The relationship between the application of internet banking and financial performance of commercial banks in Kenya

Abstract

The purpose of the study was to investigate the relationship between the application of internet banking and financial performance of commercial banks in Kenya for a period of 10 years. Kenya’s financial sector has undergone significant financial innovations in the last few years. Many new more efficient and real time financial systems have come into place with the adoption and application of internet banking. Despite the undeniable importance of internet banking adoption and application, its effect on financial performance is not always obvious since there are reported cases of reverse causality between internet banking application and financial performance. Descriptive research design was used to carry out this study. The population of study was all the 43 commercial banks in Kenya as at 30th December 2013. The study used secondary data from published central banks’ annual reports and the EFT settlement reports for every clearing centre as generated by the Kenya Bankers’ Association. The independent variables were internet banking, bank size and efficiency ratio while dependent variable was financial performance of the banks measured by their Return on Equity. The relationship between the dependent variable and the independent variables was determined by use of linear regressions. Study results indicated that internet banking is positively correlated to financial performance of commercial banks in Kenya. It also indicated that the independent variables (Internet banking, Bank Size and Efficiency Ratio) explain and can predict financial performance of commercial banks in Kenya. The variables could explain 95.6% of the variation in profits in the commercial banks and only 4.4% of the variation in profitability in the banking sector could not be explained by the model used.