The relationship between agency banking and financial performance of commercial banks in Kenya

Abstract

The business environment has changed and it has been characterised by stiff competition among the players and the banking industry is no exception in Kenya. Competition amongst the commercial banks has pushed banks towards becoming more innovative. Most of the innovations were introduced in the period between 2006 and 2010. These included ATMs, credit cards, mobile banking, internet banking, youth oriented accounts, women oriented banking, Shariah compliant banking, children accounts and now most recently introduced within the Kenyan banking sector – agency banking. The main objective of this study was to establish the relationship between agency banking and financial performance of the banks in Kenya. An agency bank is a company/organisation that acts in some capacity on behalf of another bank. It thus, cannot accept deposits or extend loans in its own name; it acts as an agent for the parent bank. Agency banking model requires commercial banks to rely on the existing infrastructure in terms of supermarkets, hotels and petrol stations to reach out to customers. Increasing access to finance has been abridged with the use of innovation such as agent banking, which allows commercial banks and DTMs to engage the services of third party outlets to deliver specified financial services on their behalf. Through review of secondary data, the study found that agency banking outlets had increased to 9,748 active agents in 2011 from 8,809 in 2010. These specific agents facilitated a total volume of 8.7 million transactions valued at KSh 43.6 billion in 2011. Most of these transactions were mainly made up of cash withdrawals and cash deposits carried out at the various banking agency outlets. The study used regression analysis to find the relationship between agency banking (in terms of number of agents and number of deposit and withdrawals transactions undertaken through agents) and the financial performance of banks as measured by return on equity. From the regression model, all the independent variables were found to have either negative or weak correlation to the dependent variable. Therefore the study concluded that agency banking does not solely contribute to increased profitability in Kenyan banks as per the secondary data reviewed for 2010 and 2011.