Core banking systems replacement and performance in Commercial Banks in Kenya

Abstract

Financial services companies around the world are seeking to upgrade their core banking systems to improve competitiveness, operational efficiency, and regulatory compliance. However, such initiatives are especially challenging for most institutions. In a survey on the implementation of Basel II regulations, CBK (2008) found that some Kenyan banks had failed to implement the regulations due to challenges in their core banking systems. The purpose of this study was to: determine factors leading to replacement of core banking systems in commercial banks in Kenya; establish the challenges that commercial banks in Kenya encounter in the process of core banking systems replacement; and determine the effect of core banking systems replacement on bank performance. This research was carried out using a descriptive survey design. The target population of this study was all the 43 commercial banks in Kenya as at 31st December 2011. No sampling was done since the population was small (N=43). The research instrument for this study was a questionnaire. Data was collected from IT directors of the 43 operational commercial banks in Kenya. This data was manipulated through descriptive statistics such as percentages, range and mean scores and regression analysis. Presentation of data was through tables. Study results indicate that there are various factors that lead banks to replace their cores. These include their technologies being outdated, to reduce cost and improve efficiency, to enable adoption of new customer centric strategies, to enhance business Challenges faced in the process of core banking system replacement include agreeing on what is actually necessary, security issues, empowering employees to use the new system, vendor capabilities and credentials, risk of the software capability to meet requirements and expectations, unavailability of the diverse skills required and data migration. Findings also indicated that replacing core systems has a significant positive effect on financial performance. The following recommendations were made. First, banks need to be mindful of the challenges associated with core banking deployments. These challenges, once understood should be mitigated properly and perfectly managed. Secondly, the small and medium banks must appreciate that technology is an enabler and should adapt to change that make the technology transformation. Lastly, banks that have not replaced their core systems should have plans to do so and should learn from the leaders on the benefits and challenges.