Impact of internet banking on financial performance of commercial banks in Kenya
The number of banks offering financial services over the internet is increasing rapidly in Kenya. By using transactional websites customers can check account balances, transfer funds, pay/ receive bills, apply for loans, and perform a variety of other financial transactions without leaving their home or place of business. In other markets internet-only banks have struggled for profitability. These difficulties contrast with relatively recent predictions that they would come to dominate traditional branching banks. According to the standard internet based bank business model, low overhead expenses and access to larger geographic markets should allow internetbased banks to offer better prices (higher deposit rates, lower loan rates) than branching banks, grow faster than branching banks, and still earn normal profits. However, in practice the number of physical branch locations is growing, not shrinking. This project describes the current state of Internet banking in Kenya and discusses its implications for the Kenyan banking industry. Particularly, it seeks to examine the impact of Internet banking on banks' performance and risk. Using information drawn from the survey of 43 scheduled commercial bank's websites, during the period of June 2010, the results show that 16 of Kenyan commercial banks are providing transactional Internet banking sites. This study estimates online banking intensity and bank financial performance indices using a combination of primary and secondary data. Online banking intensity is specified as a term construct INTERNET and estimated using web feature data collected from bank websites. An empirical function of a nonstandard Fourier flexible form is estimated using bank's financial data to derive a theoretically consistent performance measure. The actual impact of online banking on performance is measured by regressing the ROA and ROE variables against a number of correlates including online banking intensity measure. Using univariate analysis, the results indicates that Internet banks are larger banks and have better operating efficiency ratios and profitability as compared to non-Internet banks. Internet banks rely more heavily on core deposits for funding than non-Internet banks do. However, the multiple regression results reveal that the profitability and offering of Internet banking does have a small significant association(less than 5%), larger significant and negative association with risk profile of the banks(more than 10%) meaning that internet based banks become better off from risks such as the non performing loans. However, the advantage expected of internet banking is yet to show some significant positive financial gains but begs for future investigation beyond financial measures used in the study as technology continues to penetrate the market.