Effect of Information Technology on Performance of Commercial Banks in Kenya

Abstract

The rapid advancement of information technology in the 21st century has revolutionized various sectors, including banking. However, its effect on the financial performance of banks, especially in emerging markets like Kenya, remains an area ripe for exploration. The primary objective was to ascertain the relationship between various information technology factors—ATMs, Mobile banking, Internet banking, and EFT transactions— and the financial performance of Kenyan commercial banks, as measured by the ratio of net income to total assets. Credit risk and bank size were used as control variables. The study was anchored on technology acceptance model, resource based theory, and diffusion of innovation theory. A descriptive research design was adopted. Using a sample of 35 out of the 39 licensed commercial banks in Kenya, secondary data from annual published financials (2018-2022) was analyzed. Descriptive, correlation, and regression analysis were employed to dissect the relationship between the variables. The regression analysis revealed that several IT variables have a significant impact on banks' financial performance. Mobile banking (Coef. 0.254, P<0.001), Internet banking (Coef. 0.173, P<0.001), and ATMs (Coef. 0.111, P=0.029) all had positive coefficients, indicating a direct positive relationship with banks' return on assets (ROA). Conversely, asset quality displayed a negative impact on ROA (Coef. -0.165, P=0.008). EFT transactions, although considered, did not show a statistically significant influence. The model's R-squared value of 0.4937 suggests that nearly 50% of the variation in the financial performance of banks can be explained by the IT variables considered. The study concludes that information technology, especially in the domains of mobile banking, internet banking, and ATMs, plays a pivotal role in enhancing the financial performance of commercial banks in Kenya. However, it also underscores the importance of maintaining asset quality, emphasizing that technological advancements should not overshadow traditional banking tenets. Banks are encouraged to bolster their technological infrastructure and provide training for optimal usage. While the focus should be on mobile, internet, and ATM channels, there's also a need to assess and optimize EFT transactions. Furthermore, stringent credit risk management practices are advised to enhance asset quality. Regulatory bodies might also consider guiding or incentivizing growth strategies, ensuring that technological adoption and traditional banking practices strike a harmonious balance. Future researchers might consider primary data collection methods for more qualitative insights. An expanded timeframe, through a longitudinal study, can capture long-term trends. Incorporation of more variables can render a fuller perspective, and a comparative analysis across countries or regions can offer a more global view of the relationship between IT and bank performance.