Financial Innovations and Financial Performance of Microfinance Banks in Kenya
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Date
2022
Authors
Odongo, Charles Omwanza
Journal Title
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Abstract
The microfinance banks in Kenya have experienced a fluctuating and mixed performance
between 2014 and 2020. For example, the financial performance measured in terms of
pre-tax profits and return on assets was 1,002 million shillings and two percent in 2014
respectively. Further in 2020, the banks recorded a pre-tax loss of 2,240 million shillings
and a return on assets of negative three percent. This presented a threat to their financial
soundness, efficiency, stability, and sustainability, which has raised concern among
financial scholars, regulators, and practitioners. Firms' financial performance has long
been associated with financial innovations. Nonetheless, the available empirical literature
failed to provide a consensus on the effects of financial innovations such as product
innovations, process innovations, and institutional innovations on financial performance.
In view of this, the current study assessed the effect of financial innovations on the
financial performance of Kenyan microfinance banks for the period 2014-2020. The
specific objectives were to examine the effect of product innovations, process
innovations, and institutional innovations on the financial performance of microfinance
banks in Kenya. In addition, the study determined the moderating effect of the regulatory
framework and the mediating effect of competitiveness on the relationship between
financial innovations and financial performance. The study was guided by financial
intermediation, constraint-induced innovation, transaction cost innovation, regulation
innovation theories, and Merton’s Market theories of innovation. The positivism research
paradigm was employed. The assessment was guided by a descriptive research design.
The assessment targeted all the 14 microfinance banks registered by the Central Bank of
Kenya. A census was carried out and a document review guide was used to collect
secondary data from the financial records of these banks. Means, standard deviations,
median, maximum, minimum, skewness, and kurtosis were used for purposes of
descriptive analysis while panel multiple regression and correlation were used for
inferential analysis. The study found and concluded that financial innovations positively
and significantly affect the financial performance of microfinance banks. Specifically,
product innovations and process innovations have significant statistically positive effects
while institutional innovations have no statistically significant effect on the financial
performance of microfinance banks in Kenya. The study further established that the
regulatory framework moderated the relationship between financial innovations and
financial performance. The research also established that competitiveness mediated the
relationship between financial innovations and the financial performance of microfinance
banks. The study concluded that financial innovations enhance the financial performance
of microfinance banks. Consequently, the study recommended that the Central bank of
Kenya reward innovative banks through tax reliefs and strengthen its regulation and
oversight while the management should focus on product differentiation strategy,
aggressive advertising, and research and development to foresee new and innovative
ideas. The study also recommends that microfinance banks should enhance their
competitiveness by increasing their market shares to improve their financial performance.
Description
A Thesis Submitted to the School of Business in Partial Fulfillment of the Requirements for the Award of Degree of Doctor of Philosophy in Business Administration (Finance) of Kenyatta University, Kenya, July, 2022
Keywords
Financial, Financial Innovations, Financial Performance, Microfinance Banks, Kenya