Abstract
Abstract: Innovation is described as the process by which, firms master and implement design, and the production of goods and services that are new to them. Innovations generally assume different forms such as product innovations, marketing innovations, micro MFIS, location innovation, and research and development innovation. Financial innovations include institutional innovation, product innovation, and process innovation. These innovations have eased the way of doing business for financial institutions including microfinance institutions. It remains largely unclear whether MFIs are adequately innovative in running their businesses given that they are faced by the challenge of limited growth and expansion. Performance and growth are related in that a firm cannot grow if it fails to post sound performance. The general objective of the study was to determine the effect of financial innovation on performance of microfinance institutions in Kenya. Specific objectives include examining the effect of institutional innovation, product innovation, and process innovation on performance of microfinance institutions. The study was guided by theory of induced institutional innovation, demand-supply theory of innovation, theory of innovation diffusion, and economic value added theory. Descriptive survey research design was used in this study. The target population comprised of all employees working with MFIs registered with AMF-Kenya and the accessible populations were 187 employees working with MFIs registered with AMF in Nakuru town, Kenya. Samples of 70 respondents were drawn from the study population using stratified random sampling technique. The study used questionnaire as the tool for primary data collection. Secondary data was collected using a data collection sheet. A pilot study was conducted before the main study with the aim of determining the reliability and validity of the research instrument. The study determined the validity of the questionnaire by use of content validity test. Reliability was tested using the Cronbach alpha coefficient. Data processing and analysis was facilitated by the use of the Statistical Package for Social Sciences. Data analysis encompassed both descriptive statistics and inferential statistics. Descriptive statistics such as means, mode, standard deviations, and variance was used. On the other hand, inferential statistics was in form of Pearson’s correlation coefficient, and multiple regression analysis. The result of the analysis was presented in form of tables, charts, and graphs. From the findings, the research concluded that there is a supervisory framework that monitors MFIs. Some of the innovations observed by MFIs in mobile banking include partnerships, financial trainings, branch networking and opening up new branches. It is was also concluded that innovations can be a source of competitive advantage if a firm understands customer needs, competitors’ actions and technological development and act accordingly to stay at par with rivals. The study recommended that in-order to enhance firm performance the management of microfinance ought to focus on the firm activities aligned towards renewing routines, procedures and processes in an innovative manner in a firm. This will positively improve the performance of microfinance.