Effect of agency banking on the growth of profits of commercial banks in Kenya

Abstract

Commercial banks play a vital role in the economic resource allocation of countries in which they operate. They channel funds from depositors to investors continuously. In order to effectively carry out the role of financial intermediation, banks need to generate necessary income to cover the operational cost they incur in the due course. In other words for sustainable intermediation, banks need to be profitable. Beyond the intermediation function, the financial performance of banks has critical implications for economic growth of countries. The Kenyan banking sector has gone through a raft of measures aimed at reforming the sector to make it more stable and increase financial inclusion. In 2009, the Central Bank of Kenya commenced measures to open up banking channels to non-bankagents. An amendment to the Banking Act allowed banks to start using agents to deliver financial services. This research studied agency banking in Kenya with a view to determining its effect on the growth of profits of commercial banks in Kenya. An exploratory research design was used. The study used secondary data. Statistical analysis was done using the aid of the Statistical Package of Social Sciences (SPSS) software. The selected period was year 2010 to year 2013 (4 years). The target study units for this research were the 13 commercial banks that had adopted the use of agency banking to roll out financial services to their customers. The findings revealed that agency banking had a statistically significant effect on the growth of profit of commercial banks in Kenya. Based on the findings of the study, it can be concluded that that agency banking has resulted in greater uptake of financial services which has resulted in more revenues for the banks. It is therefore recommended to the management of commercial banks and the government continue to do more to increase the number of agents as a way of improving accessibility of financial services in Kenya and at the same time enhancing the financial performance of commercial banks. The researcher also noted that agency banking is lagging behind as only thirteen out of a possible forty three banks have enrolled the agency banking model, and that their reach and coverage is also poor as compared to that of mobile banking platforms such as M-Pesa, which has achieved tremendous reach and growth. The researcher therefore recommends that a further study be conducted to establish the factors hindering the growth of agency banking model in Kenya as compared to mobile banking