The impact of product innovation on financial performance of commercial banks in Kenya

The purpose of the study was to assess the impact of product innovation on commercial \nbank’s financial performance as the key players in the banking sector over a period of 4 \nyears. Kenya’s financial sector has undergone significant transformation in the last few \nyears. Many new more efficient and real time financial systems have come into place. \nDespite the undeniable importance of financial innovation, its effect on financial \nperformance is not always obvious since there are reported cases of reverse causality \nbetween innovation and performance. The descriptive research design was used to carry \nout this study. The population of study was all the 43 commercial banks in Kenya as at \n30th June 2011. The study used secondary data from published central banks’ annual \nreports. The independent variable was product innovations unique to commercial banks \nwhile dependent variable was consolidated financial performance of all banks. A cross \nsectional regression model was adapted. The regressions were conducted using statistical \npackage for social sciences (SPSS) version 21. Regression results indicate that there is a \npositive and significant relationship between innovated products Ratio and ROA. The \nstudy concludes that product innovations positively affect financial performance. Based \non these results, the study recommends that product innovation information should be \navailable particularly to regulatory and advisory bodies for guidance to the commercial \nbanks on the need to craft and employ sound strategies geared towards continuously \nembracing innovativeness since innovation leads to improved financial performance. In \naddition, the study also recommends that firms should create an enabling environment for \nthe employees to be innovative in their operations in order to utilize its competitive \nadvantage so as to increase financial performance and growth of the sector.