It seeks to explain how why and at what rate new

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It seeks to explain how, why and at what rate new ideas and innovations spread through cultures. This can explain how financial innovation has evolved over time in the commercial banks in Kenya. Banks efficiency due to innovation takes time as it involves transmission of new ideas and processes to its customers and employees. This new idea has to be accepted by all stakeholders, shareholders to the customers, so that the social systems can understand the importance of the innovation despite high costs and work towards streamlining the processes (Honor, 1998). 2.2.2 Silber’s Constraints Theory of Innovation Silber (1975) attributes financial innovation to attempts by profit maximizing firms to reduce the impact of various types of constraints that reduces profitability. The theory points out that the purpose of profit maximization of financial institutions is the key reason of financial innovation. Firms that rare less profitable in their respective sector are
14 disproportionately innovative. Moreover, their decrease in profitability, which can be attributed to external competition or government regulation, has provided these firms with the necessary motivation to increase profitability. Silber considers the main historical causes of innovation by US banks as a response to a reduction of their utility or adversity in innovation: the interest rate ceiling, where banks tried to indogenize exogenous items of the balance sheet (Certificate of Deposit and bank related commercial paper); decline in the market for particular assets; a declining growth rate of sources of funds (new products in order to get new sources of funds) and an increase of the risk of a particular asset or of all assets due to the economic environment are reason for financial innovation. On the hand, success innovations are the extensive use of cost reducing information technology and elaborate new finance theories in the financial sector and several new products designed to cope with the rising yield of assets in order to attract new funds. Generally, Silber proposes that the three possible ways a financial institution could innovate, by indogenizing an exogenous item of the balance sheet, introducing an existing financial instrument from another country and thirdly as the mixture of the ways above, taking the form of modification of an existing instrument. The importance of Silber’s theory is that, by using the concept of financial innovation, he provides us with a wider spectrum of potential reason contributing to the innovating process that helps to improve the performance of financial institutions. The suggestion in the work of Silber, is that investment in innovation is a rational response to an unfavourable competitive position (Silber, 1983)
15 2.2.3 Kane’s theory of Innovation Kane (1984) sees financial innovation as an institutional response to financial costs created by changes in technology, market need, and political forces, particularly laws and regulations. Financial industry is special, it has stricter regulations and financial

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