Strategic responses of commercial banks to the threat of substitute products

Abstract

For a number of years, the banking sector in Kenya has been experiencing challenging times. Some of the challenges have been external - poor macro economic policies, and a hostile operating economic environment. Other factors include poor debt culture, a slow and cumbersome judicial process, the rein of political patronage and poor supervision by the regulatory body. Coupled with this there is the emergence of non- banking key players in the delivery of financial services targeting marginalized groups but also those seeking to close the gaps evident in the financial services provided by the commercial banks. This study sought to identify the substitute products that the commercial banks in Kenya consider a threat, and the strategic responses that the commercial banks' are using to counter this threat. For the purpose of the study, all the commercial banks in the clearinghouse, forty-five at the time of the study, were included. However, only 15 of them responded, constituting a 33% response rate. The study was carried out by use of a questionnaire, which consisted of both open- ended and closed questions. The data collected was analyzed using the SPSS computer based statistical program and presented in tables and other descriptive statistics. The study revealed that commercial banks in Kenya were concerned about the threat posed by treasury bills as an alternative to savings and investment products in the commercial banks. They were also concerned about the entry of money transfer organizations and the existence of long term financial providers. The study revealed that to counter the threat of these substitutes, commercial banks were diversifying their product portfolio to include these products. They were also deliberately listening to the needs of their customers and packaging products that customers would find suitable for their needs. Some commercial banks were entering into strategic alliances with other service and product providers, to enhance customer retention, as the customers would perceive them as a one- stop- shop for financial services. From these findings, it was recommended that commercial banks should monitor emerging competitors both in the financial and non financial sectors, and "quick responses be formulated to counter the threats as they emerge. Commercial banks should also monitor global trends with a view to proactively managing emerging threats from substitute products emerging in the market. If need lie the commercial banks will need to redefine their market segments to ensure continued profitability, which all respondents regarded as a very important factor for the organization.