EFFECTS OF MOBILE BANKING ON THE FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN KENYA
EFFECTS OF MOBILE BANKING ON THE FINANCIAL
PERFORMANCE OF COMMERCIAL BANKS IN KENYA
CHAPTER ONE
INTRODUCTION
1.1 Background of study
Mobile banking (m-banking) is a term used for performing
banking transactions via mobile device such as mobile phones (Anyasi and Otubu,
2009). Tiwari, Buse and Herstatt (2006) define mobile banking as any
transaction, involving the transfer of ownership or rights to use goods and
services, which is initiated and/or completed by using mobile access to
computer- mediated networks with the help of an electronic device. They further
indicate that mobile banking refers to provision and availment of bank-related
financial services with the help of mobile telecommunication devices. The scope
of offered services may include facilities to conduct bank and stock market
transactions, to administer accounts and to access customized information from
the bank. Mobile banking is most often performed via short message services
(SMS) or mobile internet, but can also be used by special programs called
clients downloaded to the mobile device.
Over the past few years, advancement in information
technology has changed the way organizations operate and conduct their business
(Al-Jabri, 2012). Technological advancement has brought about the evolution of
m-banking and online banking in the banking industry which has revolutionized
the manner in which commercial banks conduct their business. Internet and
m-banking has not only made financial organization provide banking services
online and via mobile but has also provided customer with easy access to
financial services and other benefits.
The movement from traditional branch banking to mobile
banking has caused banks to come up with strategies to attract more customers
and retain existing ones. The desire to reduce both operational, administrative
cost and competition has driven banks to adopt mobile banking. However cost
reduction is only realizable with an increase in customer adoption (Bradley and
Stewart, 2003).
Technological advancements in the area of
telecommunications and information technology have continued to revolutionize
the banking industry. The delivery of financial services has experienced major
changes during the past few years. A feature of the banking industry across the
globe has been that it is increasingly becoming turbulent and competitive
thereby forcing commercial banks to innovate for survival. Banks, aided by
technological developments, have responded to the challenges by adopting new
strategies which emphasize on attempting to build customer satisfaction through
offering better products and services and at the same time to minimize
operation costs (Sohail & Shanmugham, 2003).
An appropriate banking environment is considered a key
pillar as well as enabler of economic growth (Koivu, 2002). The banking
industry has been subject to this technological change (Bradley and Stewart
2003). In order to be in line with the
changes in the operating environment, it is apparent that bank in Kenya and
other financial institution have to embrace mobile banking in meeting customer
demands (Tiwari and Buse, 2006). Providing banking through internet has proved
fruitful in terms of cost control by employing automated ways of transacting
other than the traditional method of labour intensive therefore higher
productivity and profitability. Consequently, growing partnership in financial
institution and other service providers has lead to an increase in m banking as
customers can transact and clear utility bills through their mobile.
1.1.1 Mobile Banking
The perceived low level of demand, low levels of bank of
income, high bank fees, untailored products and services and limited
geographical reach ensured only a small percentage of Kenyan population had
access to banking services (Chogi, 2006). Banking was driven by income
generated from fees for services rendered, interest earned deposits and
interest received from loans. The move from traditional banking to agency
banking and currently mobile banking has been beneficial to both the banks and
customers as it reduces operating cost of the institution and its convenient
and cheap as lesser fees are charged on mobile transaction.
Mobile banking is the provision or availment of banking
services with the help of mobile devices. The advent of M-banking was fostered
by competition from telecommunication industry mainly safaricom with their
Mpesa services to their customers and Zain (formerly Airtel) with Zap services.
These services facilitated the customers to deposit money into their account,
transfer money to other user for instance sellers of goods and services,
relatives and friend; this brought convenience.
The banking sector has had to adopt technological change to
remain competitive. In search of competitive advantages in the technological
financial service industry, banks have acknowledged value of differentiate
themselves from others financial institution through new service distribution
channels (Daniel 1999). Banks bureaucratic process of account opening cut out
many rural poor as they could not qualify to own accounts. With competition
banks had to simplify the process and had to come up with innovative ways of
doing so. Quite a number of banks have innovated various M-banking products for
example Equity bank M-kesho, KCB Mobibank, Family bank Pesa pap and more
recently M-swari of Commercial bank of Africa.
Mobile banking provides a number of advantages for both
banks and customers. Mobile banking removes geographical limitation to
customers and therefore bringing convenience. There is no time limitation i.e.
banking maybe performed throughout the day and in any place. Mobile banking
also provides efficient cash management and security of cash
1.1.2 Financial Performance
Financial performance is a subjective measure of how well
an organization can use assets from its primary mode of business and generate
revenues (Greenwood and Jovanovic, 1990). This term is also used as a general
measure of a firm's overall financial health over a given period of time, and
can be used to compare similar firms across the same industry or to compare
industries or sectors in aggregation. There are many different ways to measure
financial performance, but all measures should be taken in aggregation. Line
items such as revenue from operations, operating income or cash flow from
operations can be used, as well as total unit sales (Jayawardhera and Foley,
2000).
Profit is the ultimate goal of firm. To measure the
profitability, there are variety of ratios used of which Return on Asset,
Return on Equity and Net Interest Margin are the major ones (Murthy and Sree,
2003). ROA is a major ratio that indicates the profitability of a bank. It is a ratio of Income to its total asset
(Khrawish, 2011). It measures the
ability of an organization’s management to generate income by utilizing company
assets at their disposal. Net Interest Margin (NIM) is a measure of the difference between the interest income
generated by banks and the amount of interest paid out to their lenders,
relative to the amount of their assets. It is usually expressed as a percentage
of what the financial institution earns on loans in a specific time period and
other assets minus the interest paid on borrowed funds divided by the average
amount of the assets on which it earned income in that time period (the average earning assets). ROE
is a financial ratio that refers to how much profit a company earned compared
to the total amount of shareholder equity invested or found on the balance
sheet. ROE is what the shareholders look
in return for their investment.
1.1.3 Mobile Banking and Financial Performance
Mobile banking offers millions of people a potential
solution in emerging markets that have access to a cell phone, yet remain excluded
from the financial mainstream. It can make basic financial services more
accessible by minimizing time and distance to the nearest retail bank branches
(CGAP, 2006) as well as reducing the bank‘s own overheads and transaction-
related costs. Mobile banking presents
an opportunity for financial institutions to extend banking services to new
customers thereby increasing their market (Lee, Lee and Kim, 2007).
Simpson (2002) suggests that e-banking is driven largely by
the prospects of operating costs minimization and operating revenues
maximization. A comparison of online banking in developed and emerging markets
reveal that in developed markets lower costs and higher revenues are more
noticeable. While Sullivan (2000) finds no systematic evidence of a benefit of
internet banking in US click and mortar banks, Furst, Lang, and Nolle. (2002) find that federally chartered
US banks had higher ROE by using the clickand-mortar business model. Furst et al (2002) also examine the
determinants of internet banking adoption and observe that more profitable
banks adopt internet banking after 1998 but yet they are not the first movers.
Jayawardhena and Foley (2000) show that internet banking results in cost and
efficiency gains for banks yet very few banks are using it and only a little
more than half a million customers are
online in U.K.
1.1.4 Commercial Banks in Kenya
As at 31st December 2012, the banking sector
comprised of the Central Bank of Kenya, as the regulatory authority, forty four
banking institutions (forty three commercial banks and one mortgage finance
company - MFC), four representative offices of foreign banks, six
Deposit-Taking Microfinance Institutions (DTMs), one hundred and eighteen Forex
Bureaus and two Credit Reference Bureaus (CRBs) (CBK, 2012). Out of the forty
four banking institutions, thirty one locally owned banks comprise three with
public shareholding and twenty eight privately owned while thirteen are foreign
owned. The six DTMs, two CRBs and one hundred and eighteen forex bureaus are
privately owned. The foreign owned financial institutions comprised of nine
locally incorporated foreign banks and four branches of foreign incorporated
banks.
According to Central Bank of Kenya (2012) out of the forty
three commercial banks thirty of them are domestically owned and thirteen are
foreign owned. In terms of asset holding, foreign banks accounted for about 35%
of the banking assets as of 2012. In Kenya the commercial banks dominate the
financial sector. In a country where the financial sector is dominated by
commercial banks, any failure in the sector has an immense implication on the
economic growth of the country. This is due to the fact that any bankruptcy
that could happen in the sector has a contagion effect that can lead to bank
runs, crises and bring overall financial crisis and economic tribulations.
1.2 Research Problem
Technological change has been inevitable in the financial
sector. The adoption of internet banking has changed the dimensions of
competition following the introduction of Personal computer banking, Automated
Teller Machines (ATMs) and phone banking, which are the initial cornerstones of
electronic finance. The increased adoption and penetration of internet has
added a new distribution channel to retail banking. Allen, Mcandrews and
Strahan (2002) define E-finance as “the provision of financial services and
markets using electronic communication and computation” and today banks are
switching to multi-channel distribution of financial services in hybrid
platforms where the traditional services of banks are provided through both
“bricks and mortar” branches and Internet.
The banking sector in Kenya has experienced turbulent times
following the collapse of many banks in the 1990s. In order to minimize their
operational costs, commercial banks have adopted internet banking including
ATMs, mobile banking and internet banking where customer can access their
accounts on their personal computers. To facilitate further financial
deepening, the Central Bank of Kenya in 2010, allowed regulated commercial
banks to operate through third party agents, subject to licensing of agents. In
May 2012, the Central Bank of Kenya allowed regulated deposit taking
microfinance institutions to operate not only through third party agents, but
to operate agencies. Mobile network operators and financial institutions have
responded rapidly to these new powers to adopt mobile and agency banking.
Between 2007 and 2012, Safaricom rolled out more than forty thousand mobile
payment agents nationwide. Since 2010 a total of ten banks have connected more
than ten thousand six hundred bank agents. However, of the banks, two banks
Equity Bank and Kenya Commercial Bank have been particularly quick to introduce
agency networks across Kenya, with thousands of agents respectively. All these
models are geared towards leveraging the operating costs of commercial banks.
Different scholars have done studies on electronic and
mobile banking in Kenya. Kigen (2010) studied the impact of mobile banking on
transaction costs of microfinance institutions where he found out that by then,
mobile banking had reduced transaction costs considerably though they were not
directly felt by the banks because of the then small mobile banking customer
base. The current study differs from Kigen (2010) because the rate of mobile
banking and the number of banks which have adopted mobile banking have increased.
In addition, this study will consider overall financial performance and not
just transactional costs.
Kingoo (2011) did a study on the relationship between
electronic banking and financial performance of commercial banks in Kenya where
he paid keen attention on the microfinance Institutions in Nairobi. However,
the current study is focusing on commercial banks and not microfinance
institutions. Kingoo (2011) also looked at the wider electronic banking whereas
this study will only concentrate on mobile banking.
Munaye (2009) studied the application
of mobile banking as a strategic response by equity bank Kenya limited to the
challenge in the external environment.
Munaye (2009) reviewed the concept of mobile banking as a
strategic response where its effects on financial performance were not
considered. From the above discussions, it is evident that not much research
has been focused on the economic and financial implication of mobile banking on
the performance of commercial banks in Kenya. This research therefore aims at
bridging the gap. To achieve this, this study will seek to answer one question:
What is the effect of mobile banking on the financial performance of commercial
banks in Kenya?
1.3 Research Objective
To determine the effect of mobile banking on the financial
performance of commercial banks in Kenya.
1.4 Value of Study
This study will be of value to different
stakeholders in the field.
To the management in commercial banks, this study will
inform them on the financial effect of mobile banking on the performance of
their institutions. Through the findings of this study, the management will be
able to strategize on how to realize maximum benefits from mobile banking.
For the policy makers and agencies like the Central bank of
Kenya (CBK), the findings of this study will be important in informing the
policy formulation especially with regard to regulating the mobile banking
services in Kenya. The research findings add dimension that may help improve
policy direction with regard to regulation of mobile banking as well as factors
that spur economic growth.
To the academicians and students of
finance, this study will help build the knowledge base in the discipline by
adding on the existing literature on mobile banking and financial performance.
The study will be used as a source of reference material besides suggesting
areas where future research may be conducted.
CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
This chapter reviews the literature on the economic and
financial effect of mobile banking on the performance of commercial banks in
Kenya. From this review, broad categories will be derived which will help to
identify the critical impact of economic and financial effect of mobile banking
on the performance of commercial banks in Kenya. Specifically, the chapter
addresses the theoretical framework guiding the study, economic and financial
effect of mobile banking, empirical literature and chapter summary.
2.2 Theoretical Review
This section reviews theories that will guide the study. It
consists of the theories governing the performance of commercial banks in their
operations. In particular, the section looks at the financial intermediation
theory which deals with the core function of financial institutions which in
intermediating between the surplus and the deficit units for sustained economic
development. It also reviews the modern economics theory which holds that for a
business to make returns, it has to obey the modern economics. It also reviews
that market power theory that holds that states that increased external market
forces results into Market Power.
2.2.1 Financial Intermediation Theory
Financial intermediation is a process
which involves surplus units depositing funds with financial institutions who
then lend to deficit units. Bisignano (1992) identified that financial
intermediaries can be distinguished by four criteria. First, their main
categories of liabilities or deposits are specified for a fixed sum which is
not related to the performance of a portfolio. Second, the deposits are
typically short-term and of a much shorter term than their assets. Third, a
high proportion of their liabilities are chequeable which can be withdrawn on
demand and fourthly, their liabilities and assets are largely not transferable.
The most important contribution of intermediaries is a steady flow of funds
from surplus to deficit units.
Diamond and Dybvig (1983) analyses
the provision of liquidity that is transformation of illiquid assets into
liquid liabilities by banks. In their model identical investors or depositors
are risk averse and uncertain about the timing of their future consumption need
without an intermediary all investors are locked into illiquid long term
investments that yield high pay offs to those who consume later.
According to Scholtens and van Wensveen (2003), the role of
the financial intermediary is essentially seen as that of creating specialized
financial commodities. These are created whenever an intermediary finds that it
can sell them for prices which are expected to cover all costs of their
production, both direct costs and opportunity costs. Financial intermediaries
exist due to market imperfections. As such, in a ‘perfect’ market situation,
with no transaction or information costs, financial intermediaries would not
exist. Numerous markets are characterized by informational differences between
buyers and sellers. In financial markets, information asymmetries are
particularly pronounced. Borrowers typically know their collateral,
industriousness, and moral integrity better than do lenders. On the other hand,
entrepreneurs possess inside information about their own projects for which
they seek financing (Leland and Pyle, 1977). Moral hazard hampers the transfer
of information between market participants, which is an important factor for
projects of good quality to be financed.
2.2.2 Modern Economics Theory
Modern economics has gone far in
discovering the various pathways through which millions of expectations of, and
decisions by, individuals can give rise to emergent features of communities and
societies like rate of inflation, productivity gains, and level of national
income, prices, and stocks of various types of capital, cultural values, and
social norms. Two factors make economic theory particularly difficult (Sohail
and Shanmugham, 2003). First, individual decisions at any moment are themselves
influenced by these emergent
features, by past decisions learning, practice, and habit, and by future
expectations. Second, the emergent features that can be well handled by
existing economic theory and policy concern only fast-moving variables. The
more slowly emergent properties that affect attitudes, culture, and
institutional arrangements are recognized, but are poorly incorporated.
According to Tiwari, Buse and Herstatt (2006), economists know that success
in achieving financial return from fast dynamics leads to slowly emergent,
nearly hidden, changes in deeper and slower structures, changes that can
ultimately trigger sudden crisis and surprise. But the complexities that arise
are such that most modern economists are frustrated in their attempts to understand
the interactions between fast- and slow-moving emergent features.
2.2.3 Market Power and Efficiency Structure Theories
The MP theory states
that increased external market forces results into market power which is
defined as the capacity of an organisation to increase its prices without
losing all its clients. In banks, as in other business organisations, Market
Power can take two forms: differentiation of products and services, or ease of
search. There is a trade-off between differentiation and loss of legitimacy
which is optimized at a strategic balance point (Shepherd, 1986). Likewise,
there is a trade-off between ease of search and security that must be taken
into account. This theory categorizes Information Communication and Technology
(ICT) investments into Market-Power driven initiatives profit. Moreover, the
hypothesis suggest that only firms with large market share and well
differentiated portfolio can win their competitors and earn monopolistic
profit.
Efficiency struture theory (ES) suggests that enhanced
managerial and scale efficiency leads to higher concentration and then to
higher profitability. According to Olweny and Shipho (2011) balanced portfolio
theory also added additional dimension into the study of bank performance. It
states that the portfolio composition of the bank, its profit and the return to
the shareholders is the result of the decisions made by the management and the
overall policy decisions.
From the above theories, it is possible to conclude that
bank performance is influenced by both internal and external factors. The
internal factors include bank size, capital, management efficiency and risk
management capacity. The same scholars contend that the major external factors
that influence bank performance are macroeconomic variables such as interest
rate, inflation, economic growth and other factors like ownership.
2.3 Bank Performance Indicators
Profit is the ultimate goal of commercial banks hence all
the strategies designed and activities performed thereof are meant to realize
this grand objective. To measure the profitability of commercial banks, there
are variety of ratios used of which Return on Asset, Return on Equity and Net
Interest Margin are the major ones
(Murthy and Sree, 2003).
Alkhatib (2012) studying the financial performance of
Palestinian commercial banks listed on Palestine securities exchange (PEX)
measured financial performance using three indicators; Internal–based
performance measured by Return on Assets (ROA), Marketbased performance
measured by Tobin’s Q model (Price / Book value of Equity) and Economic–based
performance measured by Economic Value add. The study employed the correlation
and multiple regression analysis of annual time series data from 20052010 to
capture the impact of bank size, credit risk, operational efficiency and asset
management on financial performance measured by the three indicators, and to
create a good-fit regression model to predict the future financial performance
of these banks. The study rejected the hypothesis claiming that “there existed
statistically insignificant impact of bank size, credit risk, operational
efficiency and asset management on financial performance of Palestinian
commercial banks”.
2.3.1 Return on Equity (ROE)
ROE is a financial ratio that refers to how much profit a
company earned compared to the total amount of shareholder equity invested or
found on the balance sheet. ROE is what
the shareholders look in return for their investment. A business that has a high return on equity
is more likely to be one that is capable of generating cash internally. Thus,
the higher the ROE the better the company is in terms of profit
generation. It is further explained by
Khrawish (2011) that ROE is the ratio of Net Income after Taxes divided by
Total Equity Capital. It represents the rate of return earned on the funds
invested in the bank by its stockholders.ROE reflects how effectively a bank
management is using shareholders’ funds. Thus, it can be deduced from the above
statement that the better the ROE the more effective the management in
utilizing the shareholders capital.
2.3.2 Return on Asset
ROA is also another major ratio that indicates the
profitability of a bank. It is a ratio
of Income to its total asset (Khrawish, 2011).
It measures the ability of the bank management to generate income by
utilizing company assets at their disposal. In other words, it shows how
efficiently the resources of the company are used to generate the income. It
further indicates the efficiency of the management of a company in generating
net income from all the resources of the institution. Wong (2004) stated that a higher ROA shows that
the company is more efficient in using its resources.
2.3.3 Net Interest Margin
NIM is a measure of the difference between the interest
income generated by banks and the amount of interest paid out to their lenders
for example, deposits, relative to the amount of their interest- earning
assets. It is usually expressed as a percentage of what the financial
institution earns on loans in a specific time period and other assets minus the
interest paid on borrowed funds divided by the average amount of the assets on
which it earned income in that time
period i.e the average earning assets. The NIM variable is defined as the net
interest income divided by total earnings assets (Gul et al., 2011). Net
interest margin measures the gap between the interest income the bank receives
on loans and securities and interest cost of its borrowed funds. It reflects
the cost of bank intermediation services and the efficiency of the bank. The
higher the net interest margin, the higher the bank's profit and the more
stable the bank is. Thus, it is one of the key measures of bank
profitability. However, a higher net
interest margin could reflect riskier lending practices associated with
substantial loan loss provisions (Khrawish, 2011).
2.3.4 CAMEL rating system
CAMEL is an acronym for five components of bank safety and
soundness: Capital adequacy, Asset quality, Management quality, Earning ability
and Liquidity. These are discussed below:
2.3.4.1 Capital Adequacy
Karlyn (1984) defines the capital
adequacy in term of capital-deposit ratio because the primary risk is
depository risk derived from the sudden and considerably large scale of deposit
withdrawals. Capital adequacy is the capital expected to maintain balance with
the risks exposure of the financial institution such as credit risk, market
risk and operational risk, in order to absorb the potential losses and protect
the financial institution‘s debt holder. “Meeting statutory minimum capital
requirement is the key factor in deciding the capital adequacy, and maintaining
an adequate level of capital is a critical element”. The capital adequacy is
estimated based upon the following key
financial ratios:
2.3.4.2 Asset quality
Frost (2004) stresses that the asset quality indicators
highlight the use of nonperforming loans ratios (NPLs) which are the proxy of
asset quality, and the allowance or provision to loan losses reserve. According
to Grier (2007), “poor asset quality is the major cause of most bank
failures”. A most important asset
category is the loan portfolio; the greatest risk facing the bank is the risk
of loan losses derived from the delinquent loans. The credit analyst should
carry out the asset quality assessment by performing the credit risk management
and evaluating the quality of loan portfolio using trend analysis and peer
comparison. Measuring the asset quality is difficult because it is mostly
derived from the analyst’s subjectivity.
2.3.4.3 Management Quality
Grier (2007) suggests that management is considered to be
the single most important element in the CAMEL rating system because it plays a
substantial role in a bank’s success; however, it is subject to measure as the
asset quality examination. Management quality refers to the capability of the
board of directors and management, to identify, measure, and control the risks
of an institution‘s activities and to ensure the safe, sound, and efficient
operation in compliance with applicable laws and regulations (Uniform Financial
Institutions Rating System 1997).
2.3.4.4 Earning ability
In accordance with Grier (2007)’s opinion, a consistent
profit not only builds the public confidence in the bank but absorbs loan
losses and provides sufficient provisions. It is also necessary for a balanced
financial structure and helps provide shareholder reward.
Thus consistently healthy earnings are essential to the
sustainability of banking institutions. Profitability ratios measure the
ability of a company to generate profits from revenue and assets.
2.3.4.5 Liquidity
Grier (2007) emphasizes that “the liquidity expresses the
degree to which a bank is capable of fulfilling its respective obligations”.
Banks makes money by mobilizing shortterm deposits at lower interest rate, and
lending or investing these funds in long term at higher rates, so it is
hazardous for banks mismatching their lending interest rate. The profitability
is estimated based upon the following key financial ratios. There should be
adequacy of liquidity sources compared to present and future needs, and
availability of assets readily convertible to cask without undue loss. The fund
management practices should ensure an institution is able to maintain a level
of liquidity sufficient to meet its financial obligations in a timely manner;
and capable of quickly liquidating assets with minimal loss. (Uniform Financial
Institutions Rating System, 1997).
2.4 Economic and Financial Implication of Mobile Banking
The government recognizes the role played by the mobile
phones and associated technologies in the economy growth and development
(Sessional paper 2005). As the numbers of mobile phone uses increases there has
been a pervasive impact on people’s lives. Mobile banking has both significant
implication of the economy and financial performance of the organization
involved.
Traditionally provision of banking services was an
expensive venture. The banks had to invest in staff, machines and building in
order to provide services to their customers.
With advent of M-banking banks need not invest in capital
equipment to provide banking services.
Many people in rural areas have access to financial
services brought about by mobile penetration. Majority of urbans dwellers use
M-banking services to make payments of airtime, prepaid electricity, and
remittance to friends and relatives in rural villages. Mbanking is facilitating
redistribution of wealth for instance new business start in order to provide
services to the users; new agency growing in oders to serve the unreached areas
in the country. M-banking and mobile phone business contribute to economic
development though creating opportunities for income generation.
2.5 Empirical Review of Effects of Mobile Banking
Several studies have been conducted on the effects of
mobile banking and the performance of commercial banks. Tchouassi (2012) sought
to find out whether mobile phones really work to extend banking services to the
unbanked using empirical Lessons from Selected Sub-Saharan Africa Countries. This
study sought to discuss how mobile phones could be used to extend banking
services to the unbanked, poor and vulnerable population. The study noted that
poor, vulnerable and low-income households in SubSaharan Africa (SSA) countries
often lacked access to bank accounts and faced high costs for conducting basic
financial transactions.The mobile phone presented a great opportunity for the
provision of financial services to the unbanked. In addition to technological
and economic innovation, policy and regulatory innovation was needed to make
these services a reality.
Ching et al
(2011) studied the factors affecting Malaysian mobile banking adoption from the
point of an empirical analysis. This study aimed at extending the Technology
Acceptance Model (TAM) to investigate mobile banking acceptance in Malaysia.
More specifically, the objective of this study was to examine the relationships
between constructs of perceived usefulness, perceived ease of use, social
norms, perceived risks, perceived innovativeness, and perceived relative
advantages towards behavioural intention in adopting mobile banking. The
findings of this study revealed that perceived usefulness, perceived ease of
use, relative advantages, perceived risks and personal innovativeness were the
factors affecting the behavioral intention of mobile users to adopt mobile
banking services in Malaysia. Meanwhile, the social norms were the only factor
found to be insignificant in this study.
Donner and Tellez (2008) did a study on mobile banking and
economic development where they sought to link adoption, impact, and use. The
study established that through offering a way to lower the costs of moving
money from place to place and offering a way to bring more users into contact
with formal financial systems, m-banking/mpayments systems could prove to be an
important innovation for the developing world. However, the true measure of
that importance required multiple studies using multiple methodologies and
multiple theoretical perspectives before answering the questions about adoption
and impact.
Tiwari, Buse and Herstatt (2006) studied mobile banking as
business strategy: impact of mobile
technologies on customer behaviour and its implications for banks. The study
sought to examine the opportunities for banks to generate revenues by offering
valueadded, innovative mobile financial services while retaining and even
extending their base of technology-savvy customers
Wambari (2009) studied mobile banking in developing
countries using a case of Kenya. This study sought to establish the importance
of mobile banking in the day to- day running of small businesses in Kenya and
to understand the challenges involved in using m-banking as a business tool and
appreciate the advantages and disadvantages therein. This study elaborated that
the adoption and use of mobile phones is product of a social process, embedded
in social practices such as SMEs Practices which leads to some economic
benefits.
Al-Jabri (2012) studied mobile banking adoption by looking
at the application of diffusion of innovation theory. This study sought to
investigate a set of technical attributes and how they influence mobile banking
adoption in a developing nation, like Saudi Arabia. The study used diffusion of
innovation as a base-line theory to investigate factors that may influence
mobile banking adoption and use. More specifically, the objective of this
research was to examine the potential facilitators and inhibitors of mobile
banking adoption. The study was guided by six hypothesis including: relative
advantage having a positive effect on mobile banking adoption; Complexity
having a negative effect on mobile banking adoption; Compatibility having a
positive effect on mobile banking adoption; Observability having a positive
effect on mobile banking adoption; Trialability having a positive effect on
mobile banking adoption; and perceived risk having a negative effect on mobile
banking adoption.
The findings suggest
that banks, in Saudi Arabia, should offer mobile banking services that are
compatible with various current user requirements, past experiences, lifestyle
and beliefs in order to fulfill customer expectations. With better mobile
banking support and provision of variety of services, the more useful customers
perceive mobile banking to be and to increase their level of adoption. Hence,
bank’s attention should focus on understanding customer behavior and designing
reliable mobile banking systems that will meet their needs and provide useful
and quality services. In addition, banks should focus on communicating
information that emphasizes the relative advantage and usefulness of mobile
banking compared to other banking channels like physical presence to the bank
or using ATM machines. Banks must seek to reduce risk perceived by their customers
by offering specific guarantees protecting them and taking their complaints
seriously and urgently.
According to Koivu (2002) uptake of mobile phone in Kenya
has been unprecedented. Mobile banking in Kenya affects performance of
organization, behavior and decision making of the entire economy. The trend of
continued reliance on mobile devices to execute monetary transaction is
steadily gaining momentum. Mobile banking is one innovation which has
progressively rendered itself in pervasive ways of cutting across numerous
sectors of economy and industry.
Kigen (2010) studied the impact of mobile banking on
transaction costs of microfinance institutions where he found out that by then,
mobile banking had reduced transaction costs considerably though they were not
directly felt by the banks because of the then small mobile banking customer
base. Kigen (2010) sought to determine the impact that mobile banking bore on
transactional costs of microfinance institutions.
Kingoo (2011) studied the relationship between electronic
banking and financial performance of commercial banks in Kenya where he paid
keen attention on the microfinance Institutions in Nairobi. Kingoo (2011)
looked at the wider electronic banking whereas this study will only concentrate
on mobile banking.
Munaye (2009) studied the application of mobile banking as
a strategic response by equity bank Kenya limited to the challenge in the
external environment. Munaye (2009) reviewed the concept of mobile banking as a
strategic response where its effects on financial performance were not
considered.
Zimmerman (2010) discovered that mobile banking in
developing world was an object of skepticism among financial insiders while
proponents argued that cell phones could revolutionize personal finance in poorer
country, regulators warned of money laundering and most bankers worried that
low customer balances wouldn’t be worth transaction costs. From the above
discussion of empirical literature, this study hypothesizes that mobile banking
supports the delivery of mobile banking services in an economy.
2.6 Summary of Literature Review
This chapter started by looking at the theoretical
framework where it discussed the theories on which the study is found:
financial intermediation theory and modern economics theory. According to
financial intermediation theory, financial institutions exist to mediate
between the surplus and deficit units in an economy by facilitating the
transfer of resources. However, this needs to be done in an economic way so as
to minimize the operating costs and maximize the revenues for these banks.
Financial intermediation theory brings out the role played by mobile banking in
the financial intermediation process by enabling the accessibility of banking
services over the mobile phone, While the modern economics theory puts into
perspective the changing times and adaption to the environment. Smirlok (1985),
subscribing to the efficiency hypothesis, considers market share as a proxy for
efficiency. The efficiency hypothesis prevails when a significant positive
correlation between market share and profitability is signaled.
From the above discussion of the theoretical and empirical
literature, limited research has been conducted on the economic and financial
impact of mobile banking on the performance of Kenyan banks. The existing
studies have been done in other economies which have different operating
environment from that in Kenya. This study therefore seeks to fill this
research gap.
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 Introduction
This chapter sets out various stages and phases that were
followed in completing the study. In this stage, most decisions about how
research was executed and how data was gathered, towards the completion of
research. Precisely, the section covers; research design, target population,
data collection and data analysis.
3.2 Research Design
The study adopted a descriptive research design. Mugenda
and Mugenda (2003) describes descriptive research design as a systematic,
empirical inquiring into which the researcher does not have a direct control of
independent variable as their manifestation has already occurred or because the
inherently cannot be manipulated. Descriptive studies are concerned with the
what, where and how of a phenomenon hence more placed to build a profile on
that phenomenon (Mugenda and Mugenda, 2003). Descriptive research design is
more appropriate because the study seeks to build a profile about the impact of
mobile banking on the financial performance of commercial banks in Kenya.
3.3 Population of the Study
Population in statistics is the specific population about
which information is desired. According to Ngechu (2004), a population is a
well defined or set of people, services, elements, events, group of things or households
that are being investigated. Following
the small number of institutions in the industry, the study included all the
institutions hence a census study was conducted. The target population for the
study included the 43 commercial banks operating in Kenya as at December 2011.
3.4 Data Collection
The study used secondary data from the Audited Financial
statements at the Bank and those deposited at the Nairobi Securities Exchange. The data was collected using data
collection sheet which was edited, coded and cleaned. Data was mainly
obtained covering the period between 31st January 2007 and 31st December 2011. Monthly data was
used in the analysis.
3.5 Data Analysis
The study used Statistical Package for Social Sciences
Version 21.0 to aid in data analysis. The paired t-test, a non-parametric test
of differences developed by Sir Williams Gosset (Mugenda & Mugenda, 1999)
was used in this study as a test of significance. The analysis will be at 0.05
level of significance.
In order to determine the effect of mobile banking on the
financial performance of commercial banks in Kenya, the researcher conducted a
multiple regression analysis using the following regression model. This model
was based on Kigen (2010) who analyzed the impact of mobile banking on
transaction costs of microfinance institutions by looking at mobile banking
adoption and the behavior of transaction costs and established that mobile
banking had reduced transaction costs considerably though they were not
directly felt by the banks because of the then small mobile banking customer
base. The model is further supported by Kingoo (2011) in studying the
relationship between electronic banking and financial performance of commercial
banks in Kenya by looking at the wider electronic banking. The study used
Return on Assets as a measure of financial performance and overall operating
cost as independent variable:-
Y= Bo+ B1X1+ B2X2+ ε
Where Y = Financial Performance of
commercial banks (ROE)
X1 = Monthly value moved through
mobile banking X2 = Number of users of mobile banking ε = Error term
Bo=Constant
B1=Coefficient of X1
B2=Coefficient of X2
To test for the strength of the model
and the effects of mobile banking on the financial performance of commercial
banks in Kenya, the researcher conducted an Analysis of Variance (ANOVA). On
extracting the ANOVA statistics, the researcher looked at the significance
value. The study was tested at 95% confidence level and 5% significant level.
If the significance number was found to be less than the critical value () set 2.4, then the conclusion
will be that the model was significant in explaining the relationship.
CHAPTER FOUR
DATA ANALYSIS AND FINDINGS
4.1 Introduction
This chapter presents analysis and findings of the study as
set out in the research objective and research methodology. The study findings
are presented on the effects of mobile banking on the financial performance of
commercial banks in Kenya. The data was gathered exclusively from the secondary
source which included the records at Central Bank of Kenya (CBK).
4.2 Number of mobile Banking Users
The study sought to establish the
developments in the number of mobile banking users among all commercial banks
since its inception. The findings were as shown in the figure
4.1 below and appendix II:
Source: (Research Findings, 2013)
From the findings presented above, the study established
that in the incpetion year 2007, the number of users in the first month was
0.02 million people. The numbers grew steadily from month to month during the
year to close at 1.35 million users. As the period lapsed, the number of users
increased. The average for the year stood at 0.506 million users.
For the second year, the number of users started at 1.59
millions then grew steadily from month to month to close the year at 5.08
million. The huge increase led to a huge increase in the annual average users
of 3.25916 million. For the year 2009, there were 5.48 million users in January
which grew again throughtout the year to reach 8.88 by December. This
transilated into an annual average of 7.265 million users.
For the year 2010, The number of users were 9.48 million in
January. The positive trend in the number of users continued in this year to
close at 16.45 million users. The annual average was 12.6875 million users. The
year 2011 started on 16.69 million users which again grew steadily throughout
the year to close at 19.19 million users in December. This transilated into an
annual average of 18.2125 million users. These findings show that as time
lapsed, the number of mobile banking users increased. The commercial banks
could now start enjoying economies of scale as more and more customers adopted
mobile banking. This affected the banking operations especially the staff costs
positively as the number of customers visiting the banking halls to transact could
tremendously reduce as more and more customers adopt mobile banking. The
resulting effects could be better services in the banking halls as they would
be less congested. This could also lead to a reduction in the headcount
offering services in the banking halls. The adoption of mobile banking also
contributes positively to the provision of standardized services.
4.3 Monthly Value moved Through Mobile Banking
The study sought to establish the Monthly value moved
through mobile banking during the study period. The findings were as indicated
in the figure 4.2 below and appendix III:
Source: (Research Findings, 2013)
From the findings illustrated in the
figure 4.2 above, the study established that in the inception month, the total
amount moved through mobile banking was Ksh. 0.06 billion which grew from month
to month during the year 2007 to close the year at Ksh. 3.77 billion in
December. The annual average for the year 2007 was Ksh. 1.631 billion.
In the year 2009, the total amount moved
through mobile banking in January was Ksh.
27.07 billion which still grew rapidly during the year to
close at Ksh. 52.34 billion in December. The annual average stood at Kshs.
39.4525. For the year 2010, the amount moved by end of January was Kshs. 48.46
billion. This amount grew steadily during the year to close at Kshs. 70.27
billion. The annual average was Kshs. 61.01833 billion.
During the year 2011, the number of companies offering
mobile money transfer had increased to six, namely; Safaricom (M-Pesa), Airtel
Networks (Airtel Money), Essar Telcom (Yu Cash), Orange Telkom (Orange Money),
Mobile Pay (Tangaza) and Mobikash (Mobikash). The amounts transacted through
these services were maintained high above 75 billion. Notably, there was a
characteristic fluctuation in transaction during this year. From a low figure
of Ksh 0.06 billion in March 2007 to Ksh. 118.08 billion by the end of the
study period.
4.4 Financial Performance of commercial banks
The study analyzed the consolidated financial performance
of the banking sector during the study period. The findings were as shown in
the figure 4.3 below:
Source: (Research Findings, 2013)
From the study findings in figure 4.3 above, the study
established that the banking industry return on Equity was 28.04%. The ROE
dropped slightly in the following year 2008 to 26.5%. The performance of the
banking industry reached its lowest point in the study period at 24.93 in the
year 2009. This could be attributed to many factors beyond this study as the
performance of commercial banks in a function of more variables including the
macroeconomic variables besides the mobile banking effects being looked at in
this study. The ROE picked an upward trend in the year 2010 to stand at 27.94%.
The upward trend was maintained in the following year to stand at 30.72%. From
the findings presented above, the findings show that the performance of the
banking sector dropped slightly during the years 2008/2009. This could largely
be attributed to the post election violenec that rocked the Country in this
period.
4.5 Regression Analysis
In order to establish the relationship between the mobile
banking and the financial performance of the banking sector in Kenya, the study
conducted a multiple regression analysis. The findings were as shown in the
table 4.1 below:
Table 4.1: Model Summary
Model
|
R
|
R Square
|
Adjusted R Square
|
Std. Error of the
Estimate
|
1
|
.608a
|
.370
|
-.260
|
2.40644
|
a. Predictors: (Constant),
Monthly value moved, number of mobile banking users
|
Source:(Research Findings,2013)
Coefficient of determination explains the extent to which
changes in the dependent variable (financial performance of commercial banks in
Kenya) can be explained by the change in the independent variables or the
percentage of variation in the dependent variable (financial performance of
commercial banks in Kenya) that is explained by all the two independent
variables (Monthly value moved, number of mobile banking users).
The two independent variables that were studied, explain
only 37% of the changes in the financial performance of commercial banks in
Kenya as represented by the R2. The study shows that there is a weak
positive insignificant correlation between mobile banking and financial
performance of commercial banks in Kenya.
Table 4.2: ANOVAb
Model
|
Sum of Squares
|
df
|
Mean Square
|
F
|
Sig.
|
|
1
|
Regression
|
6.797
|
2
|
3.399
|
.587
|
.630a
|
Residual
|
11.582
|
2
|
5.791
|
|
|
|
Total
|
18.379
|
4
|
|
|
|
|
a. Predictors: (Constant), Monthly value
moved, number of mobile banking us
|
ers
|
|||||
b. Dependent Variable: Financial
Performance
|
|
Source: Research data
The probability value of 0.630 indicates that the
regression was insignificant in predicting how mobile banking impacts the
financial growth of the banking sector in Kenya. The F critical at 5% level of
significance was 0.587 since F calculated is less than the F critical (value =
2.371), this shows that the overall model was insignificant.
Table 4.3: Coefficients of Determination
Model
|
Unstandardized
Coefficients
|
Standardized Coefficients
|
t
|
Sig.
|
||
B
|
Std. Error
|
Beta
|
||||
1
|
(Constant)
|
26.123
|
1.947
|
|
13.414
|
.006
|
number of mobile banking users
|
.012
|
.394
|
.213
|
.030
|
.979
|
|
Monthly value moved
|
.118
|
2.108
|
.395
|
.056
|
.960
|
|
a. Dependent Variable: Financial
Performance
|
|
|
|
Source: Research data
The researcher conducted a regression analysis so as to
determine the relationship between mobile banking and financial performance of
banking industry in Kenya. The regression equation (Y = β0 + β1X1
+ β2X2 ) was:
Y = 26.123 +0.012X1 + 0.118X2
Whereby Y = financial performance of commercial banks in
Kenya; X1= Number of mobile banking users; X2 = Monthly
Value moved.
According to the regression equation established, taking
all factors (number of mobile banking users and total value moved through
mobile banking) constant at zero, the financial performance of the banking
sector will be 26.123%. The data findings analyzed also shows that taking all
other independent variables at zero, a unit increase in number of users will
lead to a 0.012 increase in financial performance of the banking sector. A unit
increase in the amount of money moved through mobile banking will lead to a
0.118 increase in in the financial performance of the banking sector. This notwithstanding, the study shows that
there is a weak positive insignificant correlation between mobile banking and
financial performance of commercial banks in Kenya. Therefore, it can be
deduced that mobile banking has an impact on the financial performance of
commercial banks although not significant.
4.6 Interpretation of Findings
From the findings presented above, it is evident that as
the number of mobile banking users increased, the monthly amount moved through
mobile banking increased. At the beginning in the year 2007, the users were few
as many individuals must have been skeptical as regards the security of mobile
banking. However, as more and more people learned of the safety of the service,
they adopted it and hence the increase in the amount of money transacted
through mobile banking. These findings are consistent with the argument by
Al-Jabri (2012) who studied mobile banking adoption by looking at the
application of diffusion of innovation theory and established that with better
mobile banking support and provision of variety of services, the more useful
customers perceive mobile banking to be and to increase their level of
adoption. The increase in the number of users shows confidence among mobile
banking users. This shows that commercial banks took keen interest in ensuring
minimal risk exposure for their customers. As AlJabri (2012) suggested, banks
must seek to reduce risk perceived by their customers by offering specific
guarantees protecting them and taking their complaints seriously and urgently.
The study indicates that there is a weak positive
insignificant correlation between mobile banking and financial performance of
commercial banks in Kenya. This was largely because the financial performance
of commercial banks is a function of many other variables not looked at in this
study. However, with the increasing levels of adoption of information
technology, commercial banks that adopt the latest information technologies are
likely to outperform those who may rely on brick and mortar branch.
From the findings, the performance of commercial banks as
measured by return on equity started at a high of 28.04 then dropped in the
year 2008 and 2009 to reach a low of 24.93. this could be largely attributed to
the post election violence witnessed in Kenya which may have had negative
effects on overall economic performance in the Country. As indicated earlier,
financial performance of commercial banks is a function of many other variables
not looked at in this study. However, despite this, the amount of money
transacted through mobile banking and number of users maintained a positive
increase. There is also a directly positive relationship between number of
mobile banking users and the amount of money moved through mobile banking over
the study period. However, the two independent variables that were studied,
explain only 37% of the changes in the financial performance of commercial
banks in Kenya as represented by the R2. The study shows that there is a weak
positive insignificant correlation between mobile banking and financial
performance of commercial banks in Kenya.
CHAPTER FIVE
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
5.1 Introduction
This chapter presented the summary of key data findings,
conclusions drawn from the findings highlighted and policy recommendations that
were made. The conclusions and recommendations drawn were in quest of
addressing research objectives of establishing the effect of mobile banking on
the financial performance of commercial banks in Kenya.
5.2 Summary
Financial institutions in Kenya have adopted mobile
services to provide crucial banking services to customers in Kenya. The results
show that as the monthly value moved through mobile banking increases, the
profitability of the commercial banks increase.
The research shows that mobile banking to a larger extent impacts the
financial performance of commercial banks in Kenya in that it helps reduce
unnecessary cost, increase efficiency and improves on service delivery to
customers. However, for the period 2008 and 2009, this relationship seems not
to hold as the value moved continued to increase while the performance of the
banking industry as a whole dropped as measured by return on assets. This could
however be explained that although there is a relationship between mobile
banking and financial performance of commercial banks in Kenya, the
relationship is somehow weak. This was well explained by the F critical at 5%
level of significance which was 0.587 falling below the F critical (value =
2.371). In addition, the R squared value was extremely low at 37% showing that
the effect of mobile banking on the financial performance of the banking
industry was low.
However, the study concludes that mobile banking is being
used to improve financial operations. The banks have put in place measures
become more competitive by keeping pace with the technological developments. It
can also be noted from the findings on the number of users that the numbers
keep increasing from one year to another. This shows that customers are
appreciating and embracing mobile banking. This could be attributed to the
advantages offered by mobile banking which include convenience and flexibility.
5.3 Conclusions
From the research findings presented in chapter four and
above summary of findings, the study concludes that there is a weak positive
relationship between mobile banking and financial performance of commercial
banks in Kenya. This could be attributed to the trends recorded in the two
variables where the number of users and monthly transfers maintained a positive
growth rate while financial performance of commercial banks was affected by
many variables which have major impacts compared to the adoption of mobile
banking. Financial performance of commercial banks in Kenya was majorly affected
by macro-economic variables like post election violence, inflation and foreign
exchange rates fluctuations among other macro-economic variables which were
outside the scope of this study.
5.4 Policy Recommendations
From the above conclusion, the study recommends that policy
makers consider mobile banking in their formulation of policies because of the
technological developments and the expected switch from physical branch
networks to technologically supported banking services. This is because despite
negligible relationship between mobile banking and financial performance of
commercial banks in Kenya, the impact could be pronounced if much change is
recorded in technological developments and more customers adopt mobile banking
services. This is because the relationship may not be direct but an indirect
one resulting from the convenience that the mobile banking services offers to
commercial banks.
Mobile banking is being used to improve financial
operations in commercial banks. The banks have put in place measures to become
more competitive by training its staff, investing in research and development
of technology. In the long run, mobile banking is likely to have major impacts
on the profitability of commercial banks as it smoothes business operations.
The study further recommends that commercial banks keep
adopting and using mobile banking in their operations because the number of
people with access to a mobile hand set is increasing every day. In addition,
the convergence of mobile phones and commercial banks has revolutionized the
banking operations. For example, Safaricom limited in conjunction with
Commercial Bank of Africa launched M-Shwari services which provide registered
members an opportunity to borrow money from the bank and repay conveniently.
This has introduced another perspective that is likely to revolutionize the
banking operations for increased profitability.
5.5 Limitations of the Study
A limitation was regarded as a factor that was present and
contributed to the researcher getting either inadequate information or if
otherwise the response given would have been totally different from what the
researcher expected. The main limitations of this study were: the data used was
secondary data generated for other purposes hence may not accurately predict
the relationship among the variables. The measures used may keep on varying
from one year to another subject to the prevailing condition. For example the
financial performance of commercial banks was subject to the total assets owned
by commercial banks. In addition, changes in the macroeconomic environment
could have affected the profitability of commercial banks e.g. the post
election violence which slowed down economic development.
Another limitation for the study included the short period
which mobile banking has been in existence which could not give a long trend
for analysis. Mobile banking was only introduced in Kenya by March 2007. It has
only been six years since the launch which may not give a clear picture of the
relationship as not all commercial banks adopted it at ago yet the performance
used in the study takes into account the performance from all banks.
5.6 Suggestions for Further Studies
The study suggests that further research be conducted on
the relationship between mobile banking and financial performance in other
countries within the East African Community. This study only concentrated on
Kenya yet mobile banking has been adopted in all members of the East African
Community.
The study further recommends that another study be
conducted in Kenya on the relationship between mobile banking and economic
growth to establish the contributions of mobile banking on the growth of the
economy.
The study further suggests that another study be conducted
on the impact of mobile banking on financial deepening in Kenya. The Central
Bank statistics show that as a result of mobile banking, there is an increase
in the level of financial deepening in Kenya of upto about 85%. A study needs
to be carried out to ascertain the effectiveness of mobile banking in financial
deepening.
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