Evaluating the effectiveness of the financial access strategies by commercial banks and microfinance banks in Kenya

Abstract

Many stakeholders, both at the global level and the local level are making an effort to promote financial inclusion. Financial inclusion, according to the World Bank, is important in achieving economic growth; having as many citizens access financial services as possible. Commercial Banks and Microfinance banks, being major players in the financial services sector, are at the forefront in promoting financial inclusion, by increasing financial access. Empirical studies have focused on various strategies that commercial banks and microfinance banks use for financial access being internet banking, mobile banking, agency banking and expansion of the branch network. However, there is little or no empirical evidence regarding the suitable financial access strategy that the commercial banks and microfinance rank as optimal for financial access. This study utilized financial intermediation and stakeholder theories first to establish the financial access strategies utilized, second, the organizational factors and how regulation influence the ranking of the financial access strategies and obtain management’s perception of the effectiveness of the financial access strategies. The main population was the 38 Commercial Banks and 14 Microfinance Banks Licensed by the Central Bank of Kenya in 2023. Primary data on the ranking of the effective financial access strategy was obtained using a semi-structured questionnaire administered online, while part of organization factors were obtained from the annual reports for year 2023. The multinomial logistic regression model was be used to analyze organizational features and the ranking financial access strategy, while descriptive statistics were used for various organizational factors and perceptions of the management. Findings reveal that all the banks use internet banking, mobile banking and agency banking for financial access, but only 13 banks use agency banking. Commercial banks and microfinance banks rank Mobile banking, then branch network, then internet banking and finally agency banking as useful in promoting financial access for financial inclusion. Large commercial banks rank internet banking as the best financial access strategy. However, even though mobile banking being ranked as the best for financial access, this is not associated with any one organizational factor and regulation. Banks that have high capital adequacy, rank agency banking as the best means of financial access. Banks with smaller boards, microfinance banks and banks with fewer years of operation will likely rank branch network as the best means of financial access, while large profitable banks will rank branch network as the best for financial access. In terms of benefits of financial access strategies, respondents indicate that Internet Banking and Mobile Banking are very useful financial access strategies due to ability to save on costs, such as those associated with operating branches. In terms of challenges in financial access strategies, strict regulation in operating these financial access strategies by the regulator (Central Bank of Kenya), seems to the be the main challenge. However, agency banking is associated with high costs while Internet banking and Mobile banking are also associated with high risk. The findings of the study are useful for commercial banks, microfinance banks, regulators to achieve innovations in financial access, thereby financial inclusion, to inform policy, while providing more information for further research. Further studies are required to identify the most effective ways to implement these financial access strategies for financial inclusion.