Effect of Product Innovation by Capital Market Intermediaries On Retail Investor Participation in The Nairobi Securities Exchange

Abstract

Retail investor participation in the Nairobi Securities Exchange (NSE) has declined sharply, with active monthly participation dropping from 0.95% (11,283 investors) in 2019 to 0.46% (6,843 investors) in 2023, despite registered accounts growing by 24.9% over the same period. This study assessed the effect of product innovation-measured by the number of new products introduced, the number of new services introduced, and product/service modifications-by capital market intermediaries on retail investor participation (trading volume) in the NSE. Anchored on the Theory of Financial Intermediation and the Schumpeterian Theory of Innovation, a positivist, descriptive correlational design was adopted. A census of all 112 licensed capital market intermediaries under the Capital Markets Authority of Kenya was conducted, targeting three senior executives per firm: Chief Investment Officers, Heads of Marketing, and Heads of Innovation/Technology. Data were collected in May–June 2025 using structured questionnaires, achieving a 97.33% response rate (n = 292). Diagnostic tests confirmed normality, linearity, homoscedasticity, and absence of multicollinearity. Regression analysis revealed that product innovation explained 48.0% of the variance in retail investor participation (R² = 0.480, β = 0.656, p < 0.05), with each unit increase in product innovation yielding a 0.656-unit increase in retail trading volume. The null hypothesis was therefore rejected. Key drivers included user experience enhancements (M = 4.26), robo-advisory services (M = 4.23), and mobile-based advisory (M = 4.15). The study concludes that introducing new investment products, services, and modifications that are accessible, user-friendly, and mobile-compatible is critical to reversing retail participation decline in Kenya. Intermediaries are recommended to develop fractional share ownership schemes, reduce minimum investment thresholds, embed financial literacy within platforms, and launch ESG-screened products to attract diverse retail investors.