FINANCIAL INNOVATIONS AND COST EFFICIENCY OF COMMERCIAL BANKS IN KENYA
FINANCIAL INNOVATIONS AND COST EFFICIENCY OF COMMERCIAL BANKS IN KENYA
Faith Moraa Otondi - Student, Department of Accounting & Finance, Kenyatta University, Kenya
Dr. Francis K. Gitagia (Ph.D), CPA - Lecturer, Department of Accounting & Finance, Kenyatta University, Kenya
ABSTRACT
Kenyan commercial banks have adopted various innovations, yet challenges in optimizing costs under inflationary pressures persist. This study examined the effect of financial innovations on the cost efficiency of commercial banks in Kenya. The specific objectives were: to establish the effect of system innovations on cost efficiency of commercial banks in Kenya; to analyze the effect of product innovations on cost efficiency of commercial banks in Kenya. The study was anchored in the Transaction Cost Theory and Innovation Diffusion Theory. The study targeted a census of all 39 commercial banks licensed by the Central Bank of Kenya and employed a descriptive research design with an explanatory approach. Secondary data were extracted from CBK reports and bank financial statements spanning 2020 to 2024, supplemented by primary data from structured questionnaires administered to 68 respondents (response rate: 87.18%). Inferential analysis utilized multiple linear regression models alongside Pearson’s product-moment correlation coefficients, while means and standard deviations supported descriptive evaluation. Correlation outcomes reflected moderate negative relationships with cost efficiency: system innovations displayed the strongest link (r = -0.470) and product innovations (r = - 0.312). The GLS regression findings showed that product innovations had a negative influence on cost efficiency (β = -0.032, p = 0.003). In conclusion, adopting product and system innovations enhanced cost efficiency in commercial banks. Consequently, the study recommends that banks prioritize system innovations.
