Total Factor Productivity in the Kenyan Banking Sector and How it is Affected by Technological Innovation
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Date
2020
Authors
Njau, Nicholas Mureu
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
Technological changes and innovation in any economy play a pivotal role in reducing
operational expenses and increasing total factor productivity. The Kenyan banking sector
is characterized by operational inefficiency in the factors of production as evidenced by
high operational expenses. The inefficiency in the factors of production can be reduced
through adoption of new technology and innovation. This study examined how technology
and innovation can remedy the inefficiency by investigating the level of total factor
productivity for the banking sector in Kenya after adopting new technology and innovation
inform of new core banking operating systems. The study also examined how the banks
can leverage on technological innovations by investigating the effects of technological
innovations on total factor productivity for the banking sector in Kenya. Within the period
2011 to 2015, commercial banks in Kenya adopted new core banking systems that have
enhanced service delivery through technology and innovations. The robust core banking
systems adopted have enabled commercial banks to have alternative channels of service
delivery which include, mobile banking, online banking, and the banking agents as the
significant developments in technology towards service delivery. The study used balanced
panel data set of 29 banks within the period 2011 to 2015. The study period was pegged
on the period banks in Kenya adopted new core banking systems and before the
implementation of interest cap in 2016. The study used a nonparametric Data Envelopment
Analysis to estimate the Malmquist Total Factor Productivity indices. The study found out
that total factor productivity level had increased by 1.4% within the period 2011 to 2015.
The cause of change on Total factor productivity was determined by decomposing the total
factor productivity change into technical change and efficiency change. The study found
out that technical change had decreased by 2.8% while efficiency change had increased by
4.3%. The increase in efficiency changes was further decomposed into pure efficiency
changes and scale efficiency changes. The current study found out that pure efficiency had
increased by 2.7% while scale efficiency had increased by 1.6%. The study also estimated
the effect of technological innovation on total factor productivity of the Kenyan banking
sector. The study found out that technological innovations were statistically significant in
determining the level of total factor productivity. The results of the study elicited the need
for the Kenyan government and the Central Bank of Kenya to intervene in policy
formulation on technology and innovation to remedy the inefficiency in factors
productivity. The intervention will ensure the banking sector productivity growth is
consistent. The interventions will also ensure commercial banks are in tandem with the
technological innovations happening across the world to leverage on technological changes
and innovation. This will go a long way in service delivery and improved efficiency in
customer service.
Description
A Research Project Submitted to the Department of Applied
Economics in Partial Fulfilment of the Requirements for
the Award of Master of Economics (Finance) Degree of
Kenyatta University.
Keywords
Kenyan Banking Sector, Technological Innovation, Kenya