Effect of Plastic Money on the Financial Performance of Commercial Banks in Kenya

Abstract

The study investigated the effect of plastic money on the financial performance of commercial banks in Kenya, that is; whether plastic money usage increases or decreases the profitability of commercial banks in Kenya. The outcome of the study was intended to enable the banking industry to establish the extent of achievement of the purpose for which plastic money was introduced, and offer information for further strategy formulation and enhancement to their competitive advantage. The study adopted descriptive survey research design. Secondary data from the Central bank annual reports for all commercial banks in Kenya for the period between 2010 and 2014 was used, together with published reports from previous studies in the same field. Descriptive statistics such as mean score for each variable were calculated. The analysis involved multiple regression of variables under study that is the financial performance represented by net profit, number of plastic cards issued by the banks, number of A.T.M system installations, number of Point of Sale Machines, and transaction value of plastic cards by the banks. The findings of the study were that plastic money has a strong and significant effect on the profitability of commercial banks in the Kenyan banking industry. Thus, there exists positive relationship between plastic money and bank performance. The significance test showed that the influence of plastic money on bank profitability was statistically significant meaning that the combined effect of plastic money in this research is statistically significant in explaining the profits of commercial banks in Kenya. The study recommends that commercial banks should revise the commission charged on plastic cards. This has the end effect of encouraging consumers to increase the usage of plastic cards. Commercial banks should also collaborate with S.M.E’s to install ATM/Credit card machines for use by consumers. Banks should also enhance credit risk management by incorporating high technology to mitigate cases of fraud and credit loss provisions. Further research needs to be carried out on the relationship that exists between money and spending, saving or investment patterns. A study would also be undertaken to show the effects of plastic on money supply.