EFFECTS OF E-BANKING ON THE FINANCIAL PERFOMANCE OF

COMMERCIAL BANKS IN KISUMU TOWN. CASE STUDY EQUITY BANK.

BRIAN GEORGE ODHIAMBO OTUMBA

BCMC01|1128|2017

LECTURER DR. MASESE

 TABLE OF CONTENTS

CHAPTER ONE: INTRODUCTION....................................1

1.1 Background to the study.........................................1

1.2 Statement of the problem.......................................2

1.3 Research objectives................................................3

1.4 Study variables......................................................4

 CHAPTER ONE
INTRODUCTION
1.0 Introduction
This chapter gives the overview of the e-banking practices on financial performance of
commercial banks in Kisumu Town. This chapter presents the background of the study, the
statement of the problem, the study objectives, research questions, the significance and scope of
the study.

1.1. Background of the study

Banking in Kenya was began in 1910 when banking services become available to African
population. Banking and other financial institutions are incorporated under Companies Act and
regulated by the banking Act, the Central Bank of Kenya (CBK) Act. Banking sector comprises
of 43 commercial banks of which 3 of them are public financial institutions.

E-banking means the process of doing transactions without the need of to physically visit the
financial institution. Namara (2014) defines e-banking as the use of computer to compute
exchange of structured information by agreed message standards from computer application to
another by electronic means and with minimum human intervention. It can also be termed as an
automated smooth and efficient delivery of banking services through electronic and
communicative channels. E-banking has enabled the access to accounts, transact businesses and
obtain information through networks. Various methods have been used in doing electronic
payment such as the use of credit cards and debit cards. Thus providing a platform where most
individuals can start their own small business

Today’s business environment is extremely dynamic and experiences rapid changes as a result of
technological improvements, increased awareness and demands that banks serve their customers
electronically. In the recent years, there has been an increasing use of digital technologies in the
banking industry, that is, co-operating in a complex and competitive environment. According to
Panida & Sunsein, (2012). E-banking refers to systems that enable bank customers to get access
to their accounts to get access to their accounts to get access to their accounts and general
information on bank products and services through the use of banks website without the
inconvenience of sending letters, faxes, original signatures and telephone confirmation. Olivia
(2011), contradicts the two by affirming that online banking differs from e-banking. She argued
that online banking narrows to only use of internet while electronic banking allows an individual
to access the account using electronic teller machine.
The banking sector has, for the past decade, witnessed various improvements and new
technologies with the main purpose of improving service delivery of the banking sector.
Currently, nearly all the commercial banks in developing nation have adopted the use of ATMs
enhancing their utility to their target making the innovation of ATMs to be most successful
delivery channel for consumer banking at the convenience (Adewoye, 2013). Banks have also
been able to adopt the use of internet which generate more revenues as well as gaining
competitive advantage. Similarly, mobile banking has also been widely used due to its
convenience and time (Asongu, 2015)

Globally, the adoption and creation of new e-banking innovations has created a strong foundation
through the spread and readily available access on the economic and financial development
information and on the global market (Wonglimpiyarat, 2017). Nowadays, most of the
organisation have deployed the use of e-banking with the aim of increasing the capacity of
products (Ahmed, Manwani &Ahmed,2018). This is e-banking plays a crucial role in improving
the efficiency as well as reducing the transactions involved.

Technology has proved to be a major driving force of economy sprouting development of firms
in terms of revenue and creating employment in Africa. A joint effort with developed countries
will enhance efficiency due to their supply of capital and adept knowledge in the field (Kaushik
& Rahman,2014).

Some of the countries in Africa that have adopted the use of e-banking include, South Africa,
Morocco and Nigeria (Asongu,2015) . These countries have implemented enormous rule to
regulate online transactions thus making it favourable for the clients to think of this ideology in
the different direction as compared to the past few decades (Idun & Aboagye, 2014). According
to Ekwekwe (2016),for Africa’s banking sector to have stiff competition they have to keep up
with the growing technology in the global market by personalizing their services in order to
attract more local and international clients.

According to Nzuki L. (2019) with the growing innovations taking place, Africa has been
rendered amongst the most competitive continents. However, it has faced some challenges in the
process. They include; banking licences, competition from monopolies and not submitting to the
rules regarding banking licencing (Moser,2015) . Although, the benefits of e-banking have been
appreciated for saving time and distance,it has rendered some people jobless. According to
Torres (2018), reduction of branches and increased number of ATMs in the countries, it has
reduced manpower and customer’s preference of service delivery .This has prompted customers
to make use of digital channels for their transactions in place of bank branches.

The banking industry in Kenya has undergone remarkable changes in the last two decades with
nearly half of the population having access to internet through mobile phones. Banking through
internet has emerged as a reliable source of achieving higher efficiency, operations control and
cost reduction by replacing paperwork and labour intensive procedures with automated processes
thus resulting into increased productivity and financial outcome. According to Idun and Aboagye
(2014), a manuscript that financial products have increased activities and organisational forms
have also improved and the overall efficiency of financial system has increased.

1.1.1concept of e- banking and the variables

According to Arunacham and sivasubramanian (2007) ,e-banking is where customers can access
his or her bank account through the internet using PC (personal computer) banking, mobile
phone and web browser. Others includes: ATMs, PC, Electronic Data interchange (EDI) and
Mobile phone and EFT.

By use of an ATM card a customer can deposit, withdraw or transact any business through the
use of PIN which prevent unauthorized access thus enhancing security.. Mobile banking on the
other hand has enabled customers to carry out transactions and enquires through e-mobile.It has
also conducted through mobile van which move from one location to another which enable the
customers to transact their transactions such as deposit, withdrawals , checks collection, draft
issuance and pass book updates. E-banking greatest promise is timelier, more valuable
information accessible to more people, at reduced cost of Information access.Electronic banking
in Kenya includes Eazzy 247 pay offered by Equity bank. This allows access to bank services
through mobile banking.it is available on the following plat form: Safaricom, MNT. Equity bank
also has M –KESHO that enable account send funds transfer between the accounts and M-PESA.
There is also Straight 2 Bank (S2B) offered by Standard Chartered Bank, it allows one stop
banking and cash management solution. Another electronic platform is Hello Money offered by
Barclays bank of Kenya among other forms of electronic banking offered in Kenya (CBK annual
report 2012).
1.1.2 Concept of financial performance in commercial banks

Financial performance is the measuring of organization’s achievement on the goals, policies and
operations stipulated in monetary terms. (Agola ,2012).Financial performance is measured using
profitability ratio, leverage ratio and asset turn over. These ratios are very important for the banks
as they show the returns on investments. It is an indicator of the profitability of the institution
and used as proximity for commercial viability (Wagennar ,2012).One of the benefits of e-
banking products to the banks is that it increases efficiency and effectiveness of their operations
so that more transactions are processed easily and most conveniently to their loyal customers. E-
banking has also improved the payment efficiency, financial services and banker –customer
relationship. On the whole we can say that e-banking has become pre-imminent method of
carrying the banking transactions and increase the customer satisfaction. E-banking plays an
important role in giving satisfaction to the customer because it fills the gap, so banks should find
ways on making e-banking services more accessible and accuracy so that customers can verify.

1.1.3 Equity Bank

Equity Bank of Kenya has gained popularity in the past few decades due to the implementation
of technology innovation in their business operation (Nzuki L.,2019),. According to Katwalo and
Huhanji (2014) Equity bank has the highest coverage area in Kenya. Equity bank has adopted the
use mobile banking, ATMs, and Internet banking and even gone an extra mile to develop a sim
card to enable banking for its customers effectively (Mwiti, 2018).

Mutisya and Gerald (2019), who studied on electronic banking and financial performance of
commercial banks in Kenya, concluded that internet banking was widely accepted and adopted
by Kenyan commercial banks as a way of transacting. In addition electronic banking was found
to be positive and significantly related to the financial performance of commercial banks in
Kenya.

1.2 Statement of Problem.

The banking sector in Kenya, has experienced tremendous changes in the banking industry in the
recent past. As the use of ATMs, mobile banking, internet banking have emerged as the most
efficient and effective way of enhancing productivity due to reduction in operation costs. Studies
done on mobile banking by different researchers who came up with different conclusions on its
effects on financial performance on the banks shows that mobile banking has greatly increased
convenience and reliability.Amin (2016) argues that mobile banking services guarantees
credibility and reliability with any information regarding the bank.Such information may include
any issues presented by their customers ,the various services offered by the bank,books of
accounts and any other issues that maybe presented by their clients and needs to be addressed.

According to a study carried out by Michael (2017) to assess the effects of internet banking on
financial performance of commercial banks in Kenya found out that internet banking had
positive influence on bank incomes, costs of operation, loan book and customer deposits .Gustin
(2007) who conducted a research on the relationship between banking technologies and financial
performance of commercial banks in Kenya revealed that adoption of automated banking had a
positive influence on the performance of commercial banks. Nader (2011) effects of ICT,
strategies on performance of commercial banks in Kenya his study revealed that mobile banking
had higher effect than internet services in banking performance.
However,the adoption of e-banking has posed various challenges and risks despite the benefits it
offers to both the customers and the banks. According to Idun and Aboagye (2014),the
investment of e-banking by banks requires that banks have to greatly on innovation costs which
come along with various risks that the banks should be willing to undertake. This is because for
banks to remain competitive in the world where globalisation is the trend of the day, banks needs
to frequently keep up with the dymanic changes taking place with technology.As much as lot has
been discussed about the issue of security to both the bank and its customers the problem has not
been fully addressed as its still one of the major problem facing the banking sector.

With this gap , this study essentially sought to establish the effects of mobile banking, ATMs and
internet banking as a whole aspect on the financial performance of commercial banks in Kenya ,
a case study of Equity bank.
1.3 Objectives of the study.

1.3.1 General objective

To assess the effects of e-banking on financial performance of commercial banks.

1.3.2 Specific objectives

i. To determine the effects of mobile banking on financial performance of commercial

banks in Kenya.
ii. To investigate the effects of ATMs on financial performance of commercial banks in
Kenya.
iii. To examine the effects of internet banking on financial performance of commercial banks
in Kenya.

1.4 Study variables(Dependent and Independent)

There is the independent variable which is stable and unaffected by other variables being
measured and the dependent variable which depends on other factors being measured,
and are expected to change as a result of an experimental manipulation of the
independent variable. In this study topic, the independent variable is the "EFFECTS OF
E-BANKING" since it is stable and unaffected by measures put in place e.g Mobile
banking, internet banking and the ATMs, hence called a presumed cause.
The dependent variable on the other hand is"FINANCIAL PERFORMANCE OF
COMMERCIAL BANKS," since it depends on the other factors being measured and are
expected to change as a result of any manipulation of the independent variables.