Moderating Effect Of Financial Innovations On The Relationship Between Interest Rates And Financial Performance Of Commercial Banks In Kenya
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Date
2022-09-30
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International Journal of Innovative Finance and Economics Research 1
Abstract
Profitability of commercial banks in Kenya have been declining since 2010 which was largely
attributed to macro-economic factors, fiscal policies introduced by central bank of Kenya and
market activities such as issuance of bonds and capping of interest rates. There has also been
increased integration due to embracement of financial innovations in the banking sector however the
moderating effects of Financial innovations on the relationship between GDP per capita and
financial performance is still uncertain. The objective of this study was to investigate the
moderating effect of financial innovation on the relationship between interest rates and financial
performance of commercial banks in Kenya. The study was based on two theories: Interest parity
theory and Constraint Induced Financial Innovation Theory. The study utilized secondary data for
10-year period as from 2011 to 2020. The target population of the study was 42 commercial banks
that are licensed and supervised by the Central Bank of Kenya. Secondary panel data on financial
performance of Commercial Banks was obtained from the individual institutions’ financial reports
while data on macroeconomic factors will be obtained from both Central Bank of Kenya and Kenya
National Bureau of Statistics. Return on assets was used to measure financial performance. The
study found a moderating effect of interest rates on financial performance of commercial banks in
Kenya (b= -5.292, t= -2,202, p=0.028. This study concludes that when a bank’s innovations are at
the highest, it can achieve a very high Return on assets even when it keeps it interest rates very low.
The study recommends that banks should implement the highest degree of innovations, which will
enable them achieve very high Return on assets even when they keep their interest rates very low.
Keywords: Financial Innovations, Interest rates, Financial Performance, Commercial Banks.
Description
Keywords
Financial Innovations, Interest rates, Financial Performance, Commercial Banks.