Forty-four percent of banks and microfinance institutions supervised by the Central Bank of Kenya (CBK) did not spend on research and development last year signalling reliance on product duplication in the financial sector.
The CBK noted that 33 percent of the financial institutions surveyed spent less than Sh5 million in research.
Only 23 percent of 37 banks, one mortgage financing institution and 14 microfinance institutions surveyed by CBK spent more than Sh5 million on research and development last year.
‘Substantive efforts are required to be channelled towards research and development when it comes to product innovation,’ said CBK in the banking sector innovation survey.
‘However, 33 percent of financial institutions indicated that they had spent less than Sh5 million in this area, with 44 percent not incurring any cost towards this at all,’ added the regulator.
The low investment was also reflected in staff training with 17 percent of the financial institutions indicating they did not incur any costs on employee training in 2025.
Analysts reckon banks have no incentive nor competition in their range of their products which have made them comfortable.
‘Banks don’t need to be innovative to make money. There is enough money to be made in investing in treasury bills and bonds,’ said Francis Mutonyi, a financial consultant with Goldplus Advisory.
‘Traditionally banks have not had competition until mobile money entered the scene. With competition from mobile lenders that’s when banks introduced Mobile loans,’ he added.
Two thirds of the respondents said they have a dedicated department to spearhead innovation activities despite the low investment in research.
Despite the low uptake of research and development 89 percent of commercial banks indicated they introduced an innovative product last year up from 79 percent in 2024 signalling to duplication rather than creativity.
Most innovations in the banking sector are in mobile banking with the survey showing 96 percent of the institutions have a mobile banking solution. Only two banks do not have a mobile banking solution.
Lack of innovation has left banks reliant on traditional products and channels to make money which keeps the price of their services high as customers bear the cost of operations for the lenders.
Data protection challenges and fear of cyber-attack were the main concerns for banks as they launched new products.
Banks cited high costs of innovation, slow market uptake of new products and a low pool of staff with the right skills to foster innovation as some of the challenges that have limited their innovativeness.
Most banks are reliant on third parties presenting them with new product innovations rather than their own staff. Innovation teams constituted 15 percent of institutions’ overall staff component with men being 60 percent.
Banks are also heavily regulated meaning they lean more on caution rather than risk even in innovation.
‘Product innovation is challenged by the need to balance rapid digital transformation with strict CBK regulatory compliance, which often prolongs approval cycles and escalates costs,’ noted CBK.
Investment management and custodial services remained the functional area with the least innovation as per CBK.
Kenyan banks are however accelerating their investment in artificial intelligence (AI) and machine learning to automate most of their processes. The deployment of AI has concentrated on credit decisioning, fraud detection, cybersecurity and customer service automation.