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Despite the mounting evidence that leadership can fuel the innovation behavior of employees, yet no study considered the psychological state of employees in such a relationship while Psychology is the primary root of human feelings and behavior. In this regard, this study uses the integrative approach of transformational leadership theory and positive psychology to uncover the pivotal role of positive psychological capital (PsyCap) and perceived effort-reward fairness in the relationship between transformational leadership (TFL) and employee’s innovation behavior. Data collected from 14 banking institutions operating in Rwanda (412 total respondents) were analyzed using structural equation modeling and findings support our hypothesized model

Despite the theoretical foundation that links Transformational leadership (TFL) with innovation behavior, previous studies have overlooked on Transformational leadership and innovation behavior at the individual level relationship but paid less attention to how transformational leadership qualities of top leaders would advance innovative work behavior within the organizational setting. To date, the impact of Transformational leadership at a top executive level on employee’s innovative work behavior (IWB) within an organizational setting has not been dealt with in-depth. However, using transformational leadership theory, this study uncovers the pivotal role of innovation culture (IC) and managerial innovation (MI) in the relationship between CEO transformational leadership and employee’s innovation behavior in SMEs. A cross-sectional design with a total of 434 employees from 24 SMEs operating from Rwanda was analyzed using structural equation modeling to evaluate the relationship between the variables developed in the study. The findings of this study support our hypothesized model.