Value Creation Strategies and Performance of Commercial Banks in Kenya

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.