Martin Okode Opiyo
Martin Okode Opiyo
School of Business and Economics
RESEARCH TOPIC:
ANALYSIS OF DIGITAL FINANCIAL SERVICES, FINANCIAL INCLUSION AND FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN KISUMU COUNTY, KENYA
ABSTRACT:
Kenya is characterised by a vibrant financial sector and high financial exclusion in most regions. Kisumu County is among the regions with financial exclusion rate at 25.85% compared to national average of 17.59%. This low financial inclusion could accelerate commercial banks expansive use of Digital Financial Services intended to enhance bank performance. Contrary to this, Kenya finance sector performance, including Kisumu County, is on the decline. Three years (2016-18) average performance by regions shows Nairobi growth return at 5.41%, Mombasa at 1.62%, Kisumu at 0.15%, Eldoret 0.65% and Nakuru 1.07%. Kisumu County growth performance is inconsistent with the postulate of Finance Innovation Theory which hold digital technology are intended to enhance firm’s liquidity and the Economic Value Added (EVA)Theory. Moreover, past studies have not adequately addressed the nexus between DFS and Financial Performance (FP), and significant proportion havefocused on analysis of digital finance or financial inclusion in establishing either determinants or/and individual effects on financial performance, and inconsistent results have been documented. This inconsistency in results could indicate an existence of a special relationship between the financial inclusion and digital finance. The study thus, conceptualized moderation of financial inclusion on the relationship between digital financial services and financial performance of commercial bank. The purpose of this study therefore was to conduct analysis of digital financial services, financial inclusion and financial performance of commercial banks. Specific objectives were to: determine the effect of D'S, establish the effect of FI; all on financial performance of commercial banks and ascertain the moderating effect of FI on the relationship between DFS and financial performance of commercial banks in Kisumu County, Kenya. The study was anchored on the Theory of Financial Innovation and Economic Value Added; adopted correlational research design and a population of 172 managers at the 43 bank branches in Kisumu County. Census survey was used and primary data collected using questionnaire. Cronbach’s Alpha α= .819 revealed internal consistency was attained. Regression results showed that DFS had a significant effect on FP (R2=.762, implying 76.2% variation on FP is explained by DFS constructs) and a unit increase in MFS leads to .368 increase in FP (β=0.368, p< .05) among other constructs. FI had a significant effect on financial performance (R2=.738, implied 73.8% variation on FP is explained by FI constructs) and a unit increase in need for sending and receiving funds leads to .645 increase in FP (β=0.645, p< .05) among other constructs. Result further showed that FI had a significant moderating effect of the relationship between DFS and financial performance (ΔR2 = 0.054, p< .05), meaning FI is a significant component when dealing with both DFS and Financial Performance. The study concluded that DFS has significant effect on financial performance of commercial banks; FI has significant effect and also significantly moderates the interdependency between DFS and financial performance of commercial banks.The study achieved its objective and would add value to Finance Innovation Theory building by itemizing critical aspects of DFS, and FI which could inform future conceptualization and theoretical advancement in financial technology and bank financial performance. The study would also guide policy interventions towards deepening financial inclusion in the country.