PAPERLESS BANKING AND FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN KENYA
DUNCAN IREGI MUHORO.
D53/OL/21311/2012
A RESEARCH PROJECT SUBMITTED TO THE SCHOOL OF BUSINESS, IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE AWARD OF MASTER OF BUSINESS ADMINISTRATION (FINANCE) OF KENYATTA
UNIVERSITY
ii
DECLARATION
This research project is my original work and has not been submitted for the purpose of a
degree course in any university. No part of this research project should be reproduced without
authority of the author and/or Kenyatta University.
Signature……….. Date………..
DUNCAN IREGI MUHORO
D53/OL/21311/2012
This research project was done by the candidate under my supervision and has been
submitted to the University for Examination with my approval as the University Supervisor.
Signature……….. Date………..
DR.JOHN MUNGAI
Department of Accounting and Finance, School of Business,
iii
DEDICATION
iv
ACKNOWLEDGEMENT
I give thanks to the Almighty God for granting me the grace to expedite this project this far. I
am greatly indebted to my supervisor Dr. John Mungai for guidance, support and his
encouragement. I thank him specifically for his exquisite attention to detail and demand for
excellence.
I am also greatly indebted to my family who have always been very understanding and
supportive both financially and emotionally and through their encouragement and prayers
that have brought me this far.
Finally, my fellow MBA students specifically; Mr. Erastus Muchira and Mr.Eliud Gitari who;
encouraged me throughout the research period. Thank you all and may God bless you
v
TABLE OF CONTENTS
DECLARATION ... ii
DEDICATION ... iii
ACKNOWLEDGEMENT ... iv
TABLE OF CONTENTS ... v
LIST OF TABLES... Error! Bookmark not defined. LIST OF FIGURES ... ix
OPERATION DEFINITION OF TERMS... x
ABBREVIATIONS AND ACCRONYMS ... xi
ABSTRACT ... xii
CHAPTER ONE: INTRODUCTION ... 1
1.1 Background of the study ... 1
1.1.1 Internet Banking ... 6
1.1.2 Mobile Banking ... 7
1.1.3 Real Time Gross Settlement ... 8
1.1.4 Financial Performance ... 9
1.1.5 Commercial Banks in Kenya ... 10
1.2 Statement of the problem ... 11
1.3 Objectives of the study ... 12
1.3.1 General Objective ... 12
1.3.2 Specific Objectives ... 12
1.4 Research Hypotheses ... 13
1.5 Significance of the Study ... 13
1.6 Scope of the study ... 14
1.7 Limitations of the study ... 14
1.8 Organization of the Study. ... 14
CHAPTER TWO: LITERATURE REVIEW ... 16
2.1 Introduction ... 16
2.2 Theoretical Review ... 16
2.2.1 Technology Acceptance Model ... 16
2.2.2 Theory of Reasoned Action ... 17
2.2.3 Theory of Planned Behaviour ... 18
vi
2.3 Empirical Review ... 20
2.3.1 Financial performance ... 20
2.3.2 Internet Banking and Financial Performance ... 22
2.3.3 Mobile Banking and Financial Performance ... 23
2.3.3 Real Time Gross Settlement and Financial Performance ... 25
2.4 Summary of Literature Review and Research gaps ... 26
2.5 Conceptual Framework ... 29
CHAPTER THREE: RESEARCH METHODOLOGY... 30
3.1 Introduction ... 30
3.2 Research Design ... 30
3.3 Target Population ... 30
3.4 Data Collection ... 31
3.4.1 Data Collection Instruments ... 31
3.4.2 Data Collection Procedure ... 31
3.5 Data Analysis and Presentation ... 31
3.6 Operational Measurement of Variables ... 32
3.7 Empirical Model ... 32
3.8 Diagnostic tests... 34
3.8.1 Normality Test ... 34
3.8.2 Autocorrelation Test ... 34
3.8.3 Heteroscedasticity Test ... 34
3.9 Ethical Considerations ... 35
CHAPTER FOUR: DATA ANALYSIS, PRESENTATION AND INTERPRETATION ... 36
4.1 Introduction ... 36
4.2 Descriptive Statistics ... 36
4.3 Diagnostic test ... 38
4.3.1 Normality test ... 38
4.3.2 Heteroskedasticity for ROA ... 39
4.3.3 Heteroskedasticity for ROE ... 41
4.4 Financial Performance ... 43
4.5 Correlation Matrices ... 43
4.6 Hypotheses Testing ... 44
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMEDATIONS ... 46
5.1 Introduction ... 46
vii
5.3 Conclusion ... 47
5.4 Recommendations ... 48
5.5 Implication of the study on policy, theory and practice ... 48
5.6 Areas of Further Study ... 48
REFERENCES ... 49
APPENDIX 2: Data Collection Schedule ... 58
Appendix 3 ... 59
viii
LIST OF TABLES
Table 1: Summary of literature review and gaps………... 25
Table 2: Operationalization of variables………. 32
Table 4.1: Descriptive Statistics………. 34
Table 4.2 Regression Model for ROA before………... 37
Table 4.3 Regression Model for ROA after……….. 37
Table 4.4 Regression Model for ROE before……… 38
Table 4.5 Regression Model for ROE after……….. 39
Table 4.6 Banks Financial Performance……… 45
Table 4.7: : Correlation Matrix ROA………. 49
ix
LIST OF FIGURES
x
OPERATION DEFINITION OF TERMS
Financial Performance A personal degree of how well an entity can make use of possessions from its chief style of trade and generate incomes.
Internet Financial transaction Is an automated payment method that allows clients of a bank to conduct a range of monetary transactions through the bank’s website.
Mobile Banking The use of a smartphone or other cellular stratagem to do virtual investment jobs.
Paperless Banking The use of online and digital means to access ones banking platform.
Profitable Bank A money making financial institution (bank) that has
been reporting financial gains over the years. Real Time Gross Payment A transmission method where the transmission of
xi
ABBREVIATIONS AND ACCRONYMS
KBA Kenya Bankers Association
M-BANKING Money Banking
MPMT Mobile Phone Money Transfer
PBC Perceived Behavior Control
PDA Personal Digital Assistant
PEOU Perceive Ease of Use
ROA Return on Assets
ROE Return on Equity
S2B Straight to Bank
SN Subjective Norm
TAM Technology Acceptance Model
TPB Theory of Planned Behavior
xii ABSTRACT
1
CHAPTER ONE
INTRODUCTION
1.1 Background of the study
In the modern world of commercial activities, with speedy growth of economic events there
is no qualm on the predictability of presence of a performance assessment scheme in all
societies. This requisite is palpable in that; lack of an assessment system would be considered
as a sign of a society’s unhealthiness. Financial valuations ensure that corporations attain a
sophisticated level of performance by showing present financial situation of a business in
relation to other businesses and creating a modest environment. Such assessments are also
worthwhile in improving and refining weaknesses through appreciation of the strong point of
past activities. Financial performance is considered as a suitable step in achieving a
self-evaluation technique and therefore improves accountability. Financial performance
directories are in fact an exploit guide from what it is concerning what it is supposed to be.
Assessing the performance of companies and industrial units can act as a parameter that
surfaces the way for impending resolutions, concerning venture, growth, and most
prominently, control, and observation (Tehrani & Brahmana, 2010). Financial assessments
are one of the oldest and the most significant approaches used for assessing the performance
of firms which are mostly based on monetary statements.
Oke and Goffin (2011) noted that in United States of America, innovation has been used by
financial institutions as a strategy to give direction which realizes benefit in a fluctuating
setting through its formation of competences, and resources with the aim of satisfying
investors’ anticipations Innovation is the outcome of man’s erudite and assimilated
knowledge or his practical skills concerning how to handle things in a better way. Quinn
2
employees to innovate, because innovation covers every aspect of all organizations. A
company’s performance is the assessment of agreed pointers or principles of efficiency,
efficiency, and ecological responsibility such as production, sequence time, controlling
acquiescence and surplus lessening. Performance also talks about the metrics on how a
certain appeal is handled, or the action of doing something efficiently.
In South Africa financial institutions have been able to create competencies and in order to
sustain them the banks have invested in online marketing, mobile banking, and paperless
banking and customized customer service. This has helped them to come up with favourable
core banking systems, marketing strategies, products as well as organization innovation. This
has improved the financial performance of financial institution. This can be found through
increased number of customers, increased profit growth and development of new banking
products (Ndunga, Njati & Rukangu, 2016). Due to the improved financial performance, the
financial inclusion has improved especially in developing countries. As a result of the rapidly
changing technology and improved financial performance commercial banks have employed
skilled and knowledgeable workers who are innovative to and able to deliver change. (Khalil,
2012)
Paperless banking in the banking industry has evolved over the years; the first bank to use
ATM was Barclays Bank in Enfield Town in north London, United Kingdom, on 27 June
1967. Since then, there have been important developments in the paperless investment sector
in the previous years. According to Delving (1995), until the early 1970s functional
demarcation was principal with several supervisory restraints enacted. One key result of this
was partial rivalry both locally and globally, consequently there was heavy dependence on
3
Paperless banking depends heavily on information and communication technology (ICT) to
24 hours accessibility, cheaper, and faster delivery of economic services; when seeing
paperless investment, bank websites stage, regularly come to mind foremost but paperless
banking needs several good website. ATM banking is one of the most primitive and
extensively embraced paperless banking amenities in Kenya (Nyangosi et al., 2009).
However, according to a yearly article by Central Bank of Kenya (CBK), its acceptance, and
usage has been beaten by mobile banking (M-banking) in the last few years (CBK, 2014).
Currently, there are about 8 million users of M-banking services related to 4 million people
who hold accounts in conventional financial institutions in Kenya (CBK 2014). The
remarkable upsurge in the number of people embracing M- banking has been credited to ease
of use, and large number of mobile phone customers.
Michael Zhang (2010) expressed that E-banking is the most recent delivery network for
banking amenities. Banks have used automated channels for several years to communicate
and conduct business with both local and global business clienteles. With the growth of the
Internet, and the World Wide Web in the last half of the 1990s, banks are gradually using
paperless networks for getting guidelines and carrying their products, and amenities to their
consumers. This form of banking is generally referred to as paperless banking, e-banking or
Internet banking, although the range of products and services provided by banks over the
electronic channel vary widely in content, capability and sophistication (Menson, 2010).
Paperless banking is the computerized supply of modern and outdated banking products, and
services straight to clienteles through paperless, cooperating communication channels.
Every bank in Kenya reports its financial results at the end its financial year. (Alton et al.,
2007), methods of after-tax rates of return, for example, the return on regular overall assets
(ROA), and the return on total equity (ROE), are extensively used to measure the
4
used ROA and ROE to evaluate business performance, and estimate tendencies in market
configuration as contributions in numerical models to forecast bank catastrophes, and fusions,
and for a diversity of other drives where a quantity of productivity is anticipated. Return on
assets is the percentage of yearly net revenue to middling total chattels of a corporate during a
business year. It measures competence of the corporate in using its possessions to make net
revenue. ROA is calculated by dividing annual net income by Average total assets. Average
total possessions are premeditated by allotting the sum of total possessions during the start,
and the end of the business year. The sum of assets at the beginning, and at the end of the
year can be gained from year ending balance sheets of two successive monetary years,
Irfanullahjan (2013).
ROE evaluates the stockholders rate of return on their venture in the firm (Majed et al.,
2012).Kenyan banks that have embraced paperless banking have ended up becoming the
market leaders, (Muthini, 2013). For instance, Kenya commercial bank introduced mobile,
and agency banking here in Kenya. Today, KCB has become the largest bank in the region by
both assets and profitability (CBK, 2014). The use of internet banking by equity bank has
improved the bank’s performance over the past few years. One of the benefits for the banks
with paperless banking service is improved labelling and enhanced reply to the flea market.
Other benefits are probable to assess in financial terms.
The highest goal of each company is to maximize incomes for its holder and other investors.
According to Allen, and Hamilton (2002), a predictable cost of providing the repetitive
business of a complete service branch in United States of America is $1.07 per business deal,
as related to 54 cents for mobile banking, 27 cents for ATM banking and 1.5 cent for internet
banking. On the other hand, the benefits for the consumers are important time saving, and
condensed costs in retrieving, and using the several banking merchandises and service,
5
According to Wright and Ralson, (2002), internet Banking delivers clear returns to both the
financial institutes and the clienteles. From the banks’ viewpoint, Internet Banking has very
cheap businesses, as compared to human teller banking. According to The Fourth ICEB
conference in Beijing (2004), paperless banking lowers head count, stationery costs because
bank statements and disclosures are presented online. For customers, Internet banking
provides suitability, reduce service charges, more reachable information about bank accounts,
and a pretty option for eventful people because it saves time to go to the bank branches and
offers 24 hours access, Khalil (2012).
The advantages of paperless banking are diverse, and are to be taken from the viewpoint of
the banks themselves, consumers, and even the managers (Glenn, 2015). The study further
expressed that paperless banking offers diverse and possibly lower obstacles to entry, chances
for important cost reduction, the capacity to rapidly reengineer business processes and greater
opportunities to sell cross border. For consumers, the possible benefits are: more choice;
better competition and healthier value for money; more information; improved tools to
manage and relate information and quicker service.
Paperless and Electronic banking (E-banking) allows customers to do their banking 24 hours
a day in a week. E-banking consumers are able to check their account balances, pay bills,
apply for a loan, trade securities, and conduct other financial dealings. Paperless banking is
divided into five main categories namely Personal computer banking, internet banking,
TV-based banking, telephone banking, and Mobile phone banking. Technological inventions in
latest decades have enabled the move towards paperless banking. The growing competition
for consumers in banking, and necessity to lower the cost of offering banking services has
6
Due to the comparative newness of this hastily developing industry, banks as well as
consumers had serious disquiets about the security of Internet right of entry to client
accounts, which was the major test, (Rebecca, 2013). Internet banking is taking over the
ground. Banks gradually control websites through which clienteles are able to ask about
account balances, interest and exchange rates, and carry out a number of transactions.
Regrettably, there is a low data on Internet banking, and diversity in definitions make cross-
country contrasts difficult, John, and Davies (2011).The study also highlighted on the
presence of risks in paperless banking which include reputational risk, operative risk, legal
risk, and regulatory risk.
1.1.1 Internet Banking
Internet banking is a system that enables bank consumers to access their accounts, and
general data of the bank products, and facilities through banks website, without the
interference or inopportuneness of sending letters, original signatures, faxes, and telephone
confirmation, (Thulani, Tafara & Langton , 2009, cited in Yahiya 2011). IB is defined as the
use of internet knowledge in the transfer of banking and monetary amenities using the
omnipresent nature of the internet (George and Gireeshkumar, 2012); It is can also be defined
as the act of performing commercial transactions tenuously over the internet via a bank’s
devoted website (Salehi & Alipour, 2010)
Customers are able to do personal and profitable banking activities speedily, competently and
appropriately via bank’s internet banking website from their homes or offices which is
economical. Internet banking also helps the bank to replicate the same services offered
usually at bank branches to their online clients at a cheaper operational cost (Dosh &
Mohanty, 2011). Internet banking has spread promptly worldwide as a result of its
7
is internet network (Auta, 2010). IB is not distribution channel but also a driver for inclusive
industrialized change in the banking sector, which results to the diffusion of internet banking
technology internationally.
1.1.2 Mobile Banking
The terms mobile banking, m-transfers, m-payments, and m-finance jointly refer to a set of
submissions that enable the general public to use their mobile telephones to operate their
bank accounts, store value in an account allied to their phones, access credit or even transfer
funds (Donner,2008).
Various factors play a vital role in the acceptance of these comparatively new-fangled
services. These factors include economic, social, and technological. However, there are also
social factors which include awareness, attitude towards change (embracing technology),
conceptualizing electronic money, the social context of transactions, trust in one’s bank or
service provider, convenience of the service and the comfort that people have in using these
services. Economic factors include mobile phone access, cost of the service, marketing
strategies and availability of alternatives. The banking industry has come a long way in
ensuring its survival having experienced improved rivalry over the last few years caused by
increased inventions among the traders, and new competitors into the monetary market,
through the provision of mobile banking services (CBK, 2014). Safaricom launched the
M-Pesa in 2007, and within a relatively short period it already has more than 10-million
consumers and is providing many poor and countryside Kenyan citizens with admittance to
financial amenities that were formerly inaccessible, since either banking services were too
expensive for them or were almost out of reach. With M-PESA, client's cash can only be
8
ways to compete effectively and profitably, and started coming up with their own mobile
banking solutions and forming partnerships with these telecommunication service providers.
1.1.3 Real Time Gross Settlement
Real Time Gross Settlement (RTGS) is a service obtainable by the standby banks of countries
to process great value cash businesses securely between two accounts (Rodrigo Andrés de
Souza Peñaloza, 2011). Kenya banker top-notch wordpress.com site (2013) defines Real time
gross settlement systems (RTGS) as a funds transmission structures where money or
sanctuaries are conveyed between banks on a real time and on gross basis. Settlement on real
time means there is no waiting period and the imbursement is reflected as final and
irreversible. Gross settlement business is settled on a face to face basis without batching or
netting with another business. Once processed, expenses are final and irreversible. An RTGS
scheme can therefore considered as a funds transference scheme which enables provision of
continuous intraday conclusiveness for separable transfers. A Real Time Gross Settlement
system where interbank transfers are developed on a gross base as they arrive at the Central
Bank.
In RTGS systems expenditures are, as designated above, settled separately and directly after
the payment teaching, delivered that the remitter has cover for the payment in question.
Payments in RTGS systems are characteristically credit businesses that is, payments started
by the remitter (debtor). Members obtain wateriness through monetary-policy finances from
the central bank, that loan with development of least possible one day, or by appropriating
from other members in the coinage market. RTGS is a developing invention in the banking
zone. Bank modernism includes; internet banking, mobile banking, Point of Sale Terminal,
9
organization that fails to influence these inventions loses its modest advantage and market
share to the participants (Mabrouk & Mamoghli, 2010).
1.1.4 Financial Performance
Generally, bank performance implies that a bank has fared well in a trading period to
meet its objectives. The only manuscript that clarifies this is seemingly the printed financial
statements. According to Rose (2008) , a reasonable assessment of a bank’s
performance should commence by estimating if it has been able to attain the aims set
by administration and shareholders. Undoubtedly, several banks have their own exclusive
intentions. Some wish to develop quicker, and realize some lifelong growth objectives,
others appear to favour unobtrusive life, reducing risk and transmitting the carbon copy
of a complete bank, but with diffident plunders to their stockholders Ibid .
Normally, stock prices and its conduct are thought to replicate the presentation of a company.
This is a market pointer and are unreliable. Nevertheless, the size of the bank, the volume
of deposit, and its productivity could be believed as more dependable performance
pointers. For the benefit of this research, effectiveness gages, exactly the Return on
Equity Capital (ROE), and the returns on Assets (ROA) are used to evaluate bank
performance. These ratios are gauges of supervision productivity, and rate of returns.
According to Rose (2008), these effectiveness procedures differ considerably over time and
between banking market. The ROE and ROA are generally in use nowadays. Nikolai &
Bazley (2010) postulate that the total net income made in relation to total possessions is a
pointer of how professionally a business uses its financial resources. They continue stressing
that when the ROE is greater than the ROA, the company has a satisfactory financial
10 1.1.5 Commercial Banks in Kenya
According to CBK by the end of June 30th 2014 the Kenyan banking zone has 43 commercial
banks, 9 microfinance banks, 1 mortgage finance company, 8 representative offices of
foreign banks, 2 credit reference bureaus, 5 money remittance providers, and 97 foreign
exchange bureaus. The Banking Sector improved its performance, and assets amplified to
Ksh. 3.0 trillion from Ksh2.5 trillion between 2013 and 2014 whereas loans, and advances
grew by 20% during the same period. The deposit base expanded by 10%, Profits before tax
grew by 15% (CBK, 2014).
In June 2013 the banking sector gross loans and advances increased from Ksh 1.5 trillion to
Ksh1.9 trillion in June 2014 which is estimated to be a growth of up to 22.6%. The consumer
deposits were the main source of funding for the banking sector assets, accounting for 72.3
percent of total accountabilities. The deposit base increased by 16.5 percent from Ksh 1.9
trillion in June 2013 to Ksh. 2.1 trillion in June 2014 mainly attributed to branch expansion,
remittances, receipts from exports and agency banking. The deposit accounts improved by
33.9 per cent from 18.9 million accounts to 25.3 million between June 2013 and June 2014
(CBK, 2014).
Additionally, the yearly report (2014) shows that the banking sector made improved capital
levels in the financial year that ended in June 2014 with total capital, which encompasses
core, and additional capital, growing by 19.9 percent from Ksh 364.0 billion to Ksh 436.6
billion in June 2013. The stockholders’ funds improved by 16.5% from Ksh 394.4 billion to
Ksh 459.4 billion between June 2013 and June 2014. However, the ratios of total and core
capital to total risk-weighted possessions reduced from 23.3% and 20.2% in June 2013 to
17.5% and 15.0% in June 2014 correspondingly. The deterioration in capital competence
ratios is caused by higher increase in total risk prejudiced possessions than the upsurge in the
11
charge for market, and operative risks which in effect upsurges their weighted possessions
base. This requirement was to effect from January 2014.
1.2 Statement of the problem
In Kenya the banking business has continued to operate in a competitive environment, most
banks have introduced new innovative products, processes, technology and organization
innovation leading to greater efficiency and product differentiation. On technology, banks
have had to offer a wide range of deposit, investment and credit products through distinct
channels of distribution which include improved ATMs, branches, telephone and Internet.
Regardless of the possible profits of ICT, and e-commerce, there is discussion on whether
and how their acceptance progresses bank’s financial performance. Numerous efforts have
been made to investigate the influence of microelectronic banking on bank performance. A
research study carried out by Kingoo (2011), explore the association between e-banking and
monetary performance of profitable banks in Kenya. The study recognized that those banks
with great revenue development are more probable to be using better statistics of progressive
ICTs. It settled that e-banking leads to greater revenues although in long-run because of high
ICT venture cost and also to decrease delinquencies; security check should be done which
will be cooperative in improving client service, upsurge methodical competence and thus
improved productivity.
There has also been mixed conclusions on the result of e-banking on the monetary
performance of profitable banks in Kenya. A research done by Okiro (2013) found that banks
with internet banking services were normally more lucrative and inclined to trust less deeply
on old-style banking activities as compared to banks with no internet. Exclusion to the larger
performance of internet banks was the de novo (new start-ups) internet banks, which were
12
Regardless of the importance of paperless banking in explanation of banking performance,
the association of paperless banking on banks financial performance is still misinterpreted for
two motives; lack of considerate drivers of paperless banking and paperless banking effects
on group’s financial performance is unknown. Previous researchers such as Pooja and Singh
(2009), Batiz-Lazo and Woldesenbet (2006), Francesca and Claeys (2010), Mwania and
Muganda (2011) have shaped mixed outcomes concerning the effect of internet banking and
e commerce on bank’s performance, and banks financial performance have stagnated despite
the adoption of paperless banking . It is from the background of such mixed conclusions
which necessitated and created the necessity to do a study to examine the relationship of
paperless banking and the financial performance of profitable banks by use of such other
relative measure as return on Asset and return on Equity, which are better indicators of
financial performance.
1.3 Objectives of the study 1.3.1 General Objective
The universal objective of the research was to establish the outcome of paperless banking on
financial performance of Commercial banks in Kenya.
1.3.2 Specific Objectives
The study was guided by the following specific objectives
(i) To determine the effects of internet banking on financial performance of commercial
banks in Kenya
(ii) To establish the effects of mobile banking on financial performance of commercial
13
(iii)To find out the effects of real time unrefined settlement on financial performance
of commercial banks in Kenya
1.4 Research Hypotheses
In view of the research objectives the study sought to test the following null hypotheses.
H01: Internet banking has no significant effect on financial performance of commercial banks in Kenya?
H02: Mobile banking has no significant results on financial performance of commercial banks in Kenya?
H03: Real time gross settlement has no significant consequence on financial performance of commercial banks in Kenya?
1.5 Significance of the Study
The research findings will be of value to:
The regulators will gain a deeper consideration of the paperless banking technology under
their policy. It would be useful to them in that they will use the knowledge gained to tailor
regulations to safeguard the interests of consumers while still and carry out their operations
profitably.
Paperless banking operators will improve and expand their services in a way that facilitates
economic empowerment to all the parties involved. They will gain a deeper understanding of
the services that consumers prefer to operate under. The information will thus be used to
tailor the Provider’s services to suit the customers’ needs and expectations and hence gain a
14
Consumers shall be educated on the many avenues and platforms that paperless banking
affords to them. Business owners may choose to use paperless banking methods in their trade
as a result of understanding their customer base. Academicians and researchers will have new
areas to push forward knowledge boundaries on the concept of paperless banking.
1.6 Scope of the study
The populace for this study contained of all commercial banks in Kenya recorded with CBK.
There are 43 profitable banks in Kenya which formed the objective populace of the research.
The study covered a 5 years period prior to paperless banking, between 2001 and 2005; and
2012 to 2016 post paperless banking. This period was significant because there was a major
political activity which changed the system of government from a central government to a
devolved system of government. During such activities the business are very anxious and
huge movements in the securities exchange were evident (NSE, 2013). During the period of
the study, the Kenyan currency depreciated against the US dollar by about 30% (CBK 2014).
1.7 Limitations of the study
The study was restricted by the point that it only covered a period of five years which cannot
be considered representative enough. This challenge was addressed by prudent analysis of the
available data. The researcher encountered inconsistent data and in some cases lack of the
data, this was as result of merger ,acquisition and receivership of some banks. The researcher
was also constrained by funding and time. The problem was addressed by the use of a
research assistant who assisted in speeding up the study.
1.8 Organization of the Study.
Chapter one of the project covers the background of the project, statement problem,
objectives of the project; as well as the hypotheses developed for empirical testing, the scope
15
review the relevant literature and studies carried out on the delinquent addressed in the study.
The third chapter presents the procedure and the technique to be used for data assemblage
and study. The fourth contains an examination of data, and demonstration of outcomes. The
fifth chapter offers a summary and argument of the investigator’s findings, insinuations for
16
CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
The chapter outlines the current writings on the result of paperless banking and performance
of commercial banks. Specifically, this chapter analyses theories relied on, empirical studies,
summary of the literature review and gaps, and conceptual framework.
2.2 Theoretical Review
Several theories are offered to investigate and illustrate the attitude that consumers have on
the acceptance and usage of paperless banking amenities. Some of the philosophies that have
been developed to clarify how e- banking expertise is adopted include: the concept of
reasoned action (Fishbein, et al., 1975), concept of planned behaviour (Ajzen, 1985),
Diffusions of innovation theory (Robinson, 2009) and technology acceptance model (Davis et
al., 1986).
2.2.1 Technology Acceptance Model
The proponent of technology acceptance model (TAM) is Davis et al., (1986). TAM
emphases on clarifying the boldness behind the meaning to use a definite technology or
facility. TAM model conjectures that structure use is unswervingly single-minded by social
purpose to use, which is in turn prejudiced by consumers’ approaches toward using the
system and the professed expediency of the structure. Approaches and superficial practicality
are also affected by apparent comfort of use.
Perceived usefulness (PU) is explained as the degree to which a being considers that using a
scheme will upsurge his or her work performance. Thus for users of online banking, will
assume the scheme if they consider the system will bring profits such as decreasing time used
17
is “the degree to which the prospective adopter expects the new technology adopted to be a
free effort regarding its transfer and utilization” (Davis et al.,). Consequently if consumers
feel that online banking is cool to use and open to hustle, then the probabilities of them to
make use the scheme will be better.
However, several research show that TAM itself is inadequate to clarify users' choices to
accept expertise, consequently they use TAM as an improper model and protracted the model
by tallying extra variables to the model relying on the kinds of expertise they studied. For
instance, Kamarulzaman (2007) on his research of internet errands acceptance depicted upon
TAM, and incorporated personal and reasoning influence. Amin (2007) also adapted the
original TAM by including apparent trustworthiness and the amount of data on mobile credit
card were added to his study of mobile credit card usage purposes.
2.2.2 Theory of Reasoned Action
The Theory of Reasoned Action (TRA) conveyed in by Fishbein and Ajzen (1975) has been
used expansively in marketing study. TRA has been functional to explain the conduct beyond
the receipt of technology and comprises four universal ideas: behavioural attitudes, personal
norms, objective to use and real use. It debates that individuals evaluate the consequences of
a particular behaviour and create intentions to act that are consistent with their evaluations.
More specifically, TRA states that individuals' behaviour can be predicted from their
intentions, which can be predicted from their attitudes and subjective norms. Following the
chain of forecast further back, approaches can be foretold from a personality's principles
about the results of the behaviour. Personal norms can be foretold by acknowledging how
important other persons think the conduct should or should not be done (Ajzen, I., 2006).
A predominantly useful feature of TRA from a technology viewpoint is its declaration that
any other issues that affect performance do so only circuitously by swaying boldness and
18
system design characteristics, and user characteristics (including cognitive styles and other
personality variables). Therefore, TRA is fairly suitable in the setting of forecasting the
performance of using hypermedia technology. Though TRA, is a very universal concept and
as such does not specify what particular principles would be applicable in specific situations.
On the other hand, the addition of personal norm signifies a significant variable, which is not
even encompassed in more general models (Fishbien, 2014)
2.2.3 Theory of Planned Behaviour
The proponent of this theory is Ajzen who developed it in 1988. This theory of planned
behaviour (TPB) started as the concept of rational action to forecast a person’s intent to
involve in a performance at a particular time and domicile. This theory propose that a
principal factor in social behaviour is developmental intention, which is pretentious by
approach toward conduct, individual norm, and alleged behavioural control (Ajzen, 1985).
Personal norm articulates the apparent structural or collective pressure of a person who
anticipates to perform the comportment in question. Additionally, the personal norm is
comparative to normative beliefs about the prospects of other people. Apparent behavioural
control replicates an individual’s insight of the easiness or difficulty of applying the
behaviour in question. It concerns principles about the existence of control factors that may
enable or impede their performing the conduct.
TPB is came up with three factors as observed behavioural control, subjective norms, and
attitude. Hence, behavioural objective is predisposed by alleged behavioural control,
subjective norms, and attitude. Real behaviour is, therefore dogged by behavioural purpose.
Among all, apparent behavioural control talk about to person’s perceived simplicity or
difficulty of performing the specific behaviours. Recently, use of internet has been extensive,
and more expanded. Studies on TPB relating on electronic market have improved. Huang et
on-19
line tax filing. Hsu et al., (2006) analyses consumers’ frequent conduct towards internet
shopping by longitudinal study, which not only use TPB factors (attitude, subject norms and
perceived behaviour control) but also assimilate anticipation disconfirmation concept to
hypothesis the research model. The experiential results show that personal norms, perceived
behaviour, and attitude control are the main factors influencing consumers’ unceasing
objective of internet shopping. In summary, the experiential results of the above- mentioned
writings prove that TPB can be applied to clarify the developmental process of human being
involved in or putative information technology (Fishbein and Ajzen,2010).
2.2.4 Diffusions of Innovation Theory
According to Robinson (2009), dissemination of inventions seek to clarify how inventions are
taken up in a populace. Diffusion of invention suggests five qualities that influence the
adoption of any given technology namely: relative benefit, compatibility with current values
and practices, trial ability, and observable results, easiness and comfort of use. Relative
benefit is the point to which an invention is professed better than the impression it succeeds
by a specific group of consumers dignified in terms that matter to those consumers, such as
social prestige, economic advantage, convenience, or satisfaction. The better the professed
relative benefit of an invention, the more prompt its rate of acceptance is probable to be.
There are no complete rules for what institutes “relative advantage”. It hangs on the specific
insights and wants of the user group (Robinson, 2009).
Compatibility with prevailing principles and practices is the point to which an invention is
seemed as being reliable with the past experiences, values, and needs of possible adopters.
An idea that is un harmonious with person’s values, standards or practices will not be
accepted as quickly as an invention that is harmonious. Straightforwardness and ease of use -
is the gradation to which an invention is professed as challenging to comprehend and use.
20
that need the adopter to change new skills and considerations. Trial ability is defined as the
gradation to which an invention can be investigated with on a restricted basis or a discovery
that is sample able signifies less risk to the person who is considering it. Noticeable results
mentions to how tranquil it is for people to see the results of an invention, the more probable
they are to accept it. Noticeable results lessen indecision and also arouse peer debate of the
invention (Robinson, 2012).
2.3 Empirical Review
This section provides an analysis of the empirical literature, which has been done according
to the variables of the study.
2.3.1 Financial performance
Monetary ratios are used by interior and exterior monetary data users for making their
financial decisions; including capitalizing, and performance assessment decisions. Numerous
financial and secretarial models were advanced during earlier decades. Nevertheless, the
monetary ratios still keep it’s standard and important power either as part of these monetary
and secretarial models or as added significant helpful examination with it. Due to the
established power of the ratio scrutiny in the concrete monetary and planning study, this
research will discover the result and power for more or less key ratios ROA, ROE together
and distinctly in explanation the financial performance of 43 commercial banks in Kenya
between 2012 and 2016 (CBK,2014).
Almazari (2011) tried essentially to measure the monetary performance of seven Jordanian
commercial banks from the year 2005 to 2009, by using modest reversion in order to assess
the influence of autonomous variable signified by; asset management, the bank size, and
operational competence on reliant variable financial performance signified by; return on
assets, and interest income size. It was established that banks with advanced total deposits,
21
productivity performance. Additionally, there subsists a confident association between
financial performance and asset utilization, asset size, and operational competence, which
was also established with reversion study that financial performance is importantly
prejudiced by these sovereign factors.
Kumbirai, and Webb (2010), examined the performance of South Africa’s commercial
banking sector between 2005 and 2009.Financial ratios are used to measure the productivity,
fluidity and credit quality performance of 5 large South African founded commercial banks.
The research found that overall bank performance amplified significantly in the first two
years of the study. An important change in trend is seen at the start of the global financial
watershed in 2007, reaching its highest between 2008 and 2009. This caused low liquidity
falling profitability, and deteriorating credit eminence in the South African Banking sector.
Raza et al., (2012) have briefed several new studies from 1972 to 2012 in their evaluation
papers using content analysis, presenting that financial measures such as stock market
returns, and accounting incomes ratios such as return on assets (ROA), return on sales
(ROS), and return on equity (ROE) are targeted Ibid. Most researchers pick out ROE, ROA,
ROIC, and EPS, as significant financial variables in their researches. Scholtens (2008) uses
standard returns as a monetary index Ibid. McGuire et al., (2012) compare both stock
market-based and accounting-market-based procedures that emphasis on dissimilar features of financial
performance. The accounting-based agencies stress on the firm’s antique performance and
apprehend a wide variety of pointers such as ROA, ROE, Expensive Rate of Net Assets Ibid,
and Growth Rate of Main Operating.
Aduda et al. (2012) carried out a research entitled “the relationship between e-banking and
financial performance among commercial banks in Kenya”. The research recognized that
22
variable as measured by investments in paperless banking, number of ATMs, and the number
of debit cards dispensed to consumers as proxy of paperless banking. The research exposed
that paperless banking has strong and significance marginal effects on ROA in the Kenyan
industry. Thus there occurs a constructive correlation between bank performance, and
paperless banking.
2.3.2 Internet Banking and Financial Performance
Internet banking and financial performance is a type of e-banking facility where
consumers’ directions are taken and attended to through the internet. Internet banking
gives clienteles the opportunity of appreciating banking services from the ease of their
homes and offices. (Onay, Ozsoz, and Helvacioglu, 2008) postulates that the rate of
acceptance of a new invention is connected to apparent relative advantage: The better the
perceived related benefit, the quicker the acceptance. In addition, the wish to advance
organizational performance is seen to be an enabler for technical change. Nevertheless,
the profits of electronic banking include a broad variety of purposes and include:
Electronic mail increases communication between persons, and the bank, in the bank,
with the bank, and peripheral parties, and amongst banks. Banks can deliver information,
and services online which consumers can pay for and collect. Banking procedures are
made more well-organized and cost operational by assimilating other features of
banking operations such as management and financial control.
De Young et al., (2006) perceived the variation in financial performance of internet
community banks in U.S. between 2009 and 2011. The outcomes found that internet
acceptance upgraded community banks’ profitability, predominantly through improved
incomes from deposit service custodies. Internet acceptance was also related with movements
of credits from checking accounts to money market deposit accounts, better use of brokered
23
of vicissitudes in loan selection mix. The findings recommended that internet acceptance was
connected with a parsimoniously and statistically important development in bank
profitability.
Ceylan et al., (2008) did a study entitled “The effect of e-banking on banks’ profitability in Turkey”. In this study, they have used bank specific variables and macroeconomic variables
to assess the result of e-banking on financial performance pointers of 14 commercial and
saving banks in Turkey in the period between the years 1996 and 2005. Results showed that
venture in e-banking is a steady process and e- banking activities has had an optimistic
consequence on performance of Turkey banking system.
Maiyo (2013) conducted a research on the result of electronic banking on financial
performance of profitable banks in Kenya. The research discovered that payments and
commission from mobile banking, debit cards, and credit cards has a important result on
returns on benefit while fees and commission from internet banking as well as the amount of
money that commercial banks capitalize in paperless banking to fix, train staff and uphold the
platforms has no or negligible consequence on return on possessions. The acceptance of
paperless banking has improved performance of commercial banks because of improved
effectiveness, efficiency, and productivity.
2.3.3 Mobile Banking and Financial Performance
Mobile banking is a deal offered by financial institutions in collaboration with mobile phone
machinists. It allows customers with busy lives to conveniently do their banking using their
phones anytime. It is about getting banking amenities to the unbanked, those who do not have
bank contact or bank accounts, and those who are at the lowest of the financial pyramid, often
living in remote areas. They obtain the profits of banking services such as being able to invest
24
Sullivan (2010) established that click and sealant banks in the 10th Federal Reserve District
experienced somewhat greater operating expenditures but balance these incidentals with
somewhat advanced fee revenue. On average, this research found no methodical indication
that banks were either aided or harmed by posing the internet delivery channel. Comparable
to the outcomes of Furst et al., this research also found that de novo click and grout banks
performed meaningfully worse than de novo brick and grout banks.
Siam (2006) assessed the properties of paperless banking on the productivity of Jordanian
banks. The outcomes of the study exposed that paperless banking services had a undesirable
influence on the productivity of banks in the short run due to improved capital costs involved
in technical and microelectronic infrastructure, cost of training to employees, and also the
cost complicated in creation of environment where the banks can function efficiently.
Nevertheless, these amenities had an optimistic influence in the long run on the productivity
of banks. The scholar suggested that banks need to carry out consciousness and elevation
campaigns to teach clients and aware them of possibility via reduced effort, time, cost, and
also to hold teaching courses for staffs to understand the e- banking business policies.
Okiro et al. (2013) conducted a study on the influence of mobile banking and internet
banking on performance of monetary institutions in Kenya. They found out that adoption of
mobile and internet banking has been sluggish because of reduced inaccessibility of
infrastructure and lack of helpful regulation for mobile and internet banking. However, the
adoption has improved performance of the banking industry as a result of improved
productivity, efficiency and productivity.
Njogu (2014) instituted that there exists a very robust relationship amongst financial
performance of profitable banks in Kenya and the electronic banking technology adoption.
25
banking, via technology which has formed greater chances to the banks to offer great
suppleness to the customers. The study also found out that the size of the bank has an
optimistic influence in the financial performance of profitable banks in Kenya. Mungai,
Maingi, Muathe, & Ndungu (2015) found out that technology and loan repayment had an
inverse relationship in Muranga County however, the study further argue that in other
countries namely Malawi, South Africa, Mozambique and India, groups who have embraced
technology have improved their micro credit loans repayment.
The banking sector has had to embrace technological variation to continue being competitive.
In search of reasonable benefits in the technical financial service industry, banks have
recognized value and differentiated themselves from other monetary institution via new
service dissemination channels (Onav et al., 2008). Banks administrative process of account
opening cut out several bucolic unfortunate as they could not be eligible to own accounts.
With antagonism banks had to streamline the procedure, and had to come up with
ground-breaking ways of doing so. Relatively a number of banks have invented various M-banking
products such as KCB Mobi-bank, Equity bank M-Kesho, M-shwari of Commercial bank of
Africa, and Family bank Pesa pap.
2.3.3 Real Time Gross Settlement and Financial Performance
RTGS is the quickest imaginable money transmission system via the banking networks that is
offered by the standby banks of countries to develop great value cash transactions securely
from one account to another. In RTGS systems disbursements are settled independently, and
instantaneously after the payment instruction, given that the remitter has cover for the
imbursement in query. Payments in RTGS systems are characteristically credit businesses,
payments introduced by the debtor. Members obtain liquidity through finance-policy loans
from the central bank, loans with development of at least one day, or by borrowing from
26
Innovation comprises of firms increasing new products or new production procedures to
better perform their processes, in which case the new produces could be based on the new
procedures (Lawrence, 2010). In the monetary services industry, invention is seen as the act
of creating and propagating new monetary instruments, institutions, technologies, and
markets, which ease access to data, trading and means of imbursement (Solans, 2003).
According to Nofie (2011), inventions in the finance sector is the influx of a new or improved
product and/or a process that depresses the cost of producing current financial services. Bank
invention includes; internet banking, mobile banking, Point of Sale Terminal, electronic
funds transfer, credit and debit cards, and real time gross settlement. The organization that
fails to influence these inventions loses its competitive benefit and market share to the
participants (Ngumi, Gakure, Waititu & Njuguna, 2013).
Makokha et al., (2015) recognized that use of RTGs does not affect the monetary
performance of the University. It also found that RTGS only safeguarded condensed cheque
leaves when paying creditors, low accounts maintenance costs, and facilitating of funds
transmission between two accounts in a shorter duration but there was other influences that
openly affected financial performance.
2.4 Summary of Literature Review and Research gaps
The researcher reviewed past researches and noted several gaps which this project pursues to
27 Table 2.1: Summary of literature review and gaps
Author Title Findings Gap
Almazari
(2011)
Measure of
monetary
performance of
seven main
Jordanian banks
Found that there is a helpful relationship
between monetary
performance and asset size, asset operation
and operational
efficiency
The research used different
variables and it was
conducted in Jordan
Kumbirai and Webb (2010)
Performance of
Monetary banks in South Africa 2005-2009
The research found that
general bank
performance improved significantly in the first
two years of the
analysis. An important change in trend is
noticed at the
beginning of the global fiscal crisis in 2007,
reaching its peak
during 2008-2009
The Study used different Variable and was conducted in South Africa
Raza et al., (2012)
Use of financial ratios to measure financial
performance
Most Scholars and
researchers use
financial to measure financial performance
Used different variables
De Young et
al., (2004)
How the internet Touches
production of and
performance at
public Banks.
Internet acceptance
upgraded community
banks effectiveness via improved revenue from
deposit service
charges.
This study was conducted in
the United states of
America.
Siam A. Z.
(2006)
Title role of the electronic
banking
amenities on the
incomes of
Jordanian banks.
The results revealed
paperless banking
amenities had an
undesirable influence on the productivity of banks in the short run.
This study focused on short run profitability of the banks and used cost of infrastructure, cost of staff
training and cost of
environment creation.
Ceylan et al., (2008)
The effect of e-banking on bank productivity in Turkey
E-banking was a steady
procedure and e-
banking activities had a confident result on
performance of
banking system.
The study used
macroeconomic variables to assess the result of e- banking.
Sullivan R. J (2010)
How has the
acceptance of
internet banking
The research found no methodical indication that banks were either
28 influenced
performance and risk at banks?
aided or harmed by giving internet delivery channel.
Adudo &
King’oo (2012)
The correlation
between e-
banking and
monetary performance among profitable banks Kenya
The research
established that there exists a correlation
between reliant
variable as measured
by ROA and the
liberated variable as
measured by
investment in paperless banking.
The relationship established is a reverse relationship and ROE and performance have not been investigated.
Maiyo (2013) The result of
automated
banking on
financial
performance of
commercial banks in Kenya.
The research revealed that commissions from debt cards, credit cards and mobile banking has an important result on returns on asset.
The study covers only one delivery channel.
Okiro et al., (2013)
The influence of
mobile banking
on performance
of commercial
institutions in Kenya.
The study established that adoption of mobile and internet banking has been sluggish due
to impaired
inaccessibility of
infrastructure and lack of helpful regulation of mobile and internet banking.
The study used different variables and the focus was also different.
Njogu (2014) The relationship
of financial
performance of profitable banks
and electronic
banking technology
The research found out that exists a very
durable correlation
between financial
performance of
profitable banks in Kenya and electronic banking
The study addressed only one delivery channel.
Makokha et
al., (2015)
Result of real
time gross
settlement on
monetary
performance of
public
universities in Kenya
The research
established that the use of RTGs does not affect the monetary
performance of the
University
Used different variables
29 Internet Banking
• Electronic Money
• Electronic Bill Payment
Mobile Banking • Cash transfers • Deposit taking
•
Real Time Gross Settlement • Interbank Transfers • Interbank settlement
Financial Performance • Return on asset
• Return on equity
2.5 Conceptual Framework
A theoretical framework is a systematic tool with numerous differences and settings. It is
used to make theoretical differences and consolidate ideas. In this study there are two key
variables that have been identified; independent and dependent variable.
Independentvariables Dependentvariable
Figure 2.1: Conceptual frame work Source: Researcher, 2017
The conceptualization seeks to examine the relationship between internet banking, mobile
banking, real time gross settlement and financial performance of commercial banks in Kenya.
In the model, the dependent variable is monetary performance of profitable banks while the
independent variables are internet banking, real time gross settlement, and mobile banking
30
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 Introduction
This chapter gives a brief description of the methodology that was used in steering the
research study. This chapter is organized into the following sections; section 3.2 explains the
research design used section 3.3 shows the populace and sample design of the study, section
3.4 shows the information collection instruments used, and lastly section 3.5 explains the data
analysis techniques and models used.
3.2 Research Design
The research design talks about the overall plan that integrates the different mechanisms of
the study in a logical way, ensuring that the research successfully address the research
problem (De Vaus, 2011). This study adopted a descriptive design in order to describe the
data and characteristics about the population. This method attempts to discover the source of
a specific event or situations. It also presents evidences concerning the nature and status of a
situation as it happens at that time of the study. Such a method tries to define present
circumstances founded on the impersonations or reactions of the participants of the research.
It seeks to answer questions such as who, what, where, when, and how. Evocative approach is
quicker and more real-world in terms of funding and therefore allows space for flexibility
when more important new issues, possibilities and queries come up during the time of the
research (Sekaran,2010).
3.3 Target Population
The target population for the study was census of 43 commercial banks in Kenya. The
31
that; target populace denotes to the whole group of personalities or objects to which scholars
are interested in simplifying the assumptions.
3.4 Data Collection
The study used census of 43 commercial banks as population. This universe method allows
greater data accuracy. It also gave the researcher an opportunity to gather more knowledge on
the study problem.
3.4.1 Data Collection Instruments
The study relied on secondary data extracted from Central bank of Kenya bank’s supervision
reports and printed audited yearly reports of the 43 commercial banks. With the secondary
data composed, returns on assets and Equity for the pertinent years was calculated. The
data collected covered the period 2012-2016.
3.4.2 Data Collection Procedure
The study used ancillary data found in the central bank performance results for the period
covered in the study. The researcher used secondary data and adopted the hypothesis driven
approach, a priori the researcher used the hypothesis and looked for dataset to address the
hypothesis.
3.5 Data Analysis and Presentation
The study used both descriptive and inferential figures in evaluating the data. Examination
was carried out with the assistance of Statistical Package for Social Scientists (SPSS).The
study used secondary data. The data was be fed into the computer, and study was done.
Descriptive statistics such as mean score, rate of recurrence or frequencies and percentages
for each variable were computed and formulated using frequency distribution tables. In order
to test the relationship between the variables the inferential tests including the Pearson
