Effect of Financial Innovation on Market Capitalization of Listed Commercial Banks in Kenya

Abstract

There has been a notable paradigm shift in the financial sector in recent years. Increasingly new financial innovation products and processes have been introduced in the banking industry. There are still confounding findings on the effect of financial innovations on investor value despite the undeniable significance of financial innovations. Some empirical studies have reported a positive relationship between financial innovations and Market capitalization, whereas others have reported a negative relationship. The prime objective of this study was to determine the effect of financial innovation on the market capitalization of the Kenyan NSE listed banks for five years from 2013 to 2017. In finance theory, the Modigliani theoretical preposition, Efficient Market Hypothesis, and Random Walk theories of market prices concur that prices of the securities in a stock market are difficult to be predicted. Other theories of financial innovation that have reported existence a link between financial innovation and market value include Schumpeter theory, Silber’s theory, Transaction cost theory, and Market efficiency theory. The study explicitly centered on the effects of; Agency banking, Mobile banking, Plastic credit card innovation, and Internet banking on the market capitalization of listed commercial banks in Kenya. The study additionally assessed the moderating effects of Bank ownership on the relationship between the effect of financial innovation and Market capitalization of listed commercial banks in Kenya. The target population of this study was all the 11 NSE listed commercial banks in Kenya as of 31st December 2017. The decision to target the 11 banks was because they were listed in NSE, and subsequently, the estimation of market capitalization can only be acquired from publicly trading companies. Census research was therefore adopted as the design. Financial data of the independent variables were obtained from banks published quarterly reports available in Nairobi Securities Exchange. Market data on share prices and outstanding shares was obtained from NSE for the period between 2013 and 2017. The data that was obtained was then cleaned, coded, and statistical outputs generated using SPSS, STATA, and EVIEWS statistical software. To analyze the data, descriptive and inferential statistics were produced using panel data models. Granger causality test was also used to examine causality among the variables. The findings revealed that financial innovations, namely: Plastic Credit card innovation and Internet Banking, had a statistically significant positive effect on the market capitalization of listed commercial banks in Kenya. The findings also revealed that Agency Banking and Mobile Banking had a positive effect on Market Capitalization, though not statistically significant. The findings also revealed that bank ownership (local or foreign) did not have a moderating effect on the relationship between financial innovations and market capitalization of listed commercial banks in Kenya. Since the overall random-effects model involving all the financial innovations against market capitalization was significant, it was concluded that financial innovations had a significant effect on the market capitalization of listed commercial banks in Kenya. It is therefore recommended to the policymakers of commercial banks, both the Government and the management, to embrace financial innovations. Correct measures such as favourable laws and regulations should be created to allow a favourable environment for the adoption of financial innovations. This study has not exhausted all financial innovations, and therefore, further study is recommended to include other financial innovations.