THE EFFECT OF M-PESA TECHNOLOGY STRATEGY ON THE 
PERFORMANCE OF KENYA COMMERCIAL BANK LTD
JUNE NDETE MUTUKU
A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILMENT OF THE 
REQUIREMENT OF MASTER OF BUSINESS ADMINISTRATION, SCHOOL 
OF BUSINESS, UNIVERSITY OF NAIROBI.
\
DECLARATION
I declare that, this research project is my own original work and has not been presented 
for award of any degree in any University.
Signed:
Date__
Name: June Ndete Mutuku
Reg no: D61/70101/2009
Declaration by the Supervisor
This research project has been submitted for the course examination with my approval 
a University supervisor
Name: Dr .Z.B. Awino. PhD 
Senior Lecturer,
School of Business Administration, 
University of Nairobi
ACKNOWLEDGEMENTS
I am truly grateful to all the people who assisted me in various ways in order to complete 
this study. First, I am very thankful to God for enabling me to be in good health and 
being able to carry out the project successfully.
My thanks also go to my supervisor Dr. Zachary Awino for dedicating his time and effort 
to guide me. This undertaking would not have been possible without her comments, 
advice, criticism and suggestions.
I would like to say a big thank you to my guardians, Mrs. Phylis Mumbua Makau and 
Regina Munene whose support, love, belief, encouragement and prayer were invaluable 
and of great benefit to my successful completion of this project.
II
DEDICATION
This research is dedicated to my late mother Joyce Nduku who has always been an 
inspiration to me and also to my family who had to bear with my busy schedule of class, 
job and family affairs. Thank you and May God bless you abundantly
III
LIST OF FIGURES
Figure 1.1: Mpesa growth in kenya ......................................................................................6
Figure 1.2: Payment systems in kenya.....................................................................................7
Figure 1.3: Change in institutional landscape......................................................................... 8
IV
TABLE OF CONTENTS
Declaration........................................................................................................................ I
Acknowledgements..........................................................................................................II
Dedication........................................................................................................................I ll
List of Figures.................................................................................................................. IV
Abstract...........................................................................................................................VII
C H A PT E R  ONE: IN T R O D U C T IO N  ......................................................................1
1.1 Background to the Study...................................................................................................... 1
1.1.1 Concept of Strategy ................................................................................................ 2
1.1.2 Firm performance ................................................................................................... 3
1.1.3Mobile money transfer.............................................................................................. 4
1.1.4 M-pesa and performance ........................................................................................9
1.1.5 Banking sector in Kenya........................................................................................ 12
1.1.4 The Kenya Commercial Bank ltd ...................................................................... 14
1.2 Research problem...............................................................................................................15
1.3 Research Objective ........................................................................................................... 19
1.4 Value of the Study ............................................................................................................ 19
CHAPTER TWO: LITERATURE REVIEW ............................................................... 21
2.1 Introduction....................................................................................................................... 21
2.2 Conept of Strategy ......................................................................................................... 21
2.3 Technology strategy .........................................................................................................23
2.4 Mobile Banking concept.................................................................................................. 25
2.5 Operational performance ................................................................................................ 28
2.6 Mobile Banking and performance ................................................................................. 29
V
CHAPTER THREE: METHODOLOGY .................................................................... 31
3.1 Introduction........................................................................................................................31
3.2 Research Design ...............................................................................................................31
3.3 Data Collection M ethod................................................................................................... 31
3.4 Data analysis ................................................................................................................... 31
CHAPTER FOUR:DATA ANALYSIS AND INTERPRETATION OF RESULTS.32
4.1 Introduction.........................................................................................................................32
4.2 Mobile Banking ................................................................................................................ 32
4.3 M-pesa Technology strategy............................................................................................ 33
4.4 M-pesa Technology Strategy and Performance in KCB .............................................. 34
CHAPTER FIVE: SUMMARY , CONCLUSIONS AND RECOMMEDATIONS 39
5.1 Summary.............................................................................................................................40
5.2 Conclusion ........................................................................................................................ 40
5.3 Recommendations.............................................................................................................41
5.4 Limitations of the Study .................................................................................................. 41
5.5 Implications for Policy, Theory and Practice .............................................................. 42
5.6 Areas of Further S tudy..................................................................................................... 43
REFERENCES...................................................................................................................... 44
APPENDICES........................................................................................................................47
APPENDIX I: Key Informant Interview Guide ............................................................. 47
APPENDIX II: Introduction letter.....................................................................................51
APPENDIX in : Data Collection Letter............................................................................ 52
APPENDIX IV: Data Collection Approval Letter..........................................................53
VI
ABSTRACT
The spread of mobile phones across the developing world is one of the most remarkable 
technology stories of the past decade. Buoyed by prepay cards and inexpensive handsets, 
hundreds of millions of first-time telephone owners have made voice calls and text 
messages part of their daily lives. However, many of these same new mobile users live in 
informal and/or cash economies, without access to financial services that others take for 
granted. Indeed, across the developing world, there are probably more people with 
mobile handsets than with bank accounts. Various initiatives have been used mobile 
phones to provide financial services to “the unbanked.” These services take a variety of 
forms—including long-distance remittances, micropayments, and informal airtime 
bartering schemes—and go by various names, including mobile banking, mobile 
transfers, and mobile payments. Taken together, they are no longer merely pilots; in the 
Philippines, South Africa, Kenya, and elsewhere, these services are broadly available and 
increasingly popular. Kenya commercial bank ltd is a leading and dominant Kenyan bank 
with a strong countrywide presence. The bank remains very strong in key parameters 
with the largest balance sheet (KShs 251.4billion), capital base (Kshs 39.1 billion) and a 
branch network (218) as at 2010. To better its way of doing business and align to current 
practices including the statutory requirements, the bank’s structures, processes and 
systems have continued to change. This research was conducted to establish the effect of 
the M-pesa technology strategy on the performance of KCB ltd. The researcher used case 
study design since the research is descriptive in nature. Both the primary and secondary 
sources of data were used to obtain information for the study. Respondents were three 
employees in the Money Transfer Services department in Kenya Commercial Bank Ltd.
VII
The interview guides were administered through a face to face interview. The researcher 
used Content Analysis to analyze the data, because content analysis involves observation 
and detailed description of objects, or things, and the errors which occur during the study 
are easily detected and corrected. The introduction of the topic is covered in Chapter 
one, literature review in chapter two covers the theoretical and empirical materials, 
chapter three covers the methodology used, while chapter four and five are the research 
findings and summary of the findings respectively.The research findings show that Kenya 
commercial bank took a beneficial strategic step to keep up with the dynamic market. 
What drives a business growth is technological innovation and successful management 
lies in skilful allocation of resources to bring about the technological change. There has 
been increasing importance of technological innovation and strategy guiding the 
acquisition and deployment of technological resources for competitive growth. The bank 
industry has come up with technological strategy to keep up with the expectations of the 
customers. However there are various challenges which are associated with M-pesa 
technology strategy, these being the system being prone to fraudsters, systems upgrades 
which leaves the customers disappointed and difficulties in reconciliations of the 
accounts when the transactions are many or when there are system errors.
VIII
CHAPTER ONE: INTRODUCTION
1.1 Background of the study
Morawczynski and Pickens (2009), argue that Mobile Money Transfer (MMT) is a peer to 
peer form of mobile payment mechanism which has the best prospects for success amongst 
other forms of mobile transactions. The money transfer has been in existence since the time 
the money was invented by man. Man has moved from one place to another in search of 
work and in many cases, leaving the family behind in his hometown. The families’ back 
home get support from the money the migrant population sends back home. Forms of 
money transfer have changed over the years. The most primitive method being either 
carrying the money themselves when they visit back home or send it through a friend or 
acquaintance. For the last many years, many people have been dependant on Postal 
Services to remit money home.
This service was popularly known as money order in many countries including Great 
Britain. Postal services are known to have branches where even the banks do not offer 
services. This envious position of postal departments was challenged with emergence of 
banks, however, these two institutions have been taken over by mobile services as their 
distribution network starts to outnumber other traditional distribution networks. Today, 
mobile operators have the largest distribution network in any developing economy and 
hence are in a better position to remit money from one location to another.
Developing countries are severely constraint by the physical infrastructure of the 
financial institutions which means that a large part of its population is excluded from the
1
formal banking system. Kenya has just 840 bank branches and 1,510 ATMs that are 
certainly not sufficient for the 38 million people. Kenya's rapid adoption of mobile money 
is occurring with a larger global trend of increased cell phone use. There are now over 4 
billion mobile phone subscriptions worldwide, compared to 1 billion in 2002, according to 
a 2009 report by the International Telecommunications Union, a United Nations agency. Of 
those subscriptions, about two-thirds are in developing countries.
1.1.1 Concept of the Strategy
There is no universal definition of strategy. It is the direction of and scope of an 
organization or institution over the long term, which achieves advantage through 
configuration of its resources within a changing environment, to meet the needs of the 
market and fulfill stakeholders’ expectations. Technology is the making, usage and 
knowledge of tools, techniques, crafts, systems or methods of organization in order to solve 
a problem or serve some purpose. A Technology strategy (e.g. as in information technology 
(IT)) is a particular generation of an organization's overall objective(s), principles and 
tactics relating to the technologies that the organization uses.
According to Max Weber (1987), a theory is an explanation that tells why or how 
things are related to each other. Management theory, developed over the past century, 
describes how companies plan, organize, staff, lead and control their employees. 
Various Theories have been used to explain the technological strategy, for instance, Game 
theory was first developed into its mature form by mathematicians such as John Nash 
after World War II, and quickly found applications in business management, and goal 
setting as a strategic theory was first developed by Edwin Locke in the 1960s,
2
motivational theories seek to understand the internal dynamics o f a business and how it 
can best succeed through different strategies of motivation. Notable ideas in this field 
include drive reduction theory, which emphasizes satisfying certain innate drives of 
people, such as the need for status.
According to Porter (1986), models are frame works that are used in order to achieve 
given objectives. There are a number of mobile banking business models; the bank- 
focused model emerges when a traditional bank uses non-traditional low-cost delivery 
channels to provide banking services to its existing customers, 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. The non-bank-led 
model is where a bank has a limited role in the day-to-day account management.
1.1.2 Firm performance
Burke (1980) argues firm performance is the systematic progress in which a firm involves 
all of employees towards improving organizational target in attainment of the firm’s 
mission and vision. Performance expectations, output and outcome are set for both 
corporate and individual departments in channeling their input towards achieving firm’s 
objectives. There is considerable support for the view that the pace of firm performance is 
accelerating as never before, and that firms have to chart their way through an increasingly 
complex environment.
Firms have to cope with the pressures of globalization, climate change, changes in 
technology, the rise of e-commerce, situations where customers and suppliers can be both
3
competitors and allies, and changes in emphasis from quantity to quality and from products 
to services. To cope with this growing complexity, firms are recognizing the need to 
acquire and utilize increasing amounts of knowledge if they are to make the performance 
necessary to remain competitive.
Pautzke (1989) clearly stated that, careful cultivation of the capacity to learn in the broadest 
sense to maximize performance of firms. For example; the capacity both to acquire 
knowledge and develop practical abilities, seems to offer realistic way of tackling the 
pressing problems of the current times. Ongoing monitoring provides the opportunity to 
check how well employees are meeting predetermined standards and to make changes to 
unrealistic or problematic standards.
According to Sorge (1997) and Whittington (1993), by monitoring continually, 
unacceptable performance can be identified at any time during the appraisal period and 
assistance provided to address such performance rather than wait until the end o f the period 
when summary rating levels are assigned. Carrying out the processes of performance 
evaluation provides an excellent opportunity to identify developmental needs.
1.1.3 Mobile Money Transfer
Mobile money transfer refers to provision and availment of banking- and financial services 
with the help of mobile telecommunication devices. The scope of offered services may 
include facilities to conduct bank and stock market transactions, to administer accounts and 
to access customized information. It is a term used for performing balance checks, account 
transactions, payments, credit applications and other banking transactions through a mobile 
device such as a mobile phone or Personal Digital Assistant (PDA).
4
The earliest mobile banking services were offered over short text message. With the 
introduction of the first primitive smart phones with WAP support enabling the use of the 
mobile webi in 1999, the first European banks started to offer mobile banking on this 
platform to their customers. Herrera (2007), points that, the advent of the technology has 
enabled new ways in money transfer business, resulting in the creation of new institutions, 
such as online banks, online brokers and wealth managers. Such institutions still account 
for a tiny percentage of the industry. Kenya's Safaricom (part of the Vodafone group) has 
the M-Pesa Service, which is mainly used to transfer limited amounts of money, but 
increasingly used to pay utility bills as well.
FSDK (2009) conducted a survey in 2008 survey of 3000 M-Pesa users; this survey of M- 
Pesa demonstrates some interesting facts that are important for regulators to consider. For 
example: 90% of customers believe their money is safe with M-Pesa- Market confidence is 
critical to maintaining stability so this high level of confidence is reassuring when 
determining whether M-Pesa products are designed appropriately.Blend of users- 20% of 
customers use M-Pesa to store value. M-Pesa is a payment product, not a savings product. 
However this demonstrates that there is latent demand for a mobile product that can deliver 
safe savings to the customer. This must be taken into account when designing regulations 
that could potentially expand the functionality of mobile payments products.
5
70% of users are already banked- Is M-Pesa really reaching the unbanked? It should be 
understood why this number is so high and if this represents the initial stages of 
development where, with targeted regulations, the industry can begin to offer products that 
provide greater access to those who are truly unbanked.
M-pesa growth
30,000
* Total Mobile Active* customers as at end of (cumulative)
Fig 1: Source: FSDT presentation 2009 at Kenya commercial bank
6
This graph shows that the extraordinary and explosive growth of M-Pesa. There is little 
doubt that it has changed the financial services landscape and the expectations of what is 
possible.As yet formally M-Pesa is only a money transfer service. Its potential is for much 
broader services but this is dependant establishing the appropriate regulatory guideline.
Throughput across payment system in Kenya
annonn
700000
737,22 9
600000
1 I
............................................................................. ■ I
snoooo
■ '4
400000 f t ' —
100000
........................................................ ' ....... ~ ................
283,009
700000
High value
navmont
Retail
100000
0
system
72.923
systems
3,250
54,741 uo.i/u
1,477* 6.996 2,639
... 1,776
RTGS(KEPSS) ACH (Cheques) ACH (EFTs) ATM MOBILE 
Value (m) ■ Volume
Figure 2 Source: FSDT presentation 2009
While the the growth of M-Pesa has been explosive its total value is very small in 
comparison with other payment system flows. This does not take away from the potential 
of M-Pesa but it is important to keep in context the risk that M-Pesa poses to the financial 
system as a whole.
7
A changing institutional Landscape
□ 2009 12006
60.0
50.0
40.0 
%30.0
20.0
10.0 
0.0
Figure 3
Here we see that the institutional landscape is changing quite rapidly over the course of 3 
years. Banks have increased dramatically, from 14% penetration to 21% and they appear to 
be replacing the SACCO segment. MFIs are starting to become a force by broadening there 
reach and insurance showing increase though not dramatic. M-PESA is the new 
phenomenon that has grown explosively by providing basic payment services to the 
population.
While this change in institutional landscape is dramatic there is this still a large informal 
population that is largely unchanged. It could be determined that this shift in influence 
amongst the institutions is beginning to set the stage to access the significant number of 
potential customers who have not traditionally had access to formal financial services.
50.150.6
38.4
| ' ■ J J 27 .9
327/n21.5
in .* . 141
9 - < UM H  a A ___ 6.8  5 .9JJ ~ j  1 3 : 4 T .7 0 .0---------1--- 1 1
Bank Sacco MFI Insurance M-PESA Informal Excluded
FSDT (2009) “The state of service delivery in Kenya today”
8
The challenge lies in developing a regulatory framework that can provide guidance and 
clarity to the financial services industry as a whole. The ecosystem of payment services and 
other financial products should be regulated without bias to the channel or institution, 
focusing squarely on the risk to the stability of the system and the safety of the customer’s 
funds.
1.1.4 Mobile Money transfer (Mpesa) and Performance
M-PESA is a small -value electronic payment and store of value system that is 
accessible from ordinary mobile phones. It has seen exceptional growth since its 
introduction by mobile phone operator Safaricom in Kenya in March 2007: it has 
already been adopted by over 9 million customers (corresponding to 40% of Kenya’s 
adult population) and processes more transactions domestically than Western Union 
does globally. The M-PESA service was developed by mobile phone operator Vodafone 
and launched commercially by its Kenyan affiliate Safaricom.
According to KCB (2010), it has continuously embraced technology; where it introduced a 
mobile telephone banking facility for its customers in 2009. The product commonly as 
KCB connect that has changed the lives and financial lifestyles of mobile subscribers in 
Kenya estimated at 17 million. The mobile banking service provides full banking services 
on the telephone handset at the touch of a button, including enquiries, banking instructions, 
funds Critical to the success of M-Pesa is an understanding of the customer profile. This is 
also critical to the establishment of regulations that meet the needs of the customer.
FSDT (2009b) noted that getting cash into the hands of people who can use it is limited on 
the supply-side rather than demand-side; more than the shortage of funds, it’s the ability to
9
move money from the sender to the receiver that is the stumbling block. Since the creation 
of money, the ability to move it from A to B—the so-called “velocity of money”—has been 
a fundamental cornerstone of economic activity. But the issue is exactly how money 
transfer is made to happen in an emerging market where the infrastructure is poorly 
developed and where very few people have or even want bank accounts. Mobile Money 
Transfer platform is instrumental in substituting the banking infrastructure as in most of the 
emerging markets, the mobile phone penetration far out numbers the bank account 
penetration (by a ratio of 3:1, i.e. for every one bank account holder, there are three mobile 
phone owners).
M-PESA has been instrumental in driving growth and development in Kenya. The World 
Bank estimates that reducing remittance commission charges by 2-5% could increase the 
flow of formal remittances by 50-70%, boosting local economies. Reducing the cost of 
each individual remittance would enable the delivery of lower value remittances than 
today’s average transfer value of US$200. M-PESA has resulted in higher remittance and 
hence higher economic activity leading to faster growth. CGAP in its survey has found that 
the incomes of rural recipients increased by 5- 30% since they started using M-PESA.
Developing countries are severely constraint by the physical infrastructure of the 
financial institutions which means that a large part of its population is excluded from 
the formal banking system. M-PESA with its 15000 agents is much more accessible to 
an ordinary Kenyan. M-PESA helped banks in their geographical locations and other 
the Micro Finance Institutions (MFIs) to go deeper into the remote areas very quickly 
without substantial increase in the cost.
10
M-PESA provides unbanked mobile phone users with a secure platform which uses 
simple, tailored menus on their phone to send fully encrypted and PIN locked messages 
to a thoroughly audited financial accounting system. It was observed by CGAP that M- 
PESA not only increased the MFI activity but is also used as a medium o f storage of 
money. Informal saving channels are much less secure than formal saving facilities. 
Those who can afford it least suffer the highest risk. Both the banked as well as 
unbanked customers of M-PESA are using it as storage medium as it is 
easily accessible.
Many people in emerging economies have to travel far from home to find work and 
need to be able to send money back to their families so they can pay bills. 
Traditionally, this has meant high fees, risky unregulated services, or long expensive 
trips carrying cash in an unsafe and unpredictable environment. It has been observed 
that M-PESA users needed to make fewer trips back home to deliver money and the 
transaction size also came down with frequent transfers. Unlike bank, the M-PESA 
service is accessible 24X7 and money can be sent anytime, anywhere. However there 
are key challenges in adopting the M-PESA strategy:-Security of financial transactions, 
being executed from some remote location and transmission of financial information over 
the air, are the most complicated challenges that need to be addressed jointly by mobile 
application developers, wireless network service providers and the bank’s IT departments.
Another challenge for the bank is to scale-up the mobile banking infrastructure to handle 
exponential growth of the customer base. With mobile banking, the customer may be 
sitting in any part of the world (true anytime, anywhere banking) and hence banks need to 
ensure that the systems are up and running in a true 24 x 7 fashion. As customers will find
11
mobile banking more and more useful, their expectations from the solution will increase. 
Banks unable to meet the performance and reliability expectations may lose customer 
confidence. There are systems such as Mobile Transaction Platform which allow quick and 
secure mobile enabling of various banking services.
Due to the nature of the connectivity between bank and its customers, it would be 
impractical to expect customers to regularly visit banks or connect to a web site for regular 
upgrade of their mobile banking application. It will be expected that the mobile application 
itself check the upgrades and updates and download necessary patches (so called "Over the 
Air" updates). However, there could be many issues to implement this approach such as 
upgrade / synchronization of other dependent components.
1.1.5 Banking Sector in Kenya
Central Bank of Kenya notes that the banking sector in Kenya comprises o f 45 institutions, 
41 of which are commercial banks, 3 mortgage finance companies, one non-bank financial 
institutions and one building society as at December 2006, according to CBK annual 
reports. However, Gulf African banks Ltd commenced banking business in November 2007 
which increased them to 46 institutions by December 2007.0ut of the 45 institutions, 34 
were locally owned. The foreign Banks comprised of 6 locally incorporated and 5 branches 
of foreign incorporate institutions. As depicted from the CBK reports, local banks 
dominates the Kenyan banking sector in terms of numbers, but only account for 48.2% of 
the sector’s total assets, closely followed by the foreign owned banks with 43% of the 
sectors assets. The Kenyan banking sector has continued to record impressive growth in the 
last few years. For example is the period ended December 2007, the overall profitability
12
rose by 30 percent while the asset portfolio expanded by 26.1 percent over the previous 
year. The banking sector performance indicators improved with a decline in the stock of 
non-performing loans and enhancement of capital adequacy ratios attributed mainly to 
fresh capital injections and retention of profits over the period
According to CBK, (2009), Kenyan banks have exponentially embraced the use of 
information and communication technologies in their service provision. They have invested 
huge amounts of money in implementing the self and virtual banking services with the 
objective of improving the quality of customer service. Some of the ICT-based products 
and services include the introduction of SMS banking, ATMs, Anywhere banking 
software’s, Core banking solution, Electronic clearing systems and direct debit among 
others. In mid 2005, Kenya’s banking Industry moved a milestone by introducing Real 
Time Gross and Settlement system (RTGS) which was renamed Kenya Electronic Payment 
and Settlement system (KEPSS). This will facilitate the inter-bank financial data transfer. 
The adoption of technology and development of e-banking services is expected to 
decongest banking halls and reduce the incidences of long queues in banking halls. Digital- 
based financial services have made a significant contribution in covering the cost of 
offering financial services.
The banking industry has also over years continued to introduce a wide range of new 
products, prompted by increased competition, embracing ICT and enhanced customer 
needs. As a marketing strategy, the new products offered in this segment of market, 
continue to assume local development brand names to suit the domestic environment and 
targeting the larger segment of local customer base. Among the products, include Islamic 
banking which was introduced in 2005, tailored in line with “Shariah” principles.
13
Currently, Barclays Bank of Kenya, Kenya commercial Bank, K-Rep-Bank and Dubai 
Bank have so far introduced Islamic banking products in the market. All the above clearly 
indicate that, Kenya’s banking Industry has great developments like any other banking 
market in the world.
1.1.6 The Kenya Commercial Bank Ltd
The history of KCB dates back to 1896 when its predecessor, the National Bank of India 
opened an outlet in Mombasa. Eight years later in 1904, the Bank extended its operations to 
Nairobi, which had become the Headquarters of the expanding railway line to Uganda. The 
next major change in the Bank’s history came in 1958. Grindlays Bank merged with the 
National Bank of India to form the National and Grindlays Bank. Upon independence the 
Government of Kenya acquired 60% shareholding in National & Grindlays Bank in an 
effort to bring banking closer to the majority of Kenyans. In 1970, the Government 
acquired 100% of the shares to take full control of the largest commercial bank in Kenya.
National and Grindlays Bank was renamed Kenya Commercial Bank. KCB is a fully 
fledged commercial bank offering savings and lending services to individuals, 
entrepreneurs and companies of all sizes. It has the largest branch network in East Africa 
and enjoys dominance as the Bank with largest balance sheet and capital base, respectively, 
in the region. It is a publicly quoted company with its shares trading at the Nairobi Stock 
Exchange (NSE), Uganda Securities Exchange, Dare-Es-Salaam Stock Exchange and 
Rwanda Over the Counter Market. The bank has impressed the use of technology in its 
services. Some this technology include electronic banking and Mobile Money transfer.
14
KCB has continuously embraced technology; where it introduced a mobile telephone 
banking facility for its customers in 2009. The product commonly as KCB connect that has 
changed the lives and financial lifestyles of mobile subscribers in Kenya estimated at 17 
million. The mobile banking service provides full banking services on the telephone 
handset at the touch of a button, including enquiries, banking instructions, funds transfers 
and utility bill payments. A key differentiator between KCB connect and other offering in 
the market is the ability of all mobile telephone subscribers to open accounts on their 
phones that will enable them to transact with KCB. Working with one of Kenya’s major 
mobile telecommunications service provider, the Bank has put in place the necessary 
infrastructure to enable customers to transfer funds from one KCB account to another, from 
KCB to the revolutionary and trend setting M-pesa service and vice versa and from any 
KCB account to any phone account of the customer’s choice.
1.2 Research Problem
Porter and Miller (1985) urged that technology adoption is strategic to the extent that it 
supports or enables the firms, business strategy. The advantage o f technology is the 
ability to link on activity with the other and make real time data widely available 
through such tools as electronic data interface, internet, and enterprise resource 
planning and customer relationship management. This has created a very strong 
perception that performance can be enhanced by advanced technology and a workable 
strategy.
Concept of Mpesa technology strategy dates back to March 2007, following a donor- 
funded pilot project, Safaricom launched a new mobile phone-based payment and money
15
transfer service, known as M-pesa. The services allows users to deposit money into 
accounts linked to their cell phones, to send balances using SMS technology to other users 
(including sellers of goods and services), and to redeem deposits for regular money. 
Charges, deducted from users’ accounts, are levied when e-money is sent and cash is 
withdrawn. By August 2009, 7.7 million M-PESA accounts had been registered; this means 
38% of adult population of Kenya had gained access to M-PESA in just two years. 
Although M-PESA has been adopted by both the banked and unbanked in roughly equal 
proportions, registered M-PESA users can make deposits and withdrawals of cash with 
agents, who receive a commission on a sliding scale for both deposits and withdrawals, 
however, withdrawals can only be effected if the agent has sufficient funds. But 
symmetrically, cash deposits can only be made if the gent has sufficient e-money balances 
on his/her phone. Agents face a nontrivial inventory management problem, having to 
predict the time profile of net-e-money needs. Despite being touted as a financial inclusion 
service, M-Pesa user households are twice more likely to have a bank account than non­
user households. It is young, male, urban migrants who are driving the uptake of services -  
customer adoption. Hence, the adoption is not uniform across social strata.
While efforts have been made to survey the various relevant empirical studies, it was 
discovered that two studies (Nyangosi, et.al, 2009 and Barako and Gatere, 2008) attempted 
to study Technology in Kenyan Banks. Banks in Kenya, have adapted different 
technologies through which e-banking services are provided. In the two studies, customers 
were asked to indicate the various technologies their banks have adopted. This was 
enquired to know if the customers are aware of the technologies provided by their banks. 
Seven common technologies were selected to present the variables which include ATM,
16
Internet banking, Tele-banking, SMS banking, PC banking, Debit cards and Credit cards. 
The variables were labeled and results revealed that Kenyan customers are seen to favor 
ATM banking at 92.0%, followed by debit cards at 58.4% and credit cards at 53.6%. Cards 
banking in general dominate e-banking adoption in Kenya. The least favored were mobile/ 
SMS banking at 46% and PC banking at 20.8%/ The least favor on the PC banking may be 
attributed to the fact that computer penetration in Kenya is very low and hence many banks 
have utilized the technologies other than PC and SMS banking, it may be due to 
infrastructural problems.
The third study by Safaricom Telecommunication Company (January 2007), respondents 
indicated that they support the usefulness of SMS banking, but could not access these 
services, especially in the rural areas in Kenya. These findings led to the introduction of 
M-pesa as means of capping the menace of shortage of financial intermediaries in the rural 
areas. The results further showed that customers use bank websites to know the products, 
use internet banking to check balances, know after sales services and buy products. This is 
a show that internet banking is gaining popularity and becoming vital in financial 
transaction events. However, the overall look indicates that the IT state in Kenyan Banks is 
at initial stages.
According to two studies by Central Bank of Kenya (January 2008 and May 2009), entry of 
M-Pesa in financial transaction has enhanced technological advancement of banking 
industry. It has seen exceptional growth since its introduction by mobile phone operator 
Safari com in Kenya in March 2007: it had already been adopted by over 9 million 
customers (corresponding to 40% of Kenya’s adult population) in December 2008, and
17
processes more transactions domestically than Western Union does globally. The M-pesa 
service was developed by mobile phone operator Vodafone and launched commercially by 
its Kenyan affiliate Safaricom. All transactions are authorized and recorded in real time 
using secure SMS, and are capped at $ 500. Generally, M-pesa service of sending and 
receiving money via Safaricom subscribed clients is coupled with a number of challenges 
that include excess electronic float or liquid cash. This occurs when there are too much 
transactions of the same type without offsetting transactions on the other side. For 
incidence, M-pesa agents gets many deposits without offsetting withdrawals, leading to 
situation where they cant take any more deposits because there e-float is diminished.
From the above studies, it shows that no adopted technology has been overly dominant 
in the banking industry, due to the ever changing technological innovation, the change 
in consumer preference and many customers remain unreached. The project will clarify 
the impact o f M-PESA technology in the banking industry. Therefore the study seeks to 
answer the following: What is the effect o f M-PESA Strategy adoption by KCB, in its 
performance as a financial service provider?
1.3 Research Objectives
To assess the effect of M-pesa technology on performance of KCB.
1.4 Value of the study
The M-Pesa technology has greatly changed the performance in the banking sector. A 
number of studies have been made on practice related to delivery of services. According to 
Nyangosi, et.al (2009), effectiveness and efficiency has been realized in the banking sector;
18
M-pesa has removed repetitive, time consuming tasks, reduced human error and extended 
access to banking related facilities. Telephone traction allows non-cash transactions to be 
carried out, which would have required a visit to a branch earlier. Cost Reduction: this 
feature has been realized and well understood by the banking industry KCB and the 
banking industry in general. M-Pesa has enhanced the blossoming and adoption o f the 
electronic banking and Internet has seen banks realize enormous cost savings by moving a 
myriad of services online. From customer service centers, to online tracking of packages 
and to online brokerages.
Safaricom (2010) notes in the assessment report that M-Pesa has created financial inclusion 
to an ordinary Kenyan; it has helped KCB and other banking institutions in their 
geographical locations to go deeper into rural areas without substantial increase on the cost 
of expansion. Two studies by Central Bank of Kenya (2010), notes that M-Pesa has 
enhanced the commercial banks’ innovation of services. Mobile phone service provider 
Safaricom signed a deal with Kenya Commercial Bank (KCB) for Agent to Agent 
transactions that has helped improve availability of M-PESA in the market. With the 
signing of the deal, authorized M-PESA agents instantly access M-PESA when they make 
cash deposits at the bank.
With the introduction of the KCB partnership, M-PESA Agents have an alternative and 
quicker process to access M-PESA or cash at a nominal commission to the bank. To use the 
service, agent outlets register their authorized personnel with KCB. Pilot testing for Agent 
to Agent transactions began in February 2009 with Safaricom testing the service with 20 
agent outlets and 16 KCB branches in different parts of the country.
19
Following the successful pilot, the service is now available at all 145 KCB branches and 
has been introduced to over 9,000 M-PESA agents around the country. M-Pesa created the 
opportunity for the innovative service by KCB. The purpose of this research will be to 
generate more information on M-PESA for strategic service delivery of KCB, focusing on 
the opportunities created by M-PESA, challenges, existing gaps with intention o f filling the 
gaps and improvement of service delivery. The study shall be important to the management 
of KCB In regard to strategic planning.
20
CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction
This chapter reviews literature related to the subject matter that is Mobile money transafer 
technology strategy and performance of Kenya Commercial Bank. Secondary data from 
minutes and periodic reports, text books, journals published and unpublished materials will 
be explored. Information will be recorded in thematic approach that comprise of concept of 
strategy, technology and strategy; mobile banking concept, performance indicators, mobile 
banking and performance.
2.2 Concept of the Strategy
According to Mintzberg et al, (1998), Strategy as a long term plan of action to achieve a 
particular goal is important in achieving competitive advantage over others, this can be 
through technology strategy as a particular generation of an organization's overall 
objective(s), principles and tactics relating to the technologies that the organization uses. 
Such strategies primarily focus on the technologies themselves and in some cases the 
people who directly manage those technologies.
Management theory has become a well developed discipline, with many theories that seek 
to predict the best strategy in a given set of situations. Many successful managers have 
found applications for these theories in the real business world. Having a good working 
knowledge of some of the more prominent strategic theories will provide you with tools to 
process information better, both in the short-term and the long-term. Furthermore, the best 
of theories will provide new perspectives.
21
According to Porter (1986), models are frame works that are used in order to achieve given 
objectives. There are a number of mobile banking business models, 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 banks or non banking service 
provider. The banking agent is an important part of the mobile banking business model 
since customer care, service quality, and cash management will depend on them.
These models differ primarily on the question that who will establish the relationship 
(account opening, deposit taking, lending etc.) to the end customer, the Bank or the Non- 
Bank Company like Safaricom. Another difference lies in the nature of agency agreement 
between bank and the Non-Bank.
Tiwari, Rajnish and Buse, Stephan(2007) noted the models of branchless banking can be 
classified into three broad categories - Bank Focused, Bank-Led and Nonbank-Led. 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.
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
22
promises the potential to substantially increase the financial services outreach by using a 
different delivery channel (retailers/ mobile phones), a different trade partner 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. In this model customer account relationship rests 
with the bank
The non-bank-led model is where a bank has a limited role in the day-to-day account 
management. Typically its role in this model is limited to safe-keeping of funds. Account 
management functions are conducted by a non-bank who has direct contact with individual 
customers.
2.3 Technology and strategy
Adelman (2000) noted that a particular generation of an organization's overall objective(s), 
principles and tactics relating to the technologies that the organization uses. Such strategies 
primarily focus on the technologies themselves and in some cases the people who directly 
manage those technologies. Technological strategy can be achieved through Theories and 
Models. Schipke (2004) notes that, a theory is an explanation that tells why or how things 
are related to each other. Management theory, developed over the past century, describes 
how companies plan, organize, staff, lead and control their employees. Effective managers 
get people to accomplish goals and use materials wisely to achieve profitability and 
maintain a competitive advantage.
23
Advances in technology have enabled standardization, automation and globalization at a 
rate that early management theorists probably never thought possible. In businesses large 
and small, all departments, including marketing, sales, finance and manufacturing, now 
typically depend on the company's IT infrastructure to manage the operations and functions 
necessary to complete business processes. Management theory has become a well 
developed discipline, with many theories that seek to predict the best strategy in a given set 
of situations. Many successful managers have found applications for these theories in the 
real business world. Having a good working knowledge of some of the more prominent 
strategic theories will provide you with tools to process information better, both in the 
short-term and the long-term. Furthermore, the best of theories will provide new 
perspectives.
Potts in Fuition (novel) conveys through the book's characters that an IT strategy needs to 
be focused on creating and measuring business value from the business investment in IT, 
and not as traditionally done which is starting with IT and figuring out how to deliver 
business value. Other generations of technology-related strategies primarily focus on: the 
efficiency of the company's spending on technology; how people, for example the 
organization's customers and employees, exploit technologies in ways that create value for 
the organization; on the full integration of technology-related decisions with the company's 
strategies and operating plans.
According to Porter (1986), models are frame works that are used in order to achieve given 
objectives. There are a number of mobile banking business models, however, no matter 
what business model, if mobile banking is being used to attract low-income populations in
24
often rural locations, the business model will depend on banking agents, i.e., retail or postal 
outlets that process financial transactions on behalf of banks or non banking service 
provider. The banking agent is an important part of the mobile banking business model 
since customer care, service quality, and cash.
2.4 Mobile banking concept
Mobile banking is used in many parts of the world with little or no infrastructure, 
especially remote and rural areas. This aspect of mobile commerce is also popular in 
countries where most of their population is unbanked. In most of these places, banks can 
only be found in big cities, and customers have to travel hundreds of miles to the nearest 
bank. Yankee Group (2009), Mobile banking is used in many parts of the world with little 
or no infrastructure, especially remote and rural areas. This aspect of mobile commerce is 
also popular in countries where most of their population is unbanked. In most of these 
places, banks can only be found in big cities, and customers have to travel hundreds of 
miles to the nearest bank.
Wallace, Neil (2005), notes that, In Iran, banks such as Parsian, Tejarat, Mellat, Saderat, 
Sepah, Edbi, and Bankmelli offer the service. Banco Industrial provides the service in 
Guatemala. Citizens of Mexico can access mobile banking with Omnilife, Bancomer and 
MPower Venture. Kenya's Safaricom (part of the Vodafone Group) has the M-Pesa 
Service, which is mainly used to transfer limited amounts of money, but increasingly used 
to pay utility bills as well. In 2009, Zain launched their own mobile money transfer 
business, known as ZAP, in Kenya and other African countries.
25
Telenor Pakistan has also launched a mobile banking solution, in coordination with 
Taameer Bank, under the label Easy Paisa, which was begun in Q4 2009. Eko India 
Financial Services, the business correspondent of State Bank of India (SBI) and ICICI 
Bank, provides bank accounts, deposit, withdrawal and remittance services, micro­
insurance, and micro-finance facilities to its customers (nearly 80% of whom are migrants 
or the unbanked section of the population) through mobile banking. In a year of 2010, 
mobile banking users soared over 100 percent in Kenya, China, Brazil and USA with 200 
percent, 150 percent, 110 percent and 100 percent respectively.
According to Jack and Suri (2009), a bank with a footprint of 100 branches and 250 ATMs 
and an average daily deposit/withdrawal volume of 165 branch transactions and 65 ATM 
transactions, could expect to save about $5 million annually if the bank were able to 
convert 20 percent of those branch and ATM transactions to its mobile channel. Features 
such as remote check deposit or P2P will enable those transactions to take place through 
the mobile channel — and reduce dependency on branches or ATMs.
IMF (2006), In countries as diverse as China, Brazil and Kenya the number of new users of 
Mobile Banking soared over 100% in 12 months, as banks leapfrogged traditional service 
models and moved directly to mobile. The increases were not restricted to emerging 
markets alone though: take-up rates also surged in the UK, USA, Singapore, South Korea 
and Sweden where banks offered customers new services via their mobile handset. 
Analyzing the findings, James Fergusson, Global Technology Sector Head at TNS, 
said:"Mobile finance technologies have the tremendous capacity to be transformational in 
rapid growth markets, empowering consumers by giving them greater access to financial 
services."
26
"The necessity, marked interest and the blossoming mobile finance infrastructure means 
that countries such as Brazil and China have the right ingredients to drive mobile finance 
growth, not just in their own markets, but globally as well."The research has been released 
as part of TNS Mobile Life, an annual report on mobile consumer usage, and reveals a 
wealth of opportunities for banks, retailers and mobile service providers to develop for 
existing and potential customers.
In the UK the proportion of people using mobile banking increased from 9.7% in 2010 to 
20.4% in 2011, while in the USA the rates from 11.4% to 21.9%. In Sweden it was greater 
still: 8.1% to 20%. And while adoption rates increased, desire for mobile banking in areas 
where it is not widespread is strong, peaking in sub-Saharan Africa, where almost two- 
thirds (63%) of mobile owners expressed an interest in mobile banking.
Bob Neuhaus, Global Finance Sector Head at TNS, said: "A significant proportion of the 
world's population does not have access to banking services. Making mobile banking easy 
to access in these markets will not only help create a more sophisticated consumer 
marketplace and drive development of the banking sector, but also provides a huge 
opportunity for the mobile industry."
"Our insights from the Mobile Life study demonstrate that in more mature markets, mobile 
banking is simply a matter of convenience, and largely an extension of the PC online 
experience - allowing the same online convenience, while mobile; however in developing 
markets mobile may provide an entry point to banking for millions o f ’unbanked’ people, in 
countries where banking infrastructure is poor, and banking restrictions create barriers”.
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2.5 Operational performance
According to Jack and Suri (2009), profit efficiency is one of the indicators of firm 
performance. For incidence, frontier efficiency computed using a profit function -  is a 
more appropriate measure. It controls for the effects of local market prices and other 
exogenous factors and because it provides a reasonable benchmark for each individual 
firm’s performance. Profit efficiency accounts for how well firms raise revenues as well as 
control costs for value maximization. Standard profit efficiency measures how close a firm 
is to earning the predicted profit that a best practice firm would earn facing the same 
exogenous conditions.
Wilson, Watson and Summers (1995), points out that, revenue growth is another aspect of 
performance indicator. Monetizing the value of customer analytics, delivering greater real­
time access to products and services; expanding distribution and coverage models. Mobile 
money transfer performance can be measured in the potential to expand beyond the 
geographical footprint as well as ability to cross sell and up-sell products to existing 
customers.
Thompson (2001) argues that, firms that harness these additional mobile financial services 
capabilities can see a profound impact on the nature of the money transfer relationship. 
This puts banks in a specific position to develop a new line of business focused on 
bundling data analytics for retailers and other entities vying for customer intelligence — 
while maintaining the privacy of individual customers’ information. Merchants could 
employ such aggregated information to target customers more effectively than they might 
through other means.
28
In addition, banks could use this knowledge of their core customers to strengthen their own 
abilities to acquire new customers, cross-sell existing customers, improve decision making 
capabilities and provide better customer service — resulting in significant value streams for 
banks.
2.6 Mobile banking and performance
Morawcznksy (2004) notes that, mobile banking is on the cusp of transformation from a 
niche service for the technologically elite to a mass-market service demanded by all 
customer segments. As banks develop their strategies for giving customers access to their 
accounts through cell phones and other mobile devices, they should also regard this 
emerging platform as a potential catalyst for generating operational efficiencies and as a 
vehicle for new revenue sources. The advance of mobile money transfer is transforming the 
economics of banking, creating additional incentives for banks to serve customers in a 
better, yet more efficient, manner. Additionally, these new and convenient products and 
services provide banking institutions with a way to reconnect with their customer base and 
regain some of the trust that was lost as a result of the financial crisis.
At the same time, banks defend their performance and franchises against threats from not 
only other financial institutions, but also mobile carriers, credit card processors, and other 
nonbank competitors that want to help consumers conduct financial transactions wherever 
they — and their mobile devices — are. Bankers have been talking about using cell phones 
as a channel for consumer banking almost as long as energy companies have been trying to 
make solar power affordable, but it has taken a confluence of factors to make mobile 
banking a reality:
29
Pandey (2003) argues that, over the past several years, consumers have made mobile 
phones their preferred mobile devices. Mobile phones allow users to make calls send and 
receive e-mail and text messages, browse the Web, and perform many other tasks by 
downloading free or low-cost software applications. Like automated teller machines 
“ATMs” and online banking services, mobile phones are giving consumers more options. 
By being able to access account information and perform transactions without requiring 
access to bank branches, ATMs, or computers, consumers are able to “bank” wherever and 
whenever they want — and they are learning to expect such convenience.
According to the Central Bank of Kenya (2009), most large banks have made substantial 
investments in mobile banking capabilities, and smaller financial institutions are not far 
behind. In addition, mobile network carriers, credit card processors, and online personal 
finance services that allow consumers to aggregate their accounts on a single Web site are 
among the many nonbanks jockeying for position in this fast-growing space. The mobile 
channel allows banks to offer customers features they cannot find online, such as remote 
check deposit, person-to-person payments, and real-time fraud notification. Such features 
make mobile banking a richer experience and will drive adoption over the next few years
30
CHAPTER THREE: METHODOLOGY
3.1 Introduction
The researcher used case study design since the research is descriptive in nature. This is 
because case study investigation was able to make a detailed examination of the subjects..
3.2 Research design
Both Descriptive and explorative research design were used in this case study. This is 
because the study acquires a lot of information through description and exploratory. The 
research design sought to establish the effects of M-Pesa technology strategy in the KCB 
banking industry and the relationship between M-Pesa technology and KCB performance.
3.3 Data collection
Both the primary and secondary sources of data were used to obtain information for the 
study. The secondary data used included circulars of KCB ltd, KCB annual report 2010 and 
publications. Respondents were three employees in the Money Transfer Services 
department at the Kenya commercial bank. The respondents were the head of Money 
Transfer services, Manager and Section Head Reconciliation, Mpesa and KCBconnect. The 
researcher picked three respondents because the data to be collected will be similar.
3.4 Data analysis
Data collected was first coded and tabulated. The researcher used Content Analysis to 
analyze the data, because content analysis involves observation and detailed description of 
objects, or things, and the errors which occur during the study are easily detected and 
corrected
31
CHAPTER FOUR: DATA ANALYSIS AND INTERPRETATION OF
RESULTS
4.1 Introduction
Data was collected from Kenya Commercial Bank ltd, Money transfer services department. 
The researcher used an interview guide to conduct face to face interviews with three 
correspondents who included; the head of money transfer services department, Manager M- 
pesa and KCBconnect manager, and M-pesa and KCBconnect reconciliation Section Head. 
The researcher also used secondary sources of data which included KCB’s annual report, 
circulars and publications.
4.2 Mobile Banking
Mobile banking is the use of mobile phone to access banking services. The services include 
bill payments, transfer between accounts, cheque ordering, cheque stopping and transfer 
between accounts and M-Pesa. KCB has a mobile money treansfer service called 
KCBconnect which was revived in 2009 after it had failed previously. Bill payments 
offered include payment of school fees through the Lipa Karo account, Payments to KPLC, 
payments of Hospital bills e.g. Tenwek hospital and payments to credit and debit cards. 
KCB offers Business to Customer service (B2C) which is transfer from account to Mpesa 
and Customer to Business (C2B) service which is transfer from Mpesa to account. 
Purchase of airtime is also available which this service and account to account transfer, but 
only for accounts held by the bank.
32
The rise of the mobile telephony as a delivery channel for financial services is beginning to 
present strategic threats and opportunities that the banking sector cannot ignore anymore. 
Mobile banking is offering opportunities for money transfers (MTS), utility and salary 
payments, and banking for the un-banked. In Kenya, Mpesa has revolutionized banking in 
a dramatic and irrevocable manner. For instance, within a span of one year, the service has 
recruited over 4 M customers transferring over Kshs 3.5 billion a month in the year 2009.
4.3 M-pesa Technology strategy
M-PESA is an innovative mobile money transfer solution that enables customers to transfer 
money. It is aimed at mobile customers who do not have a bank account, either by choice, 
because they do not have access to a bank or because they do not have sufficient income to 
justify a bank account. Kenya is the 1st country in the world to launch M-PESA, which was 
done as a partnership between Safaricom & Vodafone. Based upon our success in Kenya, 
M-PESA is being considered for a number of countries across the globe.
KCB sought to use Mpesa because Safaricom owns the infra-structure and posses massive 
resources to sustain a marketing blitz, any frontal attack may be vigorously resisted as 
elucidated by the price wars with airtel. KCB was better placed to collaborate with 
Safaricom, and through its own money transfer, offer account to account services and 
transfers above Kshs 35,000 which Mpesa has no mandate to engage in.
Further, despite the popular belief that Mpesa customers are bottom of the pyramid transfer 
payment recipients, the transfers are originated by those with surplus funds who send 
transfer payments to their relatives, majority of whom are account holders with the banks 
including KCB. The service was launched to compete with the proposed KCB’s MTS,
33
Western Union, MoneyGram, Posta Pay, Equity Bank’s Benki yangu Mkononi and all 
other money transfer services. Mpesa uses the latest tool kit and sim replacement 
technology which is only available to network service providers. The sms banking 
technology is now obsolete and is slowly being replaced by USSD. This means by 
partnering with Safaricom, KCB enjoys the latest technology.
4.4 M-Pesa Technology strategy on the performance of KCB
The banking industry is a very dynamic industry which it’s ever changing technological 
strategies to cater for its customers need and also be relevant in the industry. KCB adopted 
the Mpesa techonolgy strategy a way to keep afloat in the industry since most of the banks 
were also in the same trend. M-pesa technology has been of benefit in the Kenya 
commercial bank in the following ways as analysed from the study
M-pesa Technological development has enhanced efficiency and effectiveness in KCB 
service delivery channels, it has removed repetitive, time consuming tasks, reduced human 
error which would have been caused by the cashiers. M-Pesa technology has fastened some 
processes which would have taken time. For example; funds transfer. It has to great extent 
helped to bridge the gap of unreached customers to their relatives, since money transfer is 
now easy and one does not have to walk to a branch. It’s through this parternership that 
KCB launched their mobile transfer service that is KCBconnect. Mobile transafers service 
offer service such as transferring money from account to their M-pesa and from Mpesa to 
account. M-PESA technology has enabled money transfer and other bank services to be 
accessible 24X7 and money can be sent anytime, anywhere, making the service convenient.
34
Due to the deficiency in financial institutions in developing countries this means that a 
large part of its population is excluded from the formal banking system.. M-PESA helped 
KCB in its geographical locations and other the Micro Finance Institutions (MFIs) to go 
deeper into the remote areas very quickly without substantial increase in the cost. KCB 
collaborates with Safaricom, and through its own money transfer, offer account to account 
services and transfers above Kshs 35,000 which Mpesa has no mandate to engage in.
It has also offered Super agency services to Mpesa agents who would have taken longer to 
get float from CBA where Safaricom have an account as opposed to KCB where it’s 
instant. Due to KCBs’ wide branch network, float and funds are available country wide 
moreso in the remote areas. Financial inclusion has a multiplier impact on the lives of 
people drawn into the formal financial system which leads to social inclusion. Due to the 
availability of float and funds in remote area people have been able to send money back 
and forth with ease, thus improving cash flow management in the rural area better and also 
providing avenues for saving and performing other services.
Mpesa has enhanced KCB’s monitoring trail of cash through the Mpesa technology where 
each and every transaction is registered with all the related detailed and stored in the 
system. In the absence of formal banking system, most of the transactions are cash based 
giving no audit trail to the regulators. We can say M-PESA brought in the transparency in 
the money transactions by trailing cash economy and digitizing the transactions thus 
avoiding money laundering and also reducing money in circulation as M-pesa can be used 
as a medium of storage of money making it easily available.
35
Introduction of the M-pesa technology by KCB increased Micro-economic activity. KCB 
has managed to help in bridging the gap between the bank and the unbanked. The unbaked 
are usually in the remote areas where banking facilities area unavailable. The bank through 
the Mpesa technology has made the exchange of money between two parties easily 
available, even people in the remote areas are able to pay bills through their mobile phone.
Mpesa technology strategy has seen the KCB Ltd save staff cost and other operational cost. 
The access of money has been made possible by just the touch of a button such that no man 
power or bank branches are need to perform some banking services e.g. transfer of funds 
but for amounts of not more than Kshs. 35,000. Marketing costs have also been reduced as 
cross-selling of other products can be done through sms when performing a transaction via 
phone or when an M-pesa agent walks into the branch to buy float he/she can be informed 
of other services offered by the bank.
Introduction of M-pesa in the bank has seen the bank retain its customers, as mobile 
banking a new trend in town and banks had adapted to the services, which was very 
enticing. KCB also sought to use it as an added value to the customers. It also used the 
service as a way of attracting new customers as it provided opportunities for transfers 
between the bank and the unbanked especially to customer who use M-pesa to send money 
to the rural areas. It also partnered with Safaricom Ltd to give float to the M-pesa agents 
who most of the have since opened accounts with the bank.
M-pesa has provided avenue for additional revenue to the bank. Apart from it been an 
additional service the customers, transaction done through the service accrue commission
36
at the rate of Kshs. 30 per transaction. The Mpesa agent also buys and withdraw float at the 
rate of Kshs 100 for transactions of between Kshs 35,000 and Kshs 100,000, and at a 0.1% 
for amount of more than Kshs. 100,001. The increase in customer base can also be 
translated into account holders and deposits, which can also be transacted into revenue 
earned through other bank services by the customers.
When M-PESA was introduced in the country at lower cost than the other money 
transfer services e.g. Moneygram and western union, there was decrease in commission 
raised locally by other money transfer service offered by the bank because many 
customers opted to use the M-PESA service. To recover the losses KCB found it 
necessary to partner with safaricom, M-PESA so as to raise more revenue and provide 
better platform for new relations with its customers, some of whom are M-PESA 
agents, However there are key challenges in adopting the M-PESA strategy:-Security of 
the financial transactions is only protected by the Pin number; in this case the customer 
does not have to be seen physically for a transaction to take place. Such a situation 
gives lee ways for fraudsters who are in cahoots with the service provider or even know 
the customers in formation.
KCB lack tools for monitoring the system especially when it is down undergoing 
system upgrades, these results to transactions hanging in the system inconveniencing 
the customers leading to lack o f confidence in the bank. Also due to the large customer 
base, when transactions are many there are usually credit and duplicates on the 
customer’s account or money. If this is not monitored carefully, it may lead losses to 
the bank and also reconciliation o f the related account during such periods it very 
difficult.
37
Also it is during such system upgrades that the bank is kept in dark by the services 
provider. During this upgrades its only safaricom who can access the system. This 
posses a danger to the bank because the lack of information disclosure may be avenues 
for frauds can also take place during such periods. After this system upgrade some 
phone need to be upgraded to be able to enjoy the services this causes inconveniences 
to customers who cannot access the software.
38
CHAPTER FIVE: SUMMARY, CONCLUSIONS AND
RECOMMENDATIONS
5.1 Summary
The research findings KCB has take a strategic step to improve the stability o f its core 
banking system with the increased availability and enhanced efficiency across the business 
by adapting the Mpesa technology strategy. The KCB has improved its performance as a 
result of the M-Pesa strategy contribution. During the year under review, the KCB Group 
performed extremely well, reporting a 56% increase in the pre-tax profit from ksh 6.3 
billion in 2009 to Ksh 9.8 billion.
The performance is anchored on good growth in total operating income amounting to to 
ksh 29.6 billion, which is a 29% improvement from Ksh 22.9 billion the year before and 
better management of the operating expenses at Ksh 18.7 billion, an 18% increase from 
2009, on the back of the recent investment in new core banking systems, that include 
strategic partnership with the Safaricom. Although the provision for bad and doubtful debts 
increased by 36% to Kshs 2.1 billion (2009-Ksh 1.6 billion). The recovery amounted to 
Ksh 1 billion, a 20% improvement over 2009 (to Kshs 856 million).
Customers have an ever-increasing array of banks to choose from. In these environment, 
mere delivery of products and service alone is not adequate to sustain our competitive 
KCBs’ competitive edge, thus the need to provide quality service and positively delight its’ 
customers. According to the research findings, in terms of efficient service delivery service 
the bank has invested significantly in expanding it service delivery channels to enhance
39
reach and added convenience to its customers through the use on mobile banking as a 
service delivery channel. This can be attributed to the 24-7 hour mobile banking system 
which has made banking services such as account transfers, payments of bills and also 
ordering of cheques to be accessible even at home and away from the banks.
5.2 Conclusion
The results contribute to the existing literature in several ways. First, is in relation to effects of 
M-Pesa technology in the banking industry in general. The effects are shown using factor 
analysis. The results show that perceived convenience had influence on the intention to use 
the mobile payment services. Secondly, perceived support from the mobile payment 
services provider influences the intention to use. Thirdly, perceived support from the 
mobile services provider had an impact on the perceived convenience. From a practical 
point of view, this would be consistent because the services become convenient to the user 
if they are adequately supported by the provider. Previous studies have explored 
convenience as one of the factors that contributes to the use of mobile payments. Fourthly, 
perceived ease of accessibility had an impact on the intention to use the mobile payment 
services.
The study has shown that Mpesa is viable and its success will depend on customer service 
that sets KCB apart from the rest. While the service is hardly lucrative, it offers KCB 
intrinsic value to partner with the most profitable company in East Africa, and boosts its 
corporate image and customer perception. This presents KCB with as a unique financial 
provider offering innovative banking solutions including loans to agents, account to 
account transfers.
40
5.3 Recommendations
KCB should endeavor to continue to invest in essential upgrades that would give the 
system capacity support to tap its efforts into the opportunities in the market. This is of 
importance especially during system upgrades by the service provider where it is left in the 
dark for a period of time. It can should have a meeting with Safaricom M-pesa support 
team and come up with solution of how it can part of the system upgrades so as to prevent 
cases of frauds and losses to the bank, the system should also have back ups to avoid a 
situation where the money transfer service is not offered at one particular time which 
reduces the customers confidence in the product.
Globalization and technology have been the force behind the dynamic banking industry; 
the world is now one very large market place where the customers preferences and tastes 
are also changing to accommodate their new lifestyle. M-pesa technology strategy from the 
sudy can only accommodate local customers. KCB should come up with ah technology 
which will also cater for the international 1 market like internet banking to as to stay afloat 
in this fast changing environment. For any bank to be successful it will need a large 
customer base and also capital base, thus the importance of a workable technology which is 
both efficient and effective both locally and internationally..
5.4 Limitation of the Study
Although the results can be considered statistically significant in most parts, the study has 
several limitations. To begin with, the study was based on effects of M-Pesa on KCB 
within Nairobi County. It would be interesting to see how the results would be if the
41
sample included other urban as well as the rural areas in the country. The research was 
carried out as a case study in one banking industry and limited in scope to the KCB 
branches within Nairobi. Thus, the study did not get divergent views from other banks in 
banking sector. Hence the results were limited in scope.
There were limitation in getting the interviewees to respondent because of the of their busy 
schedules thus the information given may have been general. The interviewees were also 
careful not give sensitive information making the interview process a bit difficult and time 
consuming.
5.5 Implication on Policy, Theory and Practice
To the police makers, there are recommendations to closely monitor the changing mobile 
banking systems in Kenya, regulatory frameworks in the banking industry and the 
imminent threat of such technology to the traditional banking institutions
Whilst corporate level strategies area mainly concerned with managing diversified 
enterprises whose activities span a number of different areas, business level innovations 
strategies relate to the different ways that an individual business unit can compete in other 
sub units within the chosen market. The highest numbers of respondents argue that, the 
rapid spread of the mobile phone usage in Kenya means that the number of mobile users 
exceeds by far the number of banked people. Mobile phones basically were to offer easy 
communication, however M-Pesa was introduced as a sub unit. It has greatly reduced the 
average transaction costs for the consumer.
42
5.6 Areas of Further Study
The study confined itself to effects of M-Pesa technology on the performance of KCB. 
This research therefore should be replicated in other institutions, industry players and 
stakeholders. The results should be compared so as to establish various change 
management strategies in different companies.
The study also failed to link specific drivers of change management and parameters in 
KCB that enables it to partner with M-pesa rather than other mobile money transfer service 
providers like Airtel with corresponding change management strategies. Future studies 
should seek to establish such parameter.
43
REFERENCES
Adelman, C. (2000). A Parallel Post-secondary Universe: The Certification System in Information 
Technology. Washington, D.C.: U.S. Department of Education.
Bureau of Industry and Security (BIS) (2005) [online] (www.bis.doc.gov), September. 
Burke W (1980), Organizational Development. Little, Brown and Co: Toronto, Canada. 
Central Bank of Kenya (2009), Annual report
Cooper, L. (2000) Strategic Marketing, Planning fo r radically new products, Journal of 
Marketing, Vol. 64 Issue 1, pp. 1-15.
Financial Sector Deepening Trust FSDT (2009b) Research on Mobile Payments 
Experience in Kenya
Fruition: Creating the Ultimate Corporate Strategy for Information Technology, Chris Potts,
Technics Publications, LLC 2008
Group of Ten (2001), "Report on consolidation in the financial sector", January 
(http://www.bis.org/publ/gten05.pdf)
Herrera, M. (2007), Competencia y  regulacion en la banca: el caso de El Salvador, serie 
Estudiosy Perspectivas N° 68, ECLAC/IDRC, Mexico, January.
International Monetary Fund (IMF) (2005), Central America Financial Sector Regional 
Project (FSRP), Payments Systems Assessment Module, Monetary and Financial 
Systems Department, Washington, DC., May.
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International Monetary Fund(IMF) (2006), Central America: Structural Foundations fo r  
Regional Financial Integration, produced by a staff team under the leadership of 
Patricia Brenner, Washington DC.
Jack W, Suri T and Townsend R (2010) Monetary Theory and Electronic Money: 
Reflections on the Kenyan Experience, Economic Quarterly-Volume 96, No 1
Micintosh, N.B (1994), Management Accounting and Control Systems: An organizational 
and Behavioural Approach. West Sussex, England: John Wiley & Sons Ltd.
Morawczynski, Olga and Mark Pickens (2009). Exploring the usage and impact o f  
transformational Mobile banking: The case o f Mpesa in Kenya.
Mintzberg, H. (1995) The Strategy Process: Concepts and Cases, 3rd edition,
Prentice Flail
Nyangosi, et.al, (2009) Emergency o f  Technology in the Kenyan Banking Sector. Any 
empirical study.
Pandey M (2003), Financial Management, 8th edition, Vikas Publishing House Ltd.
Porter, M. (1986) Competitive Strategy, Harvard Business School Press.
Rodlauer, M. and A. Schipke (2004), Central America: Global Integration and Regional 
Cooperation, International Monetary Fund (IMF), Washington DC.
Safaricom, (2007,2008,2009 and 2010), Mpesa assessments and Annual Report.
45
Sorge, A (1997) Organizational behavior. Hand book of Organizational Behaviour. 
International Thompson Business Press, London..
Tabora, M. R. (2007), Competencia y  regulacion en la banca: el caso de Honduras, 
(LC/MEX/L.818), serie Estudios y  Perspectivas No. 91, ECLAC/IDRC, Mexico, 
November.
Tiwari, Rajnish and Buse, Stephan(2007): The Mobile Commerce Prospects: A Strategic 
Analysis o f  Opportunities in the Banking Sector, Hamburg University Press (E- 
Book as PDF to be downloaded)
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research group, Bradford.
46
APPENDICES
APPENDIX I: KEY INFORMANT INTERVIEW GUIDE
The effect of M-Pesa technology strategy and performance of KCB LTD
(a) General information
i. Name of the institution
ii. Department of the institution
iii. Position at the institution
iv. For how long have you worked for the organization
(b)Mobile Money Transfer Services
i. Kindly define what you understand by the term mobile money transfer services.
ii. Are you a user of KCBconnect? If so why?
iii. In your opinion why would KCB prefer Mobile Money transfer as opposed to other 
Money Transfer Services?
47
In your opinion, has Mobile Money Transfer been a strategic response by KCB as a 
way of getting competitive advantage in the banking industry.
Is mobile money transfer in Kenya an emerging rapidly growing service? And 
why?
(c) Performance in Kenya commercial bank
What are the key performance indicators that would rate KCB as a good performer 
in the banking industry?
ii. In your opinion did the introduction of MPesa by Safaricom change performance in 
KCB? And if so how?
(d)M-PESA technology strategy
i. What is your understanding of M-pesa technology strategy?
ii. What is the effect of M-Pesa technology strategy on the performance of KCB in 
your understanding?
iii. What are opportunities for operational efficiencies in KCB as a result of M-Pesa 
strategy?
49
IV. What are opportunities for revenue growth?
v. What are the challenges for the Mpesa technology strategy?
Thank you very much for taking your time in responding to these questions. 
God Bless you
50
APPENDIX II: INTRODUCTION LETTER
University Of Nairobi, 
School of Business,
P.O. BOX 30197-00100 
NAIROBI
Dear Sir/Madam,
Re: Master of Business Administration (MBA) Research Project
I am a post graduate student at the University of Nairobi studying Master of Business 
Administration in Strategic Management. I am currently conducting a case study of the 
Kenya commercial Bank Ltd, in the area of performance and M-PESA technology strategy. 
The purpose of this letter is to request for your cooperation in responding to the attached 
interview guide. The interview guide is unstructured and it is designed to get information 
on the effectiveness of M-PESA strategy in the performance of Kenya Commercial Bank 
Ltd.
The information you will be treated in strict confidence and at not one time will your name 
be referred to directly. The information gathered will be used for academic purposes only
Kindly Cooperate 
Yours Sincerely
June Ndete Mutuku Dr. Z.B, Awino
MBA Student Supervisor
51
APPENDIX III: Data Collection Letter
Telephone: 020-2059162 
Telegrams: “Varsity”, Nairobi 
Telex: 22095 Varsity
imviRiiTY @f nwfgiisi
SCHOOL OF BUSINESS
Mba programme
P.O. Box 30197 
Nairobi, Kenya
d a t e ...9?T :.C ct.:.U.
The bearer of this letter
TO WHOM IT MAY CONCERN
j V  -.V) L  Ki0> f-3 Cz. fo  yj\Kj- K O
Registration No.............^.6 1. j.T9T9.1.1.9.99.9.
is a bona fide continuing student in the Master of Business Administration (MBA) degree 
program in this University.
He/she is required to submit as part of his/her coursework assessment a research project 
report on a management problem. We would like the students to do their projects on real 
problems affecting firms in Kenya. We would, therefore, appreciate your assistance to 
enable him/her collect data in your organization.
The results of the report will be used solely for academic purposes and a copy of the same 
will be availed to the interviewed organizations on request.
Thank you.
] -JUSTICE MAGUTU Q 6^ n  
ASSISTANT REGISTRAR^ 
MBA OFFICE, AMBANK
"«9>
Ak-
APPENDIX IV : Data Collection Approval Letter
Kenya Commercial Bank Limited
1 /  fl  "O Making the
l\A —. D  Difference
Head Office
Kencom House, Moi Avenue
P.O. Box 48400-00100, NAIROBI,KENYA
Telephone: +254 20 343018
Fax: +254 20 2250095
Email: Cnaeno@ kcb.co.ke
W ebsite: http/Avww.kcbbankaroup.co.ke
October 14, 2011
To whom it may concern,
Re; Approval for Data collection at Money Transfer Services department
June Ndete Mutuku is a posted graduate Student at the University of Nairobi studying Master of 
Buisness Administration in Strategic Management.. She has been approved to collected data in 
the area of performance and M-PESA technology in the Money Transfer Services Department.
The information collected should be treated in strict confidence and should only be used for 
academic purposes
For
Head, Money transfer Services 
For;
Ghrispinus N geno
Directors: P.W. Mufhoka; (Chairman); Dr. M.L. Oduor-Ofieno (Chief Executive); J.K. Kinyua;
Mrs. S.N. Omanga; Mrs. C.A. Kola; S.N. Shah; J. Adongo; Prof. P.K. Kimuyu; Eng. J.M. Ndefo; N g’eny Biwoff