FINANCIAL LENDING INNOVATION, OPERATIONAL EFFICIENCY AND FINANCIAL SUSTAINABILITY AMONG COMMERCIAL BANKS IN KENYA

Abstract

The sustainability of commercial banks in Kenya is a major concern to various stakeholders as market volatility conditions are continuously shifting, stiff competition, and evolving customer demands all affecting banks business models. A critical issue confronting these banks is the limited understanding of how financial lending innovations such as digital lending, open banking, block chain-based lending and credit card lending affect their financial sustainability. Despite the significant investment in these innovations, the relationship between these lending practices and long-term financial sustainability remains unclear, particularly in the context of how operational efficiency mediates this relationship. The primary objective of this study was to examine the effect of financial lending innovations on the financial sustainability of commercial banks in Kenya and operational efficiency explored as a mediating factor. The study was guided by the following specific objectives: to assess the impact of digital lending, open banking, block chain-based lending, credit card lending on the financial sustainability of commercial banks and to test the mediating effect of operational efficiency on this relationship. A descriptive research design was employed to capture the current state of lending innovations and their impact on financial sustainability. The study targeted commercial banks in Kenya, categorized into Tier 1, Tier 2 and Tier 3 banks, with a total population comprising 7 Tier 1 banks, 19 Tier 2 banks, and the remaining Tier 3 banks. A stratified random sampling technique was used to select a representative sample, ensuring that insights are captured across different bank categories. Data was collected using a structured questionnaire, designed to gather information on respondents' perceptions of lending innovations, financial sustainability and operational efficiency. The reliability and validity of the instrument was tested through a pilot study, employing Cronbach’s alpha to ensure internal consistency, Keiser- Meryer -Olkin (KMO) tested construct validity, current variance index (CVI) used to assess content validity and Brletts Test of Sphericity assessed null hypothesis. Data analysis involved testing the assumptions of the Sobel Test, Classical Linear Regression Model (CLRM), including linearity, normality, homoscedasticity, autocorrelation, and Multicollinearity. The main analysis was conducted using regression models to determine the direct and mediating effects. The results were presented using descriptive and inferential statistics, including regression coefficients, significance levels and graphical presentations to illustrate key findings. The findings of this study are expected to provide critical insights into the role of lending innovations in enhancing the financial sustainability of commercial banks. The results will inform stakeholders on the strategic value of operational efficiency as a mediator, offering recommendations for enhancing sustainable banking practices in Kenya.