Branchless banking and financial performance of commercial banks in Kenya
Dzombo, Gift Kimonge
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ABSTRACT The Banking sector acts as the life blood of modern trade and economic development. Banks do influence, facilitate and integrate the economic activities like resources mobilization, poverty elimination, production, and distribution of public finance. The financial performance of commercial banks has great implications in the financial sector and the country at large, and will still remain an important subject of concern by all the stakeholders in the banking industry. In order to improve financial performance, commercial banks both globally and locally have invested heavily in technology based modes of banking like branchless banking which involves the use of agency banking and electronic banking channels in the distribution of banking product and services. However, despite this massive investment, it is still difficult to ascertain the payoffs associated with these technology based modes of banking. The early adopters of branchless banking in Kenya had to rely on studies from South America whose geographical and social context was different from Kenya. Moreover the available literature in the Kenyan context has either considered branchless banking channels in isolation, used research designs and models that limit generalization of findings and have not considered the effect of financial inclusion and government policy in the relationship between branchless banking and financial performance of commercial banks in Kenya. This study was heavily anchored on the financial intermediation theory. The study purpose was to evaluate the effect of branchless banking on the financial performance of commercial banks in Kenya. The specific objectives of the study were to analyse the effect of agency banking and electronic banking channels on the financial performance of commercial banks. The study also aimed at determining the mediating effect of financial inclusion and also the moderating effect of government policy on the relationship between branchless banking and financial performance of commercial banks in Kenya. The study adopted an exploratory non experimental research design. A survey of all the 42 licensed commercial banks in Kenya was done. Both primary and secondary data on branchless banking and financial performance of banks was obtained from the individual commercial banks and Central Bank of Kenya Banking annual supervision reports respectively. Return on Assets (ROA) was used as the main indicator of financial performance of commercial banks and was obtained from CBK annual supervision reports. The amount of investment in agency and electronic banking was used as indicators for agency and electronic banking. Deposit Market Share, Branchless banking accounts and value of transactions were used as indicators of financial Inclusion. This data was obtained from the respective commercial banks through a questionnaire. Statistical data analysis was done using SPSS and STATA statistical software. Descriptive statistics, diagnostic tests and tests of hypothesis were done. Data was presented using tables and charts. Study findings indicated that when used in isolation; both agency and electronic banking had a significant negative effect on financial performance. However when agency and electronic banking channels were used together as a multichannel strategy, they had a significant positive effect on financial performance at 5% significance level. Study findings also point to the direction that the strength of the relationship between branchless banking and financial performance in Kenya depends on financial inclusion. Findings also indicate that government policy partially moderates the relationship between agency and electronic banking and financial performance and the effect is significant at 5 percent significance level. The study recommends that for positive returns, commercial banks should invest in both agency and electronic banking as a multichannel strategy since these channels are complimentary to each other. Secondly, the government should come up with policies to foster financial inclusion within the banking industry in order for the industry to achieve maximum returns from branchless banking. Lastly, the government should review the policies around branchless banking in order to make them more effective in addressing the risks and opportunities associated with the branchless banking model of banking in Kenya.