THE EFFECTS OF FINANCIAL INNOVATION ON THE FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN SOUTH SUDAN BY: MAKUR PETER MALAK D61/61103/2013 A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS OF THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION, SCHOOL OF BUSINESS, THE UNIVERSITY OF NAIROBI 2014 DECLARATION I declare this project is my original work and has never been presented for a degree in any University or Higher Institution of learning for any academic accreditation Signed....................................... Date.............................................. Makur Peter Malak D61/61103/2013 This research project is presented for approval as university supervisor Signed....................................... Date........................................... MIRIE MWANGI Supervisor ii ACKNOWLEDGEMENTS I would like to acknowledge the effort of my supervisor, Mirie Mwangi. I am particularly grateful for his steadfast support, patience, constructive criticism and professional guidance. I wish also to express my sincere appreciation to my family, friends and well wishers for their understanding and support during the project and MBA program as a whole. And most importantly I dedicate this work to the Almighty God for granting me peace, good health and a sound mind. iii DEDICATION I dedicate this project to the almighty God for the blessings he has accorded to me and also to my lovely family. iv TABLE OF CONTENTS Page DECLARATION ....................................................................................................................... ii ACKNOWLEDGEMENTS ..................................................................................................... iii DEDICATION .......................................................................................................................... iv TABLE OF CONTENTS ........................................................................................................... v ABBREVIATION..................................................................................................................... ix ABSTRACT ............................................................................................................................... x CHAPTER ONE ........................................................................................................................ 1 INTRODUCTION ..................................................................................................................... 1 1.1Background of the Study ................................................................................................... 1 1.1.1 Financial Innovation .................................................................................................. 3 1.1.2 Financial Performance ............................................................................................... 4 1.1.3 Financial Innovation and Financial Performance ..................................................... 6 1.1.4 Commercial Banks in South Sudan ........................................................................... 7 1.2 Research Problem ............................................................................................................ 9 1.3 Objective of the Study .................................................................................................... 11 1.4 Value of Study ................................................................................................................ 11 CHAPTER TWO ..................................................................................................................... 12 2.1 Introduction .................................................................................................................... 12 2.2 Theoretical Review ........................................................................................................ 12 v 2. 1.1Constraint–Induced Innovation Theory ................................................................... 13 2.1.2 Circumvention Innovation Theory .......................................................................... 14 2.1.3. Regulation Innovation Theory ................................................................................ 15 2.1.4. Transaction Cost Innovation Theory ...................................................................... 15 2.3 Determinants of Financial Performance of Commercial Banks..................................... 16 2.3.1 Regulation ................................................................................................................ 17 2.3.2 Costs of Production Reduction ................................................................................ 17 2.3.3 Technological Advancement ................................................................................... 18 2.3.4 Competitive Environment........................................................................................ 18 2.4 Empirical Review ........................................................................................................... 19 2.5 Summary of Literature Review .................................................................................. 23 CHAPTER THREE ................................................................................................................. 25 3.0 Introduction .................................................................................................................... 25 3. 1 Research Design ............................................................................................................ 25 3.2 Population....................................................................................................................... 26 3.3 Sample Design................................................................................................................ 26 3.4 Data collection................................................................................................................ 26 3.5 Data Analysis ................................................................................................................. 27 CHAPTER FOUR .................................................................................................................... 30 DATA ANALYSIS, RESULTS AND DISCUSSION ............................................................ 30 4.1 Introduction .................................................................................................................... 30 vi 4.2 Response Rate ................................................................................................................ 30 4.3 Descriptive Analysis ...................................................................................................... 31 4.4 Inferential statistics ........................................................................................................ 32 4.4.1 Correlation Analysis ................................................................................................ 32 4.4.2 Regression Analysis ................................................................................................ 33 4.5 Discussion of the research findings ................................................................................ 35 CHAPTER FIVE ..................................................................................................................... 38 5.1 Introduction .................................................................................................................... 38 5.2 Summary of Findings ..................................................................................................... 38 5.3 Conclusions .................................................................................................................... 39 5.4 Recommendations .......................................................................................................... 40 5.5 Limitations of the Study ................................................................................................. 40 5.6 Suggestions for Further Research .................................................................................. 41 APPENDIX I: THE LIST OF COMMERCIAL BANKS IN THE REPUBLIC OF SOUTH SUDAN ..................................................................................................................... 49 APPENDIX II: INTRODUCTION LETTER .......................................................................... 50 vii LIST OF TABLES Table 4.1: Response Rate ......................................................................................................... 31 Table 4.2: Descriptive Statistics .............................................................................................. 31 Table 4.3: Correlation Analysis ............................................................................................... 33 Table 4.4 Model summary ....................................................................................................... 34 Table 4.5 ANOVA ................................................................................................................... 34 Table 4.6: Regression Coefficients .......................................................................................... 35 viii ABBREVIATION ATM- Automated Teller Machine BOSS- Bank of South Sudan CAMEL- Capital Adequacy, Asset Quality Management, Quality Earning and Liquidity CBOS- Central Bank of Sudan CBSS- Central Bank of South Sudan CPA- Comprehensive