Effect Of Alternative Banking Channels On Operational Efficiency Of Commercial Banks In Kenya

Abstract

There is a revolution in the banking sector worldwide; this has seen the banks embrace new technology as well as review of the governing regulations. Other banks are changing and embracing relationship management and marketing via technologies for instance phones, emails and even social media with the general consensus that this enhances the value of the firm and its clients. The advancement in technology has made some tasks cheaper and efficient but it also has its fair share of challenges. This has seen firms in the banking sector use technology to develop alternative banking channels to reduce costs and enhance efficiency and convenience but still fail. This study sought to determine the effect of alternative banking channels on operational efficiency of commercial banks in Kenya. The study’s population was all the 42 commercial banks operating in Kenya. Data was obtained from 41 out of the 42 banks giving a response rate of 97.62%. The independent variable for the study wasalternative banking channels as measured by value of transactions carried out through mobile banking, internet banking, agency banking and ATMs. The control variables were liquidity as measured by the current ratio, firm size as measured by natural logarithm of total assets and capital structure as measured by debt ratio. Operational efficiency was the dependent variable which the study sought to explain and it was measured by the ratio of operating expenses to total revenue. Secondary data was collected for a period of 5 years (January 2013 to December 2017) on an annual basis. The study employed a descriptive cross-sectional research design and a multiple linear regression model was used to analyze the association between the variables. Data analysis was undertaken using the Statistical package for social sciences version 21. The results of the study produced R-square value of 0.177 which means that about 17.7 percent of the variation in the Kenyan commercial banks’ operational efficiencycan be explained by the seven selected independent variables while 82.3 percent in the variation of operational efficiency of commercial banks was associated with other factors not covered in this research. The study also found that the independent variables had a weak correlation with operational efficiency (R=0.421). ANOVA results show that the F statistic was significant at 5% level with a p=0.000. Therefore the model was fit to explain the relationship between the selected variables. The results further revealed that liquidity produced positive and statistically significant values for this study. The study found that mobile banking, agency banking, ATMs, internet banking, firm size and capital structure are statistically insignificant determinants of operational efficiency of commercial banks. This study recommends that measures should be put in place to enhance liquidity as this will improve operational efficiency of commercial banks in Kenya.