The Effect of Agency Banking on Financial Performance of Small and Medium Sized Enterprises in Nairobi County

Abstract

Agency banking model has been found to be very successful in propelling the performance of commercial banks in many developing countries that includes Kenya, Colombia, Brazil, Peru and India but the effect on SMEs businesses remain unknown. Bank agents have been found to lack the capacity to handle large transactions of cash and that they are not spending enough on security measures leading to poor performance of agency banking. Studies in Kenya and around the world have focused on determining the effect of agent banking model on financial performance of commercial banks with no attention being paid to effect of agency banking on financial performance of end users who include small and medium sized enterprises. Driven by this knowledge gap, this study sought to determine the effect of use of agency banking services on financial performance of SMEs in Nairobi County. The study used descriptive study design and extracted five years data from year 2009 to 2013 relating to SMEs financial performance as measured by return on assets and amount transacted through agency banking model. The study sample was identified through stratified random sampling technique where SMEs in Nairobi County were classified into their industry and a sample of 120 SMEs using agency banking services selected. Multiple regression analysis was used to show the relationship between dependent and independent variables. The study found that agency banking has led to financial inclusion of small SMEs and has significant positive weak relationship with financial performance of SMEs in Nairobi County. The adoption of agency banking by SMEs and mainly the medium sized enterprises is still low with the transaction costs of transacting through agent bank being high and the perceived risk of transacting through agent banks. The study recommends reduction of transaction costs through agent banks, banks to allow agents to be able to convert cheques into cash, deal with foreign currency exchange among other services and banks to develop strategies to manage the perceived risks of using agency banking which will include end user education and formulation of regulations to ensure highest security measures for the firms.