FINANCIAL INNOVATIONS AND OPERATIONAL EFFICIENCY OF COMMERCIAL BANKS IN KENYA
FINANCIAL INNOVATIONS AND OPERATIONAL EFFICIENCY OF COMMERCIAL BANKS IN KENYA
James Ngugi Thiong’o - Postgraduate Student, Department of Accounting and Finance, School of Business Economics and Tourism, Kenyatta University, Kenya
Dr. Francis Gitagia (Ph.D, CPA) - Lecturer, Department of Accounting and Finance, School of Business Economics and Tourism, Kenyatta University, Kenya
ABSTRACT
This study examined the effect of financial innovations on the operational efficiency of commercial banks in Kenya amid continued digital transformation and persistent cost pressures reflected in cost-to-income ratios that remained above internationally accepted efficiency benchmarks between 2019 and 2024. The study focused on financial product innovations, financial process innovations, financial service delivery innovations, and financial infrastructure innovations. Guided by Schumpeter's Innovation Theory, Business Process Reengineering Theory, Diffusion of Innovations Theory, Modern Banking Theory, and the Bank Performance Efficiency Model, the study adopted a census design targeting all thirty-eight commercial banks licensed and supervised by the Central Bank of Kenya. Secondary data covering the period 2019 to 2024 were obtained from audited financial statements, Central Bank of Kenya reports, Kenya Bankers Association publications, and GSMA databases. Using fixed effects panel regression analysis, the findings established that financial product innovations, financial process innovations, and financial service delivery innovations had a negative and statistically significant effect on the cost-to-income ratio, implying improvements in operational efficiency. In contrast, financial infrastructure innovations exhibited a positive and statistically significant effect on the cost-to-income ratio, indicating increased short-term operational costs associated with ICT investments and digital infrastructure expansion. The study concludes that financial innovations significantly influence the operational efficiency of commercial banks in Kenya, with product, process, and service delivery innovations enhancing cost efficiency, while infrastructure investments impose short-term cost pressures before yielding long-term efficiency gains. The study recommends that commercial banks continue strengthening digital financial products, process automation, and technology-enabled service delivery while adopting strategic planning and evaluation frameworks to optimize infrastructure investments and realise sustainable operational efficiency.
