THE EFFECT OF MOBILE BANKING ON THE FINANCIAL

PERFORMANCE OF COMMERCIAL BANKS IN KENYA

BY:
MOSES W. SINDANI
(D61/70192/2007)

A Management Research Report Submitted In Partial Fulfillment Of The

Requirements For The Award Of The Degree Of Master In Business
Administration, School Of Business, University Of Nairobi

November, 2011

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 DECLARATION

I declare that this is my original work and has not been presented for a degree in
any other university.

Moses W. Sindani D61/70192/2007

Signed________________________________ Date ____________________

This project has been submitted for examination with my approval as University
Supervisor.

Signed____________________________________ Date __________________

Mr. M’Maithulia
Lecturer
Department of Finance and Accounting
School of Business, University of Nairobi

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 ACKNOWLEDGEMENTS

My thanks go to the Almighty God for seeing me through the entire period. I live
for you.

Thanks to my family for their encouragement and support during this entire
period.

Many thanks to my supervisor Mr. M’Maithulia for his patience during the entire
research period. You gave me the chance to see my best side.

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 DEDICATION

This project is dedicated to my loving mother, Gladys Namalwa for her hard work
in supporting me throughout my education. There is none like you Mother.

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 ABSTRACT
The study was carried out to determine the effect of mobile banking on the
financial performance of commercial banks in Kenya. Various independent
variables were identified and these included: income, salaries and wages,
depreciation on plant and equipment, rent for branch premises, stationery,
telephone and postage, amortization of Information Communication and
Technology (ICT) systems and other administrative costs.

The study employed a linear multiple Regression to establish the effect index of
mobile banking on the financial performance of commercial banks in Kenya. The
population of interest in this study consisted 44 commercial banks registered and
licensed under the Banking Act Chapter 488 of the Laws of Kenya and were
inexistence by 1st May 2010. The analysis consists of responses from 34
commercial banks representing 77% response rate which was considered
sufficient for data analysis.

The findings indicated that mobile banking had great effect on staff salaries and
wages 17% followed by rent paid for branch premises16%. Income came in third
with 15%, other administrative expenses 14%, Depreciation on plant and
equipment and amortization on ICT systems each registered 13%. Least effect
was recorded on the stationery, telephone and postage.

The overall effect of mobile banking on the financial performance of commercial

banks was 72%. This index being above 50% indicates that mobile banking has
had positive effect of the financial performance of commercial banks in Kenya.

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 TABLE OF CONTENTS
DECLARATION ................................................................................................................. 2
ACKNOWLEDGEMENTS.................................................................................................. 3
DEDICATION ..................................................................................................................... 4
ABSTRACT ......................................................................................................................... 5
LIST OF TABLES ............................................................................................................... 8
LIST OF FIGURES ............................................................................................................. 8
CHAPTER ONE: INTRODUCTION .................................................................................. 8
1.1 BACKGROUND ........................................................................................................................................ 1
1.2 STATEMENT OF THE PROBLEM ............................................................................................................. 6
1.3 OBJECTIVE OF THE STUDY .................................................................................................................... 8
1.4 IMPORTANCE OF THE STUDY ................................................................................................................ 8
CHAPTER TWO: LITERATURE REVIEW .................................................................... 10
2.1 INTRODUCTION................................................................................................................................... 10
2.2 OVERVIEW OF THE BANKING SECTOR IN KENYA ......................................................................... 10
2.3 MOBILE BANKING BUSINESS MODELS............................................................................................ 11
2.3.1 BANK-FOCUSED MODEL .................................................................................................................... 11
2.3.2 BANK-LED MODEL ............................................................................................................................. 12
2.3.3 NON-BANK-LED MODEL .................................................................................................................... 12
2.4 THEORETICAL FRAMEWORK ............................................................................................................ 13
2.4.1 INFORMATION ASYMMETRY ............................................................................................................ 14
2.4.2 TRANSACTION COSTS ........................................................................................................................ 15
2.5 EMPIRICAL STUDIES .......................................................................................................................... 19
2.6 MOBILE BANKING IN KENYA ........................................................................................................... 22
2.7 CHAPTER SUMMARY.......................................................................................................................... 24
CHAPTER THREE: RESEARCH METHODOLOGY..................................................... 25
3.1 INTRODUCTION................................................................................................................................... 25
3.2 RESEARCH DESIGN ............................................................................................................................ 25
3.3 POPULATION AND SAMPLE OF THE STUDY ..................................................................................... 25
3.4 DATA COLLECTION ........................................................................................................................... 26
3.5 DATA ANALYSIS ................................................................................................................................. 26
3.6 DATA RELIABILITY AND VALIDITY .................................................................................................. 28
CHAPTER FOUR: DATA ANALYSIS, RESULTS AND DISCUSSION .......................... 30
4.1 INTRODUCTION ..................................................................................................................................... 30
4.2 DATA PRESENTATION........................................................................................................................... 30
TABLE 1: OVERVIEW OF DATA COLLECTED ..ERROR! BOOKMARK NOT DEFINED.
4.3 DATA ANALYSIS ................................................................................................................................. 31
TABLE 2: OWNERSHIP OF THE COMMERCIAL BANKS .......................................... 31

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TABLE 3: AGE OF COMMERCIAL BANKS IN THE INDUSTRY ................................ 31
TABLE 4: CLIENTELE BASE OF BANKS............ERROR! BOOKMARK NOT DEFINED.
TABLE 5: PROVISION OF MOBILE BANKING SERVICESERROR! BOOKMARK NOT DEFINE
TABLE 6: THE TYPE OF MOBILE BANKING SERVICES OFFEREDERROR! BOOKMARK NO
TABLE 7: AGE OF MOBILE BANKING IN THE INDUSTRYERROR! BOOKMARK NOT DEFIN
TABLE 8: MOBILE BANKING CLIENTELE BASEERROR! BOOKMARK NOT DEFINED.
TABLE 9: IMPORTANCE OF FACTORS IN AFFECTING FINANCIAL
PERFORMANCE ............................................ERROR! BOOKMARK NOT DEFINED.
FIGURE 1 : RELATIVE IMPORTANCE OF FACTORS.ERROR! BOOKMARK NOT DEFINED.
TABLE 10: FACTOR ANALYSIS SCORE..............ERROR! BOOKMARK NOT DEFINED.
FIGURE 2: EFFECT OF MOBILE BANKING ON THE FACTORS. ...............ERROR! BOOKMARK NOT DEFINED.
TABLE 11: MOBILE BANKING EFFECT COMPUTATIONERROR! BOOKMARK NOT DEFINE
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS............. 40
5.1 INTRODUCTION..................................................................................................... 40
5.2 SUMMARY OF THE FINDINGS AND CONCLUSIONS........................................ 40
5.3 LIMITATIONS OF THE STUDY............................................................................. 41
5.4 SUGGESTIONS FOR FURTHER RESEARCH....................................................... 41
REFERENCES: ................................................................................................................. 42
APPENDICES.................................................................................................................... 47
APPENDIX A: INCOME STATEMENT FORMAT OF COMMERCIAL BANKS .................................................... 47
APPENDIX B: COMPONENTS OF OTHER OPERATING EXPENSES COMPONENTS ......................................... 48
APPENDIX C: LIST OF COMMERCIAL BANKS OPERATING IN KENYA........................................................ 49
APPENDIX D: QUESTIONNAIRE .................................................................................................................... 51

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 LIST OF TABLES

Table 4.1: Overview of Data Collected ............................................................................ 30

Table 4.2: Ownership of the Commercial Banks.............................................................. 31

Table 4.3: Age of Commercial Banks in the Industry ...................................................... 31

Table 4.4: Clientele Base of Banks................................................................................... 32

Table 4.5: Provision of Mobile Banking Services ............................................................ 32

Table 4.6: The Type of Mobile Banking Services Offered .............................................. 33

Table 4.7: Age of Mobile Banking In the Industry........................................................... 33

Table 4.8: Mobile Banking Clientele Base ....................................................................... 34

Table 4.9: Importance of Factors in Affecting Financial Performance ............................ 34

Table 4.10: Factor Analysis Score .................................................................................... 36

Table 4.11: Mobile Banking Effect Computation............................................................. 39

LIST OF FIGURES

Figure 4.1: Relative Importance of Factors ...................................................................... 35

Figure 4.2: Effect of Mobile Banking On the Factors ...................................................... 37

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 CHAPTER ONE: INTRODUCTION

1.1 Background of the Study

Information communication and technology (ICT) has transformed many organizations

bringing with it efficiency and improved productivity. The Banking sector has embraced

changes occurring in ICT with most banks having already achieved branchless banking as

a result. According to the Central Bank of Kenya annual bank supervision report (2006),

the increased utilization of modern ICT has for example led to several banks acquiring

automated teller machines, (ATMs) as part of their branchless development strategy

measures. Several banks had also started offering e-banking services that included

internet banking, short message service (SMS) and mobile banking. The trend in mobile

banking was however still at infancy in terms of level of utilization expected in this

sector. (Central bank annual report, 2005/2006)

Perumal and Shanmugan (2004) contend that, the banking industry is an extremely

information intensive industry and must remain at the forefront of advanced use of

information technology. Banks are continually looking for alternative ways of relating to

customers, reduce costs, improve efficiencies and differentiate their products and

services. One trend in this line is the increasing use of self-service technologies like

Automated Teller machines, Internet Banking and Mobile phone banking.

The financial services industry has undergone phenomenal transformation. In just half a

century, banking and customer’s access to financial services has changed beyond the

belief of traditional retail banks. It has changed from local branches, to branch networks,

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to ATMs, to ATM- interbanks agreements, and to home banking software, to call centers,

to telephone banking and internet banking and mobile phone banking is the most recent

(Smith, 2001).

The way forward according to Quresh (2003) for Nigerian banks are to take full

advantage of technological solutions including ATM, phone banking, home banking and

internet banking if they are to remain competitive. He stresses that banks must adopt

information technology or perish. The rapid changes in the financial services

environment, increased competition by new players from both banking and non-banking

sector on product innovations, globalization and technological advancements, have led to

a market situation where battle for customers is intense. Customers want access to all

their financial services from anywhere at any time regardless of who provides the service.

1.1.1 The Concept of Mobile Banking

Laudon and Laudon (2005) defines mobile banking (M-Banking) as the provision of

banking services using handheld devices such as mobile phones, palmtop computers and

personal digital assistants. Tiwari and Buse, (2007), define mobile banking as the

provision and availment of banking and financial services with the help of

telecommunication devices. The term M-Banking is used to denote the access to banking

services and facilities offered by financial institutions such as account-based savings,

payment transactions and other products by use of an electronic mobile device. Mobile

banking has yielded a multiple effect on the number of solutions available to clients. This

is in addition to more efficient transactional environment and the high substitution of

banking point, (Otieno, 2008)

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According to Wambari (2009), 35% of online banking households will be using mobile

banking by 2010, up from less than 1% as at the year 2009. Upwards of 70% of bank

center call volume is projected to come from mobile phones. Mobile banking will

eventually allow users to make payments at the physical point of sale. "Mobile contact

less payments” will make up 10% of the contact less market by 2010. Many believe that

mobile users have just started to fully utilize the data capabilities in their mobile phones.

In Asian countries like India, China, Bangladesh, Indonesia and Philippines, where

mobile infrastructure is comparatively better than the fixed-line infrastructure, and in

European countries, where mobile phone penetration is very high (at least 80% of

consumers use a mobile phone), mobile banking is likely to appeal even more (Wambari

2009).

M-Banking started with the creation of services by banks which could be accessed

through the mobile phone. These facilities aimed at enabling customers access

information relating to their accounts. Subsequent innovations have seen the mobile

banking phenomena continue to grow steadily. Mobile banking takes several dimensions

of execution; all representing a new distribution channel that allows financial institutions

and other commercial actors to offer financial services outside traditional bank premises,

(Otieno, 2006)

Mobile phone communication has progressed rapidly extending the range of services that

can be carried out through mobile telephony. Today, the mobile phone is no longer just

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another communication tool. It is now being used in business applications especially with

the introduction of 3G mobile phones which not only transmit voice and text messaging

but also video messaging, video streaming, infotainment, multimedia messaging location

services, online banking and financial services, online shipping and internet browsing.

Mobile phones have come to represent a new era of secure electronic mobile commerce

(Ontunya, 2006)

The financial services industry has undergone phenomenal transformation. In just half a

century, banking and customer’s access to financial services has changed beyond the

belief of traditional brick and mortar bank networks. It has changed from local branches,

to branch networks, to ATM machines, to ATM- inter-banks agreements, to home

banking software, to call centers, to telephone banking and to internet banking and

mobile banking is the most recent (Ontunya, 2006)

Customers can now conduct banking transactions via their mobile phones. Mobile

banking with the regular mobile phones enables transactions such as getting an account

balance, transferring money between accounts, getting real time alerts as transactions are

passed on one’s account, requesting cheque book and stopping cheque payment, enquire

the status of a cheque, request account statement, getting utility bills payment details

from the mobile phone among other services being introduced almost on a daily basis. In

2007, Card vendor Visa launched an initiative that saw its mode of transacting business

shift from plastic cards to mobile phones. The move followed the launch of mobile phone

based money transfer products in the Kenyan market (Otieno, 2008)

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According to a study by financial consultancy Celent (2007), The rapid changes in the

financial services environment, increased competition from both the banking and non-

banking sector on product innovation, globalization and technological advancement, have

led to a market situation where battle for customers is intense. Mobile phone service

providers in Kenya have also entered the banking business where they provide their

customers with services more similar to those provided by commercial banks. With a

mobile phone, one is now able to send and receive money within and outside the country.

In addition, bank customers can now access their account information via their mobile

phone. At anytime regardless of where they are. This has meant that customers can now

access their financial services from anywhere the services are provided from. In effect,

the linking of a portable device such as a mobile phone and a bank account is seemingly

the way forward.

1.1.2 Context of the Study

The transformational mobile banking is made available by mobile phone service

providers as part of their value added services. It is embedded among other services

within the service providers menu. For commercial banks to be able to deliver their

services on mobile phone, they have to invest heavily in technology that is compatible

with that of the mobile phone service providers. The perceived difference between

mobile service providers mainly lies on the pricing strategy, quality and scope of services

as well as the pricing strategy (Zheng & Zhong, 2005).

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M-banking reduces the cost of basic banking services to customers with over 60 percent

from what it would cost through traditional channels. The electronically managed

transactions result in huge cost savings, the benefits of which are transferred to customer.

This is aptly demonstrated by the 85% score of M-baking customers who have registered

lower transactional costs. CBK (2007) statistics put the average monthly cost of operating

a current account with a Kenyan commercial bank at over Ksh 900 (Wambari, 2009).

Mobile banking information system is a relatively new technology which is being

adopted at a high rate. Many organizations especially financial institutions are finding it a

challenge to successfully use and adopt mobile banking information systems. It is also

clear that managers face a lot of challenges when trying to implement new systems in

their organization. It is only when the managers can successfully identify the challenges

to implementation of mobile banking information system that they can ensure its smooth

and successful implementation (Otieno, 2008).

1.2 Statement of the Problem

As cited earlier, authors have come up with different challenges to mobile banking. In

Kenya, mobile network operators keen to having a share of the lucrative mobile banking

market are also posing a challenge. Operators such as Safaricom (M-Pesa), Yu Esser (YU

Cash) and Zain (Zap) have spent billions of pounds on third generation mobile phone

licenses and are now desperate to find ways of recouping their money and some experts

expect many operators to apply for banking licenses in the future, as the trend is shifting

to mobile banking, there is a challenge for Chief Information Officers of banks to decide

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on how to leverage their investment in internet banking and offer mobile banking in the

shortest possible time (Otieno, 2008)

Siam (2006) studied the “Role of the Electronic Banking Services on the Profits of

Jordanian Banks” He researched on the impact of changes from traditional banking

services into electronic ones, on banks as well as on customers, banks measures to cut

costs of their electronic operations, and the future of electronic banking in Jordan.

According to Wambari (2009), mobile phones provide technological services that reduce

costs; increase income and increases reach ability and mobility. They can help to extend

social and business networks and they clearly substitute for journeys and, for brokers,

traders and other business intermediaries.

Most of the existing studies in electronic banking services or electronic banking delivery

of financial services in Kenya have adopted an organizational perspective or

distribution/access channel perspective (Ontunya 2006, Otieno 2006, Otieno 2008 and

Wambari 2009). This leaves the effects of mobile banking on the financial performance

of commercial banks in Kenya unexplored territory yet the country has witnessed an

increased rollout of mobile banking. How does this affect the financial performance of

these institutions?

This research aims at filling the existing gaps by shedding light on the effect of mobile

banking on financial performance of commercial banks in Kenya. It focuses on financial

performance of commercial banks with respect to changes in operating costs as a result of

7
the implementation of mobile banking. The research attempts to answer the following

question:-

What effect does mobile banking have on the financial performance of commercial banks

in Kenya?

1.3 Objective of the Study

The objective of this study is to determine the effects of mobile banking on the financial

performance of commercial banks in Kenya.

1.4 Importance of the Study

The study would be important to bank managers, mobile phone operators, mobile phone

banking customers, government of Kenya and researchers as well as academicians. The

findings can be used by the central bank and the government of Kenya in policy

formulation to control and regulate mobile phone banking in Kenya.

For bank managers, the finding will be useful in understanding the effects of adoption of

mobile phone banking on the financial performance hence guide their decisions in its

application.

For mobile phone operators, the findings will enable them understand the impact of

mobile phone banking on the financial position of their partners and hence effects on its

uptake. This will enable them take necessary measures to correct any anomalies noted.

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To academicians and researchers, the findings contribute new knowledge for the

theoretical commercial bank behavior on implementing mobile phone banking as part of

their services.

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 CHAPTER TWO: LITERATURE REVIEW

2.1 Introduction
This chapter delves into the body of existing literature and seeks to show the existing

knowledge gaps on the effects of mobile phone banking on the financial performance of

commercial banks in Kenya. DFID report (2006) indicates that mobile banking if

properly implemented will open up financial services to the non-banked and besides it

will play a greater role in the alleviation of poverty. For banks, it is the technology that

will bring with it cheaper transaction costs and competitive advantage and an increase in

the clientele base (Mennecke, 2003).

2.2 Overview of the Banking Sector in Kenya

Kenya’s banking history goes back to 1896 when the National Bank of India opened a

branch in this East African country. The banking system in Kenya consists of 44

commercial banks. Seventy three percent of all banking business is handled by 12% of

the Kenyan banks (Ontunya, 2006).

Competition is stiff among banks in Kenya which has forced some banks to even open

seven days a week in an effort to attract more clients. In addition, many banks have also

extended their weekday working hours from the initial three o’clock closing time to eight

o’clock. They are aggressively pursuing growth in personal loan products and credit card

accounts or non secured loans. Kenya’s banking industry still has a long way to go,

salaries and wages are often very high because there are no IT systems as each has its

10
own infrastructure. New legislation, a new IT infrastructure and new strategic directions

will strongly contribute towards growth of banking in Kenya. Most banks have achieved

branchless banking through the ATM networks in Kenya although there is about one

ATM for every 100,000 people (Ontunya, 2006).

2.3 Mobile Banking Business Models

According to Ravallion (1993) a wide spectrum of mobile/branchless banking models are

evolving. However, no matter what business model, if mobile banking is being used to

attract low income populations in often rural locations, the business model will depend on

banking agents, i.e. retail or postal outlets that process financial transactions on behalf of

commercial banks. The banking agent is an important part of the mobile banking business

model since customer care, service quality, and cash management heavily rests with

them. The other difference lies in the nature of agency between the bank and the non-

bank. Models of branchless banking can be classified into three broad categories i.e.

Bank focused, Bank led and non bank led.

2.3.1 Bank-focused Model

The bank-focused model emerges when a traditional bank uses non-traditional low-cost

delivery channels to provide banking services to its existing customers. Examples range

from use of automatic teller machines (ATMs) to internet banking or mobile phone

banking to provide certain limited banking services to banks‟ customers. This model is

additive in nature and may be seen as a modest extension of conventional branch-based

banking (Wambari, 2009).

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2.3.2 Bank-led Model
The bank-led model offers a distinct alternative to conventional branch-based banking in

that customer conducts financial transactions at a whole range of retail agents (or through

mobile phone) instead of at bank branches or through bank employees. This model

promises the potential to substantially increase the financial services outreach by using a

different delivery channel (retailers/ mobile phones), a different trade partner (telco /

chain store) having experience and target market distinct from traditional banks, and may

be significantly cheaper than the bank-based alternatives. The bank-led model may be

implemented by either using correspondent arrangements or by creating a JV between

Bank and Telco/non-bank. In this model customer account relationship rests with the

bank (Wambari, 2009).

2.3.3 Non-bank-led Model

The non-bank-led model is where a bank does not come into the picture (except possibly

as a safe-keeper of surplus funds) and the non-bank (e.g. telco) performs all the functions

(Wambari, 2009). Quite a number of commercial banks have adopted M-banking in

Kenya. To sample a few, we have SMS banking offered by Commercial bank of Africa

(CBA). CBA’s SMS banking has transformed the way banking is done in Kenya. This

service allows customers to access their accounts via their mobile phones- quickly and

conveniently without the need to visit their branches. A complete package, with a host of

benefits: Easy set-up, User friendliness and security: the system uses PIN and phone

combinations to ensure maximum security, 24hours access- no more space and time

constraints. The transactions customers perform with CBA SMS banking include account

balance enquiries and mini-statement request (Otieno, 2008)

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The services available on NIC M-Banking include: Balance Enquiry, Top up Airtime ‘,ini

Statement Request, M-Pesa ,Funds Transfer, Pay Bills, Stop Cheques, Service Requests -

Cheque Book & Full Statement requests, Cheque Status, Forex Rates and My Settings (

change settings). The alerts and notifications include: debit and credit notifications, loan

credit notification and unpaid items notification (NIC Bank)

The cooperative bank of Kenya offers Mobile banking which offer information services

like balance enquiry, mini-statement, automatic advices to customers on credits and

airtime purchase as the only payment service. Customers utilize the cell phone to query

the balances and other informational services, but no payment services at all (Ontunya,

2006).

2.4 Theoretical framework

Traditional theories of intermediation are based on transaction costs and asymmetric

information. They are designed to account for institutions which take deposits or issue

insurance policies and channel funds to firms. However, in recent decades there have

been significant changes. Although transaction costs and asymmetric information have

declined, intermediation has increased. The role or roles played by these intermediaries

in the financial sector is found in the many and varied models in the area known as

intermediation theory. These theories of intermediation have built on the models of

resource allocation based on perfect and complete markets by suggesting that it is

frictions such as transaction costs and asymmetric information that are important in

understanding intermediation. Gurley and Shaw (1960) have stressed the role of

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transaction costs. For example, fixed costs of asset evaluation mean that intermediaries

have an advantage over individuals because they allow such costs to be shared. Similarly,

trading costs mean that intermediaries can more easily be diversified than individuals.

2.4.1 Information Asymmetry

Asymmetries can be of an ex ante nature, generating adverse selection, they can be

interim, generating moral hazard, and they can be of an ex post nature, resulting in

auditing or costly state verification and enforcement. The informational asymmetries

generate market imperfections, i.e. deviations from the neoclassical framework. Many of

these imperfections lead to specific forms of transaction costs. Financial intermediaries

appear to overcome these costs, at least partially. For example, Diamond and Dybvig

(1983) consider banks as coalitions of depositors that provide households with insurance

against idiosyncratic shocks that adversely affect their liquidity position. Another

approach is based on Leland and Pyle (1977). They interpret financial intermediaries as

information sharing coalitions. Diamond (1984) shows that these intermediary coalitions

can achieve economies of scale. Diamond (1984) is also of the view that financial

intermediaries act as delegated monitors on behalf of ultimate savers.

Frictions that relate more to investors' information sets, numerous authors have stressed

the role of asymmetric information as an alternative rationalization for the importance of

intermediaries. One of the earliest papers, Leland and Pyle (1977), suggests that an

intermediary can signal its informed status by investing its wealth in assets about which it

has special knowledge. Diamond (1984) has argued that intermediaries overcome

asymmetric information problems by acting as "delegated monitors." Many others

14
followed, expanding on these two contributions and advancing the literature in

substantive ways.

2.4.2 Transaction Costs

Transaction costs theory is based on non-convexities in transaction technologies. Here,

the financial intermediaries act as coalitions of individual lenders or borrowers who

exploit economies of scale or scope in the transaction technology. The notion of

transaction costs encompasses not only exchange or monetary transaction costs (Tobin,

1963; Towey, 1974; Fischer, 1983), but also search costs and monitoring and auditing

costs (Benston and Smith, 1976). Here, the role of the financial intermediaries is to

transform particular financial claims into other types of claims (so-called qualitative asset

transformation). As such, they offer liquidity (Pyle, 1971) and diversification

opportunities (Hellwig, 1991). With transaction costs, and in contrast to the information

asymmetry, the reason for the existence of financial intermediaries, namely transaction

costs, is exogenous.

2.5 Financial performance

Evaluating bank performance is a complex process that involves assessing interaction

between the environment, internal operations and external activities. In general, a number

of financial ratios are usually used to assess the performance of banks. Financial

performance has been studied under different yardsticks of performance i.e., size,

profitability, financing pattern, economic efficiency, operational efficiency, asset quality,

diversification and cost of operations.

15
2.5.1 Cost of Operation

In addition to revenue enhancement, Internet banking may enable banks to reduce costs

of operation, in particular, by allowing them to reduce expenditures on “brick and

mortar.” To the extent this may be so, Internet banking could be considered a causal

factor in generating lower expenses related to maintaining physical branches. On the

other hand, banks with relatively high expenses in maintaining their branch networks

may be expected to have the incentive to adopt Internet banking. The adoption of Internet

banking would thus be the effect of existing characteristics of banks (Furst et al., 2002).

2.2.2.3 Profitability, Operating Efficiency and Financing

On an average, Internet banks are more profitable than non-Internet banks and are

operating with lower cost as compared to non-Internet banks, thus, representing the

efficiency of the Internet banks. The study will be similar to Furst et al. (2000a, 2000b,

2002a and 2002band Hernando and Nieto, 2005). The benefits of mobile banking

include: Reduced operating costs as mobile banking eliminates the need for costly call

centres and customer service help desks. Using a mobile platform such as SMS text

messaging for simple and repetitive tasks such as reminders about payments due or

balance requests can reduce the burden on IT and personnel resources. Using secure and

integrated messaging platforms enables an organization to reduce the costs and errors

associated with paper-based payments. For example, one of Clickatell's clients on the

African continent, SatCom Networks Africa Ltd operates out of Tanzania and uses SMS

notifications to alert banks on problems before they become customer complaints. This

includes alerting banks to ATM events such as low stock of funds or paper, power

16
failures, attempts at frauds among other activities. This innovative service allows banks

to proactively resolve problems before they become issues (Al-Hajri and Tatnall, 2008).

Mobile Banking reduce risk for the banking institutions as SMS mobile banking is cost-

effective which lowers the financial risk involved in rolling out new banking initiatives. It

is immediate and effective and with two-way messaging enabled, campaigns can be

monitored in real-time affording the opportunity to change strategy if need be.

Clickatell's SMS mobile banking solutions can be integrated into existing infrastructure

or externally managed thereby reducing the need for additional personnel. SMS mobile

banking reduces the potential for fraud immediately as fraud and account transaction

notifications are sent in real-time empowering customers to take action immediately. This

gives customers peace of mind around the accuracy and security of their financial

transactions through SMS authentication PIN codes and transaction text notifications.

Use of premium-rated SMS to charge for banking transactions creates an additional

revenue stream for commercial banks. Commissions and service fees on mobile payments

and transfers are another potential income stream. Customers can also purchase goods

and services via a mobile banking platform and the mobile number database can be used

for cross-selling purposes - particularly time and event related options. This could include

insurance packages, discounted holiday packages and premium banking services. Prepaid

airtime, electricity vouchers, coupons etc can all be purchased via mobile phone (Otieno,

2008).

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Offering existing customers an additional, secure, easy to use banking channel is sure to

improve the loyalty or 'stickiness' of customers to a financial institution’s brand. It also

act as an attraction point to new customers looking for ease of access and innovative

banking services. SMS text messaging may be used in many ways to increase the level of

service a bank offers its customers. These may include: Using SMS transaction and fraud

alerts to guarantee their level of banking security; allowing customers to receive critical

information and services via SMS messages; allowing customers to communicate with

the bank via SMS text message and set-up an 'intelligent customer callback service' that

negates the need for customers to wait in frustrating phone queues; running SMS

marketing campaigns to attract new customers to your financial institution; because these

campaign results are available immediately, the return on investment is measurable;

allowing customers the flexibility and peace of mind to access their bank accounts on the

go, receive their balance notifications and perform banking functions; A simple SMS

service offering 'point of sale' SMS receipts contributes to customers feeling assured that

their money transactions are accurate and secure; Mobile to mobile fund transfers are a

very convenient way for customers to make payments ( Jeckins, 2008).

Just by implementing SMS mobile banking commercial banks will effectively enhance

the value and reach of their brand and build consumer confidence by offering them

customer-centric service. SMS mobile banking becomes a unique tool for not only

radically improving customer service but also to generate additional revenue and aid in

the prevention of fraud (Layman, Porteous, and Pickens, 2008).

18
2.6 Empirical Studies
The world witnesses an information and technology revolution (Siami, 2006). This

revolution has touched every aspect of people’s life including banking. Singh (2002)

opined that technology has introduced new ways of delivering banking services and

products to the customers, such as ATMs, and internet banking (IB). Hence banks have

found themselves at the forefront of technology adoption for the past three decades.

These changes and developments in the banking industry have impacts on serves quality,

future of the banking activities, and consequently its continually competitive ability in the

world markets since going along with technology is one of the most important factors of

economic organizations success in general and banks in particular (Siami, 2006). This

motivates banks to spend more on technology and information to achieve maximum

returns and attract large number of clients.

Zheng and Zhong (2005) examined the trend in the internet revolutions that have set the

Chinese banking sector in motion and the Factors which have influenced the adoption of

IB in china. It was revealed that internet availability, awareness, attitude towards change,

computer and internet access, cost, trust in ones bank, security concerns, ease of use and

convenience were the major factors affecting the adoption. Al-Hajri (2008) examined

various factors that might act to determine whether a given technology is likely to be

adopted by the banking industry in developing country such as Oman by comparing it

with a developed country such as Australia. The result indicated that relative advantage,

organizational performance, Customer organizational relationship and ease of use, can

shed light on the reasons for adoption of Internet technology. An exploration done by

19
Singhal and Padhmabhan, (2008), revealed that utility request, security, utility

transaction, ticket booking and funds transfer were major factors contributing to internet

banking adoption. Tat, et.al (2008) examined predictors of intention among users of

internet banking to continue using IB services. It was revealed that trust was the strongest

predictor followed by compatibility and ease of use.

Mirza,et.al.,(2009) revealed a significant difference between demographic and attitude of

users and non-user groups. The majority of customers were very comfortable and willing

to use IB services. Security concerns, lack of technological knowledge and awareness

stood out as being obstacles to the adoption of Internet Banking. Yuttapong et.al (2009)

investigated the factors impacting the adoption of internet banking and found that

complexity had a negative relationship with intention to adopt the internet banking in

Thailand. Further, it was indicated that compatibility had a high positive relationship with

intention to adopt IB. Al-ghamdi and King (2009) explored how IB affects the

relationship between customers’ trust and their loyalty. The study also examined how

factors may affecting IB usage can be different in UK and Saudi Arabia. The study

considered privacy aspects, communication, customer experience, usefulness, self-

efficacy and ease of use as major factors trust and customer loyalty.

According to Wambari (2009), a wide spectrum of Mobile/branchless banking models is

evolving. However, no matter what business model, if mobile banking is being used to

attract low-income populations in often rural locations, the business model will depend

on banking agents, i.e. retail or postal outlets that process financial transactions on behalf

telecoms or banks. The banking agent is an important part of the mobile banking business

20
model since customer care, service quality, and cash management will depend on them.

Many telecoms work through their local airtime resellers. However, banks in Colombia,

Brazil, Peru, and other markets use pharmacies, bakeries, etc. These models differ

primarily on the question that who will establish the relationship (account opening,

deposit taking, lending.) to the end customer, the Bank or the Non-

Bank/Telecommunication Company (Telco). Another difference lies in the nature of

agency agreement between bank and the Non-Bank. Models of branchless banking can be

classified into three broad categories - Bank Focused, Bank-Led and Nonbank-Led.

Ontunya (2006) examined consumer adoption of mobile phone banking in Kenya. It was

revealed for most users, the service must be affordable, convenient and secure.

Customers should not be worried of interception or hang up of systems that run the

service. They also hoped that the mobile phone user interface for the mobile phone would

improve, as it was key to usability i.e. keypad user friendliness. Customers needed

support occasionally. For non users, they wanted to be sure that the service worked

therefore they wanted to try using the service before adopting it. Confidence was very

valuable in the use of mobile phone banking service.

Otieno (2008) examined the challenges in the implementation of mobile banking

information systems in commercial banks in Kenya. It was revealed that successful

implementation of mobile banking was crucial for provision of mobile banking services.

A number of factors posed challenge to the implementation, these factors included

security, legislative and user related challenges. Users had not been keen to adopt mobile

21
banking services because of insecurity fears and the fact that they were still accustomed

to the normal banking systems. Another challenge posed by users was the fact that users

were slow in adopting the new technology especially the old.

Weila (2008) examined the adoption of online credit operations by commercial banks in

Kenya.. Her findings indicated that online credit operations had only been adopted to a

small extend by commercial banks. This online technology had been employed in credit

operations, loan repayment, cash deposit and withdrawal, electronic funds transfer and

other operational areas. The research identified some benefits enjoyed by customers and

banks as a result of having online credit operations which included reduction in

paperwork, time saving, ease in carrying out bank transactions and a reduction in

throughput time (from when a loan is applied for to when funds are released).

Murugami (2008) surveyed on Short Message Service (SMS) banking application in

commercial banks in Kenya. The study revealed that there were only a few services that

were utilized by customers to commercial banks using SMS banking. These services

included balance inquiry, mini statement, and utility bills payment. The research revealed

that the challenges hindering SMS banking included security, top management support,

literacy levels of customers, customer awareness of SMS banking and outcome

expectations.

2.7 Mobile Banking in Kenya

The transformational mobile banking is made available by mobile phone service

providers as part of their value added services. It is embedded among other services

22
within the service providers menu. The perceived difference between mobile service

providers mainly lies on the pricing strategy, quality and scope of services as well as the

pricing strategy (Otieno, 2008).

The mobile banking services are available to mobile phone users of the two major mobile

service providers namely Safaricom and Zain. Safaricom’s service is branded M-Pesa,

Zain’s service goes by the Zap brand name and YU Esser’s YU Cash. The latest entrant

Orange / Telkom is also expected to roll out its mobile banking services in the course of

time. While the fees charged for transactions are largely below those levied by traditional

banks for similar services, low incomes amongst the vast proportions of the population

tends to reduce the levels of affordability. But prices are expected to decline over time as

competition intensifies. For instance the launch of Zap service at a flat rate of Kshs. 10 is

expected to have a ripple effect on M-Peas whose average transaction charge stands at

Kshs. 35 (Wambari, 2009).

The collective access points of mobile banking are numerous and widespread. The

service vests a heavy reliance on airtime distributors who double as agents. It is these

agents who decide on the most strategic points to locate their service outlets. This highly

differs from the conventional banking systems whereby banks will only be located in

major urban centers. Currently Safaricom has over 5,000 agents across the country; while

Zain prides itself of having over 3,000 agency set ups in the short span it has operated the

Zap service (Wambari, 2009).

23
This translates to over 8.000 mobile banking outlets around the country within a span of

three years since inception. A Central Bank of Kenya survey CBK (2008) sets the

number of conventional branches at 876. In addition to these branches there are only

1424 ATM machines in total implying that within the short duration of operation the M-

banking outlets have tripled that of traditional banks (Wambari, 2009).

2.8 Chapter Summary

Kenyan mobile banking sector presents a delightful outlook of exploitation. Most

stakeholders acknowledge the importance of mobile banking in a myriad of their daily

activities. Commercial banks have been in the fore-front in the adoption and embracing

of new technologies. The theories of intermediation especially the transaction costs and

information asymmetry are especially important as the banks can easily communicate

with their customers on their products at a relatively lower costs. Many banks are serving

their customers using m-banking which range from ATM, internet banking and mobile

phone banking.

Several studies have been done on mobile banking in Kenya. However, these studies

have concentrated on the adoption of mobile banking both among commercial banks and

customers. There is no study that has sought to establish the effect of mobile banking on

the financial performance of commercial banks in Kenya hence this study seeks to fill

this existing gap.

24
 CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Introduction
This chapter outlines the overall methodology to be used in the study. It includes:

research design, population, a description of data collection methods, and data analysis

approach to be used.

3.2 Research Design

This will be a census survey that collects data from the entire population of 44

commercial banks in Kenya. Each bank will be given one questionnaire through the

finance department. The choice of census is based on the relatively small population (44)

of commercial banks in Kenya and the fact that they are mainly concentrated in Nairobi

thus making it easy and cost effective to contact them. Moreover, most banks have their

head offices in Nairobi where financial results are generated and analyzed. The research

will be collecting descriptive data for analysis purposes because of the sensitive nature of

quantitative data relating to the study. Self administration of questionnaires will be used

to distribute questionnaires to identified respondents. The variables will be assessed using

descriptive measures, according to Otieno (2008) a descriptive study is undertaken in

order to ascertain and be able to describe the characteristics of the variables of interest in

a situation.

3.3 Population and Sample of the study

The population of the study is 44 commercial banks listed by the Central Bank Kenya

(CBK). These are organizations that are involved in providing financial services to

25
clients. For purposes of this research, the entire population will be used because only one

questionnaire will be given to each bank and most banks have their head office operations

in Kenya located in Nairobi hence easily accessible. Therefore a total of 44

questionnaires are expected to be filled. The banking sector was selected largely because

it has taken a lead role in implementing new ICT services and systems, Otieno (2008) and

has also been willing to try new technology. Besides, the banking sector is one of the

sectors that have invested heavily in ICT systems.

3.4 Data Collection

Primary data was collected using a self-administered questionnaire with semi-structured

questions. The first part of the questionnaire is constructed to collect general information

about the respondent and the financial institution while the second part was to

concentrate on gathering data related to the effects of mobile banking on operating costs

of commercial bank in Kenya. The respondents will be finance managers or people

working in finance department. Finance managers were chosen because of their role and

ability which give them ability to effectively respond to most of the questions. The

questionnaire will be piloted to two banks and revisions made where necessary before the

main data collection exercise. The drop and pick method will be used. The questionnaires

will be hand delivered to commercial banks with self addressed envelops enclosed.

3.5 Data Analysis

The collected questionnaires from the field was inspected for errors and omissions,

accuracy, uniformity and completeness, edited, coded and then inputted into IBM

Statistical Package for Social Sciences (SPSS) Statistics version 17 package. Given that

26
 this is a descriptive design, data analysis will be done using ratios, percentage and

proportions to assess the relative importance of various grouped factors. The following

regression model will be used to compute the relative effects of mobile banking on the

financial performance of commercial banks:

Y= AAw + BBw + CCw + DDw + EEw + FFw+ GGw

Ta Tb Tc Td Te Tf Tg

Where Y- Effect of mobile banking on performance of commercial banks

A- The weight assigned to Income in affecting financial performance

B- The weight assigned to salaries and wages in affecting financial performance

C- The weight assigned to depreciation of plant and equipment in affecting financial

performance

D- The weight assigned to rent for branch premises in affecting financial performance

E- The weight assigned to stationery, telephone and postage in affecting financial

performance

F- The weight assigned to amortization of ICT systems in affecting financial performance

G- The weight assigned to other administrative cost in affecting financial performance

Aw- Total score of respondents for income

Bw- Total score of respondents for salaries and wages

Cw- Total score of respondents for depreciation on plant and equipment

Dw- Total score of respondents for rent for branch premises

Ew - Total score of respondents for stationary, telephone and postage

27
Fw - Total score of respondents for amortization of ICT systems

Gw- Total score of respondents for other administrative costs

Ta- Total possible maximum score for income

Tb- Total maximum possible score for salaries and wages

Tc- Total maximum possible score for depreciation on plant and equipment

Td- Total maximum possible score for rent for branch premises

Te- Total maximum possible score for stationery, telephone and postage

Tf- Total maximum possible score for amortization on ICT systems

Tg- Total maximum possible score for other administrative costs

The basis for using descriptive measure was to give a basis for determining the weights

of the variables under the study. A ranking based on the likert scale will also be used to

help analyze the data closely. Zhengh and Zhong (2005) and Waila (2008) have used the

likert scale in the studies successfully. Findings will be presented using pie charts and bar

graphs for easier interpretation

3.6 Data Reliability and validity

Mugenda and Mugenda (2003) asserted that, the accuracy of data largely depended on the

data collection instruments in terms of validity and reliability. Validity as denoted by

Robinson (2002) in the degree to which results obtained from the analysis of the data

actually represents the phenomenon under study. Validity will be ensured by having

objective data. This will be achieved by pre-testing the questionnaire to a sample of two

28
respondents of the information to be collected to determine the accuracy of the

instrument. Reliability on the other hand refers to a measure of the degree to which

research instruments yield consistent results (Mugenda and Mugenda 2003). In this study,

reliability will be ensured by pre-testing the data with a selected sample of two

commercial banks in Kenya.

29
 CHAPTER FOUR: DATA ANALYSIS, RESULTS AND DISCUSSION

4.1 Introduction
This chapter covers data analysis and findings of the research. The data is summarized and

presented in the form of tables and pie-charts. The collected data has been analyzed and

interpreted in line with the aim of the study which is to determine the effects of mobile banking

on the financial performance of commercial banks in Kenya.

4.2 Data Presentation

A total of 44 questionnaires were distributed to commercial banks operating in Kenya. 34

commercial banks filled the questionnaires. The information was collected from finance

managers, branch managers, human resource managers and Information technology managers.

The banks that did not respond gave various reasons including the competitive sensitivity of the

information required; only senior officers of the bank could authorize release of the information

and they were out of office on official duties, some banks feared misuse of the information

required.

Table 4.1: Overview of Data Collected

Number of Population Response rate Non responsive

Institutions Institutions (t) (r) error (t-r)
Commercial
44 44 34 10
Banks
Total 44 44 34 10

Key: t= Population (100%); r= Response Rate (77.28%); t-r=Non-responsive error (22.72%)

Source: Research Data

Out of 44 questionnaires that were administered, 34 were dully filled and returned. This

represents 77%, which is considered significant enough to provide a basis for valid and reliable

30
conclusions with regard to the effects of mobile banking on the financial performance of

commercial banks in Kenya. This is well explained in table 4.1 above.

4.3 Data Analysis

Table 4.2: Ownership of the Commercial Banks

Ownership structure
Government Private Total
No. of respondents 2 32 34
Total 2 32 34
Percentage 6% 94%
Source: Research Data

A majority (94.12%) of the respondents were from privately owned commercial banks while

5.88% had government ownership. All banks were incorporated and licensed to operate in Kenya

under the Banking Act, Cap 488.

Table 4.3: Age of Commercial Banks in the Industry

No. of years No. of respondents Percentage

Less than 15 years 1 2.94%

16 to 30 years 16 47.06%
31 to 45 years 4 11.76%
Above 46 years 13 38.24%
Total 34 100.00%
Source: Research Data

The research established that majority of the commercial banks have been in operation for

between 16 and 30 years (47.06%), 38.24% more than 46 years, 11.76% for between 31 and 45

years and only 2.94% for less than 15 years.

31
Table 4.4: Clientele Base of Banks

Clientele Base
No. of respondents Percentage
Less than 100,000 0 0.00%
Between 100,000- 499,999 12 35%
Between 500,000- 999,999 18 53%
Over one million 4 12%
Total 34 100.00%
Source: Research Data

The researcher wanted to establish the number of customers served by different commercial

banks operating in Kenya. The study found that majority of the respondents (53%) had clients

between 500,000 – 999,999 followed by 12 respondents (35%) having between 100,000 and

499,999 clients. 4 respondents (12%) had over one million clients. No respondent had less than

100,000 clients. This is as shown in table 4.4 above.

Table 4.5: Provision of Mobile Banking Services

Provision of Mobile Banking Services

No. of respondents Percentage
Yes 34 100%
No 0 0%
Total 34 100%
Source: Research Data

The researcher sought to find the implementation of mobile banking services among

commercial banks operating in Kenya. All the 34 respondents who returned the

questionnaire have implemented mobile banking system. This is as represented in table

4.5 above.

32
Table 4.6: The Type of Mobile Banking Services Offered

Type of Services offered through mobile Banking

Offering the Not offering the
service Proportion service Proportion
Point of sale services 13 38% 21 62%
ATM services 34 100% 0 0%
Internet Banking 23 68% 11 32%
Mobile Phone Banking 34 100% 0 0%
Source: Research Data

Point of sale services were provided by 13 commercial banks representing 38%. All

(100%) respondents offered Automated Teller Machine services. Internet banking was

offered by 68% of respondents while mobile phone banking services were provided by all

the respondents. The service that has not been taken up by most respondents was point of

sale and internet banking.

Table 4.7: Age of Mobile Banking In the Industry

Age of mobile Banking in the industry

No. of respondents Percentage
Less than 1 year 0 0.00%
1-5 years 11 32%
more than 5 years 23 68%
Total 34 100%
Source: Research Data

Majority of the respondents (68%) have been offering mobile banking services for more

than 5 years closely followed by respondents with between 1 and five years. Majority of

the respondents in the category of 1-5 years commenced their operations in Kenya

between the year 2005 and 2010 when this study was conducted.

33
Table 4.8: Mobile Banking Clientele Base

Mobile banking clientele base

No. of respondents Percentage
Less than 100,000 0 0.00%
100,000-200,000 5 14.71%
200,000-300,000 3 8.82%
300,000-400,000 3 8.82%
400,000-500,000 2 5.88%
over 500,000 21 61.76%
Total 34 100.00%
Source: Research Data

The respondents were asked to indicate the number of customers utilizing their mobile

banking services. 21 respondents (62%) had over 500,000 mobile banking customers, 5

had customers between 100,000 and 200,000. The number of respondents having mobile

banking customers ranging between 200,000 and 400,000 was 6.

Table 4.9: Importance of Factors in Affecting Financial Performance

Factor Score (%)

Salaries and wages 17
Rent for branch premises 16
Income 15
Other administrative expenses 14
Depreciation of plant and equipment 13
Amortisation of ICT systems 13
Stationery, Telephone & postage 12
Total 100
Source: Research Data

Respondents were asked to rank the factors affecting the financial performance of

commercial banks. Respondents attached great importance on salaries and wages (17%),

followed by rent for branch premises (16%), Contribution to income (15%), Other

34
administrative expenses were ranked fourth with 14% while Depreciation of plant and

equipment and amortization coming in closely in sixth and seven positions respectively

with 13% each. Stationery, telephone and postage were ranked the least important in

affecting financial performance of commercial banks in as far as mobile banking is

concerned. The results are presented in a pie-chart below

Figure 4.1: Relative Importance of Factors

Source: Research Data

35
Table 4.10: Factor Analysis Score

Factor Total score

Other administrative expenses 54%
Amortisation of ICT systems 68%
Salaries and wages 71%
Depreciation of plant and equipment 71%
Income 76%
Stationery, Telephone & postage 79%
Rent for branch premises 86%
Source: Research Data

Respondents indicated that mobile banking had great effect on the rent for branch

premises at 86%, followed by stationery, telephone and postage charges (79%). The least

score was recorded on other administrative expenses (54%). Income came in at third

position with 76%, Salaries and wages, and depreciation on plant and equipment tied at

71%. Amortisation of ICT systems was at 68%.

36
 Figure 4.2: Effect of Mobile Banking On the Factors

Source: Research Data

As indicated under research methodology in Chapter 3, the following regression model

will be used to compute the index effects of mobile banking on the financial performance

of commercial banks in Kenya.

Y= AAw + BBw + CCw + DDw + E Ew + FFw + GGw

Ta Tb Tc Td Te Tf Tg

Where Y- Effect of mobile banking on performance of commercial banks

A- The weight assigned to Income in affecting financial performance

B- The weight assigned to salaries and wages in affecting financial performance

37
C- The weight assigned to depreciation of plant and equipment in affecting financial

performance

D- The weight assigned to rent for branch premises in affecting financial performance

E- The weight assigned to stationery, telephone and postage in affecting financial

performance

F- The weight assigned to amortization of ICT systems in affecting financial performance

G- The weight assigned to other administrative cost in affecting financial performance

Aw- Total score of respondents for income

Bw- Total score of respondents for salaries and wages

Cw- Total score of respondents for depreciation on plant and equipment

Dw- Total score of respondents for rent for branch premises

Ew - Total score of respondents for stationary, telephone and postage

Fw - Total score of respondents for amortization of ICT systems

Gw- Total score of respondents for other administrative costs

Ta- Total possible maximum possible score for income

Tb- Total maximum possible score for salaries and wages

Tc- Total maximum possible score for depreciation on plant and equipment

Td- Total maximum possible score for rent for branch premises

Te- Total maximum possible score for stationery, telephone and postage

Tf- Total maximum possible score for amortization on ICT systems

Tg- Total maximum possible score for other administrative costs

38
Therefore, this can be summarized in the table 4.11 below

Table 4.11: Mobile Banking Effect Computation

Total score Factor

Factor (%) weight (%) Effect (%)
Other administrative expenses 54 14 8
Amortisation of ICT systems 68 13 9
Salaries and wages 71 17 12
Depreciation of plant and equipment 71 13 9
Income 76 15 11
Stationery, Telephone & postage 79 12 10
Rent for branch premises 86 16 14
Total Effect (Y) 100 73
Source: Research Data

39
 CHAPTER FIVE: SUMMARY, CONCLUSION AND
RECOMMENDATIONS

5.1 Introduction

This chapter summarizes the findings and makes conclusions based on the specific

objective of this study i.e. to determine the effect of mobile banking on the financial

performance of commercial banks in Kenya. It also includes the study recommendations,

limitations of the study and suggests areas for further research.

5.2 Summary of the findings and conclusions

The study reveals that all 34 commercial banks included in this research have

implemented mobile banking systems. However, various banks are at various stages of

implementation and are experiencing different levels of effect on their financial

performance. The effect index was 72%. This indicates that the banks that have fully

operationalized mobile banking are having a greater effect on their financial performance

than those yet to fully embrace it. The study revealed that mobile banking has greatest

effect on staff salaries and wages (17%), followed closely by rent for branch premises

(16%). Income came in third (15%) while other administrative expenses 14%.

Depreciation on plant and equipment had the same index with amortization of ICT

systems at 13% each and the least affected was stationery, telephone and postage charges

which registered a 12% index. From these findings mobile banking has greatly affected

staff salaries and wages hence leading to a great effect on the financial performance of

commercial banks.

40
5.3 Limitations of the study

Mobile banking is a relatively new technology and not very many studies have been done

especially on its effect on the financial performance of commercial banks. The few

studies that have been done have tended to concentrate on its adoption. Furthermore, the

banking industry is a very competitive environment and as such, the bank management

did not want to disclose their information for fear of competition. On the same note, due

to the insecurity risks involved in the banks, management in some instances were

suspicious of any inquisitive personality especially on issues which are believed to be

used by the competitors in extracting sensitive information.

The extent of the study was limited by time to collect all the questionnaires from the

respondents, which may have led to improved conclusions.

5.4 Suggestions for further Research

This was a study of the effect of mobile banking on the profitability of commercial banks

in Kenya. Since no study had been carried out in this area, I recommend that another

study be carried out after a period of time (say three to five years) to measure the change

in the effect index. As more and more banks chose to deliver their financial services

through mobile banking, a study on the factors hindering full adoption of mobile banking

by all banks need to be carried out to establish the reasons behind some commercial

banks not fully utilizing mobile banking systems.

41
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 APPENDICES

Appendix A: Income statement format of commercial banks

Current year previous year

KShs KShs

Interest income xx xx
Interest expense (xx) (xx)

NET INTEREST INCOME xx xx

Commissions xx xx
Foreign exchange gain xx xx
Changes in fair value of investments xx xx
Net (losses)/ gains on re-measurement of investments xx xx
Amortisation of investments held to maturity xx xx
Amortisation of capital grants xx xx
Other income xx xx

OPERATING INCOME xx xx

Net impairment losses on loans and advances xx xx

Other operating expenses xx xx

OPERATING EXPENSES xx xx

PROFIT BEFORE TAX xx xx

TAX CHARGE xx xx

NET PROFIT FOR THE YEAR xx xx

Basic and Diluted Earnings per share (KShs.) xx xx

Dividend per share (KShs.) xx xx

Source: CBK May 10, 2010

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Appendix B: Components of other operating expenses components

Current year previous year

Salaries and wages xx xx
Depreciation on property and equipment xx xx
Rent for branch premises xx xx
Motor vehicle running & other equipment maintenance xx xx
Stationery xx xx
Travelling xx xx
Telephone & postage xx xx
Contribution to Deposit Protection Fund xx xx
Amortisation of intangible assets xx xx
Directors’ emoluments xx xx
Other administrative expenses xx xx
Other operating expenses xx xx

Source: CBK May 10, 2010

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 Appendix C: List of Commercial Banks operating in Kenya.

1. African Banking Corporation, Nairobi

2. Bank of Africa Kenya, Nairobi
3. Bank of Baroda, Nairobi
4. Bank of India, Nairobi
5. Barclays Bank of Kenya, Nairobi
6. CFC Stanbic Bank, Nairobi
7. Charterhouse Bank Ltd, Nairobi
8. Chase Bank Ltd, Nairobi
9. Citibank, Nairobi
10. City Finance Bank, Nairobi
11. Co-operative Bank of Kenya, Nairobi
12. Commercial Bank of Africa, Nairobi
13. Consolidated Bank of Kenya Ltd, Nairobi
14. Credit Bank Ltd, Nairobi
15. Development Bank of Kenya, Nairobi
16. Diamond Trust Bank, Nairobi
17. Dubai Bank Kenya Ltd, Nairobi
18. Equatorial Commercial Bank Ltd, Nairobi
19. Equity Bank, Nairobi
20. Family Bank, Nairobi
21. Fidelity (Commercial) Bank Ltd, Nairobi
22. Fina Bank Ltd, Nairobi
23. First Community Bank Ltd, Nairobi
24. Giro Commercial Bank Ltd, Nairobi
25. Guardian Bank, Nairobi
26. Gulf African Bank Ltd, Nairobi
27. Habib Bank A.G. Zurich, Nairobi
28. Habib Bank Ltd, Nairobi (foreign owned)
29. Housing Finance Co. Ltd, Nairobi
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30. Imperial Bank, Nairobi
31. I&M Bank Ltd (former Investment & Mortgages Bank Ltd), Nairobi
32. K-Rep Bank Ltd, Nairobi
33. Kenya Commercial Bank Ltd, Nairobi
34. Middle East Bank, Nairobi
35. National Bank of Kenya, Nairobi
36. National Industrial Credit Bank Ltd (NIB Bank), Nairobi
37. Oriental Commercial Bank Ltd, Nairobi
38. Paramount Universal Bank Ltd, Nairobi
39. Prime Bank Ltd, Nairobi
40. Southern Credit Banking Corp. Ltd, Nairobi
41. Standard Chartered Bank , Nairobi
42. Trans-National Bank Ltd, Nairobi
43. UBA Kenya Bank Ltd., Nairobi
44. Victoria Commercial Bank Ltd, Nairobi

Source: CBK May 10, 2010

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 Appendix D: Questionnaire
INVESTIGATING THE EFFECTS OF MOBILE BANKING ON FINANCIAL
PERFORMANCE OF COMMERCIAL BANKS IN KENYA
Date ________________________________________________
Please take a few minutes to complete this questionnaire. Your honest answers will be
completely anonymous, but your views, in combination with those of others are
extremely important in building knowledge on effect of mobile banking in Kenya.
Kindly answer all questions.

Section A: Demographic and Mobile Banking Details

1. Name of the Bank (optional) ________________________________________________
2. How can you describe the ownership of your Bank?
(a) Government [ ] (b) Private [ ]
3. How long has your Bank been in operation?
(a) 1- 15 years [ ] (b) 16-30 years [ ] (c) 31-45 years [ ] (d) Over 46 years [ ]
4. What is your clientele base? (Tick as appropriate)
a) Less than 100,000 [ ]
b) Between 100,000- 499,999 [ ]
c) Between 500,000- 999,999 [ ]
d) Over one million [ ]

Section B; Mobile Banking implementation

5. Does your bank offer mobile-banking services to its customers?
(a) Yes [ ] (b) No [ ]
6. If yes, which ones (tick all that apply)
(a) Point of sale services [ ]
(b) ATM services [ ]
(c) Internet Banking [ ]
(d) Mobile Phone Banking [ ]
(e) Other (please specify)_________________________________
7. If No, please give reason(s) ______________________________________
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8. For how long has the Bank been offering mobile-banking services? (tick as appropriate)
(a) Less than 1 year [ ]
(b) Between 1-5 years [ ]
(c) More than 5 years [ ]
9. What is an approximate number of your mobile-banking clientele base? (tick as
appropriate)
(a) Less than 100,000 [ ]
(b) Between 100,000- 200,000 [ ]
(c) Between 200,000-300,000 [ ]
(d) Between 300,000-400,000 [ ]
(e) Between 400,000-500,000 [ ]
(f) Over 500,000 [ ]

Section C: Effects of Mobile Banking

Strongly Agree Neutral Disagree Strongly
Agree Disagree

INCOME
M-Banking services has increased the income [ ] [ ] [ ] [ ] [ ]
from service fees
The M-Banking has increased the bank’s net [ ] [ ] [ ] [ ] [ ]
interest income
OPERATING COST
SALARIES & WAGES
M-Banking has reduced permanent staff head [ ] [ ] [ ] [ ] [ ]
count
M-Banking has reduced casual staff employed [ ] [ ] [ ] [ ] [ ]
by the bank
M-Banking has reduced queues in the hall [ ] [ ] [ ] [ ] [ ]

M-Banking has reduced total salaries & wages [ ] [ ] [ ] [ ] [ ]

DEPRECIATION OF PLANT AND EQUIPMENT

M-Banking has reduced the depreciation levels [ ] [ ] [ ] [ ] [ ]
of plant and equipment in the bank

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 M-Banking has extended the useful life of the [ ] [ ] [ ] [ ] [ ]
bank’s plant and equipment
RENT FOR BRANCH AND PREMISES
M-Banking has reduced physical branches for [ ] [ ] [ ] [ ] [ ]
the bank
ATM/internet banking/mobile phone banking [ ] [ ] [ ] [ ] [ ]
has reduced need for setting up physical branch
offices
STATIONERY , TELEPHONE AND POSTAGE
M-Banking has reduced printing costs [ ] [ ] [ ] [ ] [ ]

M-Banking has reduced telephone costs [ ] [ ] [ ] [ ] [ ]

M-Banking has reduced postage costs [ ] [ ] [ ] [ ] [ ]

Amortisation of ICT SYSTEMS

Amortisation of ICT systems has increased [ ] [ ] [ ] [ ] [ ]
since the adoption of M-Banking
Litigation costs arising from M-Banking frauds [ ] [ ] [ ] [ ] [ ]
are high
OTHER ADMINISTRATIVE EXPENSES
The cost of integrating the systems with those [ ] [ ] [ ] [ ] [ ]
of mobile banking service providers has
increased administrative costs
M-Banking advertisement costs are high [ ] [ ] [ ] [ ] [ ]

In general, operating costs have increased with [ ] [ ] [ ] [ ] [ ]

the introduction of M-Banking

Section C: Respondents’ Priority

Below are factors that are important to commercial banks in measuring the effects of mobile banking on
their financial performance. On a scale of 1-5, please score them in order of importance in affecting of
financial performance. (5 represents the most important)
Number Factor Score (1-5)

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Income
Salaries and wages
Depreciation of plant and equipment
Rent for branch premises
Stationery, Telephone & postage
Amortisation of ICT systems
Other administrative expenses

54