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This chapter presents the literature review which covers theoretical framework and empirical studies that have been carried out investigate the effects of mobile banking on the financial performance of commercial banks in Kenya. First, a theoretical review is provided which will involve a review of various theories on technological innovations and firm performance. This will then be followed by an empirical review of literature and finally, a summary of the literature review.
Financial intermediation is a process which involves surplus units depositing funds with financial institutions who then lend to deficit units. Bisignano (1992) identified that financial intermediaries can be distinguished by four criteria. First, their main categories of liabilities or deposits are specified for a fixed sum which is not related to the performance of a portfolio. Second, the deposits are typically short-term and of a much shorter term than their assets. Third, a high proportion of their liabilities are chequeable which can be withdrawn on demand and fourthly, their liabilities and assets are largely not transferable. The most important contribution of intermediaries is a steady flow of funds from surplus to deficit units.
Diamond and Dybvig (1983) analyses the provision of liquidity that is transformation of illiquid assets into liquid liabilities by banks. In their model identical investors or depositors are risk averse and uncertain about the timing of their future consumption need without an intermediary all investors are locked into illiquid long term investments that yield high pay offs to those who consume later.
According to Scholtens and van Wensveen (2003), the role of the financial intermediary is essentially seen as that of creating specialized financial commodities. These are created whenever an intermediary finds that it can sell them for prices which are expected to cover all costs of their production, both direct costs and opportunity costs. Financial intermediaries exist due to market imperfections. As such, in a perfect market situation, with no transaction or information costs, financial intermediaries would not exist. Numerous markets are characterized by informational differences between buyers and sellers. In financial markets, information asymmetries are particularly pronounced. Borrowers typically know their collateral, industriousness, and moral integrity better than do lenders. On the other hand, entrepreneurs possess inside information about their own projects for which they seek financing (Leland and Pyle, 1977). Moral hazard hampers the transfer of information between market participants, which is an important factor for projects of good quality to be financed.
The MP theory states that increased external market forces results into market power which is defined as the capacity of an organization to increase its prices without losing all its clients. In banks, as in other business organizations, Market Power can take two forms: differentiation of products and services, or ease of search. There is a trade-off between differentiation and loss of legitimacy which is optimized at a strategic balance point (Shepherd, 1986). Likewise, there is a trade-off between ease of search and security that must be taken into account. This theory categorizes Information Communication and Technology (ICT) investments into Market-Power driven initiatives profit.
Moreover, the hypothesis suggest that only firms with large market share and well differentiated portfolio can win their competitors and earn monopolistic profit.(Shepherd, 1986) Efficiency structure theory (ES) suggests that enhanced managerial and scale efficiency leads to higher concentration and then to higher profitability. According to Olweny and Shipho (2011) balanced portfolio theory also added additional dimension into the study of bank performance. It states that the portfolio composition of the bank, its profit and the return to the shareholders is the result of the decisions made by the management and the overall policy decisions.
This theory was officially introduced by Bradley and Stewart in the year 2002 and it affirms that firms engage in the diffusion of innovation in order to gain competitive advantage, reduce costs and protect their strategic positions. The innovation diffusion theory put forward by Rogers in 1962 is a well -known theory that explains how an innovation is diffused among users over time (Liu & Li, 2009). It also helps to understand customers‟ behavior in the adoption or non-adoption of an innovation (Vaugh and Schavione, 2010; Lee and others, 2003). The theory depicts that the adopters of any innovation follow a bell-shaped distribution curve which may be divided into five parts to categorize users in terms of innovativeness (Liu and Li, 2009). Rogers classified users as innovators, early adopters, early majority, late majority and laggards (Liu and Li, 2009).
The adoption and use of mobile banking has the potential to extend the limited nature and reach of the formal financial sector to the poor and rural population in Africa. Most of the existing literature is from the developmental/practitioners‟ arena with a few scholarly studies emerging (Mas & Morawczynski, 2009). Although most of the studies from the practitioners are not peer reviewed, they provide valuable information on actual usage and contextual information on the development and use of the phenomenal. For example, Ivatury and Pickens (2006) provided valuable insight into the characteristics of the early adopters of WIZZIT, one of the first major initiatives dedicated to offering mobile banking to the poor in South Africa. Also significant are the ethnographic work of Morawczynski during 18 months stay in Kenya (Morawczynski & Krepp, 2011).
From the above theories, it is possible to conclude that bank performance is influenced by both internal and external factors. The internal factors include bank size, capital, management efficiency and risk management capacity. The same scholars contend that the major external factors that influence bank performance are macroeconomic variables such as interest rate, inflation, economic growth and other factors like ownership.
Financial performance is the profitability of a business enterprise measured through various measures mostly return on assets and return on equity. Profit-seeking enterprises and individuals are constantly seeking new and improved products, processes, and organizational structures that will reduce their costs of production, better satisfy customer demands, and yield greater profits. Sometimes this search occurs through formal research and development programs; sometimes it occurs through more informal “tinkering” or trial and error efforts. When successful, the result is an innovation. The consequences of financial innovation in terms of the payoffs to the innovators and the impact on society as a whole have been a subject for theoretical literature. Innovation generally does seem to have positive effects in raising financial performance of innovators (Boot &Thakor, 2007).
The key determinants of financial performance of any company include the following, Product innovation, process innovation as well as institutional innovations. Others may include operation efficiency, capital adequacy, macro-economic condition, institutional factors such as corruption control, rule of law and accountability. The three perspectives of assessing financial performance of telecommunications companies are profitability, asset management and efficiency leverage. Return on assets (ROA) fall within the domain of profitability measures and tracks any firm’s ability to generate income based on its assets (Mwangi, 2014).
Financial innovation is an on-going process where new financial products, services and procedures are created or and standardized products are differentiated in order for the companies to respond at the continuously changing economic environment. Financial innovation by firms is a key determinant of financial performance and growth of any telecommunication company. Like any other economic behaviors, it generally arises in anticipation of material gains following a cost-benefit analysis. The innovation makes possible to either reduce costs or an increase revenues, or both. On the cost-reducing side, in particular, exogenous technological change provides room for cost reduction (Mathenge, 2013).
Another determinant of financial performance is capital adequacy. Capital refers to the amount of owners, funds available to support any business and, therefore, capital acts as a safety net in the case of adverse development. Capital is calculated as the ratio of equity to total assets. The ratio measures how much of the company’s assets are funded with owners, funds and is a proxy for capital adequacy of any company by estimating the ability to absorb losses. Based on past literature, the relationship between capital and profitability is said to be unpredictable (Gupta, 2008). This is due to the fact that while positive relationship had been found by some studies, other studies found a negative relationship between capital and profitability. Another determinant of financial performance in any organization is the operational efficiency. The operational efficiency refers to the ability to produce maximum output at a given level of input, and it is the most effective way of delivering small loans to the very poor in microfinance context. This involves cost minimization and income maximization at a given level of operation, and it has an enduring impact on financial performance of microfinance institutions. Thus, efficiency can be measured by its productivity and cost management dimensions (Nyambariga, 2013).
The MP theory states that increased external market forces results into market power which is defined as the capacity of an organization to increase its prices without losing all its clients. In banks, as in other business organizations, Market Power can take two forms: differentiation of products and services, or ease of search. There is a trade-off between differentiation and loss of legitimacy which is optimized at a strategic balance point (Shepherd, 1986). Likewise, there is a trade-off between ease of search and security that must be taken into account.
This theory categorizes Information Communication and Technology (ICT) investments into Market-Power driven initiatives profit. Moreover, the hypothesis suggest that only firms with large market share and well differentiated portfolio can win their competitors and earn monopolistic profit.(Shepherd, 1986) Efficiency structure theory (ES) suggests that enhanced managerial and scale efficiency leads to higher concentration and then to higher profitability. According to Olweny and Shipho (2011) balanced portfolio theory also added additional dimension into the study of bank performance. It states that the portfolio composition of the bank, its profit and the return to the shareholders is the result of the decisions made by the management and the overall.
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