Moderating Effect Of Financial Innovations On The Relationship Between Interest Rates And Financial Performance Of Commercial Banks In Kenya

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.