Effect of Financial Innovation on Intermediation Efficiency within the Banking Sector in Kenya
Abstract
The banking sector in Kenya has rampantly undertaken a lot of financial innovation, a move seemingly emanating from the need to bridge the gap between the two economic agents and a quest to address the dynamic changes in their clientele and the financial system as a whole. However, despite the vital role played by the financial innovations, the tangible evidence related to its effect on financial intermediation efficiency has been scanty. The latter could be as a result of few empirical studies, denying the players the vital information on the effect that financial innovation has on the sector. This study sought to establish the effect of financial innovation on the financial intermediation efficiency within the banking sector in Kenya for the period beginning on 01st January 2012 and ending on 31st December 2020.Secondary data collected from the Central Bank of Kenya website was utilized. This data was grouped on quarterly averages based on the financial reporting timelines of the banking sector in Kenya. The predictor variables used include: Volumes of Mobile banking transactions; internet banking transactions; Point of Sale; RTGS; Automated Clearing House and Automated Teller Machines. The outcome variable was interest rate spread, which is the difference between the lending rates and deposit rates, as proxy for financial intermediation efficiency. The study focused on the aggregate banking sector. The study adopted a descriptive research design and the data was analyzed using a multiple regression model. The F-value had a significance of <0.001 which is less than p-value of 0.05, an indication of significant statistical relationship between the outcome and predictor variables under the study. The results from the regression analysis indicated that volume of mobile banking transactions was positively and significantly affecting the efficiency of financial intermediation. Internet banking and Agency banking were positively but insignificantly affecting financial intermediation efficiency. Automated clearing house and ATMs’ volumes were adversely and insignificantly affecting the efficiency of financial intermediation. The adjusted R2=0.844 indicating that 84.4% of the change in financial intermediation efficiency was influenced by the predictor variables under the study. The study also established that R=0.931, meaning that the predictor variables had a strong correlation with the outcome variable. Therefore, the study concluded that, financial innovation is a huge determinant of the financial intermediation efficiency in Kenya, highly influenced by the Mobile Banking Transactions. The recommendations thereby were: Banks to continuously research on the technology based banking; carry out rigorous mass sensitization programs and campaigns; designing of the technology based banking platforms to be done in conformance with the consumers requirements and expectations; create an integrated one stop comprehensive financial services platforms; offer rebates on savings/deposits rates done on the financial innovation platforms; continuous maintenance of the alternate banking channels ;creation of digital centers at bank branch levels; offer information and financial support to agency banking agents and install security measures to safeguard information /financial losses. The study suggests that: The same kind of study to be conducted after a significant period of time (post the interest rate capping period); another study that entirely focusses on individual banking institutions and same scope be extended to the other subsectors of the finance sector including insurance and microfinance institutions.
Keywords: Financial Innovation, Financial Intermediation Efficiency, Banking Sector in Kenya
