Contents

CHAPTER 1........................................................................................................................................................................ 2
INTRODUCTION...............................................................................................................................................................2
1.1Background of the study............................................................................................................................................2
1.1.1Financial Innovation...............................................................................................................................................3
1.1.2 Financial Performance...........................................................................................................................................4
1.2 Statement of the problem..........................................................................................................................................5
1.3 Research Objectives..................................................................................................................................................6
1.3.1 General objective................................................................................................................................................6
1.3.2 Specific objectives...............................................................................................................................................6
1.4 Research Questions...................................................................................................................................................6
1.5 Significance of the Study...........................................................................................................................................7
1.6 Scope of the Study.....................................................................................................................................................7
1.7 Limitation of The Study............................................................................................................................................7
1.8 Assumption of the Study...........................................................................................................................................7
1.9 Definition of Key Terms........................................................................................................................................8
CHAPTER 2........................................................................................................................................................................ 9
LITERATURE REVIEW...................................................................................................................................................9
2.1 Introduction...............................................................................................................................................................9
2.2 Theoretical Review....................................................................................................................................................9
2.2.1 Theory of Financial Intermediation..................................................................................................................9
2.2.2 Innovation Diffusion Theory............................................................................................................................10
2.2.3 Task-Technology Fit Theory (TTF).................................................................................................................10
 CHAPTER 1

INTRODUCTION
1.1Background of the study
Globally, according to Federal Deposit Insurance Corporation (FDIC) (2019), when deposit taking SACCOs in
America apply financial innovations in their operations, there has been creation of approaches to increase their
asset base. In addition, deposit taking SACCOs in Europe and China have increased the gross profits from the
high number transactions they receive within certain timeframe (Deloitte, 2020). There has been reduced
expenses since deposit taking SACCOs keep on advancing and introducing new financial innovative products in
Sweden (Hull, 2018).

The financial innovations in SACCOs are of much importance more so to Africa in its fight against poverty as
enshrined in sustainable development goals. Africa contribute to 48 percent of poverty level worldwide
(Omilola & Lerven, 2019). Putting in mind that SACCOs are owned by members, there is the need for SACCOs
to rely on themselves financially, which can be done through implementation of financial innovations which
will attract more customers leading to increase in profitability, ability to meet their long and short term
obligations as well as capital adequacy instead of relying on donor funding and grants. South African
government has provided policies to deposit taking SACCOs that have portrayed potential in high tax returns
thereby increasing their chances of making even more revenue (Price Water house Cooper, 2019). In Nigeria,
there has been 2 provisions of employment opportunities to the public so as to create awareness of the new
financial products introduced in the SACCO. Clients in Ghana have also gotten alternative financial products
and services that they can choose from hence diversifying their wealth (Yusheng & Masud, 2019).

Kenya has classified micro financial institutions into 3 major categories; Large (market share of above 5%),
medium (market share between 1% and 5%) and small (market share of below 1%).These institutions have
adopted various financial innovations over the years to aid in their operations. Such innovations have been
fueled by the rapid adoption of Information System technology to usher in a digital age of banking (Sang
Kiplimo, 2019).The Kenyan financial sector has experienced remarkable changes where advanced technology
has totally reformed the banking philosophy. Challenges experienced within the banking system have led to
creation of new innovations including: telephone banking, internet banking and agency banking. Deposit taking
SACCOs have increased their clientele portfolio worth through engaging in financial innovation products and

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services. There have been increased loan disbursement since borrowers have access to different types of loans
that have been re-engineered to suit their needs (Wanyonyi & Ngaba, 2021). Shareholders have been able to
have increased dividends since the financial innovation products have increased the net income; salaried
customers are able to acquire advances especially through customized overdraft (Karanja & Munene, 2019).
There have been rebates gotten from fixed deposits which have in overall improved financial performance of
the deposit taking SACCOs.

1.1.1Financial Innovation

In early days, deposit taking SACCOs used manual processes in most of their banking activities which would
normally cause inefficiencies and limit their reach. The introduction of innovative financial tools has sparked a
revolution in the provision of financial services, opening new ways for SACCOs to grow and interact with more
clients. These innovations specifically affect the organization’s revenue and risk by either increasing or reducing
them thus affecting the overall performance of the organization (Kiplimo, 2019). Telephone banking, internet
banking, and agency banking are among the fundamental changes that have redefined the functioning of
SACCOS and impacted upon their financial performances.

Telephone banking is one of the innovations in deposit taking SACCOs. There is a positive impact of telephone
banking on enhancing customer engagement, reducing transaction costs, and improving financial inclusion
(Smith, 2019). It allows customers to process banking transactions even without the need of to the physical
branch. Customers are able to deposit and withdraw cash, check their balances, pay bills, transfer funds or even
top up airtime from the comfort of their home or workplace. This innovation has enhanced the accessibility of
banking services especially to individuals in the remote areas. They have also allowed financial institutions to
carry out transactions within the required time and provided a secure means of banking for individuals using
security protocols to prevent unauthorized access of information.

Internet banking is also another financial innovation. With internet banking, customers are able to perform tasks
like managing their accounts, fund transfer, loan application and buying of shares from anywhere as long as
they are connected to the internet. This innovation has improved customer experience as well as simplified
operations for SACCOs by eliminating manual processes and physical structures. Internet banking adoption is
positively associated with SACCOs' financial performance, including increased revenues, cost savings, and
customer retention (Chen, Li & Wang, 2019).

Agency banking comprises of agents and principals (customers). These agents are licensed and authorized by
the respective banks and operate on given localities. The essence of banking agents is to decentralize essential

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banking services closer to the people as way of enhancing availability, accessibility and reliability of banking
services. According to Nyagadza (2019), the modern world is dictating the essence of reliable and accessible
banking services where people can obtain key banking services closer to them and when they need them. This
means that for the commercial banks to be competitive and aligned to customers’ changing needs, they ought to
integrate a banking mode that enhances accessibility of banking services to all customers.

1.1.2 Financial Performance

A well-functioned financial sector looks for continuous adaptation, evolvement, and the diffusion of innovative
financial assets, institution, and services along with easy access to financial services, and readily available for

the population (Qamruzzaman and Wei, 2019). The role of financial innovation in the financial system assist
in improving financial institutions performance (Chipeta and Muthinja 2018). Financial performance measures
the financial health of an organization at a particular point in time. It also measures how well a firm is
generating value for the owners. It can be measured through various financial measures such as profitability,
liquidity ratios and Return on Assets.

Globally for example in China, there have been cyber insecurity causing massive loss of financial data and
money from the Sacco; and increased competition from the banks offering even more advanced financial
products and services (Macdowell, 2019). Regionally, Saccos have experienced inconsistency of savings by
clients since there are no attractive interest paid on their savings accounts and limit on how much one can
withdrawal in a day. In addition, Moki et al. (2019) complained that some of the implemented financial
innovations were not user friendly for clients to use hence they avoided using them resulting to loss of
purported income to the Sacco.

Locally, there have been excess bureaucracy of the Saccos management hence discouraging staff from offering
innovative ideas and high taxes by the government particularly on new financial products developed (Kalume &
Makau, 2019). Additionally, Saccos have been facing the issue of keeping up with the rapidly changing
technology; low skills and inadequate training by its staff to adapt new technology; and lack of interest leading
to low adoption of new financial products by clients and members.

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1.2 Statement of the problem
Deposit taking Saccos are financial institutions that are registered and regulated by Sacco Societies Regulatory
Authority into accepting deposits and offering loans to qualified borrowers (SASRA, 2022). These institutions
add capital to the economy by lending it to different people, firms, and other organizations who are supposed to
repay back later at an agreed interest rate. Moreover, they offer access to financial advice from experts on
investment at a price which has to be paid. As they strongly contribute to the economic system, it is necessary to
assess their financial status in the view of going concern.

On the other hand, Saccos have been declining in profitability as seen in Kenya (SASRA, 2022). In the
Financial year 2021/2022, the deposits from deposit taking Saccos dropped from Ksh. 114.59 billion to Ksh.
83.78 billion in the year 2021/2022. Yet, the other side of it was that profits dropped by 26.89% which is a
matter of concern. The profitability has partially been associated with the low rate of the implementations of
innovations like telephone banking, internet banking and agency banking of the Saccos. This has led to a clash
between the clients and the Saccos in that the Saccos have not been presenting the services that the clients want.
Nevertheless, the persistence of this distortion has compelled the customers to switch to the commercial banks
which have been offering the similar services with some touch of innovations.

In Nyeri Town, where the economic environment is shaped by a range of influencing elements such as
population dynamics, urbanization trends and different consumer behaviors, SACCOs are faced with the need to
adapt to these shifts to become competitive and sustainable. According to (Odero,Egessa & Osena ,2019) the
research generally dwelt on innovation and the overall performance of deposit taking SACCOs in Kenya hence
calling the need to conduct a local study specifically in Nyeri Town and also discuss the effects of financial
innovation itself and the financial performance of deposit taking SACCOs. Nahashon.M (2020) studied the
innovative strategies and the performance of SACCOs in Nyeri County, however it was conducted in the
organizational or firm industry leaving a gap in the financial industry. Therefore, this study sought to fill the
knowledge gap by establishing the financial innovations and the financial performance of deposit taking
SACCOs in Nyeri Town, Kenya. From the above discussion, it is evident that a number of studies have been
conducted on innovation and performance of deposit taking SACCOs. However, the focus of these studies was
limited on the innovative strategies, contrasting factors as well as regions where the deposit taking saccos were

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based. There has been growth of the current financial innovations that SACCOs may adapt hence this study aim
to fill this gap by assessing the effects of financial innovation on financial performance of deposit taking
SACCOs in Nyeri Town.

1.3 Research Objectives

1.3.1 General objective
The general objective of this study is to assess the Effect of Financial Innovations on the Financial Performance
of Deposit Taking SACCOs in Nyeri Town.
1.3.2 Specific objectives
The specific objectives include:
i. To determine the effects of telephone banking and financial performance of deposit taking SACCO’s in
Nyeri Town.
ii. To identify the effects of internet banking and financial performance of deposit taking SACCO’s in
Nyeri Town.
iii. To examine the effects of agency banking and financial performance of deposit taking SACCO’s in
Nyeri Town.
iv. To measure the overall effects of financial innovations on the financial performance of deposit taking
SACCOS in Nyeri Town.

1.4 Research Questions

i. What is the effects of telephone banking on the financial performance of deposit taking SACCO’s in
Nyeri town?
ii. What is the effects of internet banking and financial performance of deposit taking SACCO’s in Nyeri
town?
iii. What is the effects of agency banking and financial performance of deposit taking SACCO’s in Nyeri
town?
iv. How to measure the overall effect of financial innovations on the financial performance of deposit
taking SACCOS in Nyeri Town.

1.5 Significance of the Study

Since SASRA's primary objective is to regulate and supervise SACCOs to ensure their stability and soundness,
this study will allow SASRA to adapt regulations, promote financial inclusion, safeguard depositor interests,
and foster competitiveness and efficiency within the SACCO industry.
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This study will also be an instrument that will assist SACCOs managers in coming up with unique projects that
suit the customer preference. Managers will be able to know the top innovations in their field and spare some
tailoring them according to their customers.

In addition, this study is essential to customers in that it determines the quality, availability, cost, and range of
financial products. Thus, customers can make conscious decisions about where deposit their money and get
credit, thinking of their financial health.

The study will assist scholars in their quest to monitor the degree of change financial innovation has brought to
the deposit taking SACCOs over the past few years. The study will assist researchers identify commonly used
financial innovations over time and monitor their effects.

1.6 Scope of the Study

The scope of this study mainly focuses on deposit-taking SACCO’s operating within Nyeri Town, Kenya. The
study examines the various types of financial innovations being adopted which includes mobile banking,
internet banking, agency banking and their impact on key financial performance indicators that is profitability
and liquidity. For the purpose of this study the target population for registered deposit taking SACCOs in Nyeri
Town is 11 which have been in operation for a minimum of 5 years.

1.7 Limitation of The Study

The study may face challenges in the collection of data. Respondents also need constant reassurance that their
data would only be used for research purposes to persuade them not to withhold any information. The study is
limited to the workforce of the SACCOs to allow the researcher to gain accurate data on the effect each
innovation had on the institution’s client.

1.8 Assumption of the Study

The study assumes that :

i. All the deposit taking SACCOs within Nyeri Town have different management structures but all of
them are under one regulatory authority,SASRA.
ii. All the deposit taking SACCOs within Nyeri Town aim to maximize their financial performance
within the constraints of their regulatory environment.
iii. The availability of data in all the deposit taking SACCOs within Nyeri Town are sufficient and
reliable for analysis including their financial statements.
iv. All deposit taking SACCOs in Nyeri Town use telephone, internet and agency banking .
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1.9 Definition of Key Terms
Financial Innovation

Is defined as the development of new financial instruments and institutions, along with new payment
systems ,that permit risk to be unbundled more effectively (Bernstein, 1996)

Agency banking

Is a banking strategy where banks establish agents who are authorized to undertake specific banking functions
such as cash withdrawals, deposits and account balance checking (Mwaiwa, Kwasira, Boit, & Chelule, 2022).

Internet banking

It is defined as banking applications that allow customers to perform financial transactions through the use of
World Wide Web wherever Internet is available, at anytime, anywhere (Shih and Fang, 2004).

Financial Performance

Refers to the ability of a SACCO to fully utilize the shareholder’s resources it has control over to make profits
by competitively offering various innovative products and services (SASRA, 2022).

Deposit Taking Saccos

These are financial institutions that are registered and regulated by Sacco Societies Regulatory Authority into
accepting deposits and offering loans to qualified borrowers (SASRA, 2022).

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 CHAPTER 2

LITERATURE REVIEW

2.1 Introduction
This part outlines the literature to be reviewed regarding the subject matter. This includes theoretical review,
empirical review, operational framework, conceptual framework and research gap. The review of literature
informs the approach of the current study.

2.2 Theoretical Review

2.2.1 Theory of Financial Intermediation
The theory regarding financial intermediation was developed in the 60’s, the starting point being the work of
Gurley and Shaw (1960). The financial intermediation theory is based on the theory of informational asymmetry
and the agency theory. In principle, the existence of financial intermediaries is explained by the existence of
the following attributable factors: high cost of transaction, inadequate information in useful time; and the
method of regulation. The unique factor in the studies regarding financial intermediation is constituted by
the argument regarding informational asymmetry. This asymmetry can be of type: exante generating the so
called problem of adverse selection; concomitant generating the moral hazard (principal and agent
relationship); or ex post leading to the need of applying some costly verification and auditing procedures or
even the forced execution of the debtor. The informational asymmetry generates imperfections of the
market, deviations from the theory of perfect markets in an Arrow -Debreu (1954) sense. Arrow-Debreu perfect
markets synopsis of a near heaven, which depicts that if they is an heaven, then the financial intermediaries
would not be useful in the economy at large, but since we are still on earth, it is certain that there will be
imperfection and incomplete information which serve has a benefit-cost effect for intermediaries and
market

Deposit-taking SACCOs in Nyeri Town serve as key financial intermediaries by collecting deposits from
members and then lending these funds to borrowers. Financial innovation within SACCOs, such as the adoption
of new technologies like telephone banking, internet banking and agency banking can enhance their efficiency
and effectiveness in performing these intermediary functions. By leveraging financial innovation, SACCOs can
attract more deposits, improve loan origination processes, mitigate risks, and enhance overall financial
performance. For instance, innovations like telephone banking, internet banking and agency banking can
streamline lending operations, reducing costs and improving profitability. These innovations can broaden the
reach of SACCOs, attracting new members and increasing deposit inflows. Thus, financial innovation plays a

9
crucial role in optimizing the financial intermediation process of SACCOs in Nyeri Town, ultimately
contributing to their financial performance.

2.2.2 Innovation Diffusion Theory

Introduced in 1962, the Innovation Diffusion theory was fine-tuned by Rogers (1995). Innovation diffusion
theory focuses on understanding how, why and at what rate innovative ideas and technologies spread in a social
system (Rogers, 1962). In terms of the theories of change, Innovation Diffusion theory takes a contrary
approach to study changes. Instead of focusing on persuading individuals to change, it sees change as being
primarily about the evolution or “reinvention” of products and behaviors so they become better fits for the
needs of individuals and groups. In diffusion of innovations, it is not people who change, but the innovations
themselves (Les Robinson, 2009). On the other hand, diffusion is the process by which an innovation is
communicated through certain channels over time among the members of a social system (Rogers, 2003).
Fichman (2000) defines diffusion as the process by which a technology spreads across a population of
organizations. The concept of diffusion of innovations usually refers to the spread of ideas from one society to
another or from a focus or institution within a society to other parts of that society (Rogers, 1962).

Innovation diffusion theory plays a pivotal role in shaping the financial performance of Deposit-Taking
SACCOs in Nyeri Town. As SACCOs navigate the dynamic landscape of financial services, their ability to
adopt and integrate innovative practices directly impacts their competitiveness and economic viability. Those
SACCOs at the forefront of adopting financial innovations such as telephone banking, internet banking or
agency banking often experience enhanced efficiency and reduced operational costs. Moreover, by quickly
embracing these innovations, SACCOs attract and retain members, thus expanding their market reach and
increasing their deposit base. This expanded market penetration not only strengthens their financial position but
also boosts customer loyalty and satisfaction. Furthermore, innovations that streamline internal processes
contribute to cost efficiency and operational effectiveness, enabling SACCOs to optimize resource allocations
and maximize returns.

2.2.3 Task-Technology Fit Theory (TTF)

The Task-Technology Fit Model was developed by (Goodhue & Thompson, 1995) to explain the utilization of
technology by examining the fit of technology to users' tasks/requirements. The purpose of the theory was to
add to the body of knowledge on technology utilization in the private and public contexts, which had limited
explanation as to how the acceptance of technology contributes to individuals’ performance. TTF was the first
theory that aimed to explore the postadoption aspect of technology utilization, unlike other prior research,
which had mainly focused on the antecedents of use and intention (Goodhue & Thompson, 1995)

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TTF plays a vital role in evaluating the ways in which the selection and implementation of technology impact
financial performance of Deposit-Taking SACCOs in Nyeri Town. SACCOs seem to see increase efficiency and
cost-effectiveness when they successfully use technology to streamline banking operations, including member
services, loan management and transaction processing. SACCOs can lower operating costs and increase
productivity by choosing technological solutions that closely match their unique goals and needs. Examples of
these solutions include powerful accounting software and user-friendly mobile banking apps. TFT also
highlights the significance of user acceptability and happiness with technology, suggesting that SACCOs give
top priority to the implementation of member and staff-friendly and intuitive technologies. Furthermore, TFT
highlights the significance of user acceptability and satisfaction with technology, suggesting that SACCOs
ought to give top priority to implementing systems that are user-friendly and intuitive for both employees and
members. This smooth incorporation of technology into day-to-day operations promotes higher worker
productivity as well as an improved member experience, which may result in higher member engagement and
retention. Thus, by increasing operational effectiveness, cutting expenses, and providing members with better
services, SACCOs that establish a strong task-technology fit are better positioned to maximize their financial
performance and maintain their competitive edge in the market.

2.3 Empirical Review

2.3.1 INTERNET BANKING

Mallick (2006) proposed that Internet banking allows customers to access their bank measures. According to

Wang (2003), Internet banking technology was underutilized in the 1990s, mainly used for marketing purposes

by companies. Thornton and White (2001) found that financial institutions in Australia, facing competition after

deregulation in 1983, have revised their strategies to leverage Internet technology. Tan and Teo (2000) observed

that banks are investing more in Internet technology to expand and retain market share, prompting a review of

IT policies in competitive markets.

2.3.2 TELEPHONE BANKING

Banking services using mobile phones (M-banking) have been available in developing as well as developed

countries for several years, but it is not until recently that new modernization of applying M-banking started

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diffusing rapidly to previously unbanked people (Michael & Mayer, 2011). The main driver for the rapid

development is the new M-banking services that are less expensive and have a geographical footprint defined

by the reach of mobile networks in contrast to services offered by traditional retail bank branches, which are out

of reach for many people in rural areas from both an economic and geographical perspective (Coetzee, Kamau

& Njema, 2003). The main benefits to rural users are affordable, fast and secure transactions. M-banking access

among previously unbanked groups is believed to have a direct, positive effect on users, since it has brought

about a transition from informal to formal transactions and hence alleviated poverty and caused economic

development (Coetzee ,2003)

2.3.3 AGENCY BANKING

Agency banking refers to a banking model where traditional banks or financial institutions extend their services

through third-party agents rather than solely relying on their brick-and-mortar branches involves extending the

reach of these SACCOs by allowing them to collaborate with third-party agents to offer basic banking services.

These services typically include depositing money, withdrawing funds, transferring money between accounts,

and sometimes even loan repayments. By utilizing agency banking, deposit-taking SACCOs can increase their

accessibility to members and potential customers, especially in areas where establishing physical branches may

not be feasible or cost-effective. It helps to enhance financial inclusion and allows SACCOs to serve a broader

customer base.

2.4 CONCEPTUAL FRAMEWORK

A conceptual framework for the current study shows the effects of financial innovations on financial

performance of SACCOs in Nyeri Town and had been depicted in Figure 2.1 below which conceptualized that

financial innovation as an independent variable while financial performance as dependent variable.

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Figure 2.1

Telephone banking

Internet banking Financial performance

Agency banking

Independent Variables Dependent Variable

2.5 OPERATIONAL FRAMEWORK

As per Figure 2.2, telephone banking indicators are balance enquiries, fund transfer and banking

services by phone while internet banking indicators are access to account, online transactions

and account management. Furthermore, agency banking indicators are agents’ characteristics
13
and financial inclusion. Financial performance indicators are profitability, liquidity and return

on assets.

Figure 2.2

Telephone banking
 Balance inquiries
 Fund transfer
 Banking services by phone

Internet banking Financial Performance

 Access to account  Profitability
 Online transactions  Liquidity
 Account management  Return on assets

Agency banking
 Agents’ characteristics
 Financial inclusion
 Agency banking services

Independent variables Dependent Variable

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