Abstract:
Innovation is described as the process by which, firms master and implement design,
and the production of goods and services that are new to them. Innovations generally
assume different forms such as product innovations, marketing innovations, micro
MFIS, location innovation, and research and development innovation. Financial
innovations include institutional innovation, product innovation, and process
innovation. These innovations have eased the way of doing business for financial
institutions including microfinance institutions. It remains largely unclear whether
MFIs are adequately innovative in running their businesses given that they are faced
by the challenge of limited growth and expansion. Performance and growth are
related in that a firm cannot grow if it fails to post sound performance. The general
objective of the study was to determine the effect of financial innovation on
performance of microfinance institutions in Kenya. Specific objectives include
examining the effect of institutional innovation, product innovation, and process
innovation on performance of microfinance institutions. The study was guided by
theory of induced institutional innovation, demand-supply theory of innovation,
theory of innovation diffusion, and economic value added theory. Descriptive survey
research design was used in this study. The target population comprised of all
employees working with MFIs registered with AMF-Kenya and the accessible
populations were 187 employees working with MFIs registered with AMF in Nakuru
town, Kenya. Samples of 70 respondents were drawn from the study population using
stratified random sampling technique. The study used questionnaire as the tool for
primary data collection. Secondary data was collected using a data collection sheet. A
pilot study was conducted before the main study with the aim of determining the
reliability and validity of the research instrument. The study determined the validity
of the questionnaire by use of content validity test. Reliability was tested using the
Cronbach alpha coefficient. Data processing and analysis was facilitated by the use of
the Statistical Package for Social Sciences. Data analysis encompassed both
descriptive statistics and inferential statistics. Descriptive statistics such as means,
mode, standard deviations, and variance was used. On the other hand, inferential
statistics was in form of Pearson’s correlation coefficient, and multiple regression
analysis. The result of the analysis was presented in form of tables, charts, and
graphs.From the findings, theresearch concluded that there is a supervisory
framework that monitors MFIs. Some of the innovations observed by MFIs in mobile
banking include partnerships, financial trainings, branch networking and opening up
new branches. It is was also concluded that innovations can be a source of
competitive advantage if a firm understands customer needs, competitors’ actions and
technological development and act accordingly to stay at par with rivals. The study
recommended thatin-order to enhance firm performance the management of
microfinance ought to focus on the firm activities aligned towards renewing routines,
procedures and processes in an innovative manner in a firm. This will positively
improve the performance of microfinance.
