AGENCY BANKING AND MARKET VALUE OF LISTED COMMERCIAL BANKS

AT THE NAIROBI SECURITIES EXCHANGE IN KENYA

MAGDALENE KATUNGE DOLNAD

A Research Proposal Submitted in Partial Fulfillment of the Requirements for the Degree
of Master of Business Administration (Finance) of Jomo Kenyatta University of
Agriculture and Technology

2024
DECLARATION
I hereby declare that this is my original work and has never been presented in any other
Institution.

Signed………………………………… Date……………………….

Magdalene Katunge Donald

HDB311-C004-3330/2017

The research proposal has been submitted for examination with our approval as the
University supervisors.

Signed……………………………………… Date……………………….

Dr. Joshua Matanda.

Lecturer, Jomo Kenyatta University of Agriculture and Technology.

Signed………………………………………… Date……………………….

Dr. Kimani E. Maina.

Lecturer, Jomo Kenyatta University of Agriculture and Technology.

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DEDICATION
I dedicate this research proposal to my family, Denis, Myles, Patricia, and my Dad and
Mum, brothers and sisters who have been my support through the entire MBA course and
throughout the time I spent working on the proposal. God bless you for your unwavering
support and encouragement.

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ACKNOWLEDGEMENT
I am grateful to Almighty God for providing the opportunity and excellent health over this
proposal duration. I’d want to express my heartfelt gratitude to my supervisor, Dr. Joshua
Matanda and Dr. Kimani E. Maina for their unwavering support and assistance throughout
the process. Finally, I want to express my gratitude to the entire Jomo Kenyatta University
of Agriculture and Technology community for creating a positive learning atmosphere.
May God generously bless every one of you all.

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TABLE OF CONTENT

4
LIST OF TABLES

5
LIST OF FIGURES

6
LIST OF APPENDICES

7
LIST OF ABREVIATIONS AND ACRONYMS

CBK Central Bank of Kenya

CMA Capital Market Authority
FE Fixed Effect
KBA Kenya Banks Association
NSE Nairobi Securities Exchange
POS Point of Sale
RE Random Effect
MTN Medium-term Note

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DEFINITION OF TERMS

Agency banking refers to a banking model where licensed commercial banks provide
banking services to their customers through third party agency. (Onwonga M., Achoki G.,
&Omboi B. 2015)

Number of Agency Banking Outlets refers to the number of retailers that conduct
financial transactions to customers on behalf of commercial banks by use of existing
infrastructure and distribution channels. Either through E-commerce, POS devices mobile
phones and other devices (Ndolo, 2017).

Agency banking number of Transactions is a count or measurement of, exchange, or

transfer of cash that occurs between customers through banking agents. It is also the total
amount of all transactions conducted via agency banking outlets by customers through
various transactions (Ndolo, 2017).

Financial services accessibility. The World Bank defines financial accessibility as ‘the
proportion of people or enterprises that use financial services and products in a formal
institution’.

The cost of Transaction is the infrastructural costs of setting up a branch, costs include
fixed costs and variable costs such as wages, rent, electricity, stationery costs and
regulatory costs. Branch fixed costs per transaction are much greater as compared to fixed
cost per transaction for an agent (Ndegwa, 2017).

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ABSTRACT
Financial sustainability is the institutions capability to finance its operating costs by having
enough funds for financing current and future academic programs. Financially sustainable
private vocational training college can reduce operational costs, formulate more innovative
business strategies, and enhance customer satisfaction. However, there has been a problem
of lack of sustainability of operations for many private tertiary training institutions in
Kiambu County, Kenya. The delinquent is proved by private higher training institutes
having a declining trend in their operating surplus ratio. There is no legislation in Kenya
that provides money for private higher training institutes through the state budget
demonstrating the delinquent behavior. The overall goal of this research was to assess
financing strategies and financial sustainability of private higher training institutes in
Kiambu County, Kenya. The precise goal was to figure out the effect of cash and cash
equivalent financing, long-term debt financing, operating income financing, and external
resource mobilization on financial sustainability of private higher training institutes in
Kiambu County, Kenya.

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 CHAPTER ONE

INTRODUCTION
1.1 Background of the Study
Market value is the amount that an asset or business is worth, as determined by market
participants, in the financial market. Market value is frequently used to refer to a profitable
bank’s market value, which is determined by multiplying the number of shares in
circulation by the price at which the shares are currently trading. Market value assesses the
worth of a profitable bank’s shares on exchange marketplaces. It is an ongoing assessment
conducted by the market for publicly traded banks whose shares are exchanged on a stock
exchange. It is computed by multiplying the total number of outstanding shares held by the
shareholders by the share price as of a specific date. A crucial component of any stock
valuation formula is the computation of market value (Yaseen, 2023).
For speculators looking to ensure a profit on their endeavor, market value is a crucial
metric. Daily fluctuations in stock value provide publicly available information on a
publicly traded profitable bank’s health. When estimating the equity of a firm, market
value speaks for the broader public. Stock prices can reflect all relevant information about
profitable banks’ past, present, and future activities, whether it be public or private,
according to a productive security exchange hypothesis. Market value can serve as a proxy
for profitable banks’ potential revenue streams, primarily dividends, and risk associated
with obtaining such streams at a pace that meets the standard rate of return (Mwau, 2020).
The price that buyers are prepared to pay for securities to a corresponding seller on a stock
exchange is known as the basic market value of shares. Because investors are confident in
a stock's potential for future performance, high market value is frequently associated with
strong demand for the stock. Because profitable banks might be hesitant to sell their shares
for fear of missing out on potential cash gains from future stock price increases, the supply
of these shares is also low. Investors are confident in the stock's potential for future
performance, high market value is frequently associated with strong demand for the stock.
The fact that market value offers a precise technique to determine an asset's value and does
away with any doubt or ambiguity is one of the key reasons it is significant. Hence, the
worth of shares can be frequently seen differently by buyers and sellers (Muthoka, 2018)

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The phrase "agency banking," often known as "agent banking," describes how registered
financial institutions offer their banking services through agents or other third-party
middlemen. A legitimate Agency connection exists where profitable banks hire another
entity under a legitimate agency arrangement to assist in the delivery of a particular range
of financial services to clients of a licensed banking institution (Nyambane, 2023). In
developing nations with increasing levels of technology, agency banking has emerged as a
significant means of expanding access to banking services. Commercial banks use money
transfer technologies to facilitate agency banking through cash deposits, cash withdrawals,
and short-term loans. A cash deposit is an amount that is deposited into a business or
individual bank account, be it a money market account, or savings account (Mwau, 2020).
Although "cash" can be in terms of a specified certain currency, cheques and other
financial transfers can also be included in cash deposits. Through already existing local
retail stores, technology allows banks and their customers to engage remotely in a
trustworthy manner. Bank cards with the necessary biometric or pin based security features
are issued to customers, and the neighborhood store (Kingsley, 2019). These cards can be
outfitted with a point-of-sale (POS) system that is managed by the bank and linked to it via
satellite, wireless, or phone lines. Using mobile phones as a point-of-sale (POS) device at
the store and to store "virtual cards" for consumers can further reduce the amount of
infrastructure needed. When a consumer uses a bank-issued card to make a deposit at a
retailer, they correspond with the bank directly. To finance the deposit, the bank
automatically deducts the appropriate amount from the banking agent's bank account. The
POS device then prints a paper receipt for the customer. As payment for the amount
deducted from its bank account, the agent retains the cash. Fess and commission, and the
amount of deposits received are part of the cash deposits (Muthoka, 2018).
Taking cash out of a bank account, typically a checking account, is referred to as a cash
withdrawal. Certain withdrawals, like pulling money out of a customer’s bank account, are
unconditional, but certain withdrawals, like certain retirement funds, have restrictions on
when money can be taken out. In Agency banking, if a client requests a cash withdrawal,
the agent does the opposite: the customer receives cash from the till in exchange for a
corresponding increase in their bank account. Naturally, to balance the till, the store
manager will eventually need to visit the bank (Innocent, 2016).

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In exchange, the store manager receives a fee based on the volume of transactions. For a
bank, an agent network is essentially a technological gamble. The bank (and, thus, bank
supervisors) may afford to be slightly slacker in how customer transactions are recorded
just as they are with current payment merchants given the right technology. A profitable
bank can lower bank service distribution costs without sacrificing the ability to properly
manage banking risks. Customers can use Mastercard and debit card to transact. Card
payments at retail establishments would be used for both the sale of goods and the
distribution and receipt of cash on behalf of banks. The amount of cash withdrawn, and the
amount of bills paid are part of the cash withdrawals (Nyambane, 2023).
A short-term loan is a kind of loan taken out to cover an urgent need for funds for a person
or a business. Being a credit kind, it entails paying back the principle plus interest by the
specified deadline, which is often one year after obtaining the loan. For small enterprises or
startups that are not yet qualified for a bank credit line, a short-term loan can be a useful
alternative. Less money is borrowed for the loan; the maximum amount that can be
borrowed is $100,000. Short-term loans are appropriate for both individuals and
organizations experiencing an unexpected, transient cash flow problem.
1.1.1 Global Perspective of Agency Banking and Market Value
Globally, Brazil was the first nation to subscribe to agency baking in 1999, marking the
beginning of agency banking history. Agency banks had expanded to 1,600 Brazilian
towns by the year 2000 (Gilbert, 2020). Therefore, as the concept expanded throughout
other nations, the start of the twenty-first century represented a significant turning point for
agency banking. Ten years later, 170,000 agents in all 5500 Brazilian towns had already
begun providing services, and 12 million accounts were active (Karangwa, 2018)
The United States has a competitive business climate with an advanced financial industry
because there are well-established US based banks that operate internationally. As a result,
international banks entered the US market through agency banks (Mwando, 2013) The
United States has greatly adoption rates for agency banking globally: over one-third of
consumers use mobile banking apps, and all major bank clients may now use mobile
banking. The agency banking applications provided by the UK's well-known banks vary in
terms of sophistication and functionality, but users can check their balance, create
customized alerts, transfer money to another account via a mobile number, and find the
closest branch or ATM (Mwangi, 2021). Lloyds Bank in the UK focused on 10 client

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journeys, deployed cross-functional customer journeys, leveraged agile delivery, and gave
product owners more authority as part of its end-to-end digital transformation. The number
of consumers utilizing Lloyds' mobile channel increased from five million to eight million
between 2021 and 2022 (Nyambane, 2023).
In 2010, 12 financial companies hired almost 9,000 banking agents in Mexico. This
translates to slightly more than one banking agent for every 10,000 adult citizens of the
nation. Although Mexico lagged its neighbors, Brazil, Colombia, and Peru, it was expected
that in 2011, almost 26,000 new agents would be established in Mexico, or 4.47 agents per
10,000 adults. There is a highly positive correlation between the number of agents in a
nation and the market value of commercial banks (Gilbert, 2020).
Based solely on years of experience as a predictor across this small sample of five nations
(including the planned agent rollout in Mexico in 2021), the linear regression model
predicts that a commercial bank will have 0.69 increase in share value. While Mexico's
agent count did not meet the expected market value level in 2022, it is expected to surpass
the expected agent count in 2023.
The Kosovo banking sector has come a long way in recent years. From notech—cash
exchangers on the street, salaries paid in cash, and scarce ATM availability—to lowtech—
bank salaries, extensive use of ATMs and debit cards—to the beginning of the high-tech
era—digital/online banking—nearly all banks are currently involved in some aspect of the
digital transformation. Kosovo's banking sector is evolving and becoming more focused on
the development and utilisation of electronic services. The swift progression of electronic
payment instruments can be attributed to the growth of information and communication
technology (ICT) and the necessity for banks to fulfill client demands (Sadiku, 2019)

Nevertheless, while having the requisite infrastructure, Kosovo's banks lack creativity and
adaptability.
Although banks have begun to progressively invest in digital, the bulk of transactions are
still completed in-person at banks rather than online, and digital is still not the main
channel for client interaction and service. Because the legislation implementing digital
signatures has not been implemented, client onboarding, account opening, and loan
applications are completed in person at the bank rather than online. Just 22% of domestic
and international transfers are made via e-channels, such as m-banking and e-banking,

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while the majority (78%) are made at physical bank branches. Only 44% of the 477 ATMs
in the sector offer a cash-in option, which means that most cash deposits are made in cash
boxes on bank property rather than ATMS.
Future developments in banking are being shaped by consumer expectations for safe, easy,
and seamless experiences across a range of media. It is no longer possible to use traditional
banking (King, 2012). In Kosovo, there are ten commercial banks that operate, accounting
for 65% of the total assets in the financial sector. Of these, eight are owned by foreign
entities and make up around 88% of the total assets in the banking system, with two native
banks making up the remaining 12%. The banking sector is the most resilient one in the
economy since it is highly liquid, well-capitalized, and steady. The region's lowest non-
performing loan (NPL) rate is less than 3%, and provisions have already covered more
than 100% of bad debts. The Tier 1 capital adequacy ratio for the banking system is 18%.

The banking industry in Kosovo has contributed significantly more in recent years to the
country's 4% economic development, loan growth rate acceleration, and loan interest rate
reductions. In the last five years, the loan portfolio has grown by 45 percent. According to
CBK (2018), the average interest rate on a loan was 6.6% as of December 2018. The
market has adequate liquidity, and banks have adequate capital.
The quality of the portfolio is still 3% but gets better every year. All indices are showing
notable increase, including deposits, lending, and the quick drop-in loan interest rates.

In Germany, privately held banks and institutions distinguished by direct government

involvement have coexisted for almost 200 years in the banking system. Large commercial
banks with national and worldwide operations, like Deutsche Bank and Commerzbank, as
well as several other, more specialized private banks and relatively tiny credit unions with
a regional focus, make up the group of privately held banks.
In Germany, the banks that belong to the so-called savings bank group are the most
significant banks that work with the government. The Deka Bank AG is a central financial
institution, there are about 415 local savings banks in this group, seven Landesbanken are
regional financial institutions, and a sizable number of other specialized financial and non-
financial organizations like building societies and data processing centers are included.

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The savings bank group and the cooperative banking group are comparable in many ways.
Local, small-to mid-sized cooperative banks make up its core. With a very straightforward
business plan that primarily entails mobilizing local deposits and disbursing them to local
households and SMEs, they are a locally based organization. First produced in the midst of
the 19th Similar to local savings banks, local cooperative banks are autonomous legal
organizations that are also a part of a vast network of connected organizations. This
network includes two central financial institutions that were established over a century ago
to combat financial exclusion. The goal of local cooperative banks is still to support their
members' businesses rather than to maximize profit.
The bigger, primarily nationally operating Landes banken and the smaller, more locally
oriented savings banks are the banks that work with the government. Savings banks and
cooperative banks operate on comparable, rather straightforward business strategies that
involve deposit taking and lending. Because their bylaws restrict them to lending money to
borrowers who reside in the same administrative district, they are also geographically
limited. Conversely, the big commercial banks and, to a lesser extent, the Landesbanken
provide the entire spectrum of products, ranging from loans, through services from
investment banking to insurance goods. Thus, typical universal banks might be defined
especially as major private commercial banks.
1.1.2 African perspective of Agency banking and Market value
The banking industry in Africa has benefited greatly from its advancements, which include
credit cards, internet banking, agency banking, automated teller machines, and the more
recent addition of agency banking. The development of technology has made it easier for
people to live better lives by providing affordable and easily accessible banking services.
Tanzania's banking industry is still strong and keeps evolving to meet the demands of a
constantly shifting environment. The country's projected real GDP of $316 billion in 2022
is expected to sustain the sector's growth, according to the IMF (Nyambane, 2023)
Tanzania's fragmented banking system experienced an uptick in 2022 as the nation's
economy steadied following the Covid-19 outbreak, following a slower growth of total
assets in 2021. The banking sector performed better in 2022 because of the BOT policy
measures that were implemented in 2021 to encourage credit to the private sector, lower
interest rates by reducing the statutory minimum reserve (SMR) requirement and introduce
special loans to banks totaling to TZS 1.0 trillion. In the upcoming years, further efforts to

6
strengthen oversight over the banking industry should guarantee that banks' average capital
levels stay high. The overall assets of the banking industry had a significant increase in
2022. The total assets rose from TZS 39.2 trillion to TZS 46.0 trillion, a 17.3% rise. The
loan book increased by 25.2%, and investments in government securities increased by TZS
1.2 trillion from TZS 6.9 trillion in 2021, accounting for most of the growth in the value of
banking assets. With assets rising by 24.0% and 22.4%, respectively, over the review
period, the two biggest banks, CRDB and NMB, were primarily responsible for the growth
in the value of banking sector assets. In tandem with the increase in total assets, the sector's
total liabilities increased by 18.2% to TZS 39.0 trillion from TZS 33.0 trillion the year
before. A 79.3% rise in deposits from other banks was the reason for the increase in total
liabilities. In 2022, customer deposits made up 78.5% of total liabilities (compared to
83.4% in 2021). In 2022, the total capital of the sector grew by 12.1%, as opposed to
14.5% in 2021. The rise was caused by a rise in the sector's overall profitability as well as
an increase in paid up capital and retained earnings as banks raised their capital to meet
capital adequacy requirements.
Commercial banks in Uganda are now able to conduct agent banking thanks to the Banking
Institutions (Amendment) Act that was passed by the parliament in 2016. A variety of
underserved and unbanked population segments will have greater access to banking
services and the ability for banks to participate in the digital financing area thanks to the
regulations provided by the law. To capitalize on the benefits of convergence, banks in
Uganda have reportedly tackled agent banking through a common interoperable
technology platform and agent network management architecture. These efforts are being
made through the Uganda Bankers Association (UBA), which serves as the umbrella
organization for banks in the country. The strategy aims to allow all agents to offer agent
banking services to bank customers regardless of which bank they bank with, while each
banking institution maintains control over customer acquisition and product and service
marketing (Saviour, 2022). The total assets rose from TZS 39.2 trillion to TZS 46.0
trillion, a 17.3% rise. A 25.2% growth in the loan book and a TZS 1.2 trillion increase in
investments in government securities from TZS 6.9 trillion in 2021 accounted for most of
the increase in the value of banking assets. The rise in asset values within the banking
sector may be attributed mostly to the two largest banks, CRDB and NMB, whose
respective asset values climbed by 24.0% and 22.4% over the study period. In tandem with

7
the increase in total assets, the sector's total liabilities increased by 18.2% to TZS 39.0
trillion from TZS 33.0 trillion the year before. A 79.3% increase in deposits from other
banks was the reason for the increase in total liabilities. Customer deposits accounted for
78.5% of total liabilities in 2022 (compared to 83.4% in 2021). The sector's total capital
increased by 12.1% in 2022 compared to a 14.5% expansion in 2021. The sector's overall
profitability improved, which contributed to the growth in addition to an increase in paid
up capital and retained earnings as banks raised their capital to fulfill capital adequacy
requirements.
The Central Bank of Nigeria (CBN) in Nigeria has started to extend financial services to
licensed banking operators that are not core businesses. The regulator and apex bank also
released recommendations for the regulation of mobile banking providers and agent banks
(CBN, 2013). According to the standards, agents can be categorized into super-agents, solo
agents, and sub-agents based on the financial database they possess (Efemuaye, 2022)
Channels including tiny kiosks/shops, gas stations, pharmacies, and other retail venues are
used to deliver financial services. In addition, the guidelines let the operators provide the
following services: transfers, cash deposits and withdrawals, bill collection and payment,
balance inquiries, account establishment, and paperwork (Bello, 2022). The total assets
increased by 17.3%, from TZS 39.2 trillion to TZS 46.0 trillion. Most of the increase in the
value of banking assets was accounted for by a 25.2% increase in the loan book and a TZS
1.2 trillion increase in investments in government securities from TZS 6.9 trillion in 2021.
The value of assets in the banking industry increased mainly because of the two largest
banks, CRDB and NMB, whose assets increased by 24.0% and 22.4%, respectively, during
the study period (Dotun, 2022). The sector's total liabilities rose by 18.2% to TZS 39.0
trillion from TZS 33.0 trillion the previous year, in line with the growth in total assets. The
increase in total liabilities was caused by a 79.3% increase in deposits from other banks.
78.5% of total liabilities in 2022 were customer deposits (up from 83.4% in 2021).
Compared to 2021, when it expanded by 14.5%, the sector's total capital increased by
12.1% in 2022. In addition to an increase in paid up capital and retained earnings as banks
increased their capital to meet capital adequacy standards, the growth was also due to an
improvement in the sector's overall profitability (Kato, 2023)

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The banking industry in Rwanda has seen notable advances since 2012. This novel
delivery channel aims to provide financial services to entrepreneurs at a much closer
distance (BNR, 2014). This study aimed to determine how agency banking contributes to
Rwanda's commercial banks' improved financial performance. The number of financial
services that may be accessed remotely that is, outside of branches has increased
dramatically in the past ten years. These have been made available through a range of
channels, such as banking correspondents, mobile phones, point-of-sale (POS) devices,
and automated teller machines (Bizimana, 2018).
By December 2016, 18 commercial banks and 5 microfinance banks (MFBs) have
contracted 2,068 agents nationwide and 53,833 agents nationwide, respectively. This
contrasted with December of the previous year, 2015, when commercial banks and MFBs
had fewer operators 40,592 and 1,154, respectively. According to the change, the number
of operators shrunk by business banks and microfinance banks by 33 percent (expansion
by 13,241 agents) and 79 percent (expansion by 914 operators/agents), respectively. Three
banks with the largest physical branches were home to over 87% of the endorsed business
bank agents:
Ethiopia's commercial banking sector now has 17 banks (16 private, 1 public). The
increasing number of banks has expanded their geographic reach during the previous ten
years by relying on large-scale branch expansions, which has improved important access to
finance metrics. As of June 2018, public and private banks had 4,757 branches, up from
2,208 branches five years ago and 571 branches ten years ago. This has significantly
improved the population-to-branch ratio over time, with each branch now serving an
average of just 20,000 people, compared to 126,000 people per branch in 2008.
Simultaneously, the number of depositors has increased dramatically, from 4 million in
2010 to 10 million five years ago to over 33 million today which is likely half of all adults.
Outside of the capital city, accessibility has improved significantly: ten years ago, just 38%
of branches were located outside of Addis Ababa; today, 65% of them are. Using a variety
of user channels (4.4 million card users and 1.7 million mobile banking customers) and a
service network that reaches almost every part of the nation (1,375 branches, 1,708 ATMs,
and 11,796 point-of-sale (POS) machines), CBE alone managed to retain 18.8 million
customers as of June 2018, demonstrating the financial accessibility offered by individual
banks. The largest private banks have surpassed a network of more than 380 branches, 2

9
million customers, over 300 ATMs, almost 1,000 point-of-sale devices, and more than
700,000 cardholders. This indicates that banks are becoming more and more widespread.
Agent banking is useful in many ways to improve bank accessibility in nations like
Ethiopia, where financial accessibility is extremely less than 8.0% of the population is
banked (IMF, 2013). It makes financial institutions more accessible in terms of location
and timing. Agent banking has a great chance to expand because of the mobile revolution
in both urban and rural locations. Branch operations can be facilitated by using this type of
service delivery. It's feasible to gather a few clients around each agent while using agent
banking to present the bank's name and services to new customers. This will facilitate the
opening of a new branch in the community (Jote, 2023). It helps the agency gain goodwill
from the bank it works with and may even grant it some special privileges, such as credit.
Over the previous ten years, banks' GDP contribution has increased from 1.5% to 3.1%
(Table 1.10). When compared to other subsectors, banking now contributes more to GDP
than other subsectors like education (2.5% GDP contribution), hotels and restaurants
(2.6%), and real estate and rental (4.3%), public administration (4.5%), and large-scale
manufacturing (4.5%) (Lelissa, 2014)
1.2.3 Local perspective of Agency banking and Market value

In Kenya, agency banking was implemented in 2010 to reach out to the unbanked rural
people and this initiative by large banks such as Equity bank which has increased the
market value of the banks listed in the Nairobi securities exchange in Kenya. The family
unit as directed by the financial sector deepening Kenya [FSD-K] together with CBK,
about 41.3% of Kenyans were unable to access financial services. About 80% of this
population was found in rustic zones. Agency banking led to a reduction in the cost of
providing financial services as well created the opportunities for banks to increase their
market value through promotion of access to formal finance and to the unbanked people in
rural areas. Over the years commercial banks’ agency banking has really gained
momentum in the banking sector. In June 2017, 18 commercial banks had contracted
64,345 active agents, while three microfinance banks had 1,974 active agents, compared to
17 commercial banks with 57,901 agents and three microfinance banks with 2,184 agents
in June 2017. As a strategy to provide services closer to their consumers and at lower costs,
commercial banks have continued to grow their agent bank presence. The closure of 228

10
microfinance agents between June 2018 and June 2019 resulted from an inability to
organize financial resources and the migration of businesses, resulting in a decline in the
number of microfinance agents. The number of banking transactions conducted through
agents climbed from 62.6 million in the previous fiscal year to 80.6 million in the current
fiscal year. In the same way, the value of banking transactions conducted through agents
climbed from Kshs 517.4 billion in June 2017 to Kshs 620.6 billion in June 2018. The rise
in transaction volume and value is linked to a 10% increase in banking agents as well as
greater client awareness of agent banking. The Prudential Guidelines on Agent Banking
established by the Central Bank of Kenya under section 33(4) (CBK, 2017) govern agency
banking in Kenya. The prudential guidelines became operational on 1st May 2010. The
Central Bank of Kenya (CBK) issued regulations in February 2011 permitting banks to sell
services through third-party agents licensed by the CBK. Compared to December 2020,
when it was 54.5 percent, the liquidity ratio was greater in December 2021, standing at
56.2%. In December 2021, the percentage of non-performing loans decreased from 14.5
percent to 14.1 percent. The country's recovery from the COVID-19 epidemic and bank
recovery efforts were the primary causes of the marginal decline. The increase in loans and
advances helped to fuel the 11.4 percent growth in total net assets, which increased from
Ksh. 5.4 trillion in December 2020 to Ksh. 6.0 trillion in December 2021. Between 2020
and 2021, customer deposits climbed by 11.0 percent to Ksh. 4.5 trillion. Deposit
mobilization via mobile phone platforms and agency banking was the cause of the increase
in deposits. The sector's pre-tax earnings climbed by 75.8 % lower than Ksh.112.1 billion
at the end of 2020 till December 2021, Ksh. 197.0 billion. The expansion was mostly
bolstered by the expansion of the credit portfolio, government securities investment,
commissions, and foreign forex profits exchange. Gross loans saw an 8.3 percent rise from
December 2020: from Ksh. 3,006.1 trillion to Ksh. 3,255.4 trillion by the end of December
2021. The rise in loan volume is ascribed to a rise in the loan demand by the different
economic sectors. The amount of banking transactions completed in Kenya by bank agents
reached around 1.83 trillion Kenyan shillings (KSh), or about 13 billion US dollars, in
2022. The nation has generally been adhering to the agency banking model more and more.
The Central Bank of Kenya implemented the system in 2010, enabling commercial banks
to hire outside companies to provide financial services and products on their behalf.
Therefore, traditional banks may grow their network without having to add more branches.

11
1.2 Problem of the Statement

Research by Cytonn, (2017), showed that Commercial banks are very instrumental in
economic growth and development of nations, this is because they stimulate economic
growth by creating capital for investment through deposit taking and credit financing,
control money and currency supply and create employment opportunities and this is
associate with increasing market value of are bank and reducing market value of small
banks. As noted by Kukuh and Etty (2018) an increase in efficiency in revenue generation
and cost reduction increases the price of outstanding shares and thus market value this
consequently attracts investors whose objective is to earn returns on their investments in
form of dividends and capital gain.
From the research by Cytonn, (2017), there has been a 15.1% growth in earnings per share
in the year 2016 compared to 9.7% growth in the third quarter the year 2015 due to
improved micro economic environment. In the year 2017 there was a 1% decline in
earnings per as compared to a growth of 9.7% in 2016 and this affected the market value of
listed commercial banks at the Nairobi securities exchange in Kenya with large banks
gaining but mall banks losing and therefore merging with other financial institutions or
being taken over. This was attributed to the deteriorating asset quality brought about by
challenging operating market and interest rates capping, which has led decreased
profitability by banks in 2017. In the year 2018, the listed commercial banks recorded
13.8% increase in earnings pe share compared to 1% decline in the year 2017. This has
been attributed to better operating environment compared to 2017. As pointed out by
Pryymachenko, (2003) high volatility may increase the possibility of losses for investors
which in turn may raise concerns over the conditions of the market and the entire economy.
The implementation of agency banking technology has resulted in increased efficiency in
the banking sector in terms of scale and scope but has not had a large effect to small banks
that lack the capita to implement agency banking across the country (Rad, 2011).
According to Kambua (2015), her study on the 'Effect of agency banking on financial
performance of commercial banks in Kenya, the adoption of agency banking increased
commercial banks' profits significantly, positively influencing their financial performance
but there has been a discrepancy on how the market value of listed commercial banks at the
Nairobi securities exchange Kenya has increased or decreased and this is supported by the

12
Arbitrage pricing theory .While Njuki (2012) as cited in Mbugua and Omagwa (2017)
opined that, in Kenya agent banking had enabled banks to increase profits and spread out
their financial services.
Most of the studies reviewed focused on how agency banking has affected financial
inclusion and financial performance of banks rather than market value. There have been
few studies that have addressed the issue of market value of listed commercial banks at the
Nairobi securities exchange in Kenya. This creates a research gap that the study aims at
addressing by looking at the issues of market value of listed commercial banks at the
Nairobi securities exchange Kenya and how it has increased or reduced.

1.3 Objectives of the Study

1.3.1 General Objective

The purpose of the study will be to determine the effect of agency banking on the market
value of listed commercial banks in Kenya.

1.3.2 Specific Objectives

i. To determine the effect of cash deposits on market value of listed commercial
banks in Kenya.
ii. To establish the effect of cash withdrawals on the market value of listed
commercial banks in Kenya.
iii. To evaluate the effect of short-term loans on market value of listed commercial
banks in Kenya.
1.4 Hypothesis of the Study
The Study will be guided by the following hypothesis.
HO1: To determine the effect of cash deposits on market value of listed commercial
banks in Keniya.
HO2: To establish the effect of cash withdrawals on the market value of listed
commercial banks in Kenya.
HO3: To evaluate the effect of short-term loans on market value of listed
commercial banks in Kenya.

13
1.5 Significance of the Study
The study benefits several stakeholders. These includes Academicians, management of
publicly traded commercial banks, regulatory bodies, and commercial bank shareholders or
investors will all benefit from the research. This will make sure that there are policies that
are aimed at increasing the market value of listed commercial banks at the Nairobi
securities exchange Kenya.

1.5.1 Academicians
The study's findings add to theoretical knowledge in the field of agency banking, as well as
to the market value of Kenya's listed commercial banks. The research also seeks to
ascertain the effects of Agency Banking on the market value of Kenya's listed commercial
banks; it seeks to contribute to a better understanding of the effects of Agency Banking on
the market value of Kenya's listed commercial banks.

1.5.2 Management of commercial banks

The study benefits Commercial banks. Based on the study results of the influence of
agency banking on the market value of listed commercial banks in Kenya, banking sector
executives was able to decide whether to engage in or expand their Agency Banking
business.
1.5.3 Regulatory Body
The conclusions of the study were useful to CBK, which was able to determine whether the
agency’s banking regulations and guidelines influence the growth of commercial banks
and consequently the economy.
1.5.4. Commercial bank shareholders
From the study finding of this research, current shareholders will have a better view of
how their investment in agency banking is affecting the overall market value of the banks.
And from this information they can decide on whether to continue investing
1.6 Scope of the Study
The scope of study basically means all those things that are to be covered in the research
project. It is the extent of the content that was covered by the means of the research to
come to more logical, conclusive, and satisfactory answers to the research. In this study we
will focus on contextual scope, geographical scope, and period scope.
In the contextual scope, the study will focus on the effects of Agency Banking on market

14
value of banking sector in Kenya. The four independent variables that were studied are
Agency banking, volume of transactions, number of agents, financial services, and
infrastructural cost.
Geographically, the study will be conducted at the NSE offices in Nairobi, Kenya. The 11
commercial banks listed on the NSE were the target population. The NSE was used
because it is Kenya's sole securities exchange firm and listed banks was used because they
are publicly traded, and it is easier to obtain financial information from them because.
In terms of period, the study will cover a duration between 2015-2020 which is equivalent
to 5 years. This is because this constitutes the latest data which is readily available for that
period. A panel data analysis of the collected data was carried out for a period of two
months that is from March 2023 to May 2023.

15
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