The Effect of Electronic Banking on Liquidity of Commercial Banks in Kenya

Abstract

The motive of this research was to examine the effects of electronic banking on liquidity of commercial banks in Kenya. The research was conducted to find out how ATMs, POS, internet banking and mobile banking affect the banks’ liquidity. Banks’ major income is from the interest on loans. The banks use the short-term customer deposits to finance long-term loans therefore liquidity is indispensable for a bank’s survival. Cash is a key operating tool and its availability affects performance of the banks. The upsurge in electronic banking creates a concern on the latter’s effect on banks’ liquidity. Descriptive research design was used for 43 commercial banks in Kenya. The study covered a period of 5 years; from 2010 to 2015. Secondary data was used and was collected from central bank of Kenya and the target commercial banks. The dependent variable was liquidity while independent variables were POS banking, ATM banking, mobile banking, internet banking and size of the bank. These variables were measured by average value of POS transactions, average value of ATM transactions, average value of mobile banking transactions, average value of internet transactions and total assets respectively. Liquidity was measured by the current ratio of the 43 commercial banks in Kenya. The study established that there is a strong positive relationship between liquidity and electronic banking of commercial banks in Kenya at 95% confidence level. ATM banking has the highest effect on liquidity while Internet banking has the least. The affordability of mobile phones and banks’ high investment in mobile banking technology has also given this form of banking an advantage of increasing number and value of transactions. Many banks are embracing electronic banking to reap the benefits of efficiency, accessibility, flexibility and decreased cost. Mobile and internet banking provide flexibility of transaction amount together with convenience to enable fulltime money movement. POS and ATM machines are more accessible compared to the traditional banking limited by branch opening hours and queues. POS banking is offered by bank agents and merchants who operate even in remote areas with no bank branches while ATMs enable 24 hour banking. This enables formal banking even in remote areas and easy cash movement. The recommendation to the banks is to adopt e-banking to benefit from reduced cost, accessibility, efficiency, flexibility and speed. Banks size also has a positive relationship with liquidity. The more assets a bank have, the higher the liquidity. Therefore banks should increase their assets not necessarily by opening more branches but by marketing to increase the loan asset.