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Influence of Mobile Banking on Growth of Micro Finance Institutions in Kenya

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Influence of Mobile Banking on Growth of Micro Finance Institutions in Kenya International Journal of Social Science and Entrepreneurship Vol. 1, Issue 2, 2013 INFLUENCE OF MOBILE BANKING ON GROWTH OF MICRO FINANCE INSTITUTIONS IN KENYA Maurice Onzere Ala Dr. Patrick Karanja Ngugi Jomo Kenyatta University of Jomo Kenyatta University of Agriculture Agriculture KENYA KENYA CITATION: Ala, M. O. & Ngugi, P. K. (2013). Influence of mobile banking on growth of Micro Finance Institutions in Kenya. International Journal of Social Science and Entrepreneurship, 1 (2), 132- 151. ABSTRACT MFIs in the developing world are increasingly deploying the use of mobile banking to increase growth. The pace of transformation in the MFI sector has speeded up with more MFIs realizing the potential of using the mobile banking in their service delivery. However, there are only a handful of studies on the effect of mobile banking on growth of micro finance institutions. A population of 360 management staff was identified from three levels of management, which included top management, middle level and lower management. The study used both primary and secondary data. The questionnaire included both structured and unstructured questions. The questionnaire was administered through the drop and pick method to the top, middle and lower managers in the MFIs. The study found out that regulatory requirements influences the growth of MFI to strengthen the governance and internal control structures ; that the profitability and growth of MFIs has led to commercialization and integration of MFIs into the formal financial sector ; that the specialized equity funds help compensate for the lack of private sector representation on MFI boards; that the growth of MFIs tend to have a strong interest in overseeing both the commercial and social objectives; that the growth of MFIs provides sustained access to multiple sources of capital. The study recommends the regulatory authorities to strengthen the governance and internal control structures; integrate of MFIs into the formal financial sector; offer specialized equity funds to help compensate for the lack of private sector representation on MFI boards. Key words: Branch Network, Convenience , Security, Mobile banking and Satisfaction. http://www.ijsse.org ISSN 2307-6305 Page | 1 International Journal of Social Science and Entrepreneurship Vol. 1, Issue 2, 2013 Introduction During the last few decades the phenomenon of MFIs has gained unprecedented importance on a world wide scale due to being regarded as a sustainable source of finance, new employment, innovation and economic growth (Morales, Gualdron & Roig, 2005). MFIs and innovation are of fundamental importance to our economy as they spur economic growth and wealth creation (Barringer & Ireland, 2008). The wireless industry is one of the most dynamic and growing industry in the world economy today. There is a shift from the ‘sit and search’ internet to ‘roam and receive’ Mobile environment. In Kenya the uptake of mobile phones has been unprecedented with 80% of Kenyan population now covered by Mobile networks. Kenya has seen a tremendous increase in the number of telephone subscriptions, from a Mobile subscription of: 23,000 in 1995, 1,187,100 in 2002 which is 78.7%, 11,440,199 in 2007 which amount to 97.7% of total telephone subscriptions respectively. Mobile Phone services have enhanced the value of a product or service in such a tremendous way. In general ‘mobile’ means “fully portable, real-time access to the same information, resources, and tools that, until recently, were available only from the desktop” (Shanker, O’Driscoll, & Reibstein, 2003). Recent developments in mobile technology have enabled users to convert their handsets from plain tools of communication to more composite m-commerce gadgets. KPMG International (2009) notes that mobile phones are being used as ideal alternative to personal computers and the challenge is for the network operators to provide services that is trustworthy and has added value for the consumers. The growing convergence of use for mobile services to network operators, manufacturers of these devices, content providers, financial services providers, and demand by consumers has applied pressure on the industry in general (Karjaluoto, 2002). It therefore means that the evolution of mobile banking will be following the internet banking. Mobile banking services allows transacting of financial transactions using mobile phones and other related devices, where they are able to make transfers between bank accounts and view account balances or settle bills. The customers are able to access online banking, while at the same time receiving full range of banking operations (Alam, 2003). There has been rapid growth in technological developments, which as a result has brought opportunities to institutions providing or offering financial services through use of channels that have multiple electronic options (Laukkanen & Pasanen, 2007). Mobile phone is one such channel which financial service providers use to serve their consumers, those providers who have adopted use of such channels have gained mileage in this direction thereby increasing numbers of their customers and making cost http://www.ijsse.org ISSN 2307-6305 Page | 2 International Journal of Social Science and Entrepreneurship Vol. 1, Issue 2, 2013 savings in the process. Due to increased competition, commercial banks have had to make the right choice in the mix of what to adopt of the processes together with which new development strategies to adopt in order to sustain growth and improve the returns to investors (Alam, 2003). Previously, literature has tended to focus much on general financial services instead of zeroing more on specifically the banking services. Mobile banking applications are continuously being developed and have now become banks’ favourite channels for offering banking services. According to Coelho (2003), one of the main strategies for growth and a major focus for mobile network providers and the banking industry, is the mobile banking and the potential it offers in providing various services. For instance, the mobile banking applications would enable offering of real-time 2-way data transmission, banking services, among other services (Daniel, 1999). Mobile banking services has enabled facilitation and movement of money from the banking institutions to the poor members of the society in the rural and urban centres at transactions costs that are much cheaper than those offered by commercial banks, which in the process has enabled the banks to reach the unbanked resulting in tremendous growth in the banking industry (Jenkins, 2008). The easy access and availability of the mobile phone and its convenience in size and use has brought additional value and created opportunities to both mobile service providers and customers, among others. Commercial banks are now able to reach many more new customers than before while at the same time providing them with banking services at their convenience anywhere in the country, while existing and new customers are enjoying the increased security and affordability of the services and devices (Jenkins, 2008). Statement of the Problem A member of the CGAP (2009) recently identified administrative costs, especially transaction costs, as the primary cause of high MFI interest rates, particularly in rural and disconnected markets. Mobile banking presents an opportunity to reduce transaction costs by replacing costly labor with less expensive, automated technology and decreasing transportation costs associated with disbursing loans and collecting payments (CGAP, 2009). A recent study by the Clinton Foundation estimates that mobile money may reduce transaction costs for MFIs by up to 80 percent. By the end of 2010, Almost half (47.5%) of all Kenyan adults own a mobile phone (up from 26.9% in 2006), with the rate of ownership rising to 72.8% in 11urban areas (up from 52.3% in 2006) and 80.4% in Nairobi (up from 63% in 2006) (Kenya Financial Survey, 2009). Further, 52% received money in 2009 compared to 16.5% in 2006. http://www.ijsse.org ISSN 2307-6305 Page | 3 International Journal of Social Science and Entrepreneurship Vol. 1, Issue 2, 2013 The most popular means of money transfer being M-PESA, is now used by 39.9% of all adults in Kenya. 26% of all M-PESA users also save money on their phones. One in six users, store value in their phone for use while travelling; M-PESA is perceived as the least risky by 26.2% of respondents, least expensive (31.7%), fastest (64.3%), easiest to get (47.8%) means of money transfer (Kenya Financial Survey, 2009). The annual number of payment transactions rose to exceed that of Western Union globally and now accounts for about 58% of the number of electronic payments in Kenya. The system allows users to send or withdraw money at over 23,000 retail outlets compared with approximately 1,000 bank branches (CBK, 2010). The potential for reaching providers of such services as health insurance, savings and MFIs has increased substantially since the advent of mobile banking in Kenya (Jack & Suri, 2010). In the introduction of mobile banking by most MFIs, Safaricom, in particular evidently increased the number of subscribers from 9 million subscribers in 2009 to 12 million subscribers in 2011. The number of mobile transactions of MFIs rose from 27% in 2008 to 51% in December 2011. This is because the mobile service provider’s M-PESA is the most popular and widely networked mobile money service (Financial Sector Deepening, 2011). Previous studies have revealed the potential of mobile network technologies for banking purposes (Pousttchi, 2003; Taga and Karlson, 2004; Speedfacts online Research, 2001). Most of these studies were conducted in developed countries and thus may not reflect the impact on the success and growth of different business environments and in particular the MFIs in a developing country like Kenya. Many studies have been carried out locally on MFIs for example; Oriaro (2001) carried an assessment on the suitability of a regulatory framework for operations of MFIs in Kenya. Magiri (2002) investigated relationships between credit models used by MFIs in Kenya and the attainment of outreach.
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