Financial Innovations And Levels Of Risks In Commercial Banks In Kenya

ABSTRACT Commercial banks would find the origins of the different financial threats that arise as a result of global changes, as they can threaten bank stability. Notwithstanding the undisputed the importance of financial innovation in recognizing banking performance remains underrated, the influence of innovation on risk management. Therefore, this study aimed at establishing the effect of financial innovations on levels of risks in commercial banks in Kenya. The specific objectives that guided the study inlude; to determine the effect of internet banking on level of risks in commercial banks in Kenya, to examine the impact of mobile banking on level of risks in commercial banks in Kenya, to establish the effect of agency banking on level of risks in commercial banks in Kenya and to determine the impact of electronic cards on level of risks in commercial banks in Kenya. The study was guided by Silber’s Constraint Theory of Innovation, Merton’s Market Efficiency Theory of Innovation and Diffusion of Innovation Theory. The study adopted a descriptive cross-sectional research design. The target population was all the 42 commercial banks registered with CBK as at December 31st 2016 (CBK, 2016). The unit of observation was the risk management managers, one from each of the 42 commercial banks. This was a census study. The study collected primary data. The primary data was collected from the respondents through a questionnaire. Each questionnaire was followed by a cover letter describing and assuring that all answers were handled confidentially. Before the actual data collection, a pilot study for the questionnaire was performed to find flaws in the concept and the instrument. The study found out that the banks had put effective security measures to mitigate internet banking fraud (risks), the study established that the transaction errors arising from mobile banking exposed the customers and the banks to financial risks and that the user behavior greatly exposed the customers to risks. The study also found out that the information of customers transacting through agency banking was kept confidential for any fraud activity to take place and that system malfunction exposed the bank and the customers to risks. It also found out that technical failures on electronic cards exposed clients and banks to financial risks and that there was high rate of electronic cards fraud in the banking sector. The study concluded that the financial innovations in the Kenya’s banking sector influence the level of risk in commercial banks both negatively and positively. The study therefore recommends that the banks should create creative ways to measure the effect of agency / mobile banking on numerous transactions and improve the requisite contingency plans. The regulator should also track the banking sector closely and strictly enforce conformity with the agent / mobile banking rules, whilst the banks are constantly monitoring agents carefully.