Abstract:
This study examines the effect of value creation strategies on the financial
performance of commercial banks in Kenya, with a specific focus on cost efficiency,
revenue diversification, elimination of Non-Productive activities, and financial
innovation. It further evaluates the moderating role of bank size in shaping the
relationship between these strategies and financial performance. The study is
anchored on an integrated theoretical framework comprising the Resource-Based
View, Efficiency Structure Theory, Innovation Diffusion Theory, and Economies of
Scale Theory. A positivist research philosophy and a quantitative explanatory
research design were adopted. Using a census approach, the study covered all 40
licensed commercial banks in Kenya over the period 2015–2019. Secondary data
were obtained from audited financial statements and Central Bank of Kenya reports,
resulting in a balanced panel dataset of 200 observations. Panel regression analysis
was employed, with the Fixed Effects Model selected based on the Hausman test.
The findings indicate that cost efficiency, measured by the cost-to-income ratio, has a
negative and statistically significant effect on financial performance, implying that
operational inefficiencies reduce profitability. Revenue diversification, proxied by
non-interest income, exhibits a positive and significant effect, indicating that
diversified income streams enhance performance and resilience. The elimination of
Non-Productive activities also shows a positive and significant relationship with
financial performance, underscoring the importance of operational optimization.
Financial innovation, measured through digital products and transaction volumes,
emerges as a strong positive determinant of performance, highlighting the critical
role of digital transformation in the banking sector. The study further establishes that
bank size has a statistically significant moderating effect, with larger banks deriving
greater benefits from financial innovation and revenue diversification, while also
experiencing amplified efficiency effects. The study concludes that value creation
strategies significantly influence bank performance and that their effectiveness is
enhanced when implemented in an integrated and coordinated manner. The findings
contribute to theory by providing empirical support for a multi-theoretical framework
and extending existing literature through the incorporation of moderation effects
within a panel data context. The study recommends that bank management adopt
integrated strategic approaches that align cost efficiency, financial innovation, and
revenue diversification. Policymakers are encouraged to develop innovation friendly
regulatory frameworks that support digital transformation while maintaining
financial stability. Overall, the study contributes to knowledge by developing an
integrated strategic framework for value creation in banking and providing context
specific empirical evidence on the moderating role of bank size.
