The Impact of Mobile Phone Banking on Commercial Bank Performance in Kenya, Thesis of Banking and Finance

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EFFECT OF MOBILE PHONE BANKING ON PERFORMANCE OF COMMERCIAL

BANKS IN KENYA

BY

DONNA M. A. ABONG’O

MASTER OF SCIENCE (COMMERCE)

KCA UNIVERSITY

EFFECT OF MOBILE PHONE BANKING ON PERFORMANCE OF COMMERCIAL

BANKS IN KENYA

BY

DONNA M. A. ABONG’O

A DISSERTATION SUBMITTED IN PARTIAL FULLFILLMENT OF THE

REQUIREMENTS FOR THE AWARD OF MASTER OF SCIENCE IN COMMERCE IN

THE SCHOOL OF BUSINESS AND PUBLIC MANAGEMENT AT KCA UNIVERSITY.

APRIL, 2016

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EFFECT OF MOBILE PHONE BANKING ON PERFORMANCE OF COMMERCIAL

BANKS IN KENYA

ABSTRACT

Globalization is making the financial world more interconnected and organizations are continuously coming up with financial products that are very innovative. The world has alsobeen taken by storm through financial interconnectivity and information technology which has now engulfed data transfer across all spheres putting the command in the hands of individuals through mobile handsets. This has gone to change the way business is done bringing with it speed, efficiency and effectiveness which transmits into economic growth and development. Various initiatives use the mobile phone to provide financial services to those without access totraditional banks everywhere in the world. Mobile banking services give a high potential to expand financial services particularly payment services to the poor. The services also provide a cost effective and convenient way to access bank accounts. The general objective of my study was to investigate the effect of mobile phone banking on performance of Commercial banks in Kenya. The population of my study was the 43 Commercial banks operating in Kenya as at 31 December 2014 with the sample being 10 in number. The sample size was 200 respondents. st Descriptive research method was employed. To determine the reliability of the tools employed, the Cronbach’s alpha test was conducted. To determine the linear relationship between all the study variables, Spearman’s Rank Correlation Coefficient was used. Tests to determine violation of OLS assumptions were carried out. Results presented in the regression model summaryindicated that the R squared for the regression was 0.458.The ANOVA indicated that F value was 29.532 and was significant at 95% confidence level. Results showed that storage of monies for safe keeping and transfer of monies from one owner to another were not a significant predictor of performance of banks. However, exchange of forms of money through mobile banking and investment of monies had a significant effect on performance of banks. The main recommendations were that should come up with products and services similar to CBA’S Mshwari and that apart from KCB and Equity, the other commercial banks in Kenya local commercial banks in Kenya should diversify their investments before technology pushes them out of business. A future researcher can conduct a research with the aim of determining the effects of mobile payments on other business organizations. Keywords: Performance, Banks, Mobile Banking, Additive Model, Transformative Model,Technology Acceptance Model.

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ACKNOWLEDGEMENT

I wish to first of all thank GOD the almighty, the giver of all wisdom and knowledge for the gift of life and for good health during the period of undertaking this thesis. I thank and will forever be indebted to my supervisors Dr. Christine Nanjala and Mr. Abraham Rotich and all the faculty staff /panelists for their guidance and support. I thank my family for their understanding, love and patience and last but not least, I thank the friends who assisted me in one way or another as I was undertaking this thesis.

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DISCUSSIONS OF RESEARCH FINDINGS, CONCLUSIONS AND RECOMMENDATIONS

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DEDICATION

I dedicate this thesis to my parents Mr. and Mrs. Philemon Abong’o Arodi. They had been a

great source of encouragement during my study period. They provided financial and emotional

support and always remembered me in their prayers.

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• 3.2 Research Design
• 3.3 Target Population
• 3.4 Samples and Sampling Procedure
• 3.5 Sample Distribution
• 3.6 Instrumentation and Data Collection
• 3.7 Pretesting the Research Questionnaire
• 3.8 Validity and Reliability.........................................................................................................................
• 3.9 Data Analysis and Presentation
• CHAPTER FOUR
• DATA ANALYSIS AND FINDINGS OF THE RESULTS
• 4.1 Introduction
• 4.2 Response Rate
• 4.3 Data Reliability and Pilot test results.
• 4.4 Descriptive Statistics
• 4.5 Findings of results of Descriptive statistics.
• 4.6 Further Data Analysis
• 4.7 Interpretation of Findings
• CHAPTER FIVE
• 5.1 Summary Discussion of Research Findings..........................................................................................
• 5.2 Conclusions
• 5.3 Recommendations
• 5.4 Suggestions for Further Research
• REFERENCES
• APPENDICES
• APPENDIX I
• LIST OF COMMERCIAL BANKS IN KENYA
• APPENDIX II
• INTRODUCTION LETTER
• APPENDIX III
• QUESTIONNAIRE
• TABLE 1 .................................................................................................................................................3 LIST OF TABLES
• Operationalization of Variables
• TABLE
• Sample Distribution
• TABLE
• The Cronbach Alpha coefficient interpretation of results
• TABLE
• Response Rate .........................................................................................................................................4
• TABLE
• Cronbach Alpha
• TABLE
• Availability of Mobile Banking Services/Products
• TABLE
• Key for interpretation of means
• TABLE
• Storage of monies for safe keeping
• TABLE
• Transfer of monies from one owner to another
• TABLE
• Exchange of forms of monies
• TABLE
• Investment of Monies
• TABLE
• Performance
• TABLE
• Correlation Matrix
• TABLE
• Regression Model Summary
• TABLE
• Analysis of Variance of the Regression...................................................................................................
• TABLE
• Significance of Independent Variables
• TABLE x
• Breusch-Pagan / Cook-Weisberg test for heteroscedasticity
• TABLE
• Shapiro Wilk Test of Normality
• TABLE
• Testing Multicollinearity Using VIF

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M Means MVNO Mobile Virtual Network Operator NBK National Bank of Kenya NIC National Industrial Credit Bank OLS Ordinary Least Squares PC Personal Computer PIN Personal Identification Number PER Performance of banks in Kenya SCBK Standard Chartered Bank of Kenya SD Standard Deviation SME Small Medium Enterprise SMS Short Message services SSA Sub Saharan Africa STO Storage of Monies T% Total percentage TAM Technology Acceptance Model TF Total Frequency TRA Transfer of monies USSD Unstructured Supplementary Services Data VIF Variance Inflation Factor

Mean

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OPERATIONAL DEFINITION OF TERMS

Performance: Performance can be defined as the attainment of set goals using resources efficiently and effectively (Schroeder, 2012).

Bank: According to the banking act cap 488 of the laws of Kenya, a bank is a corporate body which engages or proposes to engage in banking business and includes the Co-operative bank of Kenya but excludes the Central bank of Kenya. Therefore for a person to conduct banking business in Kenya, one must be a corporate body incorporated under the companies Act Cap 486 of the laws of Kenya (The banking Act Chapter 488, 2010) Mobile Banking: Mobile banking is a term used for performing banking transactions or acquiring bank account information via mobile devices (McGregor, 2013).

Additive Model: The model of providing financial services through a mobile phone linked to a bank account (Guitterez and Singh, 2013). Transformative Model: This is where non banks issue electronic currency to offer customers payment services and value Storage services (Guitterez and Singh,2013). Technology Acceptance Model: This is a theoretical model that explains how users come to accept and use a technology (Davis,1989).

According to Donner and Tellez (2008) the spread of mobile phones across the developing world is one of the most remarkable technology stories of the past decade. They add that voice calls and text messages has been made part of the daily lives of millions of first time telephone owners. According to Porteous (2006) there are probably more people with mobile handsets than with bank accounts across the developing world. Mobile phones provide financial services to the unbanked using various initiatives. These services include remittances, small payments, and go by various names, including mobile banking, mobile transfers, and mobile payments (Donner and Telez, 2008). Mobile banking has enabled a financial revolution to take place. In the late 1990’s in Kenya, opening a bank account was not easy. One had to show evidence of a strong liquidity position. Nowadays, due to competition in the banking industry and competition by other entrants in the market, almost everybody whether coming from Kibera and Mathare slums or the up market areas of Nairobi can own a bank account. This has been enabled or made easier through the use of mobile phones. There are more people with mobile phones than with bank accounts in the developing world (Porteous,2006) and therefore this has enabled financial inclusion. Mobile phone banking is a form of branchless banking. These schemes are coming up everywhere in the world. Another form of branchless banking schemes is by use of point of sale devices across shops but mobile banking seems to be growing faster than these forms of payments. An example of mobile money is M-pesa in Kenya. M- pesa has enabled financial inclusion to previously undeserved citizens. M-pesa’s partnership with many banks has enabled mobile phone banking to take place.

Mobile money has resulted in reduced costs of cash access and convenient means of payment. This is advantageous especially to communities that had previously no access to formal means of exchange (Klein and Mayer,2011). Mobile banking also provides communities access to individual networks, merchants and institutions from which they were previously excluded. The potential to reach service providers like insurance for health, lending products and savings products has substantially increased since the advent of mobile banking. Mobile banking also facilitates development of trust relations. Mobile banking permits record keeping. It provides instantaneous transactions record. Transactions can also be easily traced which makes it different from past situations where cash transactions were unverifiable and anonymous Klein and Mayer (2011). Mobile technology through mobile phone banking has enabled financial transactions in poor countries particularly payments and savings. This in turn increases revenues for banks through transaction costs. Mobile phone banking clearly distinguishes between payments and banking. According to Klein and Mayer (2011), mobile phone banking transactions has four components. These are exchanges of forms of money, keeping money safe, money transportation and money investments. Donner and Telez, (2013) describe this components as storing of values in an account linked to the handset, converting cash in and out of the stored value account and transferring stored value between accounts. Mobile phone banking have all the markers of an innovation waiting to be diffused to or adopted by a subset of mobile users in the developing world (Rogers, 1983). Rogers' model studies diffusion from a change communication framework to examine the effects of all the components involved in the communication process on the rate of

1.1.1 Contextual overview of mobile phone banking in Kenya In the recent past, due to technology and market changes, banks have seen the need to come up with mobile phone banking products. Mobile networks in Kenya that have offered m-money services include M-pesa by Safaricom, Orange money by Orange, Yu- cash by Essar, and Airtel money by Airtel. Other mobile money companies in Kenya are Mobikash and Tangaza pesa. Mobile phone banking services provides easy access to one’s account from time to time and from anywhere, the services takes convenience to the next level as one can perform real time transactions over the mobile phone by use of various commands, funds can be transferred to your account, to other accounts within the same bank and to accounts in other banks, one can check his/her account balance and mini statement, transfer funds from bank account to mpesa account and vice versa, purchase airtime, pay utility bills, order account statement, order cheque books and for some banks, it is accessible when one is on the mobile provider’s roaming facility. The history of mobile money started with mpesa in Kenya which was introduced in March 2007 and has since shown tremendous growth since its inception. In developed economies, mobile banking made its first appearance in the year 2001. Additive model is the model of providing financial services through a mobile phone linked to a bank account while transformative model is where non-banks issue electronic currency to offer customers payment services and value storage services (Guitterez and Singh, 2013). The Technology acceptance model which is an information systems theory that models how users come to accept and use a technology (Davis, 1989) also applies here. The TAM suggests that when users are presented with a new technology, a number of factors influence their decision about how and when they will use it. As mobile phone usage and

levels of technology increase, the growth in demand for banks to offer mobile banking services to its customers continue. 1.1.2 General Performance in the banking sector in Kenya According to CBK reports (2013) the Kenyan banking sector registered an improvement in performance with the size of assets, loan and advances, deposit base and profits before tax improving. The number of bank customer deposits and loan accounts increased. The banking sector aggregate statement of financial position also expanded. Deposit base grew, the number of deposit accounts increased and capital levels and shareholders’ funds increased. Profitability also increased. The components of expenses were staff costs, interest on deposits and others. 1.1.3 Mobile Phone Banking and Performance of Commercial Banks in Kenya Mobile phone banking products in Kenya include Mshwari by CBA and Safaricom, the recently launched Equitel by Equity and Airtel, Patacash by Post bank, Hello money by Barclays, Mobibank by KCB and Pesapap by Family bank among others. Mshwari was launched in November 2012. On day one of its launch 70, 000 people subscribed for it’s services. Within the first 100 days, it had 32000 new customers and one million customers in 41 days. By April 2013, 3 million customers had subscribed. The high number of registrations shows that indeed this was technically feasible and commercially viable. It is yet to be seen if the other mobile phone banking products in the market will significantly improve commercial banks performance as it has been seen with CBA’S Mshwari. 1.2 Statement of the Problem Telecommunication companies have come up with products that are somehow similar to banks products which have made them to take up some of the market share of banks. To