The Effects Of Electronic Banking As An Innovation Strategy On Performance Of Commercial Banks In Kenya

Abstract

The goal of this study was to analyze the impact of e-banking as an innovation strategy on the performance of commercial banks in Kenya. The study adopted a descriptive research design that was cross sectional in approach. A drop and pick questionnaire was administered on the relevant bank’s respondent headquartered in Nairobi, Kenya. A census survey was conducted on the total population of 42 commercial banks registered by CBK as at 30th June 2016.Most respondents accounting for 70% of the total respondents were in finance and operations and were also experienced in their field. Their responses informed the findings of this study. Secondary data for this study was analyzed using regression analysis of the dependent variable being profit before tax and independent variables being electronic banking innovation strategy proxied by POSs, electronic cards and ATMs. The analysis was generated from entering and sorting data through excel and subsequently analyzed through SPSS package. Results of this study indicate that e-banking strategy enhance performance of banks in terms of capital adequacy, asset quality, management efficiency, earnings, liquidity position, market risk sensitivity and client value addition by expanding efficiency in processes of deposit taking, withdrawals, account checking and payments at the comfort of their mobile phones, agents, internet or even ATMs. 90% respondents were in agreement of e-banking’s positive effect on the performance of their banks. This study also found significantly strong relationship between e-banking strategy proxied by point of sales terminals and electronic cards issued and performance of commercial bank measured by profit before tax, where one point increase in electronic cards leads to 5 points increase in performance while one point increase in POS leads to 0.22 point increase in performance and one point increase in ATMs installed lead to a decline in performance by 3.473. However, results indicate that e-banking effectiveness in enhancing performance of commercial banks is affected by various challenges that include; rapid technological advancements, high e-banking infrastructure cost, security concerns, limited support by top management and regulators such as Central Bank of Kenya. Also, with the emergence of alternative e-banking platforms channels such as mobile money, offered by communications companies, a thorough research needs to be done to analyze their effect on performance of the commercial banks as well as strategies pursued by banks to counter this competitive threat. Finally, recommendations for this study include bank management to seek alternative funding for e-banking technology such as joint investment by all banks in a single e-banking platform to be shared and tailored for participants in the industry at a fraction of the original fee. They should also consider continuous innovations, training of staff and end users to ensure productivity of e-banking innovation tools. Great support is also required from top management from planning to implementation and evaluation of e-banking innovation strategy for its success. In conclusion, an appropriate in house risk management framework and an up to date regulatory framework by CBK is required to govern and mitigate risks and security concerns posed by electronic banking innovation strategy environment.