Background: Kenya has become the epicentre of branchless banking financial innovations in the last decade, effectively attracting global research interest.Aim: This article examines the relationship between financial innovation and the financial performance of 42 commercial banks in Kenya.
Setting:The financial innovations covered are the branchless banking models, which represent a departure from the traditional branch-based banking. More specifically, the financial innovations covered are: mobile banking, agency banking, internet banking and automated teller machines.
Methods:We use the Koyck dynamic distributed lag model to estimate the relationship between financial innovations and bank financial performance. The model has been using dynamic panel estimation with system generalised method of moments.
Results:The results show that financial innovations significantly contribute to bank financial performance, and that firm-specific factors are more important in determining the firm's current financial performance than industry factors.
Conclusion:We provide evidence that financial innovations generate good results for the shareholders, suggesting that shareholders are the primary beneficiaries of financial innovations used by commercial banks.
This article examines the speed of adjustment of firm performance to financial innovations usage and the speed of adjustment of financial innovation to financial innovation drivers for banks in Kenya. We used the Koyck distributed lag model, which is estimated using dynamic panel estimation with System Generalised Method of Moments. We find that it takes on average 1.179 years for bank financial performance to adjust to the four financial innovations studied. Secondly, it takes less than a year (0.368 years) to accomplish 50% of the total change in firm performance following a unit-sustained change in the financial innovations. Moreover, mobile banking has the shortest mean lag (2.849), while Automated Teller Machines (ATMs) have the longest mean lag (4.926). Notably, it takes approximately three years for mobile banking to adjust to financial innovation drivers at firm level and on average five years for ATMs to adjust to the financial innovation drivers.
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