenya. Cross sectional descriptive survey was employed in this case.
This informed who, how and what about the mobile banking in commercial banks in Kenya
and as a one-time event. The study found that there were mobile banking variables
influencing the financial performance of commercial banks in Kenya which are; annual
amount of money moved through mobile banking, number of mobile banking users, capital
adequacy, asset quality, bank liquidity and management efficiency. They influence it
positively.
2.3.4 Credit cards and financial performance

Kyalo (2012) conducted a study on the effects of credit card wage on the financial
performance of commercial banks in Kenya. According to the study a census study of seven
commercial banks spanning from 2009 to 2013 indicated that credit cards has strong and
positive relationship with financial performance.
Kanal (2012) conducted a study on the electronic credit card usage and their impact on banks
profitability. The rate of returns on owner’s equity model, the study was applied on a sample
of commercial bank working in Jordan, the information and data were collected from annual
reports given by the banks and by returning to the credit management in the cash
management board. The study found that there is a positive effect between the number of
credit cards, the net income from credit cards and the profitability of commercial banks. This
study was done in Jordan and there is need to carry out the same in Kenya.
Kibe (2013) carried out a study on the effects of credit card default on the financial
performance of the Kenya commercial banks. The independent variables were number of
14
accounts closed; non-performing loan and bad debts written off and the dependent variable
were earnings per share, dividend per share, loans to customers, total assets and customer
deposits. The research findings were that Gold card holders are the majority of the
cardholders in Kenya commercial banks at 56%. The research concluded that the proportions
of credit card holders, revenue collected as well as the amounts and proportion of defaults
from card default negatively affects the bank performance.
Odhiambo (2012) did a study on credit cards and performance of commercial banks portfolio
in Kenya. Six commercial banks in Migori town and all were involved in data collection thus
the bank managers were all interviewed. The sample size of 120 credit cardholders was
drawn from the bank’s records. The researcher designed a questionnaire for the credit cards.
The questionnaires were randomly distributed to credit card holders who were asked to
indicate the extent to which they agree or disagree with the statement. The findings of the
study were that there was a positive correlation between the wage of the credit cards and the
bank portfolio. This research is specific to Migori town meaning that there is a research gap
to be filled on all commercial banks in Kenya.
2.3.5 Agency banking and financial performance

Kinyanjui (2013) had focused on embracing agency banking roles by commercial banks in
Kenya and concluded that security and infrastructure cost related to agency banking have a
significant role in improving their performance particularly in banking. Primary data was
gathered from all the banks operating in Kenya. From the results of 43 banks, 8 had
implemented agency banking and had a significant role in their financial performance. The
agency banking benefits were associated with its low transaction costs and convenience. The
agents helped in deposit mobilization hence increased the funds available for granting loans.
Rodrigez (2014) evaluated the impact of agency banking adoption on commercial banks in
Mexico. The result showed that agency banking improved access networks and transactions
efficiency beefed up making transactions easier and faster in Mexico.
Oburu (2016) conducted a research on the effects of agency banking on financial

performance of commercial banks in Kenya. Chi-square test was employed in evaluation of
the degree and nature of association between agency banking and financial performance. The
regression and chi-square test found that the variables under the model are vital in
15
determining the direction of financial performance of Kenyan banks. The findings indicate
that their progression in agency banking positively enhances finance performance.
Njagi (2011) conducted a study on the contribution of agency banking on financial

performance of commercial banks in Kenya. The study established that the financial services
accessibility through agency banking effects the financial performance of commercial banks
in Kenya to a great extent. The study also established that agency banking adoption in
banking system has shown a great momentum and spread at an unbelievable pace a cross the
world which increased the accessibility of financial services to many customers in the remote
and this has led to profitability of commercial banks.
2.4 Conceptual framework

Conceptual framework is a diagrammatic representation of how the independent and
dependent variables are related. It therefore specifies the working definition of a variable and
enables a simple explanation of the flow of theoretical framework used by the study
(Mugenda, 2000). In this study, independent variables will be internet banking, mobile
banking, agency banking and credit card banking. The study will investigate how these
independent variables influence the financial performance of commercial banks in Kenya.
Our dependent variable is financial performance which will be measured using ROA, ROE
and net profit. The study is conceptualized in a framework as shown in the schematic
diagram.
16
Independent variables Dependent variables
Mobile banking
• Security service
• Convenience
• Customer satisfaction
• Access to financing services
Internet banking
• Online pay bill

Financial performance
• Loan application
• ROE
• Account transfer
Agency Banking • ROA
• Cash deposits/ withdrawals • Net profit

• Sales
• Number of agents
• Account opening form collections
• Balance inquiry
Credit cards
• Service security
• Reliability
• Number of bank transactions
Figure 2.1 Conceptual framework
17
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 Introduction
This chapter presents the preferred research design, where a brief summary of the methods of
data collection that will be used are outlined, the population of the study and the procedure
for data analysis methods are expounded.
3.2 Research Design

According to Kerlinger (2008) research design refers to the plan and structure of
investigation so conceived so as to obtain answers to research questions. We adopted the
descriptive design. Descriptive studies are usually the best methods for collecting information
that will demonstrate relationship and describe the world as it exists. These types of studies
are often done before an experiment to know what specific things to manipulate and include
in an experiment. According to Serakan (2003), a descriptive study was taken in order to
ascertain and be able to describe the characteristics of the variable of interest in a situation.
3.3 Population of the study

According to Cooper and Schindler (2008), population is referred to as the collection of
elements about which we wish to reference. The study covered data on financial innovations
in the Kenyan banking sector which can be found in peer-reviewed articles, published books
and internet. The population of the study consisted of seven registered commercial banks in
Kakamega (See appendix II) that was convenient for analysis. The study sample was based
on a census survey of all the listed commercial banks in Kenya.
3.4 Sampling Design

Sample design refers to the techniques of the procedure the researcher would adopt in
selecting items for the sample. The study did not involve all employees in the study, rather
purposive sampling was used and the study concentrated on the effect of financial
innovations on the institution’s financial performance. The study was sensitive, where the
data required focused on people in key positions well informed about the bank innovations
and performance. The study sampled a total of seven listed commercial banks in Kakamega
in which two managers were selected from each bank that is, Branch and Operations
managers forming a sample size of 14 respondents.
18
3.5 Data Collection
The study relied on secondary data sources extracted from annual reports, publications,
industry analysis, interviews, trend analysis, and board of directors’ speeches on corporate
pages. Most data will be sourced from the central bank of Kenya, Kenya Bankers Association
(KBA), and Kenya institute of insurance and Kenya bureau of statistics. The study also relied
on primary data which was collected by use of questionnaires designed and administered
through drop and pick techniques targeting branch managers, and Operations managers in the
bank to be the respondents. The questionnaire consisted of six main sections where; Section
A contained introductory and background questions considered relevant to the study, Section
B contained questions about the internet banking services in the Kenyan banking sector,
Section C contained questions on mobile banking and various mobile banking services in the
Kenyan banking sector, Section D contained questions on credit card ,section E contained
questions on Agency banking and lastly section F contained questions on Financial
performance.
3.6 Data Analysis

According to Cooper and Schindler, 2000 data analysis usually involves reducing
accumulated data to manageable level, developing summaries, looking for patterns, and
applying statistical techniques. After collecting the data, the questionnaires were edited for
completeness and consistency before processing. Excel sheets were used to group
information for analysis. Information was then grouped into meaningful subsets and analyzed
using descriptive statistics, pie charts, frequency tables, percentages, mean and deviation was
used to analyze the data. Tabular presentation that is in a self-explanatory format was used to
display the results of the data analysis for better presentation and analysis of data. The study
used multiple linear regressions to analyze the data.
Correlation analysis was used to describe the degree to which one variable is related to the
other. The relationship is usually assumed to be linear. In this study coefficient of
correlation(r) and coefficient of determination (r2) was estimated to determine the nature and
magnitude of the relationship. Correlation coefficient was used to measure the degree of
relationship between financial innovation and financial performance of the commercial
banks. The data was entered into a statistical package for Social Package for Social Sciences
(SPSS) version 20 for the analysis along with variables and values to get the correlation
coefficients. The magnitude of the sample coefficient of correlation indicated a strong linear
19
relationship.
Model,
Y=α +β1X1+ β2X2+ β3X3+ β4X4 +e
Where,
Y = Financial performance
α is a constant for autonomous factors
β is a coefficient of each variable
X1 = Mobile banking
X2 = Agency banking
X3 = Internet banking
X4 = Credit card usage

e = error term (captures all relevant variables not included in the model)
Table 3.1 Operationalization of Independent Variables
NO FACTOR ABBREVIATION NATURE OF DATA REQUIRED
1 Mobile banking MB Types of other mobile banking services used by

commercial banks, Number of transactions.
(M-shwari)
2 Agency banking AB Total number of commercial banks involved,

Number of contracted agents’ country wide,
Total amount of transactions
3 Internet banking IB Number of transactions
4 Credit card CU Number of gross loans and growth
Source: Researcher
20
In order to determine whether financial innovations are statistically significant on
performance of commercial banks in Kenya statistical tests were carried. The study
conducted an analysis of variance (ANOVA). The study applied F-statistical to test on the
overall model and for each independent variable T-statistical test was used. The study
focused on significance value on extracting the ANOVA statistics the study was tested at
95% confidence level and 5% significance level.
3.7 Data validity and reliability
The relevance of the questionnaire was subjected to an expert review in the related field of
financial innovation in order to be in the data collection. Sampling validity also stem from the
selected commercial banks which made a good representation of the population which is the
commercial banks in Kenya while Cronbach’s reliability test was used to test the reliability of
factors extracted from dichotomous (that is, questions with two possible answers) and multi-
point formatted questionnaires or scales (with a rating scale of: 1= poor, 5= Excellent) the
higher the score, the more reliable the generated scale is. If the results obtained from the test
is 0.7 and above, then the instrument is reliable (Whalen, 2004)
21
CHAPTER FOUR
DATA ANALYSIS AND INTERPRETATION
4.1 Introduction
This chapter basically presents the findings of data collected from the field. The response rate
Is given first followed by background information of the respondents, descriptive statistics
and inferential analysis.
4.2 Response Rate
The respondents were administered with 14 questionnaires. The questionnaires reflected

85.71% return rate as presented in the table below.
Table 4.1 Response rate
Status Frequency Percentage
Targeted 14 100
Respondents 14 100
Discrepancy N/A N/A
Source: Research Data (2022)
Description of findings in table 4.1, confirmed 100% of respondents return rate. A reflection
of just that all informants were involved in this study. As per the recommendation by Baruch
(2012) for data analysis, a response rate of above 80% is enough. Hence the study response
rate of 100% was considered appropriate for data analysis.
4.3 Demographic data
The respondents’ background information was based gender, education level, age and work
experience. The findings are presented as follows.
22
4.3.1 Gender of the respondents
Table 4.2: Gender of the respondents
Gender Frequency Percentage
Male 9 64.30
Female 5 35.70
Total 14 100.0
The study established that the proportion of gender indicates a higher number of male
respondents presented by 64.30% while the female counterpart accounted for 35.70% as
presented above.
Figure 4.2: Pie chart for gender
Source: Research data (2022)
The proportion of male and female margin is presented above.
23
4.3.2 Education level of the respondents
Figure 4.3: bar graph for respondents' education level
Respondents' education level
Post graduate diploma
Masters
Respondents' education level

First degree
Diploma
0 10 20 30 40 50
Source: research data (2022)
Figure 4.2 above indicates that all the managers have reached Master’s’ degree level. This is
an indication that all the respondents had achieved the highest level of education and were
able to respond appropriately to the study.
4.3.3 Age of the respondents
Table 4.3: Age of the respondents
Category of years frequency Percentage
Below 25 years 0 0.0

26-35 years 3 21.43
36-45 years 9 64.29
46-55 years 2 14.28
Above 56 years 0 0
Total 14 100.0
24
Table 4.3 above indicates that majority of workers (64.29%) were aged between 36 and 45
years, 21.43% between the ages of 26 and 35 years and 14.28% between the ages of 46 and
55 years. This demonstrates that responses from various age groups who participated in the
study were obtained.
4.3.4 Work experience from the respondents
Table 4.4: Duration of working in the organization
No. of years Frequency Percentage
Less than 5 years 8 57.14
5-10 years 4 28.57
Above 10 years 2 14.29
Total 14 100.0
Table 4.4 shows that the majority of workers 57.14% have worked for a period of less than 5
years, 28.57% between 5 and 10 years and 14.29% for a span of more than 10 years. These
findings suggest that respondents have served for a long time and could therefore contribute
enough to the study.
4.3.5 Job description of the respondents

Table 4.5: Job description of the respondents
Description Frequency Percentage
Senior management 4 28.57
Middle level management 10 71.43
Lower level management 0 0
Total 14 100.0
25
Table 4.4 indicates that the majority of respondents’ 71.43% are middle level managers and
28.57% of the respondents are senior managers. These findings suggest that the respondents’
fall in the middle level management and could therefore contribute sufficient information to
the study.
4.4 Descriptive Statistics

In order to present quantitative information, descriptive statistics such as means and standard
deviations were analyzed. Descriptive findings in this section are presented in form of means
and standard deviations. The questionnaire responses were based on a Likert scale which was
coded in numerical values for ease of data analysis. The scale used had the values 1-5
representing level of agreement from strongly disagree to strongly disagree. These were
presented as described in the study goals as shown below.
4.4.1 Internet Banking

The study sought to investigate the impact of internet banking on commercial banks’ success
in Kakamega County.
Table 4.6 Performance and internet banking
Sum Mean Standard

Statement
statistic (M) Deviation
Internet banking allows online payment of bills 14 4.1905 .68829
Internet banking enables transfer between accounts 14 3.9821 .68264
Internet banking enables customers to apply loans

14 4.1429 .52718
online
Average 14 4.1905 .6327
Source: Survey Data (2022)
From table 4.6, the average score was 4.1905 which show that internet banking influence
commercial banks in Kenya to a great extent with standard deviation of 0.6327. Online
banking has been found to be very useful for customers to pay for their bills (M=4.1905,
SD=0.68829), this was followed by internet banking enables transfer between accounts
26
(M=3.9821, SD=.68264), internet banking allows online payment of bills (M=4.1429,
SD=0.52718).
4.4.2 Mobile banking

The study was assessing how mobile banking affected performance in Kenya’s commercial
banks.
Table 4.7 Mobile banking and performance
Standard
Statement Mean (M)
deviation (SD)
Mobile banking provides convenient services to
4.7143 .46881
customers
Mobile banking provides security of cash transacted by
3.7143 .99449
customers through the phone
Mobile banking allows customers to have access to

3.9286 .91687
financial services
Through mobile banking customers are satisfied with their

3.5714 1.08941
transactions
Average 3.9821 .86732

The findings in Table 4.7 show that the average score was 3.9821 which shows that mobile
banking influences performance of commercial banks in Kenya to a great extent with a
standard deviation of 0.86732 It was found to a large extent that customers receive
convenient services through mobile banking (M=4.7143, SD=0.46881), this was followed by
mobile banking allows customers to access financial services (M=3.9286, SD=0.91687),
mobile banking provides security for cash transactions (M=3.7143. SD=0.99449), and that
through mobile banking customers are satisfied with their transactions (M=3.5714,
SD=1.08941).
4.4.3 Credit card usage

The study sought to explore the effect of credit card usage in commercial banks in Kenya.
27
Table 4.8 Credit card usage & performance
Standard
Statement Mean (M)
Deviation
Use of credit cards provides security of cash transacted by

4.5000 .85485
customers
The use of credit cards is dependable for consumers to use

3.7857 .89258
anytime
Credit card usage has led to increased number of bank

4.1429 .77033
transactions
Average 4.1429 .8393
Based on Table 4.6, the average score was 4.25 which demonstrate that the use of credit
cards significantly affects performance of commercial banks in Kenya with a standard
deviation of 4.1429. The study investigated that credit cards usage provides security of cash
transacted by customers to a large extent (M=4.50, SD=0.85485) and that use of credit cards
has led to an increased number of bank transactions (M=4.1429, SD=0.77033) and that use of
credit cards is dependable for customers to use anytime (M=3.7857, SD=0.89258).
4.4.4 Agency banking

The study sought to evaluate how Kenya commercial banks’ performance was affected by
agency banking.
Table 4.9 Performance and agency banking
Description Frequency Percentage

Less than 100 agents 6 42.86
101-500 agents 8 57.14
501-1000 agents - -
1001-2000 agents - -
Over 2000 agents - -
Total 14 100.0
Source: Survey data (2022)
28
Table 4.9 above indicates that majority of the banks (57.14%) have the number of bank
agents between 100 and 500 and 42.86% have agents less than 100. This study found that the
agent numbers and financial performance have a positive relationship.
Table 5.0 Performance and agency banking

Standard
Statement Mean (M)
Deviation
Agency banking enables deposit of cash 4.5714 .64621
Customers can withdraw cash through agents 4.2143 .80178
Customers can enquire their accounts’ balance 4.0000 .78446
Customers can collect account opening forms 3.7857 1.12171
Average 4.1429 0.8385
From table 5.0, the aggregate score was 4.1429, which shows that agency banking
significantly influence Kenya commercial banks’ performance was 0.8385 as standard
deviation. The study determined that customers can deposit cash through agents (M=4.5714,
SD=0.64621) and that customers can withdraw cash from agents (M=4.2143, SD=0.80178) to
a large extent had influenced performance. These were followed by the statements that
customers can enquire their account balances (M=4.00, SD=0.78446) and that customers can
collect account opening forms using agency banking (M=3.7857, SD=1.12171).
These findings are consistent with the Wanga (2015) analysis which revealed that Kenya’s
introduction of a banking agency has brought major improvements to the banking industry.
Study by Mbugua and Omagwa (2017) found that banking costs of agency banking affects
the financial efficiency of commercial banks.
4.4.5 Performance of commercial banks

Table 5.10 financial performance of commercial banks.
29
Statements Mean Standard
deviation
Financial innovation has resulted to an increase in

4.500 0.94054
the profit for the last five years.
The return on assets (ROA) in the organization have
3.9286 1.14114
increased in the last five years.
The organization has increased the sales volume in
3.857 0.77033
the last five years.
Return on equity (ROE) has increased in the last
3.5714 0.9371
five years.
Average 3.9643 0.9472

The findings in table 5.10 shows that the aggregate score was 3.9643 which shows that
commercial Banks have greatly performed with 0.9472 as the standard deviation. It was
found that the commercial banks’ profits have greatly increased in the last five years due to
the financial innovations with a mean score of 4.50 and a standard deviation of 0.94054. The
return on assets (ROA) in the commercial banks have increased in the last five years with a
mean score of 3.9286 and 1.14114 as the standard deviation. The organizational sales have
also increased in the last five years with a mean score of 3.8571 and a standard deviation of
0.77033. This was followed by the increase in ROE that is the returns on equity with a mean
score of 3.514 and a standard deviation of 0.9371.
4.5 Regression results

In the study, regression analysis was carried to show the relationship between the dependent
and the independent variables. The dependent variable was financial performance of
commercial banks in Kenya measured by ROA, ROE, Net profits and sales for instance loans
or product whereas the independent variable was internet banking, mobile banking, agency
banking and credit card usage. The regression test was conducted through hierarchical
regression analysis with two stages where the first model presents the coefficients for the
independent variables and the second model presents the coefficients for both the dependent
and independent variables. The test of the relationship was tested at the 5% level of
significance. Findings under this section presents the results on the relationship between the
independent and dependent variables.
30
Regression test was carried out to show the extent of influence of the financial innovations on
the financial performance of the commercial banks in Kenya case study of Kakamega county.
The significance of the regression model was tested at 5% level of significance through F-
statistics which shows the level of reliability of the so developed models in presenting the
relationship between financial innovation and financial performance. Results under
regression analysis give regression model summary which shows the extent of variability of
growth due to the influence of the predictor variables as given by the coefficient of
determination, the ANOVA table which shows the significance of the regression model as
well as the regression coefficients.
4.5.1 Multicollinearity Test

The results in table 5.2 give the variance inflation factor (VIF) for each variable using
traditional criteria employed in the study that the results imply that the level of collinearity
that exist in the analysis is not problematic in anyway as the VIF values are not greater than
10.
Table 5.2 Multicollinearity Test using variance inflation factors (VIF)
Collinearity Statistics
Variables
Tolerance VIF
Internet Banking .446 2.244

Mobile Banking .107 9.372
Credit card usage .122 8.188
Agency Banking .717 1.395
The diagnostics test as given by the VIFs and the correlations in this case indicate no major
collinearity problems in the data alongside other diagnostic tests hence revealing no such
severity. The collinearity results show that the independent variables (internet banking
=2.244, mobile banking =9.372, Credit card usage =8.188 and Agency banking =1.395) all
the variables have the VIFs less than 10 indicating no collinearity problems in the data sets.
With this evidence from the collinearity results presented in the table indicates that
collinearity has not caused problems for the simple effect transfer in the data sets and that the
31
existence of low-level collinearity cannot make the results statistically different in any way.
Therefore, there is no significant collinearity in the data set that can hinder regression
analysis.
4.5.2 Reliability Test
Table 5.3 Reliability Statistics
Cronbach's Alpha No of Items
.871 18
Source: primary data (2022)

The data collection instrument, which is the questionnaire, was reliable since it had a
Cronbach's Alpha of 0.871 above 0.7. According to Whalen (2004), an instrument with a
Cronbach's Alpha of 0.7 and above is considered to be reliable.
Table 5.4 Coefficient of determination results
Model R R Square Adjusted R Std. Error of the

square Estimate.
1 .793a .629 .465 .42963
Predictors: (constant), mobile banking, internet banking, agency banking and credit card
usage.
Table 5.4 presents the regression model summary for the relationship between banks
performance and the predictor variables (internet banking, online banking, agency banking
and credit card usage. The table presents the summary coefficients indicating the extent of
influence of the predictor variables on the performance.
According to the findings, the R-coefficient is 0.793 which shows that the predictor variables
have a positive association with the performance of the commercial banks. The coefficient of
determination (R-square) shows that the predictor variables used in the study can be relied on
to explain 62.9% (0.629) of the viability of the bank’s performance. Thus, based on the
findings, it is clear that holding other factors constant, internet banking, mobile banking,
agency banking and credit card usage contribute to 62.9% growth in the bank’s performance.
32
4.5.3 Analysis of Variance and F-Test Results
Table 5.5 Analysis of variance and F-test results

ANOVA
Model Sum of Df Mean Square F Sig.
Squares
1 Regression 2.821 4 .705 3.821 .044b
Residual 1.661 9 .185

Total 4.482 13
a. Dependent Variable: PERFORMANCE
Predictors: (Constant), AGENCY, INTERNET, CREDIT, MOBILE
From table 5.5 the significance value is testing the reliability of the model for the relationship
between financial innovations and financial performance was obtained as 0.044 which is less
than 0.05 the critical value at 95% significance level. Therefore, the model is statistically
significant in predicting the relationship between financial innovations and financial
performance of commercial banks in Kenya case study Kakamega. The F value calculated is
3.821 indicating a significant model for the relationship as given by the regression
coefficients. This shows that the overall model was statistically significant and reliable in
explaining the effects of financial innovations on financial performance of commercial banks
in Kakamega county.
4.5.4 Correlation Analysis
Table 5.6 Pearson Correlations
Pearson Correlations
PERFORMAN INTERNET MOBILE CREDIT AGENCY
CE BANKING BANKING CARDS BANKING
PERFORMANCE 1.000 .383 .346 .375 .766
INTERNET
.383 1.000 .745 .694 .380
BANKING
MOBILE BANKING .346 .745 1.000 .935 .517
CREDIT CARDS .375 .694 .935 1.000 .528
AGENCY BANKING .766 .380 .517 .528 1.000
Source: Author computation (2022)
33
The table shows the correlation results of the study on the variables, according to the
correlations the range of the output is between -1 to +1. A positive value indicates the
variables are positively related while negative values indicate that the values are negatively
related.
From the findings shows internet banking and banks performance are positively related
(0.383), Mobile banking is positively related with the bank’s performance (0.346), Credit
card (0.375) also showed appositive correlation with the banks performance and agency
banking showed a strong correlation with the performance (0.766).
The use of internet banking was positively related to the use of mobile banking (0.745), credit
cards (0.694) and agency banking (0.380). The use of mobile banking was positively related
to internet banking (0.745), credit card (0.935) and agency banking (0.517). Credit card usage
was positively related to internet banking (0.694), mobile banking (0.935) and agency
banking (0.528). Lastly the agency banking adoption was positively related to the internet
banking (0.380), mobile banking (0.517) and credit cards (0.528).
This indicates that any of the financial innovations had a positive correlation with the banks
performance and the financial innovations had positive correlation among themselves, this
shows that the banks increase the use of innovations simultaneously
4.5.1 Regression Analysis
Table 5.7 Regression Model
Model Summary
Model R R Square Adjusted R Std. Change Statistics
Square Error of R Square Change F Change df1 df2 Sig. F
the Change
Estimate
1 .793a .629 .465 .42963 .629 3.821 4 9 .044
a. Predictors: (Constant), AGENCY, INTERNET, CREDIT, MOBILE
b. Dependent Variable: PERFORMANCE
The four independent variables analyzed, as expressed by the modified R-square, clarify a
factor of 0.465 in the output of commercial banks. This implies that, therefore, that other
34
variables not analyzed in this analysis contribute 0.535 percent of the output of commercial
banks.
4.5.6 Regression coefficients

Table 5.8 Regression coefficients
Model Unstandardized Standardized T Sig.
Coefficients Coefficients
B Std. Error Beta
(Constant) .128 1.060 .121 .907
.248 .259 .291 .957 .364

Internet Banking
.
Mobile Banking -.347 .534 -.403 -.649 .532
Credit card .120 .536 .130 .224 .827
Agency Banking .888 .268 .795 3.316 .009

Source: Author computation (2022)
a. Dependent Variable: Performance
The regression equation resulted to Y=0.128 +0.248X1-0.347X2+0.120X3+0.888X4
Results from table 5.8 indicates that internet banking had no significant influence on the
financial performance. The significance level for the t-statistic is greater than 0.05 (p=0.364)
as indicated hence the study accept the null hypothesis which states that internet banking does
not significantly affect the financial performance of commercial banks in Kenya.
The results also indicated that mobile banking has no significant influence on the financial
performance. The significance level for the t-statistic is greater than 0.05 (p=0.534) as
indicted hence the study accept the null hypothesis which states that mobile banking does not
significantly affect the financial performance of commercial banks in Kenya.
The study indicated that credit card usage has no significant influence on the financial
35
performance. The significance level for the t-statistic is greater than 0.05 (p=0.827) as
indicated hence the study accept the null hypothesis which states that credit cards do not
significantly affect financial performance of commercial banks in Kenya.
The study also indicated that agency banking has a significant influence on the financial
performance as indicated, the significance level for the t-statistic is less than 0.05 (p=0.009)
as indicated in the table hence the study reject the null hypothesis which states that agency
banking does not significantly affect financial performance of the commercial banks. This
result concurs with Kasekende (2008) study where found out that Agency banking has
increased territory, reached marginalized and customer base hence improving on their
financial performance. This implies that Agency banking is playing a significant role in the
performance of the commercial banks in Kenya.
36
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS

5.1 Introduction
This chapter presents the summary of the study findings, the conclusions that were made
from the findings, the recommendations given for policy improvement and suggestions for
further studies.
5.2 Summary
The study aimed at investigating the effect of financial innovations on financial performance
of commercial banks in Kenya, case study of Kakamega County. The study specific
objectives were to examine how internet banking, mobile banking, agency banking and credit
card usage affects the performance of commercial banks. The 14 banks which embrace all the
four financial innovations from 2013-2022 were selected using purposive sampling method.
Questionnaires were used to obtain information which was evaluated descriptively using
mean and standard deviation in addition, multiple regression analysis was conducted to
illustrate the degree to which variables contribute to each one. As follows, the over view of
the results is provided.
The study examined the effect of internet banking on the performance of commercial banks
in Kenya and examined a positive and important impact on the performance of the
organizations, it was found that a unit increase in internet banking would result is a 0.248
factor increase in bank performance in Kenya. Internet banking highly enables customers to
apply for loans online, transfer between accounts and allows online bills payments.
The study sought to evaluate the effects of mobile banking on the performance of commercial
banks in Kakamega County, it was found that a unit decrease in mobile banking would lead
to a 0.347 factor decrease in banks performance in Kakamega. Through mobile banking
services customers derive satisfaction with their transactions, mobile banking provides
convenient services to customers, it enables security of phone transactions and also allows
customers to access financial services.
The study evaluated how Kakamega commercial bank performance is impacted by agency
banking and found a strong positive relationship. It was found that a unit increase in agency
banking would lead to a 0.888 factor increase in banks performance in kakamega county,
customers can conveniently collect accounts opening forms, withdraw cash, request for mini
statements, cash deposits and inquire for their accounts balance.
37
The study aimed to investigate the effects of the credit cards on commercial banks
performance and to investigate a positive and important impact on organizational
performance, a unit increase in credit card usage was developed to increase banks
performance in Kenya Kakamega County by a factor of 0.120 Use of credit cards provides
security of cash transacted by customers in large extent, and is dependable for consumers to
use anytime and also Credit card usage has led to increased number of bank transactions.
5.3 Conclusions
From the findings, it can be concluded that agency baking has a significant influence on the
performance of the commercial banks in Kenya, On mobile banking it can be concluded that
,mobile banking has no Significant influence on the commercial banks performance, it can
also be concluded that internet banking has no significant influence on the performance of the
commercial banks in Kenya and lastly on credit card usage, it can be concluded that credit
cards have no Significant influence on the commercial banks performance. Therefore, from
the study results, only Agency banking has a significant influence on the financial
performance of commercial banks.
5.4 Recommendations for policy and practice

The study recommends that banks should transform banking service by adapting to Agency
banking so that not only to provide jobs but also increase market share. Agency banking has
been practiced by few banks that is why the number is still less.
Significant influence on the commercial banks’ performance
5.5 Study Limitations

This study was faced with difficulties in data collection from the respondents such as top
managers of the banks since they are senior people and to get access to them is limited due to
tight schedules given from their personal assistants. This limitation was mitigated through use
of the data collection assistants who booked appointments with the managers and got access
to them before distribution of questionnaires. The study was limited due to respondents’ fear
to disclose relevant information for the study. However, the researcher overcome this by
assuring the respondents that the information obtained was purely for academic purposes and
therefore will remain confidential.
38
5.6 Suggestion for further studies
The study examined the effect of financial innovations on the financial performance of
commercial banks in Kakamega, with specific focus on how financial innovations affects
financial performance, The study consequently suggests that further studies can be
undertaken to analyze the influence of financial developments on the output of other
economic sectors within the country, using various methodologies that were not used in the
study because the current study focused on the commercial banks performance.
39
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44
APPENDICES
LETTER OF INTRODUCTION
QUESTIONNAIRRE
LIST OF COMMERCIAL BANKS
45
APPENDIX I: LETTER OF INTRODUCTION
46
APPENDIX II: SAMPLE QUESTIONNAIRE
Dear respondent,
RE: DATA COLLECTION
In connection with our bachelor’s degree program, we are required to conduct a research
report on 'Financial Innovation and Performance of Commercial Banks in Kenya' as part of
the degree award requirement. We therefore, seek your assistance in completing the attached
questionnaires.
The results of the study will be for research purposes only and strict confidentiality will be
ensured. Only summary results will be made public. Access to those records will only be by
the university.
SECTION A: GENERAL INFORMATION
1. Age (tick as appropriate)
Below 25 years 26-35 years 36-45 years 46-55 years Above 56 years
2. Gender (tick as appropriate)
Male Female
3. Indicate your highest level of education (tick as appropriate)
Diploma [ ]
First degree [ ]
Masters [ ]
Post graduate diploma [ ]
47
4. Kindly indicate your job description.
Senior management
Middle level management
Lower level management
5. Indicate how long you’ve worked with the organization.
Less than 5 years 5-10 years Above 10 years
SECTION B: INTERNET BANKING
This segment seeks to assess the level of use of internet banking on performance of
commercial banks.
6. Please indicate the extent to which you agree with internet banking as a factor that affects the
financial performance of your organization using the following scale 5= strongly agree,
4=Agree, 3= Moderate, 2=Disagree, 1= Strongly Disagree
Statement 1 2 3 4 5
Internet banking allows online payment of bills
Internet banking enables transfer of accounts
Internet banking enables customers to apply loans online
48
SECTION C: MOBILE BANKING
This section seeks to find the extent to which mobile banking affects the financial
performance.
7. Please indicate the extent to which you agree with mobile banking as a factor that affects
your organization’s financial performance. Use the scale where 5= strongly agree, 4=Agree,
3= Moderate, 2=Disagree, 1= Strongly Disagree
Statement 1 2 3 4 5
Mobile banking provides convenient services to customers
Mobile banking provides security of cash transacted by customers

through the phone
Mobile banking allows customers to have access to financial

services
Though mobile banking services customers are satisfied with their

transactions
SECTION D: CREDIT CARD
8. Please indicate the extent to which you agree with the use of credit cards as a factor affecting
financial performance in your organization. Use the scale where 5= strongly agree, 4=Agree,
Statements on credit cards 1 2 3 4 5
Use of credit cards provides security of cash transacted by

customers
The use of credit cards is dependable for consumers to use

anytime
Credit card usage has led to increased number of bank

transactions
49
SECTION E: AGENCY BANKING
9. How many agents does your organization have?

a) Less than 100 Agents []
b) 101-500 Agents []
c) 501-1000 Agents []
d) 1001-2000 Agents []
e) Over 2000 Agents []
10. Please indicate the extent to which you agree with agency banking as a factor that affects the
financial performance of your institution. Use the scale where 5= strongly agree, 4=Agree,
Statements 1 2 3 4 5
Agency banking enables deposit of cash
Customers can withdraw cash through agents
Customers can enquire their accounts balance using agency

banking
Customers can collect account opening forms
SECTION F: FINANCIAL PERFOMANCE
Statements Strongly Disagree Moderate Agree Strongl

disagree y
Agree
Financial innovation has resulted to an
increase in the profit for the last five years.
The return on assets (ROA) in the
50
organization has increased in the last five
years.
The organization has increased the sales
volume in the last five years.
Return on equity (ROE) has increased in
the last five years.
Average
END OF QUESTIONNAIRE
51
APPENDIX III: LIST OF LISTED COMMERCIAL BANKS IN KAKAMEGA
SELECTED FOR THIS STUDY
1. Equity Bank
2. Corporative bank
3. Absa bank
4. Kenya commercial bank
5. Diamond Trust Bank
6. Standard Chartered Bank
7. NCBA bank.
52

Effect of Financial Innovations On Financial Perfomance of Commercial Banks

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THE EFFECT OF FINANCIAL INNOVATION ON FINANCIAL PERFORMANCE:

A CASE OF COMMERCIAL BANKS IN KAKAMEGA COUNTY.

RESEARCH PROJECT SUBMITTED TO THE DEPARTMENT OF ACCOUNTING

BRONIX ONYANGO BCM/B/01-00371/2018 ………….

VICTOR SWAKA BCM/B/01-00226/2018 ………….

MUTUKU J KUMBU BCM/B/01-00195/2018 ………….

HANNAH WANJIKU BCM/B/01-00279/2018 ………….

SHARON WASWA BCM/B/01-00332/2018 ………….

NDINDA TABITHA BCM/B/01-00238/2018 …………

BENEDETA MBUTE BCM/B/01-00185/2018 ………….

MUTISYA JULIUS BCM/B/01-02456/2018 ………….

SIGNATURE: .................... DATE: ……………

Financial Innovation - The process of equipping financial institutions in new, improved

Internet Banking - An electronic payment system enabling customers of a bank or other

Mobile Banking - Subset of electronic banking in which customers access a range of

Agency Banking - Refer to contracting of a retail or postal outlet by a financial institution or

SPSS-Statistical Package for Social Sciences

CBK-Central bank of Kenya

ROAE-Return on average Equity

ROAA-Return on average assets

Figure 2.1 Conceptual framework............................................................................................18

Figure 4.2: Pie chart for gender………………………………………....................................25

Figure 4.3: Bar graph for respondents’ education level...........................................................26

Table 3.1 Independent Variables..............................................................................................22

Table 4.1 Response rate……………………………………....................................................24

Table 4.2: Gender of the respondents………………...............................................................25

Table 4.3: Age of the respondents………………………………………………....................27

Table 4.4: Duration of working in the organization……………………….............................28

Table 4.5: Job description of the respondents..........................................................................28

Table 4.6 Performance and internet banking……………………………………....................29

Table 4.7 Mobile banking and performance……………………………………....................30

Table 4.8 Credit card usage & performance………………………………….........................32

Table 4.9 Performance and agency banking………………………………………................33

Table 5.0 Performance and agency banking………………………………………................34

Table 5.4 Coefficient of determination results……………………………….........................38

Table 5.6 Pearson Correlations...................................................................................40

Table 5.8 Regression coefficients……………………………………....................................42

1.1 Background of the study

Performance is defined as meeting a goal (Boru, 2011). Financial performance is defined as a

1.1.1 Financial innovation

1.1.2 Financial performance

According to Walter ,2001, performance is evaluated in three dimensions; company’s

Financial performance indicator can be measured in financial and non-financial terms

1.1.3 Financial Innovation and Financial performance

Innovation has a considerable impact on corporate performance by producing an improved

1.1.4 Commercial banks in Kenya

1.2 Research problem

1.3.1 General Objective

1.3.2 Specific Objectives

1.4 Research Hypotheses

1.5 Scope of the Study

1.6 Significance of the Study

2.2 Theoretical Literature Review

2.2.1 Constraint Induced Financial Innovation theory

2.2.2 Transaction cost innovation theory

2.2.3 Regulation innovation theory

2.2.4 Schumpeter theory of innovation

2.2.5 Location innovation theory

2.2.6 Circumvention innovation theory

2.3 Empirical Literature Review

Cheruiyot (2010) did a study on impact on internet banking on financial performance of

2.3.2 Mobile banking and financial performance

2.3.4 Credit cards and financial performance