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This research paper investigates the influence of mobile banking on the financial performance of commercial banks in kenya. It analyzes data from 2010 to 2014 to determine the effect of mobile banking transactions, capital adequacy, bank size, and market share on return on equity (roe). The study concludes that mobile banking transactions have a positive and significant impact on the financial performance of commercial banks in kenya.
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This research project is my original work and has not been presented for a degree award in any other University.
Signature …………………….. Date …………………………..
Mr. Felix Mabwai
D61/74471/
This research project has been submitted for examination with my approval as the University supervisor.
Signature …………………. Date …………………………..
Mr. Barasa. J. L
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This study sought to determine the effects of mobile banking on the financial performance of commercial banks. This study used a descriptive research design of the registered commercial banks in Kenya. Purposive sampling was employed toselect the main commercial banks engaging in mobile banking and thus focused on 8 commercial banks in Kenya. The study only used secondary data which was collected from financial statements of the commercial banks. Data was analysed using descriptive and regression analysis. The results reveal that the number of mobile banking transactions, capital adequacy, markets share and the size of the assets had apositive influence on the financial performance of commercial banks. The study concludes that the adoption of mobile banking by commercial banks in Kenya has resulted in improved performance over the years. The study recommends that commercial banks should increase their focus and investments in mobile banking as this is the future of the banking industry in order for them to remain profitable.
The revolution of information technology has influenced almost every facet of life, among them is the banking sector. The introduction of electronic banking has revolutionized and redefined the way banks were operating. As technology is now considered as the main contribution for the organizations‟ success and as their core competencies. So the banks, be it domestic or foreign are investing more on providing customers with the new technologies through mobile banking.
An appropriate banking environment is considered a key pillar as well as enabler of economic growth (Koivu, 2002). In order to be in line with the changes in the operating environment, it is apparent that banks in Kenya and other financial institutions 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 resulted in an increase in mobile banking as customers can transact and clear utility bills through their mobile.
According to Burgessy and Wong (2005), the growth of IT has affected almost each aspect of life; among them being the banking industry. The coming up of mobile banking has changed and redefined the way banks were running. Since technology is now regarded as the major input for the institutions achievement and as their main proficiencies, banks, be it local or foreign, are channelling their finances more on
Services include performing balance checks, account transactions, payments, credit applications and other banking transactions through a mobile device such as a mobile phone which is most used in developing countries or Personal Digital Assistant (PDA).
In both the developed and developing countries, mobile phones have become the primary form of telecommunication (Bhavnani,Chiu,Janakiram&Silarszky,2008).The northern European countries are among the most advanced ones in adoption of different new mobile technologies. In 2003, M-Banking in Finland enabled services such as checking account balances, funds transfer, payment of bills, share dealings, portfolio management and purchase of insurance. Mari, Rafael and Francisco (2007) established that product and service delivery innovations contribute positively to regional Gross Domestic Product (GDP), investment and gross savings growth. These sentiments are shared by Hendrickson and Nichols (2011), while studying the performance of small banks in the United State with regards to interstate branching and found out that banks perform better when they adopt innovations across their branches.
Mobile banking has transformed the way people in the developing world transfer money and now it is poised to offer more sophisticated banking services which could make a real difference to people's lives. This type of banking can offer a wide variety of services ranging from account information, which has to do with alerting the customers on the updates and transactions on their account through their mobile phones. People receive short messages on their phones informing them of their immediate transactions in their bank accounts. Also, they help in payments (utility bills), deposits, withdrawals, transfers, purchase airtime, request bank statements and
perform 13 other crucial banking tasks, all in real time over their mobile phones (Mutua, 2013).
Financial performance refers to the financial soundness where depositors‟ funds are safe in a stable banking system (BOU, 2002). The financial soundness of a financial institution may be strong or unsatisfactory varying from one bank to another. According to Mugembe (2008), external factors such as: deregulation, lack of information among bank customers and homogeneity of the services bank offer do cause bank failure. The activities undertaken in m-banking contribute to the financial soundness of the commercial banks in Kenya. Some useful measures of financial performance are coined into what is referred to as CAMELS (Capital adequacy, Asset quality, and Management, Earning, Liquidity and Sensitivity analysis) which guide the banking sector (Madhyam and Stichele, 2010).
External parties normally evaluate a firm‟s ability based on its performance (Bonn, 2000). This implies why performance is like a mirror to a firm. The level of goal accomplishment generally defines a firm‟s performance (Achrol and Etzel, 2003). Firm performance is the outcomes achieved in meeting internal and external goals of a firm (Lin et al., 2008). As a multidimensional construct, performance has several names, including growth, survival, success and competitiveness. The concept of firm growth was introduced in the early 1930s known as the “Law of Proportionate Effect” (sometimes called Gibrat's rule of proportionate growth). The Law of Proportionate Effect is frequently used as a benchmark for many studies to determine business growth.
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.
Mobile technology has significantly entered rural areas in Kenya and is expected to be on an increasing trend in the coming years. Banks and other financial institutions which have conventionally depended on physically setting up branches to offer banking services, are now moving towards the taking up of mobile banking services (MBS) as a structure of branchless banking. This has the effect of reducing banking costs, and thus improving the profitability ratios. Technology has thus offered huge openings to service providers to provide the clients with immense flexibility. Ultimately, banks have adopted branchless banking like internet banking, mobile banking and ATMs; among others (Ndungu & Njeru, 2014).
According to the Central Bank of Kenya, there are 43 licensed commercial banks and 1 Mortgage Finance Institution in Kenya. Three of the banks are public financial institutions with majority shareholding being the Government and state corporations.
The rest are private financial institutions. Of the private banks, 27 are locally owned commercial banks while 13 are foreign owned commercial banks. The Kenyan banking industry has been undergoing dramatic operational transformation in recent years. Mergers and acquisitions, increased competition, and new regulatory requirements have driven banks to rethink their retail strategies. It has become important for banks to leverage technology to optimize sales and fulfilment processes, manage distribution channels, and streamline operations to acquire, satisfy and thereby retain customers (CBK, 2015).
In the recent wave of globalization, increased technological growth and competition there has been a lot of emphasis on performance in the Kenyan banking sector. Many scholars and researchers have used performance synonymously with productivity, efficiency, effectiveness and competitiveness. According to Bohlander and Snell (2007) organizational performance comprises the actual output or results of an organization measured against its intended outputs (organizational goals and objectives). According to Barney (2000) firms that use resources and capabilities to exploit opportunities and neutralize threats will see an increase in their net revenue or a decrease in their net costs or both and vice versa. Players in this sector have experienced increased competition over the last few years resulting from increased innovations among the players and new entrants into the market.
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
in Kenya since its introduction in 2007. Commercial banks have continued to deploy huge investments in mobile banking services. In addition more and more banks in Kenya are strategically launching newer and newer Mobile Banking platforms hence the need toinvestigate the effect of mobile baking on financial performance of the commercial banks. In addition, today many people in Kenya are still without effective access to mobile banking services and this may have also affected the financial performance of commercial banks.
A search for empirical literature on the influence of mobile banking on the financial performance of commercial banks reveals a number of studies, some international and others local. Ching, et al. (2011) evaluated the factors that influence the adoption of mobile banking in Malaysia. The study revealed that one of the factors is improved efficiency and thus performance. Lee et al (2007) also carried out a similar study with the aim of establishing the factors that are important in South Korea. Some of the local studies that have attempted to investigate the influence of mobile banking on the financial performance of commercial banks include Kithaka (2014), Argamo (2015), Kathuo, Rotich and Anyango (2015) and Mutua (2013). However a gap remains in addressing the overall implications of mobile phone banking, in relation to traditional banking transactions. This is evidenced by studies that reveal unresolved issues on mobile phone banking and little or no examination on how the technology is affecting banking transactions. Further, the effects of new developments such as the introduction of Equitel, a mobile money transfer service by Equity bank on the financial performance have not been evaluated. The study therefore seeks to fill this gap by answering the following research question: What is the effect of mobile banking on thefinancial performance of commercial banks in Kenya
The objective of this study is to determine the effect of mobile banking on the financial performance of commercial banks in Kenya
This study will inform the bank management 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.
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.
Academicians and researchers in the field of finance and banking will benefit from this study as it 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.
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. Financialintermediaries 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.
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.(Shepherd, 1986)
Efficiency structure 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.
This theory was officially introduced by Bradley and Stewart in the year 2002 and it affirms that firms engage in the diffusion of innovation in order to gain competitive advantage, reduce costs and protect their strategic positions. The innovation diffusion theory put forward by Rogers in 1962 is a well -known theory that explains how an innovation is diffused among users over time (Liu & Li, 2009). It also helps to understand customers‟ behaviour in the adoption or non-adoption of an innovation (Vaugh and Schavione, 2010; Lee and others, 2003). The theory depicts that the adopters of any innovation follow a bell-shaped distribution curve which may be divided into five parts to categorize users in terms of innovativeness (Liu and Li,
