Financial regulation, financial innovation, portfolio diversification and profitability of financial institutions in Kampala Capital City Authority

Abstract

This study investigated the mediation role of financial regulation in the relationship between financial innovation and portfolio diversification with profitability of financial institutions in Kampala Capital City Authority. The study applied a cross-sectional research design and quantitative approach to study the relationship between variables as outlined in the study objective. The population comprised 33 formal and regulated financial institutions (24 commercial banks, 4 credit institutions and 5 MDIs). From each financial institution, four respondents were purposively selected to participate in the study and these formed the unit of inquiry. These included supervisors, credit officers, business development officers and managers. Questionnaires were used to collect relevant data for the study. Data were analyzed using SPSS version. 22.0. Pearson Product Rank correlation coefficient was used to test the association between the dependent variable and independent variables, and the regression test was used to find out how profitability varied with financial innovation, portfolio diversification and regulation. Med-graph application for testing mediation effect was also used. The findings established that financial innovations, portfolio diversification and financial regulation are positively associated with profitability. A significant positive relationship between financial innovation, portfolio diversification and financial regulation was established. The study also revealed that financial regulation does not mediate the relationship between financial innovation, portfolio diversification and profitability. The study also confirmed that financial innovation, portfolio diversification and financial regulation are essential in improving profitability. The study recommended that financial institutions should embrace appropriate ICT-based applications so as to reduce operational costs, improve decision making processes, facilitate on-line transactions, enhance efficiency and customer satisfaction to achieve improved profitability and sustainable growth.