Application of differentiation strategy in commercial banking in Kenya

Abstract

Differentiation strategy is one of the generic strategies used by firms to achieve competitive strategy. The banking industry in Kenya is facing a very competitive environment coupled with different environmental changes. The competition in this industry triggers the need for firms to come up with competitive strategies for survival and sustained profitability. The banking industry was recently affected by government regulations such as reenactment of section 44 of the banking act, imposition of ceiling on interest charged on non performing loans and disclosure of banks charges. The banks also faced changed economic environment that saw a major decline on interest rates on government securities. Banks traditionally invested and reaped high revenues from the high interest rates. The study sort to establish the use of differentiation strategy in the banking industry given the changes in the environment. The study was set out as a census survey involving all the 42 active commercial banks. Structured questionnaires were administered to all the banks. However, only 26 banks responded constituting 61% response rate. The findings of the study indicated that the factors most affecting the banks were decline on government security interest rates and inability to increase charges without government approval. Inability to increase charges directly affects application of differentiation strategy since it affects premium pricing which is at the core of differentiation. Due to these factors, the research found that there was an overall change in strategies as banks sought to find ways of coping with the changing environment. The research also found that banks had also attempted to fight against some of the regulations through their umbrella body, the Kenya Bankers Association. While all banks practice differentiation strategy to some extent, it was found that there was a significant difference in application of the strategy between large and small/medium banks and between foreign and local banks.