EFFECTIVENESS OF MOBILE BANKING IN KENYA

A RESEARCH PROJECT PROPOSAL SUBMITTED IN PARTIAL

FULFILMENT OF THE REQUIREMENT FOR THE AWARD OF

DEGREE OF MASTER OF BUSINESS ADMINISTRATION (MBA),

SCHOOL OF BUSINESS, UNIVERSITY OF NAIROBI

NOVEMBER 2012

iii

TABLE OF CONTENTS

CHAPTER ONE: INTRODUCTION ......................................................................... 1

1.1 Background of the Study ................................................................................. 1

1.1.1 Mobile Banking ......................................................................................... 2

1.1.2 The Banking Industry in Kenya ................................................................. 3

1.2 Statement of the problem ................................................................................ 4

1.3 Objectives of the study .............................................................................. 6

1.4 Value of the study ............................................................................................ 6

CHAPTER TWO: LITERATURE REVIEW ............................................................. 7

2.1 Introduction ..................................................................................................... 7

2.2 Introduction to M-Commerce .......................................................................... 7

2.3 Mobile banking: M-Commerce in the banking sector ..................................... 8

2.4 Trends in Mobile Banking ............................................................................... 9

2.6 Mobile Banking Business Models ................................................................. 13

2.6.1 Bank-led model ........................................................................................ 13

2.6.2 Bank-focused model ................................................................................ 13

2.6.3 Non bank-led model ................................................................................. 14

2.7 Advantages of mobile banking to providers and consumers ......................... 14

2.7.1 Benefits to banks ...................................................................................... 14

2.7.2 Benefits for customers ............................................................................. 15

2.8 Critical success factors for M-banking .......................................................... 15

2.9 Challenges for a mobile banking solution ..................................................... 16

CHAPTER THREE: RESEARCH METHODOLOGY ............................................ 19

3.1 Introduction ................................................................................................... 19

3.2 Research Design ............................................................................................ 19

3.3 Study Population ........................................................................................... 19

3.4 Data Collection .............................................................................................. 19

3.5 Data Analysis ................................................................................................ 20

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REFERENCES .......................................................................................................... 21

APPENDICES ........................................................................................................... 27

APPENDIX 1: QUESTIONNAIRE .......................................................................... 27

APPENDIX 2: LIST OF BANKS ............................................................................. 31

1

CHAPTER ONE: INTRODUCTION

1.1 Background of the Study

The remarkable gains made towards mobile phone access have seen a steady progress in the

scope of innovations emanating from exploitation of these fairly new technologies. What has

characterized the Kenyan mobile landscape is a rapid uptake of various services key among them

the mobile based products. Mobile banking is one innovation which has progressively rendered

itself in pervasive ways cutting across numerous sectors of economy and industry.

An appropriate banking environment is considered a key pillar as well as an enabler of economic

growth. With the continuously emerging wave of information driven economy, the banking

industry in Kenya has inevitably found itself unable to resist technological indulgence. The need

for convenient ways of accessing financial resources beyond the conventional norms has seen the

recurrent expansion and modernization of banking patterns. Given the huge demand for finance

oriented services, institutions beside the historical banks have joined the fray in an attempt to

grab a piece of the perceived cake of opportunity within the banking industry.

According to Financial Sector Deepening Kenya (FSD Kenya), the most recent data in available

indicates that only 19% of adult Kenyans reported having access to a formal, regulated financial

institution while over a third (38%) indicated no access to even the most rudimentary form of

informal financial service. This leaves a percentage of more than 80% outside the bracket of the

reach of mainstream banking.

The pent up demand for an affordable and reliable way of holding funds while ensuring that risk

levels are consigned to a minimum is consistently unfolding. A system with the potential to

obliterate the historical hurdles of cost and free access which have for a long time stood in the

way of willing partakers of banking services evokes immediate attention and interest. The

unprecedented uptake of mobile phone banking services in Kenya is a testament to this fact.

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1.1.1 Mobile Banking

Mobile banking (also known as M-Banking, mbanking or SMS banking) is a term used for

performing balance checks, account transactions, payments, credit applications and other

banking transactions through a mobile device such as a mobile phone or Personal Digital

Assistant (PDA). The terms Mobile Phone banking and mobile banking (M-Banking) are used

interchangeably. It is used to denote the access to banking services and facilities offered by

financial institutions such as account-based savings, payment transactions and other products by

use of an electronic mobile device. Mobile banking has yielded a multiple effect on the number

of solutions available to clients. This is in addition to more efficient transactional environment

and the high substitution of banking points.

Porteous (2006) distinguishes two aspects of mobile banking: Additive and transformational

characteristics. Additive aspects are those in which the mobile phone is merely another channel

to an existing bank account. Mobile banking is additive when it merely adds to the range of

choices or enhances the convenience of existing customers of mainstream financial institutions.

Transformational characteristics arise when the financial product linked to the use of the phone

is targeted at persons who do not hold formal bank accounts with the conventional banking

institutions.

Sarker and Wells (2003) assert that the only single access requirement or barrier to the resultant

mobile banking will be the mobile phone. However, worldwide market penetration of affordable

cellular devices and growing network service diffusion makes this intricacy almost fully resolved

hence setting a firm pedestal for mobile banking escalation.

The effects of usage associated with mobile phone banking in Kenya are yet to be consolidated

or quantified in a well documented fashion. With the dramatic adoption of mobile banking

services this study seeks to extend its scope of analysis to indicators that reflect the nature of

usage. This ranges from overall patterns of use, access and provision strategies and consumption

patterns. Mobile banking started with the creation of services by banks which could be accessed

through the mobile phone. These facilities aimed to enable customers’ access information

relating to their accounts.

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Subsequent innovations have seen the mobile banking phenomena continue to grow steadily.

Mobile banking takes several dimensions of execution all representing a new distribution

channel that allows financial institutions and other commercial actors to offer financial services

outside traditional bank premises.

1.1.2 The Banking Industry in Kenya

The banking sector in Kenya is governed by the company’s Act, the Banking Act and the Central

bank Act and the various prudential guidelines issued by Central Bank of Kenya .The banking

sector was liberalised in 1995 and exchange controls lifted. The Central Bank of Kenya is

responsible for formulating and implementing monetary policy directed to achieving stability in

the general level of prices and fosters the liquidity, solvency and proper functioning of a stable

market based financial system while supporting the economic policy of the Government (Central

Bank of Kenya, 2011).

As at 31st December 2011, the banking sector comprised of the Central Bank of Kenya, as the

regulatory authority, 44 banking institutions (43 Commercial banks and 1 Mortgage finance

company), 2 representative offices of foreign banks, 5 Deposit-Taking Microfinance Institutions

and 126 Forex Bureaus. 31 of the banking institutions are locally owned while 13 are foreign

owned.

The locally owned financial institutions comprise of 3 banks with public shareholding, 27

privately owned commercial banks, 1 mortgage finance company while 5 Deposit-Taking

Microfinance Institutions and 126 forex bureaus are privately owned (Central Bank of Kenya,

2011). The foreign owned financial institutions comprise of nine locally incorporated foreign

banks and four branches of foreign incorporated banks. The sector was dominated by local

private institutions with 27 institutions accounting for 58.0 percent of the industry’s total assets

and 64% of total financial institutions. The foreign owned financial institutions were 13 and

accounted for 37.2 percent of the industry’s total assets as at 31.12.2011 and 36% of total

number of financial institutions. Multinational banks play an important role of intermediation in

the economy which is vital for the smooth and efficient running of the economy (Central Bank of

Kenya, 2011).

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In 2011, a number of banks responded to the growing need of convenient straight-through

payments using mobile solutions. As a result, a number of banks continued to sign up

partnerships with money transfer service providers as they improve their banking-on-the-move

menus. In only four years of existence of mobile phone money transfer services, four mobile

operators have enrolled over 15 million customers. Some of the notable mobile money solutions

launched during the year include; M-Kesho, Mobicash, Orange money, Yu-cash, Elma, Pesa-

Pap, Pesa-Connect among others. M-Pesa was still the most widely used method of mobile

money transfer as evidenced by the 305.7 million transactions effected and valued at Ksh. 727.8

billion in the year (Central Bank of Kenya, 2011).

Banks continued to embrace the use of the Internet as a remote delivery channel for banking

services. The most common online services include; viewing of accounts, inquiries and requests,

salary payments, clearing cheques status query, instant alerts of account status and transfer of

funds. The microfinance industry in Kenya is also experiencing positive growth and change.

Microfinance has over the years evolved from charity based social and financial empowerment

programmes to fully operational financial institutions, which continue to contribute towards

bridging the gap of financial inclusion. Further, the microfinance sector is witnessing increased

interest from commercial banks (Central Bank of Kenya,2011).

1.2 Statement of the problem

The field of M-Banking is fairly new and fast evolving. It also rests at the overlap of several

domains including those of banking, telecommunications and security. The overlap substantially

raises issues of operational or regulatory concern. Porteous (2006) asserts that mobile banking

has the potential to be transformational owing to various facts. First, it uses existing mobile

communications infrastructure which already reaches unbanked persons. Secondly it may be

driven by new players, such as mobile phone industry operators, with different target markets

from traditional banks who are able to harness the power of new distribution networks for cash

transactions.

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The Kenyan case offers sufficient evidence to the claim that competition triggers creativity and

innovation. To survive in a competitive market firms must maintain new products. The sustained

presence of mobile products being floated to customers on a consistent basis depicts high

standards of innovativeness. Continuous innovation not only yields new products but rather

promotes efficiently in performance of activities. As a result the price for new services

introduced to the market declines consistently.

A number of studies have been done in Kenya on M-banking and the responses to challenges

encountered in restricted banking hours and accessibility to the banks and other money transfer

institutions. Maina (2001) focused on, perceived quality and value preposition but failed to

study the effectiveness of the M-banking service in the banking industry. Another study done by

Odhiambo (2003) focused on factors that influenced customer satisfaction and services offered

by mobile firms but failed to focus on the effectiveness of such a product/ service. Gitari (2006)

focused on the challenges organization face in meeting consumer expectations but there was no

documented research data available to show people’s response to the new facility of accessing

their money through their mobile hand-sets beyond normal working hours, easily and almost

everywhere. The above study still focused on perceived quality and value proposition but failed

to assess the effectiveness of the mobile banking service in meeting the banking needs of the

customers. A more recent study conducted by Munywoki J.M (2010), focused on customer

perception of M-pesa services provided by small and medium sized businesses. This study only

focused on one product M-pesa. Although extensive research had been carried out to establish

how the banking sector responded to the challenges of the changing environment, no research

had been done on the effectiveness of the entire M-banking service in the Kenyan banking

sector.

The study will seek to explore the effectiveness of mobile banking services in the Kenyan

banking sector and establish the challenges that are encountered in implementing M-banking.

The questions the study will attempt to answer will therefore be: Has mobile banking been

effective in the Kenyan banking sector? What challenges have been encountered in

implementing mobile banking?

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1.3 Objectives of the study

This study has two objectives:

(i) To establish the effects of mobile banking in the Kenyan banking sector

(ii) To establish the challenges encountered in implementing mobile banking in Kenya

1.4 Value of the study

This study will be of value to the banks’ management in helping them to understand the key

drivers, benefits and challenges of mobile banking. This will enable them to make better

decisions on how best to utilize the M-banking service in order to maximize the gains from the

range of services available. The management of the banks will also be able to understand the

impact the mobile phone revolution is having on the banking sector in Kenya hence helping them

to find ways to embrace the technology rather than shy away from it.

For the scholars and researchers the study will provide a base on which future studies can be

conducted on a similar concept to establish the growth of M-banking. For mobile phone

operators, it provides a platform on which to evaluate future business opportunities in the

banking sector within Kenya. The study will also act as a feedback mechanism on the already

established M-banking services and provide a basis on which to improve on the same.

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CHAPTER TWO: LITERATURE REVIEW

2.1 Introduction

This chapter contains the literature review which begins with the introduction of mobile

commerce which is narrowed down to mobile banking industry. The mobile banking market,

mobile banking in Kenya and the mode of mobile banking operation are also discussed. It looks

at the technology employed by banks in carrying out mobile banking services. The diffusion,

adoption and development of mobile banking are also discussed. It goes further to explain the

advantages of m-banking and the macroeconomic impact of mobile banking in Kenya. This will

serve as a frame work for this research work.

2.2 Introduction to M-Commerce

Mobile commerce (M-Commerce) is an extension of M-Commerce, and these allow consumers to

interact with other one another or businesses in a wireless mode, anytime and in anywhere. The use

of mobile phone for buying and selling of goods and services is regarded as mobile commerce. M-

Commerce is usually called mobile commerce, which allows customers, to make any kind of

transaction including service enquiry, transferring of money, buying and selling of goods through

internet service on the mobile phone. Mobile commerce has its own drawback, though it‟s slowly,

but definitely, portraying signs of strong recovery (Tiwari & Buse 2007). Mobile commerce has been

used interchangeably, and this is sometimes misused and confused with mobile banking, this is

therefore, important to put more clarity on m-commerce which is a subset of Mobile Business

(Cronin 2004). Mobile business is activities carried out by organisations to sell goods and services

such as those commercial and other processes; human resource management (HRM), customer

relationship management (CRM), procurement and production while M-Commerce involves buying

and services, and other activities which are associated with such transactions in the business segment

and consumer segment. M-Commerce is been adopted just as E-Commerce though it is slower and

the extent of progress are different in all part of the world (Deans 2002). Japan and Europe are taking

the lead because of their decision to establish a single wireless standard (Dean 2002; Coursaries et al

2004).

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The word ‘mobile’ is related to mobile businesses which connote the possibilities of having access to

business activities anywhere and anytime in the world and which is managed by computer mediated

network. The facility makes service availability to independent of user’s geographically location as

oppose to electronic (Stanoveska-Slabeva 2003). Mobile commerce comprises of Mobile banking,

innovation driven by the banking industry, and others such as mobile entertainment, mobile

marketing and advertising, mobile information services, and mobile ticketing (Tiwari & Buse 2007).

The mobile commerce has its unique features which give it an edge over other form of commercial

transaction; these are instant connectivity, immediacy, localization, pro-active functionality, ubiquity

and simple authentication procedures (Tsalgatidou & Pitoura 2001).

2.3 Mobile banking: M-Commerce in the banking sector

Mobile commerce is a broad term that encompasses all forms of interaction with a consumer through

a mobile device, such as issuing electronic coupons, providing loyalty services, and creating

dedicated websites that a specifically designed to facilitate mobile browsing (Alex 2010). In the

banking industry, services that are finance-related which involves mobile telecommunication

technologies is known as Mobile financial services. These services are therefore categorised into

mobile payment and mobile banking. In regards to this research we will focus on mobile banking.

Mobile Banking is a type of m-commerce service that allows consumers to perform banking services

(i.e. alerts, banking transactions and balance enquiries) with the use of their mobile devices (Corbitt

and Barnes 2003). It is very important to understand what banking business is all about. Banks are

businesses that deal in money (Hammonds 2006:4) therefore banking involves any service given and

received from the bank, people open accounts with banks to save money, other people go to the bank

to borrow money (Sobczak 1997:6).

Mobile banking could be defined as a facility which provides banking services such as balance

enquiry, funds transfer, bill payment, and transaction history via a user’s mobile phone (Stair &

Reynolds 2008). Kondabagil (2007:24) defines mobile banking as an occurrence, when customers

access a bank’s networks using cellular phones, pagers, personal digital assistants, or similar devices

through telecommunication wireless networks. Mobile banking (m-banking) could also be defined as

an application of mobile commerce that enables customers to bank virtually at any convenient time

and place (Suoranta, 2003).

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Tiwari et al (2006a:5) believes that a cornerstone of m-commerce is built by m-banking; many banks

are taken advantage of this innovation in order to increase customer satisfaction, manage cost,

increase profits and bring positive transformation of payment system in the economy. In 2004,

Finland-based Nordea bank experiences a high growth of 30% from the utilisation of transaction-

based mobile financial services (Atkins 2005).

Mobile Banking as the term connotes is banking “on the move” with the aid of a mobile

telecommunication device (Ciuci 2010) which can be used for a different purpose at anytime and

anywhere. Mobile banking (M-banking) allows customers to receive short message (SMS) through

their phone, wireless application protocol (WAP) and Java enables phone support other banking

activities using GPRS (General Packet Radio Service) such as direct payments confirmation and

funds transfer (Mallat et al 2004). From research 30 per cent of households in the United Kingdom

use their mobile phones to perform banking operations (MMA 2009). Research also shows that,

internet has only a penetration rate of 6 % in a population of 140 million in Nigeria but mobile

technology is close to 50 per cent penetration with prospects for growth (Ciuci 2010). Mobile devices

show a promising way to the future which can reach larger population of customers irrespective of

their location and this can lead to customer’s loyalty.

2.4 Trends in Mobile Banking

The advent of the Internet has revolutionized the way the financial services industry conducts

business, empowering organizations with new business models and new ways to offer 24 hour

accessibility to their customers. The ability to offer financial transactions online has also created

new players in the financial services industry, such as online banks, online brokers and wealth

managers who offer personalized services, although such players still account for a tiny

percentage of the industry. The banking industry in recent times has been undergoing radical

change and this is taking place in all aspects of the banking sector. One of these new changes in

the banking industry is the information technology system (IT) and is mainly used by banks to

reduce turnaround time and improve business in general. The introduction of mobile technology

and its devices have indeed brought about efficiency in the manner in which commercial and

business activities are been carried out (Tiwari and Buse, 2007; UNCTAD, 2007). Among this

technological development is the introduction of mobile telephony. Mobile telephony serves as a

platform for launching out innovative mobile phone applications and services (UNCTAD, 2007).

10

The use of mobile technologies for commercial purpose has generated the concept of mobile

commerce. Mobile banking is an application of mobile commerce which enables customers to

bank virtually at any convenient time and place (Suoranta, 2003). There has been evidence of

increase in the number of people subscribing for mobile phone in developed and developing

countries (Boadi et al., 2007; UNCTAD, 2007). The fastest growing market in the world now is

the mobile industry (UNCTAD, 2007).

2.5 Utility of Mobile Banking from Banks’ Perspective

At this stage it would be relevant to understand the usefulness of Mobile Banking from the

banks’ perspective. It is therefore imperative to understand the business environment in which

banks operate and to identify customer groups that the banks may seek to target via Mobile

Banking.

Intensified Competition in the Banking Sector

Bank products are of immaterial nature sold increasingly with the help of computer networks

spanning across the globe. The global networks provide the customer with world-wide services,

for instance the use of credit cards while abroad. The creation of an EU-wide single domestic

market has led to intensification of competition in the EU in all business fields including in the

banking sector. The ongoing Globalisation has further intensified the competition. Technical

developments coupled with the process of Globalisation, have made it possible for banks to offer

their services in far-flung areas without investing money to build branches and hire additional

staff. This opportunity, of course, is a two-way street: On the one hand, a bank gets access to

new markets. On the other hand it is faced with increased competition on its home turf. To

master this combination of opportunities and challenges banks need – apart from business

consolidation and cooperation – organic growth. It is therefore necessary to retain the existing

customer base while simultaneously acquiring new, economically prosperous customers. Seen in

conjunction with the price-sensitivity of customers and the resultant low relevance of the brand-

name banks are compelled to introduce innovative services that potentially attract prospective

customers while retaining others.

Even though the brand-name remains a critical factor on account of the need for trust in banking

business, the globalisation and the technological developments, however, have reduced entry

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barriers so that the number of available reputed brands has increased significantly; thereby

intensifying the competition (Tiwari & Buse 2007).

Adapting to Requirements of Core Target Groups

Banks, today, are increasingly confronted with technology-savvy customers who are often on the

move. As Wolfgang Klein, Private Customers Director at Postbank, a leading German bank,

puts it: “Today’s customers want to organise banking transactions while on the move,

irrespective of opening hours”. Banks are responding to this development by introducing mobile

services. Core target groups of Mobile Banking are often divided in three categories, youngsters,

young adults and business people.

Mobile Banking as Distribution Channel

Mobile Banking enhances the number of existing channels of distribution that a bank employs to

offer its services. The efficiency of a distribution channel can be measured by its fulfillment of

three major objectives, which are closely related to each other.

Increasing Sales Volume

One of the primary tasks of a distribution channel is to increase the volume of demand for

products at profitable prices. This objective is arrived by increasing operational efficiency so that

those losses are minimized that are caused by delays in catering to customer orders. Further, a

favourable reputation of the firm’s logistical capacities may help generate additional orders.

Reducing Costs of Distribution

Due to increased competition a distribution channel must organize business processes efficiently

so as to reduce distribution costs. This pressure can be coped with by rationalizing organizational

structures to increase productivity.

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Increasing Customer Satisfaction

Mobile Banking may help increase the customer satisfaction by streamlining of business

processes to increase efficiency, more attention and better consulting for customers due to

automation of routine processes and innovative “anywhere, anytime” services customized for

individual preferences. The collected data can also be utilised to create customer profiles.

Increased customer satisfaction can help reduce the customer attrition rate

Mobile Banking as Source of Revenue

Mobile Banking can also serve as a source of revenue. Mobile services can be offered on a

premium basis. The price, in this case, should be reasonable enough so that customers are willing

to pay them but at the same time they should be – from a financial point of view – higher than

the costs incurred by the bank. Additional revenues can be generated through offering

innovative, premium services to existing customers and attracting new customers by offering

innovative services.

Mobile Banking as Image Product

Finally, Mobile Banking can be also used as an image product to gain strategic advantages. A

bank may hope to win or retain a positive image amongst technology-savvy sections of the

society and strengthen the brand-reputation of being innovative and visionary [8]. The image of

being a technology leader can help the bank win customers looking for modern products and

services and at the same time help it retain its own existing base of technology-savvy customers,

some of whom otherwise might have switched to other banks while looking for such a product.

Further, the bank can profit from an early-mover advantage by actively shaping technological

standards that are based on one’s own strengths. This is, of course, fraught with a substantial risk

of incurring financial and image losses if the propagated technology fails to establish (Tiwari &

Buse 2007).

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2.6 Mobile Banking Business Models

A wide spectrum of Mobile/branchless banking models is evolving. However, no matter what

business model, if mobile banking is being used to attract low-income populations in often rural

locations, the business model will depend on banking agents, i.e. retail or postal outlets that

process financial transactions on behalf telecoms or banks. The banking agent is an important

part of the mobile banking business model since customer care, service quality, and cash

management will depend on them. Many telecoms will work through their local airtime resellers.

However, banks in Colombia, Brazil, Peru, and other markets use pharmacies, bakeries, etc.

Three models have been identified and developed, and they are primarily different from one

another based on who established the relationship (Banks or the Non-Bank/ Telecommunication

Company) of account opening, deposit or withdrawer, borrowing, etc., with the customers. There

are differences in the Bank-led model, Bank Focused model and Non-bank-led model (Porteous,

2006; Anyasi & Otuba 2009).

2.6.1 Bank-led model

This is when customers perform transaction with the use of their phones, which is different, from

the branch-base with the help of a trade partners. This is an alternative to conventional branch-

based banking. This method could be created by joint venture between banks and

telecommunication companies. This system allows customers account relationship to be

established and managed by the bank.

2.6.2 Bank-focused model

The bank focus model is when a traditional banks decides to use the low-cost delivery channels,

which is a non-traditional banking system to provide banking services to its customers such as

the use of m-banking facilities, automatic teller machine (ATMs), internet banking, e.tc., The

bank-focus model is additive in nature and is an extension of the conventional branch-based

banking (Porteous 2006).

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2.6.3 Non bank-led model

The non-bank-led does not get involve unless required to do so when the need arises as a safe

keeper of surplus funds, and this allows the telecommunication company handle all the functions

(Aguirre et al 2008). However, mobile banking services that are focused on low income earners

of the population size which are regularly found in the rural area will need to reply on retail

outlets. A lot of telecommunications agents operate through their airtime resellers while banks

muses bakeries, pharmacies, e.tc which can be found in some countries such as Colombia (ibid.).

2.7 Advantages of mobile banking to providers and consumers

The use of mobile phones has a positive and significant impact on a country’s economic growth,

and its impact may be as twice as large in developing countries as to developed countries (ITU

2005, Salzaman et al 2001). Mobile banking is fast growing and is moving at a fast rate. The fast

development of information technology in the global world has paved way for the development

of this sector. The banks were faced with different challenges as a result of the large increase in

their customer base in the past few decades, and these has brought about many innovative

products and services which could foster the rapid development of the banking sector. And one

of such innovation is the mobile banking which is targeted at three different categories of people

between the ages of 14 & 18 years; secondly the young adult and thirdly, the business people

(Muller-Veerse 2000). Mobile banking has many benefits for both the banks and the customers.

2.7.1 Benefits to banks

The mobile banking is expected to increase customer satisfaction, reduce the cost of distribution,

e.tc, but trust and credibility has been the greatest challenge of mobile banking from their

provider (Oxford business Group 2008; Langendoerfer 2002). And many effort that are been

made to increase customers awareness and confidence in online facilities for banking appears

insufficient (Merry 2005). The higher the number of people using mobile banking, the higher the

money saved. According to Robinson (2000:105) the cost of making electronic transaction is

lower than the cost of making branch transaction. Mobile banking strengthens the relationship

between the banks and the customers because it brings banking service directly to the people

which eventually leads to customers loyalty.

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2.7.2 Benefits for customers

Mobile banking provides more benefits to its users and has been a more secure means of

accessing banking services compared to other forms of online banking (Herzberg 2003). Its

services could be used anywhere and it could be used without a desktop or PC and at a reduced

price, which makes it convenient for users compared to the traditional banking method (ibid).

M-banking usually supports time critical situation that requires prompt response from the

customer due to its immediate feature (Kemper & wolf 2000). It also provides self-service and

digital access which is more cost effective (Ahonen 2002).

2.8 Critical success factors for M-banking

Critical success factors (CSFs) has been defined in various ways, and this depends on the

purpose for which they are been used for. If well understood, critical success factor (CSF)

approach shows an accepted top-down methodology for corporate strategic planning in an

organisation, and has it identifies key success factors, it can show the key relevant information

that is required by top management. When the key success factors are identified and they are

controllable, the management of an organisation should take the necessary step in ameliorate its

potential for success

Mobile banking has a lot of impact it can make on its provider (Banks). These are regarded as

critical success factor and if well studied and implemented it can bring positive impact to the

provider. There are several suggestions in the literature as to what constitute to the critical

success factor of mobile commerce (inclusive of M-banking). According to the findings of

Buellingen and Woerter (2002) from interview expert, they see data security, user-friendliness,

personalization, and transmission rate as concern of people. And also the research survey carried

in UK by Strong and Old (2000) it reveals that convenient and easiness to use internet facilities

at any time and in any way is more paramount and will serve as a motivating factor to customers

to use mobile banking services. On the contrary, Green (2000) believes that user friendliness is a

key factor for consumers and that; high complexity phones and the size of the screen can be a

serious threat to the user.

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It is also argued that psychological issues such as security and privacy can serve as a serious

drawback when compared with technological issues which is believed to have a lesser impact. It

is also argued from a different view, Shuster (2001 cited by Shaw 2006) believes that, pricing

will be a crucial issue to customers and that price must be reasonably adjusted and affordable to

subscribers of mobile users.

2.9 Challenges for a mobile banking solution

Handset operability

There are a large number of different mobile phone devices and it is a big challenge for banks to

offer mobile banking solution on any type of device. Some of these devices support Java ME and

others support SIM Application Toolkit, a WAP browser, or only SMS. Initial interoperability

issues however have been localized, with countries like India using portals like R-World to

enable the limitations of low end java based phones, while focus on areas such as South Africa

have defaulted to the USSD as a basis of communication achievable with any phone.

The desire for interoperability is largely dependent on the banks themselves, where installed

applications (Java based or native) provide better security, are easier to use and allow

development of more complex capabilities similar to those of internet banking while SMS can

provide the basics but becomes difficult to operate with more complex transactions. There is a

myth that there is a challenge of interoperability between mobile banking applications due to

perceived lack of common technology standards for mobile banking. In practice it is too early in

the service lifecycle for interoperability to be addressed within an individual country, as very few

countries have more than one mobile banking service provider. (Tiwari et al, 2007).

Security

Security of financial transactions, being executed from some remote location and transmission of

financial information over the air, are the most complicated challenges that need to be addressed

jointly by mobile application developers, wireless network service providers and the banks' IT

departments. The following aspects need to be addressed to offer a secure infrastructure for

financial transaction over wireless network:

(i) Physical part of the hand-held device. If the bank is offering smart-card based security,

the physical security of the device is more important.

17

(ii) Security of any thick-client application running on the device. In case the device is stolen,

the hacker should require at least an ID/Password to access the application.

(iii)Authentication of the device with service provider before initiating a transaction. This

would ensure that unauthorized devices are not connected to perform financial

transactions.

(iv) User ID / Password authentication of bank’s customer.

(v) Encryption of the data being transmitted over the air.

(vi) Encryption of the data that will be stored in device for later / off-line analysis by the

customer.

One-time passwords (OTPs) are the latest tool used by financial and banking service providers in

the fight against cyber fraud. Instead of relying on traditional memorized passwords, OTPs are

requested by consumers each time they want to perform transactions using the online or mobile

banking interface. When the request is received the password is sent to the consumer’s phone via

SMS. The password is expired once it has been used or once its scheduled life-cycle has expired.

Because of the concerns made explicit above, it is extremely important that SMS gateway

providers can provide a decent quality of service for banks and financial institutions in regards to

SMS services. Therefore, the provision of service level agreements (SLAs) is a requirement for

this industry; it is necessary to give the bank customer delivery guarantees of all messages, as

well as measurements on the speed of delivery, throughput, etc. SLAs give the service

parameters in which a messaging solution is guaranteed to perform (Boyd, C, & Jacob, K, 2007).

Scalability and reliability

Another challenge for the Chief Information Officers (CIOs) and Chief Technical Officers

(CTOs) of the banks is to scale-up the mobile banking infrastructure to handle exponential

growth of the customer base. With mobile banking, the customer may be sitting in any part of the

world (true anytime, anywhere banking) and hence banks need to ensure that the systems are up

and running in a true 24-7 fashion.

18

As customers will find mobile banking more and more useful, their expectations from the

solution will increase. Banks unable to meet the performance and reliability expectations may

lose customer confidence. There are systems such as Mobile Transaction Platform which allow

quick and secure mobile enabling of various banking services. Recently in India there has been a

phenomenal growth in the use of Mobile Banking applications, with leading banks adopting

Mobile Transaction Platform and the Central Bank publishing guidelines for mobile banking

operations (Boyd, C, & Jacob, K, 2007).

Application distribution

Due to the nature of the connectivity between bank and its customers, it would be impractical to

expect customers to regularly visit banks or connect to a web site for regular upgrade of their

mobile banking application. It will be expected that the mobile application itself check the

upgrades and updates and download necessary patches (so called "Over the Air" updates).

However, there could be many issues to implement this approach such as upgrade /

synchronization of other dependent components.

Personalization

It would be expected from the mobile application to support personalization such as: Preferred

Language, date /time format, amount format, default transactions, standard beneficiary list and

alerts (Boyd, C, & Jacob, K, 2007).

19

CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Introduction

This chapter sets out various stages and phases that will be followed in completing the study. It

involves a blueprint for the collection, measurement and analysis of data. Specifically the

following subsections are included; research design, target population, data collection

instruments and procedures and data analysis. Methodology is the overall approach which

underpins the research process (Blaxter et al 2006).

3.2 Research Design

Research design refers to the methods used to carry out a research. It is important to highlight the

two main methods when investigating and collecting data - quantitative and qualitative. This

research problem can best be studied through the use of a descriptive survey design. This study

will specifically try to establish the effects of mobile banking and the challenges encountered in

implementing mobile banking in Kenya. A survey will be carried out in all the commercial

banks in Kenya.

3.3 Study Population

The population of this study will consist of all the commercial banks in Kenya. According to

Central Bank of Kenya (CBK 2011), there are 43 licensed commercial banks and 1 mortgage

finance company (see appendix 2 for full list). A census survey study is recommended so as to

cover the entire population of commercial banks in Kenya.

3.4 Data Collection

Primary data will be obtained through self-administered questionnaires with closed and open-

ended questions. The questionnaires will include structured and unstructured questions and will

be administered to the respondents. The closed - ended questions will enable the researcher to

collect quantitative data while open-ended questions will enable the researcher to collect

qualitative data. The respondents targeted will be Heads of department in charge of the mobile

banking section. Only one respondent will be picked from each bank.

20

The questionnaire will be divided into three sections. Section A will deal with general

information of the bank and respondents; section B will address effects of mobile banking and

section C will address challenges encountered in implementing m-banking.

3.5 Data Analysis

The data collected will be thoroughly examined and checked for completeness. The data will

then be summarized, coded and tabulated. Descriptive statistics such as means, standard

deviation and frequency distribution will be used to analyze the data through the Statistical

Package for Social Sciences (SPSS). Data presentation will be done by the use of pie charts, bar

charts and graphs, percentages and frequency tables. This will ensure that the gathered

information is clearly understood.

21

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27

APPENDICES

APPENDIX 1: QUESTIONNAIRE

SECTION A: GENERAL INFORMATION

1. Name of Bank: …………………………………………………………

2. Position held at the Bank: ………………………………………………

3. Number of years bank has operated in Kenya (Please tick as appropriate)

1 – 5 years

6 – 10 years

10 – 15 years

Over 15 years

4. Number of branches in Kenya

1-5 11-20

6-10 Over 20

5. Ownership of the bank

Local

Foreign

Both local & foreign

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SECTION B: EFFECTS OF MOBILE BANKING

6. Does the bank offer mobile banking services?

Yes No

7. If yes, for how long has your bank offered m-banking services? ………………………

8. Please indicate in the table below the extent to which the following m-banking services

apply to your bank:(Tick as appropriate)

Key: 5 – Very large extent, 4- Large extent, 3- Moderate extent, 2 – Low extent, 1 – No

extent.

5 4 3 2 1

Account information service

Mini-statements and checking of account history

Alerts on account activity or passing of set thresholds

Monitoring of term deposits

Access to loan statements

Access to card statements

Mutual funds / equity statements

Insurance policy management

Pension plan management

Status on cheque, stop payment on cheque

Ordering cheque books

Balance checking in the account

Recent transactions

Due date of payment (functionality for stop, change and deleting

of payments)

PIN provision, Change of PIN and reminder over the Internet

Blocking of (lost, stolen) cards

29

5 4 3 2 1

Payments, deposits, withdrawals, and transfers

Cash-in, cash-out transactions on an ATM

Domestic and international fund transfers

Micro-payment handling

Mobile recharging

Commercial payment processing

Bill payment processing

Peer to Peer payments

Withdrawal at banking agent

Deposit at banking agent

Cash-in, cash-out transactions on an ATM

9. How do you rate the following effects of m-banking to your bank?

Key: 5 – Very large extent, 4- Large extent, 3- Moderate extent, 2 – Low extent, 1 – No

extent.

Statement 5 4 3 2 1

Has increased customer satisfaction

Has reduced the cost of distribution

Has improved trust and credibility

Has reduced transaction costs

Has strengthened the relationship between the bank and the

customers

Has increased revenues

Has reduced the risk of fraud

Has helped to promote and sell the bank’s products and services

like credit cards, loans etc

Has increased the customer network

Has improved the bank’s competitiveness

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SECTION C: CHALLENGES ENCOUNTERED IN IMPLEMENTING M-BANKING

10. To what extent do you agree that the following are challenges the bank has encountered

in implementing m-banking?

Key: 5 – Very large extent, 4- Large extent, 3- Moderate extent, 2 – Low extent, 1 – No

extent.

Statement 5 4 3 2 1

Inability to offer mobile banking solution on any type of device

Security of financial transactions

Inability to meet the performance and reliability expectations

Application distribution

Personalization of mobile phones

Lack of consumers awareness of their ability to use their phones

to bank

Finding talented mobile developers for the bank

Dependence on mobile phone operators

11. Kindly list some of the ways in which the bank uses to deal with the challenges

encountered:

…………………………………………………………………………………………….

…………………………………………………………………………………………….

…………………………………………………………………………………………….

…………………………………………………………………………………………….

…………………………………………………………………………………………….

…………………………………………………………………………………………….

…………………………………………………………………………………………….

Thank you for your co-operation.

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APPENDIX 2: LIST OF BANKS

Commercial Banks

1. African Banking Corporation Bank

2. Bank of Africa

3. Bank of Baroda

4. Bank of India

5. Barclays Bank

6. CFC Stanbic Bank

7. Charterhouse bank (under statutory management)

8. Chase Bank (Kenya)

9. Citibank

10. Commercial Bank of Africa

11. Consolidated Bank of Kenya

12. Cooperative Bank of Kenya

13. Credit Bank

14. Development Bank of Kenya

15. Diamond Trust Bank

16. Dubai Bank Kenya

17. Ecobank

18. Equatorial Commercial Bank

19. Equity Bank

20. Family Bank

21. Fidelity Commercial Bank Limited

22. Fina Bank

23. First Community Bank

24. Giro Commercial Bank

25. Guardian Bank

26. Gulf African Bank

27. Habib Bank

28. Habib Bank AG Zurich

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29. I&M Bank

30. Imperial Bank Kenya

31. Jamii Bora Bank

32. Kenya Commercial Bank

33. K-Rep Bank

34. Middle East Bank Kenya

35. National Bank of Kenya

36. NIC Bank

37. Oriental Commercial Bank

38. Paramount Universal Bank

39. Prime Bank (Kenya)

40. Standard Chartered Kenya

41. Trans National Bank Kenya

42. United Bank for Africa

43. Victoria Commercial Bank

Mortgage Finance Companies

44. Housing Finance ltd

Source: Central Bank of Kenya - 2011