National Payments System and Operational Efficiency of Commercial Banks in Kenya

Abstract

National Payment System plays a crucial role in the banking sector and the entire economy as a whole. It is an infrastructure through which payments are made to the parties in a transaction while facilitating the circulation of money in the economy. The general objective of this study was to examine the effect of national payment system on operational efficiency of Kenya’s commercial banks. Specifically, the study aimed at examining the effect the underisted variables had on the operational efficiency of the Kenya’s banking sector. The four variables were: real-time gross settlement, automated clearing house, payment cards and mobile payments. The study was anchored on three theories; innovation diffusion, task fit technology and the technology acceptance models. The study adopted descriptive research design and employed pooled ordinary least squares regression in analysing the hypothesised relationship amongst the variables. The period of the study was the most recent 10-years, 2009-2018. All the 40 commercial banks operating and licenced at the time formed the target population and with all of them being studied, sampling was not required and census was adopted. Secondary panel data on operating efficiency and national payments systems obtained from the reports of the regulator, Central Bank of Kenya, and also audited financial statements of the targeted banks. The objectives and the hypothesis stated were tested at 95 percent confidence level. The analysis of the research data showed that national payments system had statistically significant but mixed effect on the Kenya’s banking sector operating efficiency. The model was able to determine 71.6% of the operational efficiency of the commercial banks. Real-time-gross- settlement was found to have a direct effect on operational efficiency to the extent of 4.888. On the other hand, the value of payment cards cleared and the operational efficiency of the commercial banks were found to be negatively related. Further, mobile payments cleared and operational efficiency of the commercial banks were also negatively related. The results further indicated that on the basis of individual variable relationship with the dependent variable. Real-time-gross-settlement had a moderately positive correlation with efficiency, though significant value of 0.114 indicated that this relationship was not statistically significant. The value of payment cards cleared and operational efficiency had positive and low Pearson coefficient value of 0.244, though not significant due to the p-value of 0.244. The relationship between mobile payments and operational efficiency was found to be strong, negative correlated and statistically significant as given by correlation coefficient of -0.682 and a significant value of 0.003. The study concluded that the relationship between two dependent variables; real time gross settlement and payments cards, with operational efficiency was not statistically significant while mobile payments had a statistically significant relationship with the dependent variable. The study recommends to the leadership of commercial banks should whole embrace the national payments functions in a bid to improve operational efficiency.