The Effect of Agency Banking on Profitability of Commercial Banks in Kenya

Abstract

Competition amongst the commercial banks has pushed banks towards becoming more innovative. These innovations include ATMs, credit cards, mobile banking, internet banking, and children accounts and now most recently introduced within banking sector – agency banking. Agency banking in the economies that are developing technologically has increasingly became an avenue for ensuring efficient and quick access to banking services, with the bank agents helping bank institutions divert customers from crowded bank halls. The agents do this by through conveniently providing these customers with services that traditionally used to be accessed at the banks only. Nonetheless, the banking agency model has yetaided alleviate the congestion in banks because clients and total transactions as wellhave grown in numbers. This research study targets to conduct an investigation on the impact that agency banking has on profitability of the commercial banking institutions in Kenya. The study employed a descriptive research design. The study population in this study constituted 43 commercial banks in Kenya as indicated in the Central Bank of Kenya Website.The study used a sample of 12 commercial banks in Kenya. The sample was purposely selected to represent commercial banks that adopted Agency banking in 2011 when the Central Bank of Kenya introduced the agency-banking model. This study used secondary data which covered a period of 5 years from 2011-2015. The Pearson correlation coefficient and the multiple linear regression were applied in order to analyze data for the study using SPSS. The study found that the number of agents has a minor significance in the positive direction in relation to profitability and the volume of deposits related significantly negative with profitability of commercial banking institutions in Kenya. The study also found that the volume of withdrawals and volume of bill of payments had an insignificant negative relationship with the profitability in the studied institutions. The study concluded that an increase in the number of agents increases the profitability and a decrease in volume of deposits, withdrawal and bills payments negatively affects the profitability of commercial banking institutions. The study recommended that commercial banks in Kenya should invest more resources towards increasing their number of agents to increase their profitability and develop deposit mobilization strategies through agency banking to ensure that their clients use agency-banking services.