Adoption of Financial Innovations by Tier One Commercial Banks and Financial Deepening in Kenya

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Winga, Emily Akinyi
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Kenyatta University
Kenya envisions that by 2030 it will realize the three pillars of success that is social, economic and political development. These pillars are not likely to be achieved if the country adopts same way of doing things, thus innovations in all sector is vital. Innovation accelerates growth in all the three pillars and more so economy. Although, bank innovations are of convincing importance when checked in terms of financial performance, the effect created by the innovation on financial deepening is still not clear. The general objective of the study was to establish the effect of the adoption of financial innovations by tier one commercial banks and financial deepening in Kenya. Specifically, the study sought to establish mobile, agency, automated teller machine and internet banking on financial deepening in Kenya. The study was based on diffusion theory of innovation and theory of financial deepening. The study adopted correlation research design. In the current study the target population composed of 6 banks in tier one. Census approach was used to select 6 tier one commercial banks from 2010 to 2018. Data was analysed using descriptive statistics, correlation analysis and multiple regression analysis with the aid of STATA 12. The regression coefficients were tested for significance using t-statistics at 5% confidence level. Diagnostic tests that conducted include auto correlation, multicollinearity, heteroscedasticity, fixed and random effects and normality. The study findings found that commercial banks in tier one had an average financial deepening of 16.61. Regression analysis revealed that mobile banking, agency banking, automatic teller banking and internet banking have positive and significant effect on financial deepening of tier one commercial banks in Kenya. There is need to take advantage of agency banking services especially in regions which have low mobile phone penetration and adopt agency banking services owing to proximity to banking agents. Data security should be provided to enhance authorization procedure when using automatic teller machines banking services. Owing to positive reception and adoption of internet banking there is need for commercial banks to take advantage of it since it will minimize operational costs and optimize provision of banking services. Banking regulators such as Central Bank of Kenya and Capital Market Authority for listed tier one commercial banks should liberalize financial innovation. To bank managers, since adoption of financial innovations has significant effect on financial deepening, there is need for them to develop innovative approaches to optimize their financial performance. This indicates that there is need for development and adoption of mobile banking, agency banking, automatic teller machines banking and internet banking that would minimize operational costs. There is need for regulation and control of agency banking services to optimize financial performance of banks.
A Research Project Submitted to the School of Business in Partial Fulfillment of the Requirement for the Award of the Degree of Master of Business Administration (Finance) Kenyatta University, June 2021
Adoption, Financial Innovations, Tier One Commercial Banks, Financial Deepening, Kenya