Financial innovations and bank performance in Kenya: Evidence from branchless banking models

Abstract

Background: Kenya has become the epicentre of branchless banking financial innovations in the last decade, effectively attracting global research interest. Aim: This article examines the relationship between financial innovation and the financial performance of 42 commercial banks in Kenya. Setting: The financial innovations covered are the branchless banking models, which represent a departure from the traditional branch-based banking. More specifically, the financial innovations covered are: mobile banking, agency banking, internet banking and automated teller machines. Methods: We use the Koyck dynamic distributed lag model to estimate the relationship between financial innovations and bank financial performance. The model has been using dynamic panel estimation with system generalised method of moments. Results: The results show that financial innovations significantly contribute to bank financial performance, and that firm-specific factors are more important in determining the firm’s current financial performance than industry factors. Conclusion: We provide evidence that financial innovations generate good results for the shareholders, suggesting that shareholders are the primary beneficiaries of financial innovations used by commercial banks.

Keywords

• financial innovation
• financial performance
• branchless banking
• network externalities
• industry adjusted ROE/ROA