ABSTRACT 

Technological changes and innovation in any economy play a pivotal role in reducing operational expenses and increasing total factor productivity. The Kenyan banking sector is characterized by operational inefficiency in the factors of production as evidenced by high operational expenses. The inefficiency in the factors of production can be reduced through adoption of new technology and innovation. This study examined how technology and innovation can remedy the inefficiency by investigating the level of total factor productivity for the banking sector in Kenya after adopting new technology and innovation inform of new core banking operating systems. The study also examined how the banks can leverage on technological innovations by investigating the effects of technological innovations on total factor productivity for the banking sector in Kenya. Within the period 2011 to 2015, commercial banks in Kenya adopted new core banking systems that have enhanced service delivery through technology and innovations. The robust core banking systems adopted have enabled commercial banks to have alternative channels of service delivery which include, mobile banking, online banking, and the banking agents as the significant developments in technology towards service delivery. The study used balanced panel data set of 29 banks within the period 2011 to 2015. The study period was pegged on the period banks in Kenya adopted new core banking systems and before the implementation of interest cap in 2016. The study used a nonparametric Data Envelopment Analysis to estimate the Malmquist Total Factor Productivity indices. The study found out that total factor productivity level had increased by 1.4% within the period 2011 to 2015. The cause of change on Total factor productivity was determined by decomposing the total factor productivity change into technical change and efficiency change. The study found out that technical change had decreased by 2.8% while efficiency change had increased by 4.3%. The increase in efficiency changes was further decomposed into pure efficiency changes and scale efficiency changes. The current study found out that pure efficiency had increased by 2.7% while scale efficiency had increased by 1.6%. The study also estimated the effect of technological innovation on total factor productivity of the Kenyan banking sector. The study found out that technological innovations were statistically significant in determining the level of total factor productivity. The results of the study elicited the need for the Kenyan government and the Central Bank of Kenya to intervene in policy formulation on technology and innovation to remedy the inefficiency in factors productivity. The intervention will ensure the banking sector productivity growth is consistent. The interventions will also ensure commercial banks are in tandem with the technological innovations happening across the world to leverage on technological changes and innovation. This will go a long way in service delivery and improved efficiency in customer service.