Effect of Agency Banking on Financial Performance of Commercial Banks in Isiolo County, Kenya

Abstract

Commercial banks authorized for commercial purpose are the super focal empowering the economy. Therefore, the performance of agency banking stabilizes the commitment of banks to the country's economic development. However, the financial performance of commercials banks in Kenya was noted to decline in 2023 partly caused by decreased agency banking transactions from Kshs 158.4 million to Kshs 145.3 million in 2022 and 2023 respectively. The purpose of the study was therefore to examine the effect of agency banking on the financial performance of commercial banks in Isiolo County, Kenya. The specific objectives were to explore the effect of agency convenience, agency cost, quality of agent services, and agency compliance on financial performance of commercial banks in Isiolo County, Kenya. The study was guided by diffusion of innovation theory, transaction cost economics theory, network effects theory and principal-agent theory. A mixed designs comprising descriptive, qualitative and quantitative were used, targeting Cooperative Bank, KCB, and Equity Bank, which control over 90% of authorized banking agents in the region. The target population included 102 staff in Equity bank, 123 staff in Cooperative bank, and 80 staff in KCB bank, which was a total of 305 banks. The study adopted the Yamane’s formula (1967) to result to a sample size of 58 staff in Equity bank, 70 staff in Cooperative bank, and 45 staff in KCB bank, which was a total of 173 staff. Stratified sampling was applied to select respondents from the finance and accounts departments of these banks. Data were collected via structured questionnaires and supplemented with secondary financial data. The pilot research used a sample size of 10% for this investigation, with 17 respondents randomly selected to fill out the survey in Meru County. To ensure the data was reliable, Cronbach's alpha was applied, which measures internal consistency. The questionnaires included in this study underwent a validation process to guarantee their content and face validity, as well as to gauge their overall quality. The results were presented using Tables and explanations. The study found out that the correlation for agency cost was r = 0.751, p < 0.01; correlation for agency cost was r = 0.702, p < 0.01; correlation for quality of agent services was r = 0.655, p < 0.01; and correlation for agency compliance was r = 0.774, p < 0.01 with financial performance. Therefore, the conclusion on agency convenience some of the agency banking services were noted not to be user friendly which hampered a lot of the clients from subscribing to them. On the agency costs, the operational costs associated to installation and maintenance of IT, compliance with banking regulations and staffing the agencies to suit the needs of the bank were high. On the quality of agent services, the study noted that most of agency banking had average standards to low standards as compared to what the branch banking was offering. On regulatory compliance, conclude that it stood out as the most critical factor influencing financial performance. The study’s recommendations on agency convenience are that bank managers should prioritize the convenience of agency services. This can be achieved by expanding the network of agents to ensure that services are accessible anywhere. On agency cost are that operations supervisors should consider focusing on implementing more efficient operational processes. On quality of agent services are that the senior management should develop a policy structure that ensures ongoing training programs for agents to equip them with exceptional service skills. On adherence to agency compliance are that the branch managers should foster a culture of compliance within the organization, emphasizing the importance of ethical practices and regular training on regulatory updates.