Financial Innovation and Financial Performance of Tier 3 Commercial Banks in Kenya

ABSTRACT : Banks play very important role in economic development of nations despite that they face amyriad of challenges including financial innovation in establishing and maintaining financial performance.General objective was to assess financial innovation on financial performance of Tier 3 Commercial Banks inKenya. Specifically, study was to establish moderating effect of bank regulatory framework on financialinnovation and financial performance. Schumpeterian growth theory adopting explanatory research design.Target population constituted all managers drawn from Tier 3 commercial banks in Kenya. Proportionatesampling and simple random sampling were employed in picking managers. Questionnaire was used incollecting data for financial innovation while secondary data was collected for financial performance frompublished annual returns obtained from Central Bank of Kenya. Pearson product moment correlation analysisand multiple regression analysis were employed. Sample size was 129. Findings indicated that correlationmatrix of financial innovation (r=0.365, p=0.000) had linear relationship with financial performance. Regressionresults indicated that coefficient of financial innovation was 2145.08, p=0.000<0.05implying positive andsignificant while bank regulatory framework, had a model where F=8.033,p=0.006<0.05 implying positive andsignificant at 5% level. Findings of study indicated that financial innovation influenced financial performancewhile bank regulatory framework moderated relationship between financial innovation and financialperformance. Commercial banks should implore financial innovations by including budgets specifically fortransaction bank cards, agency banking, mobile banking, internet banking and electronic payment so as toincrease financial performance.

KEYWORDS – Commercial Bank, Financial Innovation, Financial Performance, Kenya, Tier 3