Effects of Retail Banking on the Financial Performance of Commercial Banks in Kenya

The study focused on the effect of liberalization of banking industry. In the past three years Kenyan banking sector has progressed towards increasing retail banking and decreasing the corporate banking. This is evident in the efforts banks are putting to attract retail customers through advertisements and sales promotions. Retail banking in Kenya in the past years had been severely underdeveloped and marginalized, since the majority of Kenyans live below the poverty line and cannot afford the luxury life. The study therefore established the effect of retail banking on the performance of financial institutions in Kenya. The general objective of the study was to determine the effect of retail banking in the performance of financial institutions. The study was guided with the following specific objectives; lending portfolio, number of customers, branch network and deposit mobilization. The study relied on both primary sources and secondary sources. The primary sources were the operation Managers, retail managers and relationship managers of the financial institutions while the secondary sources included reviewing the literature on the banking sector in Kenya and the East Africa region, previous research carried out from the same field, annual reports regarding the industry and official company manuals. The data collection methods included questionnaires and interviews. The collected data was edited and then coded. Data was analyzed using descriptive and inferential statistics with the aid of Statistical Package for Social Sciences (SPSS) Version 22.0. Descriptive statistics included, frequencies, percentages, means and standard deviations. On the other hand, inferential statistics was in form of both Pearson‟s correlation coefficient and multiple regression. Correlation facilitated drawing of infrences on relationship between each of the independent variables. Multiple regression enabled assessment of the effect of the independent variables on savings mobilization performance as a whole significance. The study findings concluded that Deposit Mobilisation, Lending Portfolio and Branch Network were found to have a significant and positive impact on financial performance; it would be wise to conclude that Deposit Mobilisation, Lending Portfolio and Branch Network were found to have a strong positive relationship. On the number of customers on financial performance, the study established that Number of Customers has an insignificant relationship with financial performance. It was recommended that commercial banks should design other innovative marketing strategies which can increase the level of low cost deposits such as use of mobile phone in collecting deposits. The Management of commercial banks should put in place strategies that focus on unbanked population since they represent a significant number of customers left out which can build trust on and sustain its performance once they are included in the financial sector. The study further recommends that inorder to enhance the performance in the whole financial sector, the same study can be carried out in micro finances. © 2017 Elixir All rights reserved. Elixir Fin. Mgmt. 110 (2017) 48474-48487 Finance Management Available online at www.elixirpublishers. com (Elixir International Journal) Leonard Kithi Ndeje and Omar Nagib / Elixir Fin. Mgmt. 110 (2017) 48474-48487 48475 The commercial banks and nonbanking financial institutions in Kenya offer corporate and retail banking services but a small number, mainly comprising the larger banks, offer other services including investment banking (PWC report, 2007). Retail banks exist to service the financial needs of business and society. The deregulation of financial services markets in the 1980s, and in particular the growing focus of both consumers and producers on quality, has created a process of structural change in the banking industry. Retail banking is a commodity service and the effects of these changes are therefore experienced by most of the population. Indeed, by the late 1990s, the mainstream banks started restructuring their service towards wealthier people, and savings services became wealthier for people. From the year 2002 to date there has been renewed interest from the banks in reaching the mass of middle income salaried individuals such as teachers and civil servants and this market segment is quite competitive (Johnson, 2004). In the last four years there has been increased competition from new entrants into the banking industry, forcing banks to cut costs and improve efficiency through automation and price rationalization (Paulson & McAndrew‟s, 2000). While the banks have been forced to cut costs and improve efficiency, there is increasing internal and political pressure on banks to expand their products and services to the unbanked and under-banked (Bitner, et al 2000). Due to the competitiveness of the banking industry many banks which were doing corporate banking changed partially or completely to retail banking. This is evident from a lot of advertisements made by banks using various forms and also by use of sales people, who have tried to convince many individuals to open accounts (Banking supervision Annual Report, 2005). Banks which have actually incorporated retail banking in Kenya are CFC, Standard Chartered, Barclays, National Bank of Kenya, Kenya Commercial Bank, consolidated Bank, NIC Bank, Cooperative Bank of Kenya (PWC Report, 2005). Retail Banking in Kenya Retail banking has been undergoing dramatic operational transformation in the recent years. Mergers and acquisitions, increased competition, and new regulatory requirements have driven banks to rethink their retail strategies. It has become important for retail banks to leverage technology to optimize sales and fulfillment processes, manage distribution channels, and streamline operations to acquire, satisfy, and thereby retain customers (Chen, 2001). The retail finance sector is currently one of the most competitive in the banking industry. However, in order to succeed in such a dynamic market place, Berry (2007) argues that the skills required to be a successful retail banker are many and varied: ability to demonstrate a deep understanding of customer needs and revenue generating methods, ability to develop new market entry and customer retention strategies, application of new business models and translating them into revenue generating projects and programmes. Financial institutions that are interested in tapping undeserved households need new strategies to segment the large under banked market. The rise in the number of financial institutions that are designing new initiatives to pursue the under banked consumer market illustrates the recent realization of retail banking (Karty and Stewart, 2006). Rapid technological advances have introduced significant changes in retail banking. Bank branches alone are no longer sufficient to provide banking services to cater for the needs of todays sophisticated and demanding customers. The provision of banking services through electronic channels (e-channels) namely ATMs, personal computer banking and phone banking have provided an alternative means to acquire banking services more conveniently (How croftet al, 2002). Other changes that have been used by the banks to penetrate into the market is the use of downscaling. Under the concept of downscaling the banks are trying to modify their services to meet the needs of the low income earners. Low income markets can be served on a “sustainable” basis, that is, with full cost recovery and a market return, without subsidy. As a result, in a growing number of countries, the formal financial sector has begun to take notice and to service these traditionalized sectors (Young et al, 2005). Deposit mobilization remains the cornerstone of retail banking. This comprises of nonefunded incomes derived from interest on loans and other advances. They include fees and commissions charged by the Bank. Non-financial institutions receive deposits and advance loans but unlike commercial Banks, they are not members of the clearing house. Deposit plus is an overdraft or loan facility secured by cash held either in savings or fixed deposits account (Hanson 2000). Lending Portfolio and Credit risk or default risk involves inability or unwillingness of a customer or counter party to meet commitments in relation to lending, trading, helping, settlement and other financial transactions. The credit risk a bank portfolio depends on both external and internal factors. The external factors are the state of economy, wide swings in commodity equity prices, foreigner exchange rates and interest rates, trade restrictions economic sanctions government policies etc. The internal factors are things like deficiency in policies (local policies) administration, absence of prudent credit concentration limits inadequately, defined lending limits for loan officers /credit committees, deficiency in approval of coroners financial position excessive dependence on collateral and inadequately risk pricing, absence of loan review mechanism and post sanction surveillance etc. (Mohan (2012) The number of Customers can be classified into three, clearly defined personal customers who depend on salary, business customers and the corporate ones. There is well laid down policies and controls which guides the lending to those groups which are revised from time to time depending on the prevailing market conditions. The policies spell out checks and balances as a guiding factor to prudent lending. What is more, before credit is advanced to any customer, a thorough and detailed appraisal process is conducted in order to review the financial and personal qualities of the customers. This helps to ascertain to the bank that the person they are dealing with is worth the deal sought. (Mohan (2012) Through expansion and development of scattered Branch network, the bank assists and acts as agents in distribution of