Financial Innovations and Financial Deepening of Commercial Banks in Kenya

Abstract

Technological innovation has conceived digital financial products which has enhanced access to financial banking services. Historic institutions, out of fashion technology encompassed by consumer unfriendly methodologies have ripened the financial industry for financial technology transformation. Subsequently, there has been a surge in fintech innovations in the emerging markets and despite significant progress in their adoption, there are still enormous swathes of global population with limited or no access to formal finance. These financial innovations have altered traditional banking services and its ultimate value addition to financial services cannot be ignored. Consequently, the current study was undertaken with the general objective of establishing the effect financial innovations have on financial deepening of commercial banks in Kenya. Mainly, the study explored the effect of mobile banking, ATM banking, online banking and agency banking on commercial banks financial deepening. In addition, moderating effect of bank size on the effect of financial innovations and commercial banks financial deepening was examined. Secondary data was collected from Kenya National Bureau of Statistics, World Bank website, Central Bank of Kenya, published financial accounts statements of all the 43 commercial banking institutions in Kenya, and the Banking survey publications for a time period ranging between 2012 to 2018.The study was anchored on financial intermediation, innovation diffusion, agency, transaction cost and financial repression theory of financial deepening. The study adopted descriptive cross-sectional research design. The five research hypothesis were estimated using panel data techniques of random effect model. The study analyzed time series secondary panel data. Target population comprised of 43 commercial banks licensed and operational in Kenya. Panel secondary data was collected through use of document check index. Inferential and descriptive statistics were adopted for data analysis. Positive significant relationship between mobile phone banking, automated teller machine, online banking, agency banking and financial deepening were reported. Bank size had positive moderating effect on financial innovations and financial deepening of Commercial banks in Kenya. In secondary data collection, one of the variables agency banking had only 18 operational agents hence the study utilised point of sale in order to gather sufficient data to give conclusive results. It was recommended that government ought to develop polices geared towards adoption of financial innovation to amplify access to financial services. There is need to invest on internal controls and security management to mitigate against risk exposure due to alternative service provision strategies. Since mobile banking may over step and overtake some commercial banking functions, there is need to regulate and confine it to its main objective of remittances. The Central bank must urgently come up with regulations that ensure that all mobile banking transactions are tracked to avoid huge cash balances ‘floating’ outside the formal system which then threaten liquidity in the economy. Banks should come up with thoughtful policies that permit them to be intermediaries or agents for the non-bank led product which has deeper access to people in order to lubricate the cash constraints and make the product more convenient.