Effect of macroeconomic factors on internet banking by commercial banks in Kenya

Abstract

Banking sector plays a major role in mobilizing and allocating resources to various sectors in an economy. However, the sector is faced with a number of challenges among them macroeconomic shocks. Thus to maximize profits and smoother macroeconomic shocks, commercial banks adopt or create various financial innovations such as internet banking in order to increase consumer demand through improved product or service quality, while simultaneously bringing down the cost of production. In Kenya, little is known on the effects of macroeconomic factors on internet banking. Therefore, the objective of this study is to analyze the effects of macroeconomic factors on internet banking in Kenya. Specifically we sought to investigate the effects of macroeconomic and bank specific factors on internet banking in Kenya. The analysis focused on 33 commercial banks for a period between 2002 and 2012. To achieve the objectives of this study we employed linear regression analysis to estimate the effects of both macroeconomic and bank specific factors on internet banking in Kenya. We used random effects model since we had a panel data. The study found that macroeconomic factors such as inflation rate and economic growth bank specific factors such as asset base of the bank determines internet banking. However, interest rate, nonperforming loans and bank profit do not determine internet banking. Inflation rate and economic growth were found to negatively affect internet banking. On the other hand asset base of the bank was found to positively influence internet banking. The study concluded that macroeconomic factors have effect on internet banking in Kenya. Specifically, inflation rate and economic growth are key macroeconomic determinants of internet banking in Kenya. The study recommended that central bank should focus on enhancing macroeconomic stability by maintaining low inflation rate. Further, the government should devise policies that aim at increasing economic growth at the same time sensitizing people on the need to adopt internet banking. Commercial banks should ensure compliance on all borrowing requirements in order to avoid bad debts in order to increase their profitability and accumulating more assets. Accumulation of asset would provide a strong muscle for the commercial banks to invest in internet banking platforms.