MEDIATING EFFECT OF FINANCIAL INNOVATION ON THE RELATIONSHIP BETWEEN ORGANIZATIONAL CAPITAL AND FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN KENYA

Abstract

The purpose of the study was to investigate the mediating effect of financial innovation on the relationship between organizational capital and financial performance of Commercial Banks in Kenya. Purposely the study sought to examine the relationship between financial knowledge and expertise and financial performance of commercial banks in Kenya. It also evaluated the relationship between financial business process and practice and financial performance. Assessment of the relationship between human capital and financial performance and assess the mediating effect of financial innovation on the relationship between organizational capital and financial performance of commercial banks was done. A census survey was carried out on all the 41 licensed commercial banks in Kenya. Out of the 123 respondents that were targeted, all responded constituting a response rate of 100%. Hypotheses were tested using a combination of multivariate techniques, including regression analysis, chi-Square, RMSEA, GFI and NFI to address the mediating effect as well as model complexity, estimating constructs and latent variable scores. The findings found that financial knowledge and expertise had a positive relationship with the financial performance of commercial banks There was a strong positive relationship between the financial business process and financial performance of commercial banks. This implies that organizational capital leads to enhanced financial performance. The results also revealed that there was a significant positive relationship between human capital and financial performance of commercial banks. The study confirmed that the combined effect of financial innovation (ATMs, internet banking, Mobile banking and Debit cards) mediated the relationship between organizational capital and financial performance of commercial banks. This study contributes to understanding the mediating effect of financial innovation and financial performance as well as confirming the finding of previous studies that have found a significant link of mediating effect of financial innovation and financial performance of commercial banks. The study used T statistical tests which indicated that financial innovation had a mediating effects effect on organizational capital and financial performance (β=0.378, p< 0.05). The study also brings out that increased understanding of financial knowledge and expertise can enhance financial performance of Commercial Banks. Firms should strengthen their financial business process and practice since it plays a significant role in channeling funds to the industries as well as contributing towards economic, financial growth and stability. Financial institutions like banks can also enhance financial performance by building on their human capital through customer relations, employee relations and increased customer loyalty. Several financial performance parameters such as Return on Assets (ROA) and Earnings Before Interest and Tax (EBIT) were used to measure the financial position for the commercial banks. Liquidity preference Theory, Diffusion of Innovation Theory and Transaction Cost Theory guided this study. The study was carried out in Nairobi‘s since over all of the Commercial Banks head offices are based in Nairobi. The study respondents were the bank operation managers, credit managers and transactional banking manager. A self administered and open-ended questionnaire was used to collect primary data while secondary data was obtained through documentary analysis of audited published financial statements.