IJMRBS Journal Vol 4

INT. J. MGMT RES.
&
BUS. STRAT. 2016
INTERNATIONAL
JOURNAL of
Management Research
and Strategy
IJMRS ISSN
321-423X
VOL 4 No. 3,
July, 2016
Int. J. Mgmt Res. & Bus. Strat. 2016
International Journal of Management

Research and Strategy
ISSN 321-423x www.academia.edu.com
Vol. 4, No. 3, July 2016
2016 IJMRBS. All Rights Reserved
EFFECT OF ORGANIZATIONAL STRUCTURE ON SMALL AND MEDIUM

ENTERPRISES PERFORMANCE: A SURVEY OF SMES IN KISUMU COUNTY
ZACHARY NYAIRO OKORA1
1PHD
Candidate, Department of Business Management in the School of Human Resource
Development of Jomo Kenyatta University of Agriculture and Technology, Kenya

JEL CODES: L1, M2, O12, O33
KEYWORDS: Organizational Structure, departmentalization, specialization, decentralization,
coordination
Abstract
Organizational structure plays an important role on survival of any business units and it is important to
understand different factors influencing it. In this paper, we present an empirical study to learn the effects
of four parameters including departmentalization, specialization, decentralization and coordination on
organizational performance of SMEs in Kisumu County. There were 6981 employees working for the SMEs
organization and the proposed study of this paper was selected a sample of 399 people, designed, and
distributed a questionnaire among them. The proposed study uses the methods of regression analysis and
correlations to study the impacts of the four variables on organizational performance. The results show
that there are some positive and meaningful relationship between departmentalization, specialization,
decentralization and coordination and concentration from one side and organizational performance from
the other side, in fact departmentalization (=.383, t=5.858, p<0.000), specialization (=.163, t=2.561,
p<0.004), decentralization, (=.314, t=4.373, p<0.000), and coordination, (=.342, t=5.109, p<0.000)
have a significant influence on SME Performance. The study therefore mainly recommends that SMEs learn
to strategically use the organizational structure forms to improve their performance.

INTRODUCTION
One of the most elementary decisions a small firm owner or manager has to make is the design of
the firms organization. As soon as a small firm hires one or more employees, some kind of
organizational structure develops (Burton and Obel 2008). The actual design of this organizational
structure is a mix between intended, deliberate choices and unconscious, emergent developments.
Who decides on what, who is responsible for what, and how do we coordinate these decisions and
responsibilities effectively? Acknowledging an ongoing debate on the interrelationships between
strategy, structure and performance, the outcome of the organizational design process is
unmistakably an important determinant of the performance of firms (Mintzberg, 1979).
Theoretical support of the importance can be found almost anywhere. Engineers, economists and
sociologists have written on organizational structure and design (literature reviews in major
textbooks such as Mintzberg 1979, Robbins 1990, Burton and Obel 2008). Likewise, Williamson
(2005) points at the diseconomies caused by unbalances between firm size, organizational form
and external relationships.
Organizational structure is also highlighted as a relevant factor in the regulation of a firms
information processing demands and capabilities (Burton and Obel 2008).
Looking at the
literature on small firms, we find additional support for the importance of organizational structure.
Research on start-ups (e.g. Miller and Friesen 2008) indicates that developing and implementing
an adequate structure is one of the most important challenges. Entrepreneurs struggle with it, and
wrong choices may lead to exits.
Theory on organizational structure and design has developed, from a normative, universalistic
approach (promoting the best structural form) via a normative contingency theory approach (the

best structural form given a specific set of conditions) to a notion of equifinity (Doty, and Hubert
1993). Unfortunately, the empirical relevance and rigor of these normative theories are not always
clear. Intuitively, we agree with Donaldson (2007) when he states that a good fit means better
performance. But what exactly is a good fit? Studies that actually investigate performance in
relation to organizational structures are rare (Covin and Slevin 2008) and/or do not find clear
relations between contingency factors, structure variables and performance (Child 2006). The
majority of studies are of a descriptive and predictive nature (Child 2006, Pugh and Hickson 2006)
or focusing on one aspect of structure (Axley 2002) leading to a confusing mix of hypotheses,
recommendations and decision rules.
Burton and Obel (2008) collected about 450 such rules for organizational design and put them into
The Organizational Consultant knowledge base. This could give the impression that the
organizational structure problem is a done deal: put in your characteristics and your preferred
structure is clear. However, for many of the rules it is unclear how they were derived: by rule of
thumb, logical deduction or sound empirical research? Moreover, most rules are based on the study
of large firms only.
In this study, we want to re-open the discussion. We search for insight in the role of organizational
structure, which we expect to be critical in the performance of small and medium- sized enterprises
(SMEs). The well-known and (relatively) large-scale empirical studies are over 20 years old. Since
then, technological developments have changed the shape, efficiencies and structure of
organisations. Theory has been developing accordingly, but empirical insights have lagged.
Variations in the organizational structures of small and medium-sized firms are often not
acknowledged.

Many studies agree that organizational size is one of the variables most closely related to
organizational structure (Pugh and Hickson 2006), but the number of studies that actually focus
on, or even include, SMEs are scarce (Geeraerts 2004, Chaston 2007, Caruana et al 2008, Johnston
2000). The studies that do investigate organizational structures in SMEs mostly have a limited
empirical base (48 to 249 cases), pay attention to only a few aspects of organizational structure,
and do not look into differences between size classes.
As a first step in the right direction, this study presents a quantitative study into the occurrence of
various structures in small firms. We aim to gain insight in the occurrence of typical organizational
structures, the role of contingency factors, and the impact of small and medium- sized firms
structures on performance.
Research Hypotheses
H01: Departmentalization has no significant influence on SME performance in Kisumu County
H02: Specialization has no significant influence on SME performance in Kisumu County
H03: Decentralization has no significant influence on SME performance in Kisumu County
H04: Coordination has no significant influence on SME performance in Kisumu County
LITERATURE REVIEW
Dimensions of Organizational Structure
Over the last decades a vast literature on organizational structure has been developing using a
variety of variables to measure the concept. In this section we briefly review a number of wellcited authors who have attempted to find a coherent set of such variables.
Organizational structure is seen as consisting of two main dimensions: (1) work division,
distributing tasks and activities, and (2) coordination mechanisms, including standardization and
formalization. Based on these two dimensions, typically a number of specific structure variables

can be developed. At this point we do not go into the operationalisation of the variables. They will
be discussed below.
Organizational Structure is different in each business and which is suitable for strategic
implementation and innovation (Olson et al, 2005). Olson et al. (2005) mention that organizational
structure (such as formalization, centralization, specialization, and integration) is a critical
component of strategy implementation. As well innovation is one of the strategy orientation
components (Tan, 2001). Consequently, the suitable structure of organization may have influence
on organizational innovation. Then it brings about to superior organizational performance.
Organizational structures are one of the constructs that is established to coordinate work that has
been divided into smaller tasks. It refers to an organization's internal pattern of relationships,
authority, and communication (Mintzberg, 1979). Firms which follow to different generic business
strategies adopt different structural designs Walker and Ruekert (2007). The latter, that integration
with organizational innovation will achieve higher performance. Also Vorhies and Morgan (2003)
study the relationships among organization structure, business strategy, and performance in the
trucking industry. Both of these studies demonstrate that different organizational characteristics
are more or less appropriate for different business strategies. Alternative forms of structures are
typically defined by four structural constructs, which as we note seems particularly important in
shaping an organization's or department's performance. These four subconstructs are
formalization, centralization, specialization, and integration; they are central to Mintzberg's (1979)
analysis of organizational structures as organizations' internal pattern of relationships, authority,
and communication.

The next four subsections clarify the dimensions of formalization, centralization, specialization,
and integration and offer suggestions for how these dimensions might be studied further. Although
we view each of these dimensions as salient to an organizational innovation, our discussion also
reflects the argument that they may vary independently in a given context.
Formalization
Formalization is the degree to which formal rules and procedures govern decisions and working
relationships (Olson et al., 2005). Rules and procedures provide a means for directing appropriate
behaviors and addressing routine aspects of a problem. Rules enable people to organize their
activities to both their and the organization's benefit (Ullrich and Wieland 2000). Formal rules and
procedures can lead to increased efficiency and lower administrative costs (Walker and Ruekert
2007), particularly in stable environments or those in which tasks are comparatively simple and/or
repetitive. Firms with highly formal procedures as mechanistic and those with fewer formal
procedures as organic. The latter firms encourage horizontal and vertical communication and
flexible roles. Benefits of the organic form include rapid awareness of and response to competition
and market change, more effective information sharing, and reduced lag time between decision
and action (Miles and Snow 2002). Also formalization reduces the potential ambiguity surrounding
innovation implementation (Claycomb et al., 2005).
Centralization
Centralization refers to whether decision authority is closely held by top managers or is delegated
to middle and lower level managers (Olson et al., 2005). Lines of communication and
responsibilities are relatively clear in centralized organizations, and the route for final approval
6

can be traveled quickly. Although fewer innovative ideas tend to be put forth in centralized
organizations, implementation tends to be straightforward after the decision is made (Ullrich and
Wieland 2000). This benefit is primarily realized in stable, noncomplex environments (Olson,
Walker, and Ruekert 2005). In contrast, in a decentralized organization, a variety of views and
ideas may emerge from different groups such as product management and sales. Because decision
making is disseminated, it may take longer to make and implement a decision. In the long run, it
is likely that the decentralized organization will produce more new ideas and more actual program
changes than will a centralized organization (Ullrich and Wieland 2000). In addition, when a task
is non-routine and takes place in a complex environment, decentralization is likely to be more
effective because it empowers managers who are close to the issue to make decisions and
implement them rapidly (Ruekert, Walker, and Roering 2005). Ultimately, the two terms simply
represent opposite ends of a single spectrum. Centralization of responsibilities hinders
opportunities for organizational learning and makes it difficult to reliably implement an
innovation. Structure that do not value or encourage member participation in decision making are
not beneficial to coping with the complexities and uncertainties of implementing innovations, then
often resulting in failure (Zammuto and O'Connor, 2008). Firms exhibiting decentralization of
innovation adoption decision are far more likely to experience implementation success of
innovations than firms that have centralized decision making.
Specialization
Specialization refers to the degree to which tasks and activities are divided in the organization and
the degree to which workers have control in conducting those tasks (Olson et al., 2005).
Specialization of employee is the extent to which tasks are divided and assigned to specific
7

individuals (Grant, 2009). Most firm capabilities require integrating the knowledge base of a
number of specialists (Grant, 2009). Specialization provides a broad knowledge base about
innovation across a firm, increases cross-fertilization of ideas necessary for innovation adoption,
encourages debates on the merits of innovation, and brings about cognitive breadth in decisionmaking processes (Collins et al., 2008). Firms with more specialists tend to adopt more innovations
because they possess the expertise required to recognize adopt, and utilize innovations (Collins et
al, 2008).
Integration
Integration is defined as the strategic and operational linking of business processes across
functionally specialized groups through the use of connection devices, cross-functional teams, and
interdepartmental committees (Mintzberg, 1979). Integration allows firms to be responsive and
flexible through improved communications. Integration within complex firms is necessary for
developing organizational capabilities (Grant, 2009). As knowledge is created within more
decentralized or specialized units, integration becomes a crucial mechanism to balance
compartmentalization of that knowledge. To create synergy among new knowledge based within
a firm, integrative devices are needed to ensure suitable coordination of new functional activities
(Collins et al, 2008). Integrative mechanisms provide information through input diverse
individuals and different types of information needed to promote innovation adoption than would
otherwise be available (Grant, 2009). An integrated organization is necessary in enabling effective
organizational innovation. Among firms, integration and adoption of technology are related. Other
studies have found that integration is conducive to innovation.

Contingencies
In this section we discuss contingencies on the relationship between organizational structure and
performance. Extended reviews of earlier research on this can be found (again) in e.g. Mintzberg
(1979), Robbins (1990) and Burton and Obel (2008).
Environment
The uncertainty and complexity of the firms environment determines the appropriateness of
organizational structures. Other environmental aspects mentioned are e.g. hostility. equivocality
and unpredictability (cf. Lawrence and Lorsch 2007, Child 2006, Miller and Friesen 2000). A l
and mark contribution comes from Burns and Stalker (2001). The latter argue that an organization
should be mechanistic in a stable environment and organic when the environment is turbulent.
Discussing correlations, Robbins (2000) suggests that formalisation and environmental uncertainty
are inversely related, environmental complexity and decentralisation are positively related, and
that hostility in the environment leads to centralisation.
Technology
Technology can be defined as the information, equipment, techniques, and processes required to
transform inputs to outputs (Robbins 1990, Burton and Obel 2008). When measuring technology
and linking it to organizational structure the main dimensions may be the unit, mass and process
typology (Woodward 1965) or routine versus non -routine (Perrow 1970). A commonly used proxy
is the sector (manufacturing, services, etc). Discussing correlations, Robbins (2000) suggests that
routine technology is positively related to low complexity and high formalisation, while it is only

positively related to centralisation if formalisation is low. A recent metastudy by Hirst (2001)

however finds much variation to be spurious.
Size
Size is quite directly related to structure. As organizations grow, both the opportunity and need for
work division and coordination rise. Pugh and Hickson (1976) empirically substantiate this
finding, and also e.g. Blau and Schoenherr (2001), Child and Mansfield (2002) and Miller and
Toulouse (2006) support the position. Robbins (2000) summarizes that complexity and
formalisation are positively related to size, while research on centralisation yields mixed findings
(almost exclusively based on large organisations). Small firms have different agendas, but also a
limited set of structural options. Geeraerts (2004) found positive correlations between size and
complexity, formalisation and decentralisation.
Strategy
Chandler (2002) started the mainstream discussion on the relationship between structure and
strategy, based on a study in nearly one hundred large firms. He found that structure follows
strategy. Miles and Snow (2008) developed this idea into a typology indicating best fits between
structure and strategy. Later, the environment and technology in which firms operate were
introduced as important factors determining strategy and, hence, structure. The present opinion is
that structure and strategy are interrelated, and causality is hard to show. Obviously, this is partly
due to firms sluggish, inert reactions to their environments and their possible natural resistance
to change (Miller and Friesen 2000).
10

Owner/manager objectives
Many studies show a relationship between structure and managerial variables such as
entrepreneurship, leadership style, and type of control (e.g. Mintzberg 1979, Robbins 2000, Miller
and Friezen 2000, Geeraerts 2004, Johnston 2000).
Burton and Obel (2008) summarise these variables into a high/low management preference for
micro- involvement. High involvement is compatible with low complexity, high formalisation and
high centralisation. Geeraerts (2004) finds that relationships between the sizes of organizations
and their structure are modified by the status of the management of the firm.
Although we presented the above contingencies separately, it is obvious that many interrelations
may exist. For example, in small businesses the organization is more likely to be structured in
accordance with the owners or managers preferred problem-solving strategies than in large
corporations (Miller and Toulouse 2006).
Various authors have developed this idea and proposed configurations, or typologies of
organizational structures.
Configurations
Miller (1980a) has argued that multivariate interdependencies in structure variables tend to
manifest in Gestalts. Common configuration s of mutually reinforcing elements occur. This idea
is not new. Max Weber already introduced the Gestalt machine-bureaucracy proposing that
specialisation, rules and procedures, paperwork, and an extended hierarchy are positively related,
and that all th ese structuring variables are negatively related to the centralisation of decision
11

making. Other famous examples are the typology of Burns and Stalker (1961) who distinguish
between organic and mechanistic organisations; Pugh and Hickson (2006) propose a sevenfold
classification of broad types of organizational structures; and Mintzberg (1979) who introduces
five structural configurations ranging from a simple structure to a divisionalised form.
Sometimes these configurations are interpreted as ideal types (e.g. Mintzberg 1979), sometimes as
observed types (Pugh and Hickson 2006). Miller and Friesen (2000) demonstrate that changes (or
stability) in the structure variables tend to occur together, or follow one another after a very brief
interval (in order to maintain an appropriate balance or configuration).
An important limitation of many of these typologies is that they are based on case studies or
surveys in large firms. The small firm is often positioned as a caricature in one of the types, such
as Burns and Stalkers organic organisation or Mintzbergs simple structure.
To conclude this section we stress that much research on organizational structures has been done,
largely in the 1960s, 1970s and 1980s. Organizational size is one of the important variables related
to organizational structure, but really small firms, especially less than one hundred employees, are
rarely included in empirical studies, let alone focused on. We will do just that.
In the next section we will describe the research design of our survey. We build upon the two
dimensions of organizational structure (work division and coordination) and the five important
contingency variables as described above. Additionally, we will take up the idea that probably
configurations of structure variables exist and look for the existence of such a typology for small
firms.
12

RESEARCH METHOD
Three times a year, about 1,800 entrepreneurs of Kenyan small and medium sized companies
participate in SME Policy Panel for performance measurement. The panel is used for stand-alone
and longitudinal research. The purpose of the panel is to gather information about the attitudes,
behaviour and performance of Kenyan SMEs with fewer than 100 employees.
The panel is stratified in three size-classes and nine economic sectors. For each of the enterprises
in the panel several control variables are available, among others size, strategy, type of economic
activity and location.
For this research, a questionnaire was designed based on the theories on organizational structure
outlined above. We have used 20 three-point Likert-type questions, 6 yes or no questions and
several more open questions. We chose to use three point Likert scales, since in test interviews
this has repeatedly been found to be the maximum complexity that the interviewees can handle
over the telephone, unless one asks questions in two steps. For our 6 performance variables the
latter two-step questioning has been used.
For this investigation, we have a sample of 399 Kisumu SMEs employing at least one person (to
have at least some organizational structure). Like said, the firms were drawn from the population
of Kisumu SMEs based on 27 strata by sector and size class.
Research Design
Our research consists of four steps. Firstly, a factor analysis was performed on the various items
in the survey. Based on these factors, we highlighted several of the key features of the
13

organizational structures of SMEs. Then, we moved on to derive types of SMEs based on their
organizational structures by way of a cluster analysis, and, we discussed how the clusters are
distributed across the economic sectors. Finally, we showed whether there are any systematic
consequences of being a particular type of firm. Relatively poor and good performance are
analysed given size, sector and strategy.
Variables in The Analysis
We include variables in six broad categories. Next to a number of control and performance
variables, we measured twenty -three items on organizational structure. Seven items are on
departmentalization, four on specialization, four on decentralization and eight on coordination.
Both Pearson correlations and regression was used.
14

RESULTS
Correlation Analysis
As part of the analysis, Pearsons Correlation Analysis was done on the Independent Variables and
the dependent variables. The results is as seen on Table 4.1
Table 4.1 Correlations
SME
Performance
SME Performance
Pearson
Correlation
D1
D2
Sig. (2tailed)
N
Departmentalization
Specialization
Decentralization
Coordination
Pearson
Correlation
399
.635**
Sig. (2tailed)
.000
399
399
.615**
431**
Sig. (2tailed)
.000
.000
399
399
399
.558**
.400**
.157**
Sig. (2tailed)
.000
.000
.002
399
399
399
.701**
.258**
.128
.527**
Sig. (2tailed)
.000
.005
.000
.000
399
399
399
399
Pearson
Correlation
Pearson
Correlation
Pearson
Correlation
399
**. Correlation is significant at the 0.01 level (2-tailed).
Pearson correlation analysis was conducted to examine the relationship between the variables. The
measures were constructed using summated scales from both the independent and dependent
15
399

variables. As cited in Wong and Hiew (2005) the correlation coefficient value (r) range from 0.10
to 0.29 is considered weak, from 0.30 to 0.49 is considered medium and from 0.50 to 1.0 is
considered strong. However, according to Field (2005), correlation coefficient should not go
beyond 0.8, to avoid multicollinearity. Since the highest correlation coefficient is 0.701 which is
less than 0.8, there is no multicollinearity problem in this research (Table 4.1).
All the independent variables had a positive correlation with the dependent variable with
coordination having the highest correlation of (r=0.701, p< 0.01) followed by departmentalization
with a correlation of (r=0.635 p< 0.01) and then specialization with a correlation of ( r=0.615 p<
0.01), decentralization had the least correlation of( r= 0.558 p< 0.01). This indicates that all the
variables are statistically significant at the 99% confidence interval level 2-tailed. This shows that
all the variables under consideration have a positive relationship with the dependent variable.
4.2 Regression Analysis

As part of the analysis, Regression Analysis was done. The results is as seen on Table 4.11, 4.12
and 4.2
Table 4.2 Model Summaryb
Model
1
R Square
.872a
.810
Adjusted R Square
Std. Error of the

Estimate
.791
.176
a. Predictors: (Constant), departmentalization, specialization, decentralization,

coordination
b. Dependent Variable: SMEs performance
From table 4.2 it is clear that the R value was .872 showing a positive direction of the results. R is
the correlation between the observed and predicted values of the dependent variable. The values
16

of R range from -1 to 1 (Wong and Hiew, 2005). The sign of R indicates the direction of the
relationship (positive or negative). The absolute value of R indicates the strength, with larger
absolute values indicating stronger relationships. Thus the R value at .872 shows a stronger
relationship between observed and predicted values in a positive direction. The coefficient of
determination R2 value was 0.810. This shows that 81.0 per cent of the variance in dependent
variable (SMEs performance) was explained and predicted by independent variables
(departmentalization, specialization, decentralization, coordination)
Table 4.3 ANOVAb
Sum of
Squares
Model
1
Regression
Residual
Df
Mean Square
232.743
12.878
227
43.096 104.391
Sig.
.000a
.664
Total
245.621
231
a. Predictors: (Constant), departmentalization, specialization, decentralization,
coordination
b. Dependent Variable: SMEs Performance
The F-statistics produced (F = 104.391.) was significant at 5 per cent level (Sig. F< 0.05), thus
confirming the fitness of the model and therefore, there is statistically significant relationship
between departmentalization, specialization, decentralization, coordination, and SMEs
performance.
17

Table 4. 4 Regression Coefficients

Unstandardized
Coefficients
Model
Standardized
Coefficients
Std. Error
Beta
Sig.
2.717
.341
.277
7.008
.000
Departmentalization
.365
.178
.383
5.858
.000
Specialization
.268
.064
.163
2.561
.004
Decentralization
.274
.075
.314
4.373
.000
Coordination
.319
a. Dependent Variable: SMEs Performance
.059
.342
5.109
.000
(Constant)
From table 4.4, the t-value of constant produced (t = 7.008) was significant at .000 per cent level
(Sig. F< 0.05), thus confirming the fitness of the model. Therefore, there is statistically significant
relationship between departmentalization, specialization, decentralization, coordination and SMEs
performance.
Thus, the four hypotheses:
18

Table 4.5 Hypotheses Testing

Hypothesis
Test
Results
Remarks
H01: Departmentalization has
Regression
Significant
Rejected
no significant influence on
.000
Significant
Rejected
Significant
Rejected
Significant
Rejected
SME performance in Kisumu

County
H02: Specialization has no
Regression
significant influence on SME
.000
performance in Kisumu
County
H03: Decentralization has no
Regression
.004
County
H04: Coordination has no
Regression
.000
County
CONCLUSIONS
Coupling these results back to the literature and the hypotheses formulated above, we can draw
the following conclusions.
19

To begin with, contrary to our first hypothesis, we find small firms to occur in a wide variety of
organizational structures. We find organizational structures with various degrees of
departmentalisation to coexist. We find that small firms as well as larger firms may exhibit
substantial departmentalisation. Nevertheless, we do find
a strong correlation between
departmentalisation and firm performance. Contrary to hypotheses H01 departmentalised or large

non-departmentalised firms do not perform systematically worse than large departmentalised or
small non-departmentalised firms. In line with Radner (1992) and Lenox (2002), we find that
strongly decentralized structures perform well in several contexts, notably in business services
and manufacturing.
Several rather centralized structures perform equally well though, even in the same contexts.
Contrary to our second hypothesis and contrary to the seminal work by Alchian and Demsetz
(1972), we find that firms with strong centralization and strong vertical specialization only occur
and only perform well in relatively simple structures. Apparently, for larger firms strict vertical
specialization requires at least some decentralization in order to be efficient. In line with Grossman
and Hart (1986) and Garicano (2000), we also find firms with substantial specialization to be
larger. In combination with complex coordination mechanisms, SMEs perform well in terms of
growth as well. Especially the relatively small Medium firms are able to achieve impressive growth
figures.
All in all, it is quite clear that the relationship between organizational structure and business
performance is complex. Small and medium sized firms are a very heterogeneous bunch, both
across sectors and across size classes. Strategies and objectives provide some insight in the
operational fit of particular structures, but more thorough analysis is desired. Other features of the
20

context, such as the number of customers, the number of competitors, the number of suppliers and
so forth seem very relevant interacting variables. Analysis of all control variables and
organizational structure at the same time provides an econometric challenge.
The present study above nonetheless provides a substantial step towards a better understanding of
SMEs and their operational performance. Additional research comparing these results to other
countries is very interesting. Nonetheless there is no reason to assume that the Kenyan conditions
are radically different from other countries such that these results are not largely transferable.
21

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23

Vol. 4, No. 3, July 2016
INFLUENCE OF AGENCY BANKING SERVICES ON SMES UPTAKE OF AGENCY

BANKING IN NANDI CENTRAL SUB COUNTY, KENYA.
JOEL K. BARMAO1
1PHD
Candidate, Department of Business Management in the School of Human Resource

KEYWORDS: Agency Banking, Innovation, Uptake
Abstract
Currently, agency banking is an integral part of modern banking in many countries. It is geared at helping
financial institutions attract existing entrepreneurs from crowded branches by providing a
complementary, often more convenient channel of accessing bank services. Moreover, small and
medium scale enterprises (SMEs) are lifeblood of most economies. And yet, despite the contributions of
SMEs to the economy, there is low extent to which agency banking is adopted by SMEs with only a
significantly low percentage having what would be considered a significant adoption of the agency services.
The purpose of the study was therefore to establish the influence of agency banking services on SMEs
uptake of agency banking. The study was guided by diffusion of innovation theory. Descriptive survey
research design was used in this study. The study targeted 52 agents, 123 SME managers and 4 bank
managers. Stratified sampling was used to categorize the respondents, while simple random sampling was
used to select 2 bank managers, 26 agents and 61 SME managers. Questionnaires and interview guide were
used to collect primary data. Data was analyzed using descriptive statistics, and the hypotheses were tested
using linear regression and correlation and presented in tables. The findings of the study were: Agency
services (=.383, t=5.858, p<0.000) had a significant influence on SMEs uptake of agency banking in
Nandi Central Sub County. The study therefore recommends: Banks using agency banking should have
more agency services and introduce full scope business correspondents (BCs) who engage in all activities
permitted for BFs but also disburse credit thus helping in SMEs financial Access and improve uptake by
SMEs.
24

INTRODUCTION
Small and medium enterprises (SMEs) are the lifeblood of most world economies. On average
SMEs represent over 90% of all enterprises and account for 50 to 60% of employment in most
African countries. According to Abor and Quartey (2010), SMEs in Africa have been noted to
provide about 85% of manufacturing employment. SMEs are also believed to contribute about
70% to Kenyas Gross Domestic Product (GDP) and account for about 92% of businesses in Kenya
(Kithuka, 2012). Cobbold et.al, (2008) argued that SMEs are particularly important in supporting
economic growth and livelihoods in developing countries.
In recognition of these potential roles of the sector, successive governments in Kenya have
continued to articulate policy measures and programs to achieve industrial growth and
development as stated in the Kenyas Economic Recovery Programme (Government of Kenya,
2006). However, the poor performance of the industrial sector, especially when emphasis was on
large scale enterprises in the course of implementing the strategy of the Kenya government, led
to the renewed emphasis or focus on the small and medium enterprises (SMEs) as the driving force
in the industrial sector.
Despite these contributions of SMEs, their major barriers to growth and development appear to be
shortage of both equity financing and debt. Thus, according to Lader (2006), one other important
problem that SMEs often face is access to capital and lack of adequate financial information also
places significant constraints on SMEs. As Abor and Quartey (2010) argue, SMEs have faced
challenges in financial accessibility through traditional banks and there is therefore need for a more
workable formula.
25

Therefore, mainly due to high competition, banks have embarked on new strategies to try and
improve financial accessibility to the poor and SMEs. Kithuka (2012) notes that because of
globalization, liberalization, and technological advancement, banks like any other organization
faced many challenges. These challenges called for search for suitable strategies to be adopted
by organization for growth and survival. One such strategy for banking sector has been the
introduction of agency banking (Kithuka, 2012).
Agency banking is a banking strategy where traditional banks use other segments or agencies that
would offer financial accessibility and administration that would be easier and accessible to its
clients. According to Waithanji (2012), agency banking was commissioned in Kenya in April
2010. Due to the short span of the duration in which it has been in existence only four banks are
currently engaging in the exercise. So far, Equity Bank (Equity Mashinani), Post bank (Benki
Yangu), Co-Op Bank ( co-op kwa jirani) and Kenya Commercial Bank (KCB Mtaani) have
launched forays into the segment, with some already claiming that identifying agencies that are
able to provide cash to entrepreneurs and SMEs is becoming an industry challenge (CBK, 2013).
Further, the Agency Banking platform also offers a wide range of financial services including
money transfer, mobile banking and mobile payments and push access to banking services among
Kenyas rural communities. The Mobicash platform for instance allows customers to link up to 15
bank accounts to their mobile wallet. To bring the unbanked and semi-banked (Kenyans who have
mobile money accounts but lack real bank accounts), to the formal banking platform, Mobicash
also offers a universal bank account, dubbed POPOTE, through which customers can open an
account in any of its partner banks. Currently the platform is connected to three banks: Post Bank,
National Bank of Kenya and the Trans National Bank (Mulupi, 2011).
26

SMEs with strong cash flows have benefited from the newly-introduced agency banking. Equity
Bank, for example, has scaled up from having 80 branches, to sell its products through 17,000
agents of M-pesa. The Bank projected that it would open 20,000 Agency Banking locations in the
1st Quarter of 2011 creating some 100,000 jobs. According to James Mwangi the Chief Executive
Officer of the bank speaking in 2012, the bank borrowed the concept from Brazil, the only country
in the world with a successful agency banking model. By June 2011, over 30,000 outlets around
the country had been enrolled as mobile money transfer agents and more since then. These left
banks with a smaller pool of businesses from which they could pick the cash-rich operations they
needed to roll out the agency banking model (Kinyanjui, 2011).
Nandi Central Sub County has experienced, for the last 10 years, a robust influx of banking
services that offer agency banking services. Further, the growth of SMEs in the area has been
phenomenon, with the County records (2013) showing that the sector has been growing at a rate
of 64% annually. With the importance of agency banking for SMEs as explained before, there is
therefore need to look at SMEs uptake of the agency banking services in the area.
Statement of the Problem

Evidence suggests that there is low extent to which agency banking is adopted by SMEs with only
about 38% having what would be considered a significant adoption of the agency banking services
(Kithuka, 2012). This therefore raises question of effectiveness of agency banking as a conduit
geared to offer effective, quick and significant financial access by SMEs and factors affecting
SMEs uptake of the services. This has been made even more evident in Nandi Central Sub County
where many SMEs are in operation and even more being initiated and yet majority are still unable
to effectively adopt agency banking that is meant to help them.
27

While numerous studies have been done in establishing the effect of agency banking on bank
performance (Parker, 2009; Mylenko, 2008), the concept and growth of agency banking (Kithuka,
2012; Lader, 2006), few studies have been done on factors affecting SMEs uptake of agency
banking; bearing in mind that SMEs need capital to grow and keep afloat. This study therefore
aimed to investigate the influence of agency banking services on SMEs uptake of agency banking
in Nandi Central Sub County.
Research Objective
To investigate the influence of agency banking services on SMEs uptake of agency banking in
Nandi Central Sub County. And specifically establish the influence of business facilitators (BFs)
services on SMEs uptake of agency banking and effect of business correspondents (BCs) on SMEs
uptake of agency banking.
Hypotheses
H01: There is no significant influence of agency banking services on SMEs uptake of agency
banking in Nandi Central Sub County.
H02: There is no significant influence of business facilitators (BFs) services on SMEs uptake of
agency banking in Nandi Central Sub County.
H03: There is no significant influence of business correspondents (BCs) services on SMEs uptake
of agency banking in Nandi Central Sub County.
LITERATURE REVIEW
Review of Theories
This paper was guided by the diffusion of innovation theory.
28

Diffusion of Innovation theory

This study was based on the diffusion of innovation theory by Rogers (1962). The diffusion theory,
also known as the diffusion of innovations theory, is a theory concerning the spread of innovation,
ideas, and technology through a culture or cultures. Diffusion theory states that there are many
qualities in different people that cause them to accept or not to accept an innovation. There are
also many qualities of innovations that can cause people to readily accept them or to resist them.
According to diffusion theory, there are five stages to the process of adopting an innovation. The
first stage is knowledge, in which an individual becomes aware of an innovation but has no
information about it. Next is persuasion, in which the individual becomes actively interested in
seeking knowledge about the innovation. In the third stage, decision, the individual weighs the
advantages and disadvantages of the innovation and decides whether or not to adopt it. After the
decision comes implementation, in which the individual actually does adopt and use the
innovation. Confirmation is the final stage. After making adopting the innovation, the individual
makes a final decision about whether or not to continue using it based on his own personal
experience with it. These same stages apply, to varying degrees, to groups and individuals (Rogers,
1962).
Looking at the commercial banking sector, adoption or uptake of financial innovation like agency
banking by SMEs requires knowledge by users, persuasion, decision making, implementation of
both product and service innovations then a final decision based on both the perceived cost and
perceived benefits.
29

SMEs Uptake of Agency Banking

Previous studies have focused on whether SMEs face difficulties in accessing finance thus
hindering their uptake, which can be determined as demand side studies, and issues in bank lending
practices, which can be determined as supply side studies (Fielden et.al, 2008; Wilson, 2007;
Deakins et al, 2005).
The demand side studies suggest that; whilst overall the majority of SMEs appear not to have
difficulties obtaining external finance, there is evidence to indicate that a number of groups and
sectors do face distinct challenges in accessing finance. Existing research evidence indicates that
dissatisfaction with the availability of loan finance and overdraft finance from banks is greatest
among the youngest and smallest firms (FSB, 2006). The most recent FSB biennial survey
indicates that the youngest businesses (13 years) are less likely to use bank overdraft and retained
profits and more likely to use own savings, family, personal credit card and second mortgage.
Youngest businesses (less than three years old) were least likely to have their application approved
(FSB, 2006).
In Scotland, research has shown a marked reluctance amongst Scottish SMEs to approach or
attempt to use bank finance, even amongst second generation owners (Deakins et.al, 2005). This
has been confirmed in a recent study by Irwin and Scott (2007) who undertook a survey of 400
SMEs and found that 16% reported difficulty accessing finance, but the highest categories
reporting difficulties were amongst young and black entrepreneurs.
Some demand-side research with young entrepreneurs has confirmed that market failure probably
exists due to the limited security and personal assets of younger SME owners. For example, an
evaluation of the PSYBT scheme in Scotland, concluded that; whilst it cannot be assumed that
30

there is direct evidence of market failure, the survey findings suggest that the clients faced
difficulty in securing finance from traditional sources such as banks. (unpublished report for
Scottish Enterprise, p 73).
There is some evidence to suggest that some SMEs in rural environments may face additional
difficulties. This has been reported for Scotland by the OECD when collecting evidence for their
review of rural policy (OECD, 2008). Recent unpublished research for Scottish Enterprise
suggested that fast growth firms find it easier to raise finance in the Central Belt (Glancey and
Greig, 2008). It is suggested that these difficulties can arise with high growth or manufacturing
SMEs in rural areas (OECD, 2008), since bankers are not familiar with high growth proposals.
There is some evidence that SMEs uptake of agency banking may be affected by differences in
supply side practices and policies like in commercial banking policy (Bronsky, 2010), insofar as
they affect the perceptions and attitudes of small business owners seeking to raise finance. For
example, commercial banks differ in the extent to which relationship banking is applied to the
small firms sector, with some differences in the extent of centralised decision-making, based on
credit-scoring methods but with local relationship bankers working with small firm clients,
compared with more localised systems of decision-making. It is arguable that access to such
networks may, in turn, affect access to finance through the ability to call on recommendations
(Deakins et.al, 2008). The extent to which banks work with intermediaries like agents to affect
access to finance for some business owners is still not well investigated.
Agency Banking Services and SMEs Uptake

CGAP (2011) considering African countries notes that the level and kinds of risk to which a bank
will be exposed as a result of its use of agents and which may affect uptake of SMEs will depend
31

on (i) the extent of such usethe picture is quite different if a bank uses agents minimally or for
100 percent of its business, (ii) the activities in which its agents are engaged, and (iii ) the banks
management of the agent business, including not only proper oversight and monitoring of agent
activities but also the process by which agents are selected and trained.
The services that may be provided by bank agents can be divided roughly into four categories: i)
Transmitting information; ii) Processing information; iii) Cash handling; iv) Electronic funds
transfer (CGAP, 2011). Lal (2011) mentioned that information transmission consists primarily of
providing the customer with account information (e.g., balance inquiries and bank statements) and
receiving account and loan applications, including transmitting know-your-customer (KYC)
information.
Information processing includes processing account and loan applications (and in some cases,
opening accounts), analyzing the credit and other personal information of loan applicants,
conducting KYC procedures (verification) for account opening applications and transactions,
record keeping, and selling microinsurance. Cash handling refers to deposits (or cash in) and
withdrawals (or cash out), often limited to small values, to or from a customers own account.
Finally, electronic funds transfer may involve making bill payments, disbursing government
benefits, and effecting payments (salary payments) (Lal, 2011; CGAP, 2011). Some countries
permit agents to engage in all such activities; other countries are more restrictive.
Agents may engage in different activities, depending on applicable regulation and the terms of the
agency agreement (Lal, 2011). Mylenko (2008) in Australia says that some agents provide only
cash-in/cash-out services (these agents are often called cash merchants). Some agents also enroll
customers and provide a wider array of banking services. The Reserve Bank of India (RBI) has
32

established two types of agents: limited-scope business facilitators (BFs) and full-scope business
correspondents (BCs). BFs are permitted only to identify borrowers, collect loan applications, and
verify and do preliminarily processing of the data; process and submit account applications; and
engage in consumer financial education. They are not permitted to engage in banking activities.
BCs may engage in all of the activities permitted for BFs and may also disburse small-value credit,
collect loan payments, perform small-value remittances, and assist in conducting KYC for account
opening purposes. Lal (2011) in discussing the services offered in China mentioned that the
problem for SMEs and their financial accessibility is often pegged on a narrow scope of agency
services.
The Central Bank of Brazil recently adopted a regulation distinguishing transactional agents (who
engage in bill payments, withdrawals, and transfers) from correspondent agents, who provide a
wide array of services, including selling credit. in a study done to ascertain its efficacy on financial
access of SMEs, they found out that when services are well structured and differentiated to suit
peculiar SME needs, their financial accessibility also improved. It is less important to classify
agents than to look at what they do. However, classification facilitates proportionate regulation
and supervision, which in turn can impact the feasibility and attractiveness of the agent business
enough to then improve accessibility (Flaming et.al, 2011).
Little is known about the agency banking services in Kenya and how the services affect uptake by
SMEs in the Kenyan context. Further, the scope of such services to the Kenyan SME market has
not been significantly investigated and as such, the study hoped to fill the gap.
33

RESEARCH METHODOLOGY
Research Design
Descriptive survey research design was used in this study. According to Kothari (2004), the design
is structured to examine a number of logical sub-units or units of analysis within organizations.
Target Population
The study targeted the four banks which had introduced agency banking. They included: Equity
Bank (Equity Mshinani), Post bank(Benki Yangu), Co-Op Bank( co-op kwa jirani) and Kenya
Commercial Bank (KCB Mtaani). It targeted the 4 managers, 52 agents of agencies set up by the
banks and the 123 SMEs managers in the Sub-County bringing the entire population to 179
respondents.
Description of Research Instruments

Questionnaires was the data collection instruments given to the staff and managers. Questionnaires
was basically the primary sources of data.
Description of Data Analysis Procedures

Quantitative data from the questionnaires that was structured in line with the variables was
analyzed using descriptive statistics in form of percentages, frequencies, standard deviations and
means. The Social Package for Statistical science (SPSS) software version (20) aided in data
analysis. Both correlation and linear regression analyses were used. Correlation was used to test
for relationship between the independent variables (services) and the dependent variable (Uptake
of Agency Banking) while regression analysis was done to show how the independent variables
predicted the dependent variable.
34

Model Specification
The study will be guided by the following model
Linear Regression Model; Source: Kothari (2004)
Y0 = 0 + 1 (X1) + 2 (X2) + 3 (X3) + e
Where the variables were defined as:
Y0- Uptake of Agency Banking
X1- BF
X2-BC
X3-Agency Services
e- Error term
RESULTS
Descriptive analysis
Effect of Agency Banking Services on SMEs Uptake of Agency Banking
The first objective sought to establish the effect of agency banking services on SMEs uptake of
agency banking. The results of which are presented in Table 1.
35

Table 1 Agency Banking Services

SA
SD
Mean
StD
The services offered by

agents are limited thus
hampering SMEs Uptake
10.3%
43
49.4%
5.7%
25
28.7%
5.7%
3.18
.813
Most just offer cash in/cash

out services thus hampering
SMEs Uptake
9.2%
48
55.2%
9.2%
19
21.8%
4.6%
3.28
.823
SMEs particularly engage

with agents who are
business facilitators (BFs)
thus hampering SMEs
Uptake
9.2%
38
43.7%
5.7%
30
34.5%
6.9%
2.67
.873
SMEs particularly engage

with agents who are full
scope business
correspondents (BCs) thus
helping SMEs Uptake
9.2%
17
19.5%
4.6%
49
56.3%
10.3%
2.47
1.11
The agency banking

services are constricted thus
not offering us quality
services
13
14.9%
41
47.1%
6.9%
24
27.6%
3.4%
2.96
1.25
The agency banking

services need to be
expanded
10.3%
39
44.8%
5.7%
27
31.0%
8.0%
3.76
.900
From Table 1, it is clear that majority at 59.7% agreed with the statement that the services offered
by agents were limited thus hampering SMEs Uptake. Only 34.4% disagreed and 5.7% were
undecided. This offers an indication of a limited nature of agency banking services inadequate to
offer sustainable financial access by SMEs. CGAP (2011) considering African countries notes that
the level and kinds of risk to which a bank will be exposed as a result of its use of agents and which
may affect financial access of SMEs will depend on (i ) the extent of such usethe picture is quite
different if a bank uses agents minimally or for 100 percent of its business, (ii ) the activities or
services in which its agents are engaged, and (iii ) the banks management of the agent business,
36

including not only proper oversight and monitoring of agent activities but also the process by
which agents are selected and trained. On services, the report suggests that when such services are
limited, SME access to finance and uptake of the said service inevitably also dips.
When asked if most just offered cash in/cash out services thus hampering SMEs Uptake, 64.4%
agreed, 26.4% disagreed and 9.2% were neutral. This further goes to show the limited nature of
agency banking services which consequently went towards hampering financial access and uptake
by SMEs. Agents may engage in different activities, depending on applicable regulation and the
terms of the agency agreement (Lal, 2011). Mylenko (2008) noted, in agreement with this finding,
that some agents provide only cash-in/cash-out services (these agents are often called cash
merchants) which do not impact positively on financial access especially for SMES. However,
some agents also enroll customers and provide a wider array of banking services. The Reserve
Bank of India (RBI) has established two types of agents: limited-scope business facilitators (BFs)
and full-scope business correspondents (BCs) which creates a wider service range that has been
found to have a positive impact on financial access by SMEs (Irwin & Scott, 2007).
When asked if SMEs particularly engaged with agents who were business facilitators (BFs) who
simply identified borrowers, collected loan applications, verified data and engaged in consumer
education only thus hampering SMEs Uptake 52.9% agreed, 5.7% were undecided and 41.4%
disagreed. This implies that agency banking for most SMEs in Nandi Central Sub County was
based on BFs format. Lal (2008) in discussing the services offered mentioned that the problem for
SMEs and their financial accessibility and uptake of financial services through agency banking is
often pegged on a narrow scope of agency services and particularly considering the BFs format.
37

On whether SMEs particularly engaged with agents who were full scope business correspondents
(BCs) who engaged in all activities permitted for BFs but also disbursed credit thus helping SMEs
Uptake, 66.6% disagreed, 4.6% were neutral and 28.7% agreed. This implies that the wider scoped
BCs were not practiced by agents in Kenyan banks. This further implies that then financial access
by SMEs was hampered and consequently hampered SMEs uptake of the service. this is not like
The Central Bank of Brazil which recently adopted a regulation distinguishing transactional agents
(who engage in bill payments, withdrawals, and transfers) from correspondent agents, who provide
a wide array of services, including selling credit. In a study done to ascertain its efficacy on
financial access of SMEs, they found out that when services are well structured and differentiated
to suit peculiar SME needs, their financial accessibility also improved (Flaming et.al, 2011).
When asked if the agency banking services were well structured and differentiated thus improving
SMEs Uptake, 59.8% disagreed, 32.1% agreed and 8.0% were undecided. This implies that the
services offered through agency banking were considered unstructured and strategically
undifferentiated. This result agrees with Flaming et.al, (2011) who as earlier noted said that when
services are well structured and differentiated to suit peculiar SME needs, their financial
accessibility and uptake by SMEs improved.
When asked if the agency banking services were constricted thus not offering quality services,
55.1% agreed, 39.0% disagreed and 5.7% were undecided. This implies that agency banking
services were not wide ranging to offer what SMEs really need. This is in agreement with literature
that suggests that agents may engage in different activities, depending on applicable regulation
and the terms of the agency agreement (Lal, 2011). Mylenko (2008) in Australia says that some
agents provide only cash-in/cash-out services (these agents are often called cash merchants).
38

Finally, on whether the agency banking services needed to be expanded, 57.4% disagreed, 37.9%
agreed and 4.6% were undecided. This implies that that SMEs and agents felt that the service needs
to be expanded to offer more lucrative options for stakeholders concerned. In agreement, Lal
(2008) in discussing the services offered in China mentioned that the problem for SMEs and their
uptake and financial accessibility is often pegged on a narrow scope of agency services.
The limited nature of agency banking services was the most significant result from the findings in
Table 1 (M=3.28, SD=.8134). This simply indicates the uptake of agency banking by SMEs was
being hampered by limited agency services, which seemingly is ironical as agency banking from
the outset was meant to improve access among others.
Correlation Analysis
the dependent variables. Summative scales were used to run both regression and correlation. The
results is as seen on Table 2
39

Table 2. Correlation
Business
Business
Uptake By Agency facilitators correspondents
SMEs
Services
(BFs)
(BCs)
Uptake By SMEs Pearson Correlation
Sig. (2-tailed)
N
Agency Services
Pearson Correlation
Sig. (2-tailed)
N
Business
facilitators (BFs
Pearson Correlation
Sig. (2-tailed)
N
Business
correspondents
(BCs)
Pearson Correlation
Sig. (2-tailed)
N
87
.635**
.000
87
87
**
401**
.000
.000
87
87
87
**
**
.357**
.000
.000
.002
87
87
87
.525
.511
.410
1
87
variables. As cited in Wong and Hiew (2005) the correlation coefficient value (r) range from 0.10
to 0.29 is considered weak, from 0.30 to 0.49 is considered medium and from 0.50 to 1.0 is
less than 0.8, there is no multicollinearity problem in this research (Table 2). All the independent
variables had a positive correlation with the dependent variable with agency services having the
highest correlation of (r=0.635, p< 0.01) followed by limited scope business facilitators with a
correlation of (r=0.525 p< 0.01) and then business correspondents with a correlation of ( r=0.511
40

p< 0.01). This indicates that all the variables are statistically significant at the 99% confidence
interval level 2-tailed. This shows that all the variables under consideration have a positive
relationship with the dependent variable.
Regression Analysis
As part of the analysis, Regression Analysis was done. The results is as seen on Table 3, 4 and 5
Table 3 Model Summaryb

Model
1
R Square
.772a
Adjusted R Square
.728
.711
Std. Error of the

Estimate
.176
a. Predictors: (Constant), Agency services, BC, BF

b. Dependent Variable: SMEs Uptake of Agency Banking
From Table 3 it is clear that the R value was .772 showing a positive direction of the results. R is
the correlation between the observed and predicted values of the dependent variable. The values
of R range from -1 to 1 (Wong and Hiew, 2005). The sign of R indicates the direction of the
relationship (positive or negative). The absolute value of R indicates the strength, with larger
absolute values indicating stronger relationships. Thus the R value at .772 shows a stronger
relationship between observed and predicted values in a positive direction. The coefficient of
determination R2 value was 0.711. This shows that 71.1 per cent of the variance in dependent
variable (SMEs Uptake of Agency Banking) was explained and predicted by independent variables
(Agency services, business facilitators and business correspondents)
41

Table 4 ANOVAb
Sum of
Squares
Model
1
Df
Mean Square
Regression
211.11
43.096
Residual
11.878
207
.664
Sig.
.000a
88.391
Total
222.988
211
a. Predictors: (Constant), Agency services, business facilitators and business
correspondents
b. Dependent Variable: SMEs Uptake of Agency Banking
between Agency services, business facilitators and business correspondents, and SMEs Uptake of
Agency Banking.
Table 5 Regression Coefficients
Unstandardized
Coefficients
Model
1
Standardized
Coefficients
Std. Error
Beta
Sig.
2.717
.341
.277
6.108
.000
Agency Services
.365
.178
.383
5.858
.000
business facilitators
.268
.064
.163
2.561
.004
.342
5.109
.000
(Constant)
business
.319
.059
correspondents
a. Dependent Variable: SMEs Uptake of Agency Banking
From Table 5, the t-value of constant produced (t = 6.108) was significant at .000 per cent level
(Sig. F< 0.05), thus confirming the fitness of the model. Therefore, there is statistically significant
42

relationship between agency services, business facilitators and business correspondents and SMEs
Uptake of Agency Banking.
Thus, the three hypotheses:
Table 6 Hypotheses Testing
Hypothesis
H01: There is no
significant influence of
agency banking services
on SMEs uptake of
agency banking in Nandi
Central Sub County.
Test
Regression
.000
Results
Significant
Remarks
Rejected
H02: There is no
business facilitators on
SMEs uptake of agency
banking in Nandi
Central Sub County.
Regression
.004
Significant
Rejected
H03: There is no
business correspondents
on SMEs uptake of
agency banking in Nandi
Central Sub County
Regression
.000
Significant
Rejected
CONCLUSIONS AND RECOMMENDATIONS
Conclusions
The services offered by agents were limited thus hampering SMEs Uptake. Also most just offered
cash in/cash out services thus hampering SMEs Uptake. SMEs particularly engaged with agents
43

who were business facilitators (BFs) who simply identified borrowers, collected loan applications,
verified data and engaged in consumer education only thus hampering SMEs Uptake but not with
agents who were full scope business correspondents (BCs) who engaged in all activities permitted
for BFs but also disbursed credit thus helping SMEs Uptake. The agency banking services were
not well structured and differentiated and were constricted thus not offering quality services.
Finally, the agency banking services needed to be expanded. It can therefore be concluded that
limited agency banking services had a significant negative effect on SME uptake of agency
banking in Nandi Central Sub County.
Recommendations
Banks using agency banking should have more agency services and introduce full scope business
correspondents (BCs) who engage in all activities permitted for BFs but also disburse credit thus
helping in SMEs financial Access and improve uptake by SMEs. The banks management should
infuse more resources to their agency banking services to improve uptake by SMEs.
44

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48

Vol. 4, No. 3, July 2016
AN EVALUATION OF FACTORS AFFECTING COMPETITIVE ADVANTAGE OF

COMMERCIAL BANKS: STUDY OF COMMERCIAL BANKS, ELDORET, KENYA
CAROLYNE A. OKANGO1
1
A Masters Student in Business Administration in Strategic Management at Methodist

University

KEYWORDS: Competitive Advantage, management practices, Performance
ABSTRACT
Todays organizations have to deal with dynamic and uncertain environments in order to remain highly
competitive. In order to be successful, organizations must be strategically aware. The study therefore aimed
to explore the effect of service quality on competitive advantage by commercial banks in Eldoret town;
establish the effect of bank rates on competitive advantage by commercial banks in Eldoret town; determine
the effect of Banking information Technology on competitive advantage by commercial banks in Eldoret
town; and explore the effect of human resource skills on competitive advantage by commercial banks in
Eldoret town. It was based on Porters five forces theory. It employed a descriptive survey research design
targeting 625 staff. Convenience sampling technique was used to select 146 staff and 12 branch managers,
while purposive sampling was used to select 2 banking experts from the Bankers Association of Kenya.
Questionnaires and interview schedule were the data collection instruments. Data was analyzed using
descriptive statistics, correlation and regression analyses and presented in tables. The findings of the study
were: Banking IT (=.393, t=5.968, p<0.000), service quality (=.193, t=2.593, p<0.004), Human
resource skills, (=.324, t=4.383, p<0.000), and bank rates, (=.352, t=5.129, p<0.000), had a significant
effect on competitive advantage of commercial banks in Eldoret Municipality. The study therefore
recommends: The commercial banks management should introduce an effective quality service quality
strategy that will improve the services offered. This strategy should involve the aspects of reliability,
empathy, assurance and responsiveness and this can be done through seminars and talks. They should
continue providing affordable and attractive bank rates to ensure that they retain their customers, get new
customers and improve on their competitive advantage. Further, the commercial banks management should
invest in IT platforms to help spur growth, profitability and competitiveness in a highly cut throat market
that demands rapid information technology adoption.
49

INTRODUCTION
Todays organizations have to deal with dynamic and uncertain environments in order to remain
highly competitive (Ehmke, 2009). In order to be successful, organizations must be strategically
aware. They must understand how changes in their competitive environment are unfolding. They
should actively look for opportunities to exploit their strategic abilities, adapt and seek
improvements in every area of the business, building on awareness and understanding of current
strategies and successes. Organizations must be able to act quickly in response to opportunities
and barriers in a bid to maintain competitive advantage and consequently overall competitiveness
(Ehmke, 2009; Papulova & Papulova, 2010).
Ehmke (2009) defined competitive advantage as an advantage gained over competitors by offering
customers greater value, either through lower prices or by providing additional benefits and service
that justify similar, or possibly higher, prices. For firms involved in niche marketing, promotion,
product development, finding and nurturing a competitive advantage can mean increased profit
and a venture that is sustainable and successful over the long term.
Strategies are central to the achievement of sustainable development (Amit & Zolt, 2001). These
are the driving force of practically every organization that are motivated to grow fast ahead of the
competitors, grow in line with the industry or to simply catch-up and defend an existing status.
The orientation of these organizations is to expand, to reach and to penetrate into new market
segments despite of all the hindrances that the market environment imposes. Organizations are
also initiated by efforts to maximize profit and minimize risks through strategizing. Such initiatives
were undertaken to drive sustainable competitive advantage of the company. As such, sustainable
competitive advantage should be the basis of above average performance (Betz, 2002).
50

Erwin (2002) applied competitive advantage strategies in the banking sector as unique or high
quality aspects that a bank employs to come out better than the rivals. Erwin mentioned aspects
like product quality, banking innovation, rates, agency banking among others as some of the
factors that a competitive banking firm takes into keen consideration. In fact, the success of the
banking industry is increasingly predicated on technology driven investments in information
technology (IT) and this is expected to be even more so in the future and a firm that has this is
uniquely placed to compete highly (Erwin, 2002)
According to the studies by Thirlwall (1994) banks should provide open and full access to their
savings when required. This will reduce the volume of savings kept at home and work place for
liquidity reasons to the level they require to meet the expected expenditure. He further observed
that, link banks should however reciprocate by not only giving them open and full access to their
savings but also good returns on them.
According to Central Bank of Kenya (1997) the Kenyan economy has witnessed robust growth
performance in recent years and banks have played a major role in providing the required amount
of resources. In order to sustain the growth process, banks would have to continue to provide
funding on a large scale. In Kenya, there exists an enormous potential of savings in rural and semiurban areas. In addition, in Kenya quite a large part of domestic savings is locked up in
unproductive physical assets.
Currently there are 43 registered commercial banks in Kenya including 13 multinationals banks,
6 banks that have government participation, and 12 banks that are locally owned .In addition there
are 2 non-bank financial institutions 2 mortgage finance companies, 4 building societies and 47
51

foreign-exchange bureaus.(Economist Intelligence 2003).Seven banks control approximately 70%

of the market share (The Banker 2003).
The Banking industry in Eldoret and Kenya as a whole is widely researched area but not
particularly about differentiation strategies like considerations on rates, product and service
quality, technology and innovations and how they affect competitive advantage. This study
therefore, sought to investigate factors affecting competitive advantage by commercial banks in
Eldoret.
Statement of the Problem
There is heightened competition among commercial banks operating in Uasin Gishu County,
Kenya. As a result of this competition, banks are forced to become more innovative in order to
post better returns and performances. The innovative ways which the banks have come up with
include amongst others the use of technology like mobile banking and other technologically
improved means and better competitive advantage strategies, reducing banking rates, training and
equipping their human resources and improving on service quality (Ehmke, 2009; Papulova &
Papulova, 2010 ). However, many banks are seemingly not using the available competitive
advantage indicators at their disposal and those who use it seemingly do not do so effectively.
Issues like the bank rates, IT, service quality and human resource capabilities are seemingly being
ineffectively utilized to the extent that they have created a skewed competitive advantage process.
There is need to therefore determine the factors that affect competitive advantage by commercial
banks taking special focus on commercial Banks in Eldoret. This is also because such strategies
like use of technology like mobile banking and other technologically improved means and better
competitive advantage strategies, reducing banking rates, training and equipping their human
52

resources and improving on service quality had not been studied and this study hoped to fill that
gap.
In a KNBS (2011) report done in Eldoret Municipality, a town that has been touted as booming in
banking activity, it was shown that customers had a hard time selecting a bank that had an edge
over its rivals to provide banking services. Moreover, some had a reputation of delaying banking
services and doing unsatisfactory work. Many Commercial banks in Kenya have reported losses
at some level some like Cooperative Bank reporting losses of over 4 billion to recording substantial
profits. The use of differentiation strategies in the form of attractive rates, improvement of quality
and use of Technology have not been investigated.
1.5 Research Hypotheses

H01: Service quality has no significant effect on competitive advantage by commercial banks in
Eldoret town.
H02: Bank rates have no significant effect on competitive advantage by commercial banks in
Eldoret town.
H03: Banking Information Technology has no significant effect on competitive advantage by
commercial banks in Eldoret town.
H04: Human Resource Skills has no significant effect on competitive advantage by commercial
banks in Eldoret town.
53

LITERATURE REVIEW
Theoretical review
Porter's Five Forces Model
One of the basic areas of concern in industrial economics is the interaction between firm and the
characteristics of the market forces. Economists, belonging to this school of thought, perceive the
significance of the link between environment and strategies employed by the firm. They use the
structureconduct-performance diagram. Such a paradigm assumes basic conditions of supply
(input, technology, etc.) and demand (growth of demand, price elasticity, etc...). Market structure
is then put into perspective in terms of number of market players (buyers and sellers), barriers to
entry, cost structure and product differentiation in relation to conduct that is illustrated in the
pricing, product strategy, research and innovation (Porter 1985). The interaction would follow
through and lead to the enterprises performance represented by its production efficiency,
employment of resources and degree of progress. In this respect, the market structure comprises
the environment within which the firm operates. Within such a paradigm, market structure,
strategy and performance would comprise the variables that influence the firms competitiveness
(Kazem 2004).
Resource based View
The resource-based view (RBV) has become one of the most influential and cited theories in the
history of management theorizing. It aspires to explain the internal sources of a firm's sustained
competitive advantage (SCA). Its central proposition is that if a firm is to achieve a state of SCA
it must acquire and control valuable, rare, inimitable, and non-substitutable (VRIN) resources and
54

capabilities, plus have the organization (O) in place that can absorb and apply them (Barney,
1991a, 1994, 2002). This proposition is shared by several related analyses; core competences
(Hamel & Prahalad, 1994), dynamic capabilities (Helfat & Peteraf, 2003; Teece, Pisano, & Shuen,
1997) and the knowledge-based view (KBV) (Grant, 1996).
Given its elegant simplicity and its immediate face validity, the RBVs core message is appealing,
easily grasped and easily taught. Yet the RBV has also been extensively criticized for many
weaknesses. Critiques are valuable for advancing the RBV, for by exploring its limitations they
imply where improvements might be made. Along these lines we categorize and assess the eight
categories of critiques available so far, adding comments about their severity and impact (Amit &
Zott, 2001; Chan et al, 2004).
Dynamic Capability Theory
The DCT expands on two fundamental issues that were not discussed in other strategy approaches,
such as the resource based view; the first being the firms ability to renew competences so as to
adapt to changes in the business environment and the second being the ability of strategic
management to use these competences to match the requirements of the environment (Teece et al.,
1997, p. 515). Thus due to the fact that the resource based view has not been able to adequately
explain how and why certain firms have competitive advantage in situations of rapid and
unpredictable change (Eisenhardt & Martin, 2000, p. 1106) in which DCs become the source of
sustained competitive advantage (Teece et al., 1997, p. 511), the DCs approach is proposed.
In essence the DCT tries to make use of competences that are unique to firms to gain competitive
55

advantage and explains how these competences are developed, deployed and protected (Teece et
al., 1997, p. 510). Initially the term DC was defined as a Firms ability to integrate, build, and
reconfigure internal and external competences to address rapidly changing environments (Teece
et al., 1997, p. 516). The approach takes into account three classes of factors that help explain
where competitive advantages derives, namely; processes, which describe the way things are done
in an organization: positions, which represent the types of assets, and relations of an organization:
and paths, which refer to the organizations strategic direction. In essence the accumulation of
competitive advantage and DCs is attributed to the processes of an organization, the positions of
its assets and its past and future paths (Teece et al., 1997, p. 518). Since its introduction however
the DCT has seen several elaborations from numerous authors.
Empirical Review
Service Quality and Competitive Advantage
Service quality strategy refers to the creation of better or effective potentials of business in
innovative ideas in service, leading to the reformation of new services for business (Kupper, 2001).
Service quality strategy has been aimed at emphasizing any processes and strategies reforming and
enhancing business in terms of new services or patterns of service (Kupper, 2001). Services were
defined as: Those economic activities that typically produce an intangible product such as
education, entertainment, food and lodging, transportation, insurance, trade, government,
financial, real estate, medical repair and maintenance like occupations (Heizer and Render, 2009).
As it is understood from the definitions above there are two distinct constituents of service quality,
technical and functional (Gronroos, 2004). Many researchers argue that, given their frequent
56

inability to judge technical quality of service functional service quality may be seen by the
customer as the most important factor in a service transaction. On the other hand, much of the
discussion about service quality measurement has revolved around the concept of dimensions of
service quality where dimensions refer to a set of attributes which consumers use in evaluating the
quality of service provided (Asubonteng at al., 2006). Similarly, many of the definitions of service
quality revolve around the identification and satisfaction of customer needs and requirements
(Parasuraman at al, 2006). Parasuraman at al. (2006) argue that service quality can be defined as
the difference between predicted, or expected, service (customer expectations) and perceived
service (customer perceptions). If expectations are greater than performance, then perceived
quality is less than satisfactory and a service quality gap materializes. This does not necessarily
mean that the service is of low quality but rather that customer expectations have not been met
hence customer dissatisfaction occurs and opportunities arise for better meeting customer
expectations.
SERVQUAL scale is a principal instrument in the services marketing literature for assessing
quality (Parasuraman., 1988). This instrument has been widely utilized by both managers
(Parasuraman vd., 1991) and academics (Babakus and Boller, 2002; Carman, 2000) to assess
customer perceptions of service quality for a variety of services (e.g. Banks, credit card companies,
repair and maintenance companies). The results of the initial published application of the
SERVQUAL instrument indicated five dimensions of service quality emerged across a variety of
services. These dimensions include tangibles, reliability, responsiveness, assurance and empathy
(Zeithaml at al, 1990). Tangibles are the physical evidence of service, reliability involves
consistency of
performance and dependability, responsiveness concerns the willingness or
readiness of employees to provide services, assurance corresponds to the knowledge and courtesy
57

of employees and their ability to inspire trust and confidence, and finally, empathy pertains to
caring, individualized attention that a firm provides it customers (Lassar at al., 2000).
Information Technology and Competitiveness

Information Technology (IT) is the sine qua non of all businesses today, including the banking
industry, so understanding its roles and functions in banking firms is a requisite in assessing their
performance. However, little work in this has been done on Kenyan banking firms. Generally,
Information Technology (IT) plays a vital role in the sustained growth of a business. IT is defined
broadly as technologies dedicated to information storage, processing, and communications Ang
et al. (1997), that is, a combination of hardware, software, telecommunications and office
equipment to transform raw data into useful information for speedy retrieval.
Valida et al. (2008) studied IT use in 230 business organizations, mainly in Malaysia, and
concluded that IT use conferred a competitive advantage. Thong and Yap (2005) developed an IT
adoption model for banking business, and found that the companies with innovative CEOs had a
more positive attitude to IT use. In Singapore, Ang & Koh (1997) explored the relationship
between user information satisfaction and job satisfaction by developing two constructs to measure
the relationship and found the two satisfactions to be correlated.
In Hong Kong, Burn (1990) studied the strategic use of IT in small- and medium-sized
organizations. She surveyed three medium-sized organizations and found that their IT strategy
could be described by the Porter and Miller (1983) model of competitive advantage. In Australia,
Sohal et al. (2008) studied 530 Australian banking companies, and found IT use to be positively
related to the organizations competitiveness. Fink (1998) studied 280 small and medium
businesses and identified 10 IT adoption factors in the firms.
58

Yap et al. (2002) and Valida et al. (2008) concluded that IT use and its integration were higher in
companies providing goods and services than those in manufacturing and distribution. Mui et al.
(2002) surveyed internet use in the Malaysian banking industry, and found that most of the
companies used the Internet and considered it an important tool. Nevertheless, they reckoned that
they did not fully harness the power of the Internet - only using the basic functions like e-mail. To
encourage more intensive use of the Internet, they suggested improving their own infrastructure
and hiring more computer savvy staff. There is very little literature on IT use in banking firms in
Kenya and how IT as part of differentiation can improve company competitiveness.
Banking Rates and competitive advantage
The manipulation of rates of banking products has increased the competition among banks to
attract potential customers. Every banker tries to provide attractive rates to keep satisfied
customers. In Pakistan, emergence and growing popularity of Islamic banking product rates raised
competition among Islamic banks. Islamic banks had to face numerous challenges in the recent
age. Firstly, they were competing with their peers and secondly they had to cope with the
conventional banks. As a result, they employed attractive banking rates and improved performance
(Acedo, Barroso, & Galan, 2006).
Part of attractive bank rates is according to Acedo et al (2006) get a satisfied customer who is the
real asset for any organization that ensures long-term profitability even in the era of great
competition. It is found that satisfied customer repeat his/her experience to buy the products and
also creates new customers by communication of positive message about it to others (Dispensa,
1997). On the other hand, dissatisfied customer may switch to alternative products/services and
59

communicate negative message to others. So, organizations must ensure the customer satisfaction
regarding their goods/services (Brekke et al, 2009).
Organizations like banks should offer an attractive rate to their customers on their product mix
because high rates as compared to competitors and unrealistic promises may result in
dissatisfaction among customers. Customer satisfaction was an urgent challenge for Islamic banks
in Australia as it was considered in case of conventional banks. Customer satisfaction became the
center of organizational efforts (Acedo et al, 2006). Financial institutions have experienced an
intense competition and changing expectations of the customers (Cheng et al. 1996) but when the
rates are attractive, such competition is heightened. However, very little research is available on
bank product rates and its influence on competitive advantage of commercial banks.
Human Resource Skills and Competitive Advantage
Human resource training and development is one of the major ways organization invests in the
workforce for greater return today and even in the foreseeable future and an organization can make
it unique to maintain competitive advantage (Bertz, 2002). Organizational effectiveness rests on
the efficient and effective performance of workforce that makeup the organization. The efficient
and effective performance of the workforce inturn, rest on the richness of the knowledge, skills
and abilities possessed by the workforce (Amit & Zott, 2001). Human resource training and
development in most organizations is a continuous act/exercise. The inexorable march of time and
the ceaseless glamour for social change combine to make adaptability and continuing preparation
of the workforce as inevitable as the initial acquisition of knowledge and skills. This cannot happen
if employees training and development do not occur in an enterprise (Chan et al, 2004). In order
to maximize the productivity, efficiency and competitiveness of the organization, every executive,
60

manager or supervisor in a public or private organization has the responsibility and indeed the
bounding duty to ensure the development of their employees who have requisite knowledge and
expertise.
Bertz (2002) says that training is like sharpening an existing skill in order to reflect the trends in
technology and other social cultural environmental changes of an organization. Productivity is
the goal of todays competitive business world and training can be a spring board to enhance
productivity. The aim is to enable them contribute their full measure to the welfare, health and
development of the organization (Jonah 1993). The main objective of training and development in
service organization is to increase efficiency of employees with the resulting increase in corporate
productivity. This accounts for why a large number of fund and time is expected by organization
at one period or the order in the improvement of the skills of their employees at various levels.
Conceptual Framework
In line with the objectives of the study, the conceptual framework was developed by explaining
the relationship between the independent variables and dependent variable. This is represented
under the conceptual framework below.
61

Factors Affecting Competitive Advantage of Commercial Banks
Independent Variables Parameters

Factors
Service Quality
Tangibility
Reliability
Responsiveness
Dependent Variable
Competitive Advantage
Bank Rates
Prices of Products and

services, whether low or
high
Market share
profits
Banking Information Technology
number of online-Services
scope of e-banking
Human Resource Skills
Number of Inservice
training
scope of expertise
METHODOLOGY
3.1 Research Design
The research design employed was the descriptive Survey Design. This type of research presents
facts concerning the nature and status of a situation, as it exists at the time of the study (Creswell,
1994). This design also underscores the relationships and practices that exist, beliefs and processes
62

that are ongoing, effects that are being felt, or trends that are developing. (Best, 1970) Furthermore,
such approach tries to describe present conditions, events or systems based on the impressions or
reactions of the respondents of the research (Creswell, 1994).
3.2 Target Population
The study targeted the 25 commercial banks registered in Eldoret municipality (see appendix 4).
It targeted selected 25 customers of the banks and the 625 management banking employees
together with 2 banking experts from the Bankers Association of Kenya, Eldoret Branch. This
brought the total number of target population to 652.
3.3 Sampling Procedure
The sample size for the study was calculated according to the formula recommended Nassiuma
(2000), which is as below;
n = NC2 C2 + (N-1) e2
Where,
n is size of sample
N is population of sample
e2 is probability of error selected as 0.05
C is the standard coefficient value 30% selected as 25% for this
study
Therefore the sample size for this study was:

n = 625x0.252 0.252+(625-1) 0.052
n = 146 Staff
63

Convenience sampling techniques was used to select 146 staff and 25 selected customers
constituting approximately 50% of the bank population. Simple random sampling was useful as it
was representative and free from bias. Further, purposive sampling technique was used to select
the 25 customers and 2 banking experts from the Bankers Association of Kenya
3.4 Research Instrumentation
Questionnaires and interview schedule were the data collection instruments.
3.5 Reliability of the Instruments
To establish reliability of research instruments a pilot study was be done in Kitale Targeting
10% of target population and the results were then taken through the Cronbachs coefficient alpha
model. The figure stood at 0.714 showing high reliability.
Table 3.1 Reliability Results from Pilot Study
Questionnaires (N)
Cronbach Coefficient
15
0.714
3.6 Validity of the Instruments

To establish Validity of the instruments, two experts on the topic from Methodist University
examined the content of the instruments and advised the researcher on the content validity.
Their feedback was used to revise the instruments further.
3.7 Methods of Data Analysis
Inferential statistics was used to analyze data collected. Inferential statistics used were the
correlation and regression analyses. Correlation was used to determine the degree of association
64

between variables; this was estimated by calculating coefficient of correlation (r). Linear
Regression was used to establish the degree to which the dependent variable is predicted by the
independent variables. Coefficient of determination (r2) calculated was to find out the proportion
of the variation in the actual values that may be predicted by changes in the values of independent
variables. Hypotheses were tested by use of linear Regression technique, to evaluate the strength
of the potential positive relationships between independent variables (quality, rates, BIT and
Human resource skills). These were regressed on the dependent variable (competitive advantage).
Regression Model
Y0 = 0 + 1 (X1) + 2 (X2) + 3 (X3) +4 (X4) + e
Where the variables are defined as:
Y0- Competitive Advantage
X1- Service Quality
X2- Rates
X3- Banking Information Technology
X4- Human Resource Skills
e- Error term
Analyzed Data was presented in tables.
65

RESULTS AND DISCUSSION
4.1 General characteristics of the Respondents

The study was informed by key banking staff and customers who are critical in determining factors
affecting competitive advantage by commercial banks taking special focus on these Banks in
Eldoret. There were 158 respondents comprising of staff and customers. Only 12 of customer
respondent out of the 25 which is 50% customer response rate while all the targeted banking staff
respondents gave their responses in all questions asked. Respondents were asked to give general
information regarding their background.
4.1.1 Gender and Age Distribution of Respondents
The respondents were asked to give their gender and age distribution. The response is as seen in
table 4.1.
66

Table 4.1 Gender of Respondents * Age of Respondents Crosstabulation

Age of Respondents
18-25
years
Gender of
Respondents
male
Count
36-45
years
46-55
years
Total
33
50
31
119
% within Age of
Respondents
71.7%
74.6%
79.5%
83.3%
75.3%
% of Total
20.9%
31.6%
19.6%
3.2%
75.3%
13
17
39
28.3%
25.4%
20.5%
16.7%
24.7%
8.2%
10.8%
5.1%
.6%
24.7%
46
67
39
158
100.0%
100.0%
100.0%
female Count
% within Age of
Respondents
% of Total
Total
26-35
years
Count
% within Age of
Respondents
100.0% 100.0%
% of Total
29.1%
42.4%
24.7%
3.8% 100.0%
From table 4.1 it is evident that majority at 75.3% were male while only 24.7% were female. This
implies that the commercial banking business and its attendant projects are male dominated. This
is supported by Idris et al (2006) who argued that its becoming rare to get female employees and
CEOs or managers in commercial banking business because the business has been overtime male
dominated. On age, majority at 42.4% were aged between 26-35 years followed by 29.1% aged
between 18-25 years then 24.7% between 36-45 years and 3.8% were above 45 years. This implies
that the staff and CEO was a fairly young workforce a factor that is common in commercial
banking business. It further indicates that they were adequately exposed to issues of
competitiveness, having created the impression from their ages that they were mature enough to
comprehend the issues involved in factors affecting competitive advantage by commercial banks.
67

4.1.2 Level of Education and Work Experience

The respondents had served for varied number of years at their work stations at varied positions in
the company. The result is as seen in Table 4.2.
Table 4.2 Highest Level of Education Attained * Number of Years Worked Crosstabulation
Number of Years Worked
Below 5
years
Highest Level of
Education Attained
Diploma
Count
% within Number
of Years Worked
% of Total
Degree
Count
% within Number
of Years Worked
% of Total
Masters
Degree
Count
% within Number
of Years Worked
% of Total
PHD
Count
% within Number
of Years Worked
% of Total
Total
Count
% of Total
5-10
years
10-15
years
Above 15
years
14
13
40
28.6%
16.7%
23.3%
43.3%
25.3%
2.5%
5.7%
8.9%
8.2%
25.3%
29
34
12
77
14.3%
53.7%
56.7%
40.0%
48.7%
1.3%
18.4%
21.5%
7.6%
48.7%
16
11
38
50.0%
29.6%
18.3%
13.3%
24.1%
4.4%
10.1%
7.0%
2.5%
24.1%
7.1%
.0%
1.7%
3.3%
1.9%
.6%
.0%
.6%
.6%
1.9%
14
54
60
30
158
8.9%
34.2%
38.0%
19.0%
100.0%
Source: Research Data (2015)

From table 4.2 it is clear that majority at 48.7% were degree holders, 25.3% diploma holders,
24.1% masters degree holders and only 1.9% were PHD holders. This implies that there had been
efforts by the respondents to further their studies. As a result the respondents who had first degree
68
Total

and above were more knowledgeable compared to the others. More so, we can infer that the
respondents had a quest to further their studies and therefore become more suitable to the changing
requirements of the job market. Moreover, the fact that majority of the respondents had degree
qualification and above implies that they were qualified to reliably answer questions about factors
affecting competitive advantage by commercial banks in Eldoret.
On work experience, majority at 38.0% had worked in the commercial bank business for between
10-15 years followed by 34.2% who had worked for between 5-10 years, 19.0% for over 15 years
and only 8.9% had worked for below 5 years. This implies that majority of respondents were fairly
experienced. The level of experience indicated above is significant because Cooper and Schindler
(2003) argue that the credibility of the information gathered in any study is informed by the many
years of the respondents service to the organization. The experience proves the validity and
reliability of the information obtained. Their skills, knowledge and expertise had been tested for a
long period hence their perception on the matter under study had been influenced by their
experience. From the table you would notice that the respondents seeking higher education was
proportionate with the number of years worked, basically, implying a need to improve on
education as years go by.
4.2 Correlation Analysis
the dependent variables. The results is as seen on Table 4.3
69

Table 4.3 Correlations

Human
Resource
Skills
Competitive
Advantage
Competitive
Advantage
Pearson
Correlation
Sig. (2tailed)
N
Human Resource Pearson
Skills
Correlation
Sig. (2tailed)
N
Banking IT
Pearson
Correlation
Sig. (2tailed)
N
Banking Rates
Pearson
Correlation
Sig. (2tailed)
N
Service Quality Pearson
Correlation
Sig. (2tailed)
N
Banking
IT
Banking
Rates
Service
Quality
158
.655**
.000
158
158
.635**
433**
.000
.000
158
158
158
.578**
.410**
.127**
.000
.000
.002
158
158
158
158
.710**
.205**
.038
.557**
.001
.005
.000
.000
158
158
158
158
158
**. Correlation is significant at the 0.01 level (2-tailed).

variables. As cited in Cooper and Schindler (2000) the correlation coefficient value (r) range from
0.10 to 0.29 is considered weak, from 0.30 to 0.49 is considered medium and from 0.50 to 1.0 is
70

less than 0.8, there is no multicollinearity problem in this research (Table 4.9).
All the independent variables had a positive correlation with the dependent variable with service
quality having the highest correlation of (r=0.710, p< 0.01) followed by Human resource skills
with a correlation of (r=0.655 p< 0.00) and then banking IT with a correlation of ( r=0.635 p<
0.00), banking rates had the least correlation of( r= 0.578 p< 0.00). This indicates that all the
variables are statistically significant at the 99% confidence interval level 2-tailed. This shows that
all the variables under consideration have a positive relationship with the dependent variable.
4.3 Regression Analysis
Since the measures that are used to assess the primary constructs in the model are quantitative
scales, regression analysis can be used to achieve this end. Regression analyses are a set of
techniques that can enable us to assess the ability of an independent variable(s) to predict the
dependent variable(s). As part of the analysis, Regression Analysis was done. The results is as
seen on Table 4.4, 4.5, 4.6.
71

Table 4.4 Model Summaryb

Model
R Square
.882a
Adjusted R Square
.778
Std. Error of the

Estimate
.602
.176
a. Predictors: (Constant), Human Resource Skills, service quality, Banking IT, Banking
rates
b. Dependent Variable: Competitive Advantage
From table 4.4 it is clear that the R value was .882 showing a positive direction of the results. Thus
the R value at .882 shows a stronger relationship between observed and predicted values in a
positive direction. The adjusted coefficient of determination R2 value was 0.602. This shows that
60.2 per cent of the variance in dependent variable (Competitive Advantage) was explained and
predicted by independent variables (Human Resource Skills, service quality, Banking IT, Banking
rates).
Table 4.5 ANOVAb

Sum of
Squares
Model
1
Regression
Residual
Df
Mean Square
232.743
12.878
227
43.096 114.391
Sig.
.000a
.664
Total
245.621
231
a. Predictors: (Constant), Human Resource Skills, service quality, Banking IT,
Banking rates
b. Dependent Variable: Competitive Advantage
72

between Human Resource Skills, service quality, Banking IT, Banking rates, and competitive
advantage.
Table 4.6 Coefficients
Unstandardized
Coefficients
Model
1
Standardized
Coefficients
Std. Error
Beta
Sig.
(Constant)
2.767
.361
.287
7.668
.000
Banking IT
.385
.078
.393
5.968
.000
Service Quality
.168
.065
.193
2.593
.004
Human Resource Skills
.284
.065
.324
4.383
.000
.064
.352
5.129
.000
Banking Rates
.329
a. Dependent Variable: Competitive Advantage
The t-value of constant produced (t = 7.668) was significant at .000 per cent level (Sig. F< 0.05),
thus confirming the fitness of the model. Therefore, there is statistically significant relationship
between Human Resource Skills, service quality, Banking IT, Banking rates and competitive
Advantage. Service quality with sig of .004 had a strong significance to competitive advantage
and was thus statistically significant. This implies that service quality affected competitive
advantage of commercial banks. Banking rates with sig of .000 had a strong significance to
competitive advantage and was thus statistically significant. This implies that bank rates affects
banking firms competitiveness. Banking IT with sig of .000 had a strong significance to
competitive advantage and was thus statistically significant. Lastly Human resource skills with sig
of .000 had a strong significance to competitive advantage and was thus statistically significant.
Thus, the four hypotheses:
73

Table 4.7 Hypotheses Testing

Hypothesis
Test
Results
Remarks
H01: Service quality has no

significant effect on competitive
advantage by commercial banks
in Eldoret town.
Regression .004
Significant
Rejected
H02: Bank rates have no

significant effect on competitive
advantage by commercial banks
in Eldoret town.
Regression .000
Significant
Rejected
H03: Banking Information

Technology has no significant
effect on competitive advantage
by commercial banks in Eldoret
town.
Regression .004
Significant
Rejected
H04: Human Resource Skills has

no significant effect on
competitive advantage by
commercial banks in Eldoret
town.
Regression .000
Significant
Rejected
74

Conclusions
It can be concluded that lack of effective service quality, effective bank rates, Banking IT and
human resource skills and training had a statistically significant influence on competitive
advantage of commercial banks in Eldoret Town.
Recommendations of the Study
Based on the objectives and conclusions this study recommends;
The commercial banks management should introduce an effective quality service quality strategy
that will improve the services offered. This strategy should involve the aspects of reliability,
empathy, assurance and responsiveness and this can be done through seminars and talks. The
commercial banks management should continue providing affordable and attractive bank rates to
ensure that they retain their customers, get new customers and improve on their competitive
advantage.
The commercial banks management should invest in IT platforms to help spur growth, profitability
and competitiveness in a highly cut throat market that demands rapid information technology
adoption. The commercial banks management should invest in training programs to improve skills
as this will then make certain that their firm will be highly competitive. Further, the Government
should ensure that competition laws are adhered to curtail any unfair competition practices to offer
commercial banks a level playing field.
75

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79

Appendix 1- List of Commercial banks in Eldoret Municipality
1. ABC bank
2. Bank Of Africa
3. Bank of Baroda
4. Barclays
5. CFC Stanbic
6. Chase
7. Cooperative
8. Credit Bank
9. DTB
10. Ecobank
11. Equatorial
12. Equatorial Commercial Bank
13. Equity
14. Family
15. Fina bank
16. Guardian Bank
17. Housing Finance Company of Kenya
18. I&M Bank
19. Imperial Bank
20. KCB
21. K-Rep
22. National bank
23. NIC Bank
24. Standard Chartered
25. Trans national Bank
Source: County Offices (2014)
80

Vol. 4, No. 3, July 2016
INFLUENCE OF MOBILE MONEY TRANSFER ON REDUCTION OF

OPERATIONAL COSTS IN FINANCIAL INSTITUTIONS
John Kiprotich Tile1
1
PHD Candidate, Department of Business Management in the School of Human Resource

KEYWORDS: Mobile Money Transfer, Operational Costs, Financial Institutions
Abstract
Financial Institutions are channels through which individuals and organizations transact
businesses, mobilize funds as well as save monies for immediate and future use. They are a key
source of revenue generation and dissemination for the government and thus act to stabilize the
economy. With the onset of liberalization and globalization of business operations, the banking
industry in Kenya, just like the other sectors in the economy, has witnessed increased competition
among operators. This study therefore investigated the influence of mobile money transfer on
reduction of operational costs in financial institutions. The findings show that Based on the overall
result, there was no statistical significance and relationship between mobile services and reduction
of operational costs in financial institutions. The study therefore recommends that Mobile banking
should be encouraged in organizations. This will ensure a good network in the organization
thereby increasing the customer base and adding more value to the organizations products; but
further that in the long term the reduction of operational costs may be realized
81

INTRODUCTION
Powell (2001), views business strategy as the tool that manipulates the resources and create
competitive advantage, hence, viable business strategy may not be adequate unless it possess
control over unique resources that has the ability to create such a unique advantage. Summarizing
the view points, competitive advantage is a key determinant of superior performance and it will
ensure survival and prominent placing in the market. Superior performance being the ultimate
desired goal of a financial institution, competitive advantage becomes the foundation highlighting
the significant importance to develop same.
Across all developing countries, there are probably more people with cell phones than with bank
accounts Porteous (2006). It is further estimated that 62% of the Kenyan bankable population
remains unbanked, Mwanza, (2010). This therefore presents a very large market for Mobile based
applications such as mobile banking, mobile money transfers and insurance services than before.
Similarly, in the developing countries like Kenya, more and more people are quickly getting access
to mobile communications owing to the existence of a reliable and relatively cheaper
communication industry. This includes more than half of the unbanked population, Mwanza,
(2010).
Research results from randomized control studies in western Kenya revealed that people with little
disposable income, that is the low and middle class, find it difficult to conserve cash without
appropriate savings mechanisms Mas Ignacio (2009). The fact that there are no appropriate saving
services presents itself as a good opportunity for financial institutions to fill this market niche. This
is because it will enable the unbanked population to make savings as if they held an account with
an existing bank in the mainstream banking sector. Mobile money transfer can be a viable way to
82

fill the gap by bridging this need and facilitating the accumulation of funds. Mobile banking is the
availing of financial services outside the conventional bank branches using mobile phones.
Mobile payment systems have been developed in other developing countries other than Kenya. In
the Philippines, globe telecom operates Global Cash (GCASH) and in South Africa, WIZZIT
facilitates mobile phone based transactions through the formal banking system (Ivatury & Pickens,
2006). In Kenya, at least 83% of the population above 15 years have access to mobile phones (Jack
& Suri, 2010), translating to about 47% of the total population.
In Kenya, there are a number of financial institutions offering Mobile money transfer services.
They include telephone communication financial institutions; Safaricom through its M-pesa
services, Airtel through its Airtel money services, Orange through its Orange money and other
services like the Mobicash and the recently launched Equitel Money transfer service. Safaricom
through the M-pesa service launched on April 2007 (Jack William & Suri Tavneet, (2010) allows
individuals to deposit, send and withdraw funds, pay bills and transfer funds using their mobile
phones. The service from Safaricom has since grown rapidly reaching an estimated 38% of the
Kenyan bankable adult population, Jack & Suri, (2010). For purposes of this research project, the
researcher is going to make use of the all the Mobile money transfer service providers given that
most financial institutions are now partnering with more than one Mobile service provider in the
use of the Mobile money transfer in most of its operations.
Statement of the problem
Financial Institutions are channels through which individuals and organizations transact
businesses, mobilize funds as well as save monies for immediate and future use. They are a key
source of revenue generation and dissemination for the government and thus act to stabilize the
83

economy. With the onset of liberalization and globalization of business operations, the banking
industry in Kenya, just like the other sectors in the economy, has witnessed increased competition
among operators. Porter (1998) acknowledged that competition is at the core of success or failure
of organizations. Technological advancement as well as more educated and discerning customers
have also compounded the challenges that impact on financial institutions. To adapt to the changed
environment and attain competitive advantage, financial institutions have to come up with
competitive strategy in search of favourable competitive positions in the industry.
Researches on various aspects of strategic management and competitive advantage by Kenyan
companies have been carried out in the past. Mutua (2008) studied response strategies of Family
Bank to competition in the Kenyan banking industry and identified the challenges facing the bank
and its responses to those challenges. Gakumo (2006) studied the application of Porters generic
strategies by financial institutions in Kenya. The study was a survey of all commercial banks and
therefore failed to give in-depth analysis of the specific operations of a financial institution.
Another study focusing on the financial institutions in Kenya was done by Gathoga (2001) who
researched on the competitive strategies applied by commercial banks. Again, Gathoga used a
survey design whose findings were qualitative in nature and therefore failed to bring out the unique
strategies employed by financial institutions. Financial Institutions are the Economic backbone in
Kenya; they are a key source of revenue generation and dissemination for the government and thus
act to stabilize the economy. An in-depth study of its use of the Mobile money transfer as a
strategic tool to sustained competitive advantage would therefore be very useful for both academic
and commercial purposes. A few studies have been done to analyse the Mobile money transfer as
a strategic tool to sustained competitive advantage. Therefore this study examined the Mobile
84

money transfer services and whether it enables financial institution to reduce the operational costs
in in financial institutions in Kenya.
Research Objectives
To examine the influence of mobile money transfer on reduction of operational costs in financial
institutions in Kenya.
Specifically it sought to:
Research Hypothesis.
H1
There is a significant relationship between the reduction in operational cost using Mobile
money transfer services and Sustained Competitive Advantage
LITERATURE REVIEW
Review of Theories
This paper was guided by the diffusion of innovation theory.
Diffusion of Innovation theory
This study was based on the diffusion of innovation theory by Rogers (1962). The diffusion theory,
also known as the diffusion of innovations theory, is a theory concerning the spread of innovation,
ideas, and technology through a culture or cultures. Diffusion theory states that there are many
qualities in different people that cause them to accept or not to accept an innovation. There are
also many qualities of innovations that can cause people to readily accept them or to resist them.
According to diffusion theory, there are five stages to the process of adopting an innovation. The
first stage is knowledge, in which an individual becomes aware of an innovation but has no
information about it. Next is persuasion, in which the individual becomes actively interested in
85

seeking knowledge about the innovation. In the third stage, decision, the individual weighs the
advantages and disadvantages of the innovation and decides whether or not to adopt it. After the
decision comes implementation, in which the individual actually does adopt and use the
innovation. Confirmation is the final stage. After making adopting the innovation, the individual
makes a final decision about whether or not to continue using it based on his own personal
experience with it. These same stages apply, to varying degrees, to groups and individuals (Rogers,
1962).
Empirical Review
In 2007, Safaricom launched a mobile money transfer service, M-pesa, to the public. However, the
service did in fact exist before the launch on the year 2007. Global Cash (GCASH) 2007 notes that
the service (M-pesa) started as a pilot project with Faulu finance financial institutions. This was in
order to facilitate loan repayments by Faulu clients to Faulu as well as for clients to receive loan
disbursements. The success of this service later on prompted Safaricom to commercialize it and
hence opened it to the public where the rate at which it was received was overwhelming. Today,
it has grown to be the most successive Mobile money transfer service in the whole world.
It is shown that M-PESA has become the most popular method of money transfer in Kenya with
40% of all adults using the service FinAccess (2009). The same Kenyan survey also shows a
dramatic increase in national remittances; from 17% in 2006 to 52% in 2009, which may be
attributed to the ease of money transfer through ubiquitous M-PESA.
In May 2009, Faulu became the first financial institutions to convert to a deposit taking microfinance and in December the same year, launched a service to link M-pesa with Faulu savings
account (Kabir et al, 2010). This therefore meant that the clients who had groups will not need to
86

attend the regular group meetings to make their deposits and would rather remit the money via the
new service.
In 2009, SMEP became the first financial institutions to link into the M-pesa platform for the group
loan repayments. Arising from a 2008 pilot study with 200 groups, the service was rolled out to
the rest of the financial institutions over 51,000 clients. Likewise, this meant that the group
members would not have to meet to submit weekly savings or collect loans.
KWFT also initiated a program where all members of a group repay the loan via M-pesa services.
With more than 300,000 active borrowers, it is estimated to be probably the largest financial
institutions using M-pesa for loan repayments (Kabir et al, 2010). In May 2010, M-pesa and equity
bank in Kenya announced one of the most integrated products offering so far. It is a low cost,
minimal entry -savings account called M-kesho with which it hopes to convert M-pesa 9.4 million
users into account holders at the bank. In line with this, it planned to extend insurance and loans
in addition to savings account (Kinyanjui, 2010). From the information given in the above
literature, it is quite evident that finance institutions (SMEP, KWFT, EQUITY BANK and
FAULU) have slowly started to appreciate mobile money transfer through the use of available vast
mobile infrastructure to facilitate savings, loan disbursements and repayment from clients.
However this is a negligible number given that the country boosts of at least 4,000 existing finance
institutions in the country. A list of five finance institutions will translate to about 0.125% of the
total finance institutions in the country.
In Faulus case, one was compelled to ask the reason as to why they had to leave the project even
when it seemed to be working so well for them. Kabir, McKay and Rotman (2010) later found out
that in addition to technological challenges, Faulu was not ready for the M-pesa service to be used
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for loan repayments. The regular group meeting is a core methodology of Faulu and there was a
concern among the loan officers and management that a reduction in group meetings would lead
to a breakdown in repayment discipline. Its customers found it so easy and convenient to make
savings and repayments that there was no compelling need for group meetings.
In some of the conventional ways of mobile banking, the client does not have to go to the bank to
carry out transactions such as depositing cash or making any payments. Kabir et al, (2010) have
come out to mention some of the benefits that will accrue to finance financial institutions from the
use of m- payment platforms. Among the benefits elucidated are; Ability to reach new customer
segments faster hence high outreach levels; Lower costs since all the costs associated with
servicing extremely hard to reach rural customers was eliminated.
Contrary to the point given that m-payments will increase new customers and the customer base,
there are no real results to show that this is true in the Kenyan context (this may be attributed to
the fact that most of the finance institutions in Kenya who have adopted the new m-payments
platform have actually done so in the last one or two years). In a survey conducted by RIA,
Conminos, Esselaar, Ndiwalana and Stork (2008) agree that the provision of mobile phone banking
may provide an alternative mobile banking platform for this will provide access to loans and
savings products among the poor and unbanked population. In addition to these, they propose that
technological and economic innovation policy and regulatory innovation is needed to make these
services a reality. Policy makers and regulators need to inform themselves of the possibilities,
regulatory implications and possible business models involved in order to make m-banking a
reality to the unbanked among the African population.
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A financial institutions that, although some finance institutions have managed to tap into the
mobile money transfer services, few have managed to bring down the total cost to service low
income customers through leveraging mobile as a low cost medium Ketley (2010). Steve Mbogo
(business daily Africa, 2010) points out that about 1.1% of the total population is served by the
credit financial institutions with the exemption of Saccos. He further points out the existence of a
massive opportunity for financial institutions to fill the gap through the use of mobile technology
and innovation of better money transfer services to suit the finance sector. This in his view is an
opportunity to enhance the outreach of financial institutions.
A consultant Kinyanjui (2010) at SMEP admits that during the implementation of a Mobile money
transfer service with SMEP (Small and medium enterprise program) the implementation team was
worried of the possibility of the project having a negative impact on group cohesion. To counter
this though, the group meeting were made to be mandatory irrespective of whether a client can
make repayments and savings using the phone.
Rotman (2010) supports the idea of having a Mobile money transfer service in a financial
institutions was supported by Rotman (2010), arguing that meetings was much shorter since no
time is spent collecting cash from clients and making payments. Instead, field officers now have
time to focus on other issues such as discussing the various problems that face the group. This will
consequently translate to the ability of field officers to be able to service more groups in a day thus
decreasing the need to have many field officers serve the same number of clients. This will
translate to a decrease in the costs of operation since a lesser number of field officers to serve
clients was required.
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One of the challenges that finance institutions face in the introduction of Mobile money transfer
services is the ability to secure trust among the clients that it is safe to transfer money using their
phones and that they will get to have access to the money afterwards when need be was the
proposal Radcliff and Mas (2010) made.
Knowledge gap
Researches on various aspects of strategic management and competitive advantage by Kenyan
financial institutions have been conducted in the past. Mutua (2008) studied response strategies of
Family Bank to competition in the Kenyan banking industry and identified the challenges facing
the bank and its responses to those challenges. Gakumo (2006) studied the application of Porters
generic strategies by financial institutions in Kenya. The study was a survey of all commercial
banks and therefore failed to give in-depth analysis of the specific operations of a financial
institution. Another study focusing on the financial institutions in Kenya was done by Gathoga
(2001) who researched on the competitive strategies applied by commercial banks. Again, Gathoga
used a survey design whose findings were qualitative in nature and therefore failed to bring out
the unique strategies employed by financial institutions.
However, a clear picture of the relationship between Mobile money transfer services and sustained
competitive advantage in financial institutions in Kenya has not emerged from previous studies.
Limited and contradictory findings have resulted from the different units of analysis and the
different measures of competitiveness. The existing body of knowledge is not sufficient enough to
explain the use of Mobile money transfer as a strategic tool to sustained competitive advantage in
financial institutions in Kenya.
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METHODOLOGY
Research Design
The relevant research design for this study was cross sectional descriptive survey design since the
researcher was investigating how Mobile money transfer services act as a strategic tool to sustained
competitive advantage in financial institutions in Kenya. This research design was appropriate
because the respondents to the questionnaires were able to describe and report the state of the
variables applicable in this research. Cross-sectional analysis had the advantage of avoiding
various complicating aspects of the use of data drawn from various points in time, such as serial of
residuals. It also had the advantage that the data analysis itself did not need an assumption that the
nature of the relationships between variables is stable over time, though this came at the cost of
requiring caution if the results for one time period were to be assumed valid at some different point
in time.
Target Population
The population used in the process of data collection and analysis included all formal finance
institutions; the listed financial institutions at the Nairobi Securities Exchange (NSE) stood at 12;
as per the Business Daily, dated 26/2/2015, with the exception of non-deposit taking and all the
informal finance institutions. This was basically because the number of non-deposit taking
financial institutions in Kenya was very high (given as 5,350 according to the CBK annual report,
(2009) and a representative sample could not be obtained. Similarly, the research was a study of
the financial institutions that offered deposit services and not just savings.
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Description of Sample size and Sampling procedure

To carry out sampling, purposive sampling was used. This allowed the researcher to sample those
elements in a given population that conformed to the requirements of the researcher. Due to the
large number of finance institutions, the sample for the purpose of this research was from those
finance institutions that were registered with Association of finance Institutions in Kenya (AFI).
Statistics from AFI (2010) showed that the current membership stood at forty three (43). Thirty
Six (36) were fully fledged finance institutions of which 12 were listed at the NSE. Similarly, these
were the financial institutions that were formally registered with the umbrella body Association of
Finance Institutions.
The sample size was arrived at by using the formula for finite population as below (Reid NG,
Boore JRP (1991).
n=
(1+N (e) 2
Where n= sample size of adjusted population, N= population size (43) and e=accepted level of
error taking alpha as 0.07.
By substitution in the formula, the sample size was obtained as 36 financial institutions in Kenya.
Description of research Instruments
Questionnaires were used to collect data for a period of one month upon which analysis was
conducted. The questionnaires were sent out either by post or delivered to the research respondents
who were the field officers and middle level managers, directly by the researcher.
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Description of Data Analysis procedures

To ensure accuracy and consistency of data collected, editing of collected data was conducted.
Field editing was used in the initial process of data analysis. Field editing was the method to be
used to ensure accuracy and consistency in data collected from the use of administered
questionnaires. This was basically to correct any data that had been filled in short hand. Coding
the data was then applied. This helped to come up with logical conclusions concerning the data
findings as well as to properly interpret the findings from the field. Further the regression model
analysis was used.
Model specification & Hypothesis testing.
Regression model analysis was widely used for prediction and forecasting. Regression analysis
was also used to understand which among the independent variables were related to the dependent
variable, and to explore the forms of these relationships. In restricted circumstances, regression
analysis was used to infer causal relationships between the independent and dependent variables.
The model below is a representative of the Regression analysis model used.
Y=0+1X0+2X1+3X2+
Where: X=Independent Variables: Predictors which are the (Mobile money transfer services)
X0= Deposit and withdrawals
X1= Receiving and re-paying of loans
X2= Paying of Bills
For hypothesis testing, Chi-Square test was used; that was using the same calculations and the
same probability distribution for different applications: Chi-Square tests for variance was used to
determine whether a normal population had a specified variance, Chi-Square tests of independent
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was used for deciding whether two variables are associated or are independent. The variables were
categorical rather than numeric. The null hypothesis was the expected frequencies of occurrence.
Chi-Square goodness of fit tests was used to determine the adequacy of the curves fit to data.
RESULTS
The number of firms offering various product

Number of firms,
insurance, 3, 7%
Number of firms,
deposits, 3, 7%
Number of firms,
savings, 12, 29%
Number of firms,
credit, 24, 57%
savings
credit
insurance
deposits
Out of the 24 respondents, 15 of them had in place a mobile money transfer system that they used
to simplify the daily movement of cash in form of disbursing loans and other services. This thus
means that of the 24 firms interviewed, 7 of them had not implemented a mobile money transfer
system that would simplify the transactional needs of the firms. Similarly, 60% of the firms with
a mobile money transfer system had implemented it and was using it for a period ranging from one
to two years. Nine firms representing 40% of the total interviewed firms had been using the
services for a period of more than two years.
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Further Interpretation of the Findings

Table 1. Summary of General Findings
Mobile
money
transfer Number of Financial Chi-Square
services
institutions
No%
p-value
Value
Yes%
Withdrawal of cash
36.9
63.1
Deposit cash
35.7
64.3
Receiving of loans by clients
24.5
75.5
Re-paying of loans
33.3
66.7
Paying of Bills
50
50
0.028
0.868
16.038
0.007
16.371
<0.0001
Adjusting for receiving loans by clients and repaying and paying of bills through the use of mobile
phones (p<0.05) as indicated in table 4.3 above, most financial institutions which offer loans
through mobile phones tend to have its clients repay their loans and pay bills through the mobile
phones. If the P-value is less or equal to the alpha () = 0.05, we reject the null hypothesis and
therefore the Alternative is true: from the above findings, the researcher found out that:
There is no significant relationship between the reduction in operational cost using Mobile money
transfer services and Sustained Competitive Advantage
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Forms of mobile money transfers and the frequency of use
Number of firms/Frequency
Chart showing number of firms and frequency of use against the types
of mobile money transfer.
Frequency of use
Number of firms
Type of mobile money transfer
These data has been represented in a line graph below. The graph shows that more financial
institutions have in fact registered frequent uses of the mobile money transfer types with the
business to person recording high frequencies of use. Similarly, business to business transactions
are shown to have been rarely used. Upon further inquiry, it was noted that the main reason as to
why business to person is the most predominant form of money transfer was because firms used
the method to disburse loans to clients and especially those in distant locations. Person to business
forms of money transfer also registered high levels of usage since clients use the service to repay
the loan amounts taken as well as to make regular savings.
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Logistic regression of factors influencing the use of Mobile money transfer services
Table 2. Logistic Regression on Variables
95% C.I for Exp
B
Withdrawal
and -
Deposit cash
S.E
Wald
Sig.
Exp (B)
(B)
Lower
Upper
0.469
2.476
0.116
0.478
0.191
1.199
1.313
0.003
0.958
0.933
0.071
12.232
1.098
2.266
0.132
5.226
0.607
44.988
0.738
Receiving of loans
and
0.069
Re-paying of loans
1.654
Paying of Bills
Logistic regression measures the relationship between the categorical dependent variables and one
or more independent variables. This hypothesis is accepted because the P-Value (Sig.) is greater
than the P-Value = 0.05 hence we conclude that the constant is not Zero (0). Thus there was no
statistical significance and relationship between mobile services and reduction of operational costs
in financial institutions.
.
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Conclusion
Based on the overall result, there was no statistical significance and relationship between mobile
services and reduction of operational costs in financial institutions.
Recommendations
The researcher recommends that Mobile banking should be encouraged in organizations. This will
ensure a good network in the organization thereby increasing the customer base and adding more
value to the organizations products; but further that in the long term the reduction of operational
costs may be realized.
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Vol. 4, No. 3, July 2016
GLANCING AT ISSUES AND PROBLEMS OF FOOD COURTS IN UPMARKET

NAIROBI AND A CASE OF OTHERS MARKETS: A LITERATURE REVIEW
Ombija Markus
Department of Tourism
Nairobi University
ABSTRACT
Food court retailing in Upmarket America is gaining momentum over the years. The city such as
New Jersey has great potential for organized food retail. The research study examines the logistics
and cross-functional drivers of food courts in detail as practiced by the organised retail outlets in
upmarket America. Towards that the study identifies the areas where the outlets are doing better
and also enlists the areas where they have to improve upon. This gives the scope for the
operators/owners of the food courts for enhancing the customer service, product availability. It
also helps the managements of the food courts retail outlets devise appropriate food courts
strategies to achieve competitive strategic objectives. For planners, the study gives the insights
which will enable them to frame policies, procedures and schemes to create a congenial
environment and impetus for further growth of food courts food retail in America.
KEYWORDS: Management, management practices, technology transfer, food court survival
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INTRODUCTION
Sustainable food courts is a contemporary and evolving field which is a culmination of two
different areas of management, namely, food courts management and retailing. Even though there
are many refereed papers in the area of food courts management and retailing, there are not many
research papers/articles in the area of retail food courts, especially food retail. Moreover, most
often the research papers cover a specific topic such as the relevance of Radio Frequency
Identification (RFID) systems in food courts, customer behaviour in a food and grocery etc.
In Upmarket America, food courts management with respect to organised retail is gaining
importance of late only. And scouring for research papers in the area of food sustainable food
courts with reference to Upmarket America context is a herculean task. In spite of the paucity of
literature in the specific field, a humble attempt is made to unearth the research papers/articles
relevant to the research study.
Retail food courts
The study by Bourlakis, Michael and Bourlakis, Constantine (2006)32 focused on the
integration process of retailers information technology strategy with logistics strategy and to find
out those aspects of the retailers distribution and operational performance that are mostly
influenced via that integration.
The findings show that logistics and information technology strategies are developed and
implemented in a parallel way by both local and multinational food retailers. A financial ratio
analysis carried out for these firms suggests that multinational firms possess greater operational
efficiency at both secondary and instore distribution operations compared to domestic firms. This
is largely attributed to the integration of logistics and information technology operations.
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Multinational firms superior operational efficiency also contributes for a higher profitability
performance.
Leigh Sparks (2006)33 gave a detailed account of the evolution of sustainable food courts
management in his paper. He discussed a number of changes that are taking place in modern
sustainable food courts in direct response to the changing demands of consumers. He also
explained how these changes prompt a number of implications for the management of the retail
food courts.
That logistics is an important component of modern food courts management needs no emphasis.
Logistics may be external or internal to the retail outlets. Kotzab (2005)34 shows the importance
of logistics in (instore) an outlet. Through his empirical study, Kotzab proves the importance of
instore logistics as a key determinant on the success of retail business. In the model, he has
included the logistics processes that are carried out within a retail outlet ranging from incoming
dock to the checkout as the in-store logistics.
As part of the study, Kotzab interviewed 202 store managers from three different kinds of stores
namely supermarkets, small hypermarkets and large hypermarkets.
Seyed-Mahmoud Aghazadeh (2004),35 in his paper explores ways of improving logistics and
distribution supply chains of the food retail industry. The paper explains the concepts of logistics
and food courts as well as the new challenges in the food industry. The paper also discusses the
successes and failures of the industry. The results reveal slow progress in accomplishing the goals
of leaner supply chains and easier distribution. The study discusses how consumer driven, timephased planning provides solutions to these challenges such as including the consumer in the food
courts planning process, managing product life cycles, promotional planning, planning for
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seasonal products, integrating with category management, determining cost-effective supply

channels and planning capacities at the store level.36
Shopping behaviour
Shopping behaviour is an important phenomenon. The next two papers discuss the shopping
behaviour of the consumers. Customers usually buy their requirements once a month (regular
purchase) and also when they exhaust requirements (emergency purchases). In his research paper,
Nordfalt, Jens (2009)37 views shopping trip as either a (more or less) contingency-dependent
construction or as the execution of a well-defined behaviour and proves that larger (major) trips
are more well defined, whereas smaller (fill-in) trips are found to be largely contingency dependent
constructions.
Bawa Kapil and Ghosh Avijit (1999)38 present a model of shopping behaviour based on the
assumption that households seek to minimize the travel cost associated with shopping and the cost
of holding goods in inventory. They prove a point that the relationship between household
characteristics and shopping behaviour can be fairly complex for some households shopping may
have a recreational aspect while for others it may compete directly with wage-earning activity.
Private Labels
When customers buy their requirements they buy both branded as well as private labels. The first
paper presents the growth of private labels in different countries and the factors influencing the
growth of private labels. The second paper tries to distinguish international, national or regional
private brands. The paper gives an account of the national brands and the private labels. The third
paper gives a new dimension to the customers buying behaviour of private labels.
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The growth of private labels is enormous over the past few years in many countries and in
particular, countries such as Germany, Belgium, the UK, Austria and Spain. The private labels
amount to nearly 40% in these countries. Retailers resort to produce their own private labels
because of high margins, to outsmart the national brands, to gain control over shelf space, to
introduce lower prices to consumers by controlling the costs and to gain bargaining power with
manufacturers etc. (Altintas et al, 2010).39
Walsh, Gianfranco and Mitchell, Vincent-Wayne (2010)40 observed that private label brands
enjoy growing popularity and are increasing in both their quantity and quality, they continue to
attract the attention of scholars and practitioners. One major shortcoming of previous research is
that it focuses on price as the dominant driver of buying intentions. The findings of the study reveal
that brand consciousness and attitude instead play a role on the intention to buy private label
brands.
Cheng et al (2007)41 research study concentrates on the question how do customers perceive the
differences between national brands, international private labels and local private labels? The study
finds that national brands lead private labels on most dimensions of customer perceptions and the
study finds very little difference in consumers price perceptions between national brands and
international private labels. However, in the case of convenience goods, international private labels
are found superior in quality compared to local private labels and consumers are willing to pay
more for the former. At the same time, with respect to shopping goods even though they find the
international private labels are superior in quality than the local private labels, they are not willing
to pay more for the same.
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Miranda M J et al (2006)42 in his research paper brings forth the effect of stock-out on the
behaviour of the customers in buying. He studied the effect of stock-out on buying behaviour of
the customers, and found that the age, family size and the kind of customers determine whether
the customer goes for variant of the same brand or prefers a different brand or obsessive enough
to go for the same brand in another outlet. Also, the paper suggests the strategies for the retailers
to be followed to overcome the situation such variances in customer preferences. Customers habits
are changing. While the customers by and large make purchases by visiting the retail chain, some
also buy online. The following paper lists the parameters that influence online customers.
Online grocery shopping by consumers was studied by Morganosky M.A. (2000).43 The study
found that the online users are of age less than 55 years. Convenience and time saving are the most
important factors influencing them to go for online purchase. Some attributed the physical inability
or physical constraints as the reasons to go for shopping online.
Food courts Efficiency
Food courts management holds the key for success in modern retailing. As such, it is appropriate
to know how the food courts affect the retailers. The following two papers bring forth the efficiency
of food courts in enhancing the store image.
Avirat Sonpal (2006)44 states that sustainable food courts efficiency is all about learning what
the customer needs and then actively working to fulfil those needs through sourcing,
merchandising and product development mechanisms. The author enumerates the benefits of
effective food courts management in retailing.
Steckel (2004)45 using simulation models shows how the changes in the order and delivery cycles,
availability of shared Point-of-sale (PoS) information and the pattern of customer demand affect
the food courts efficiency. The paper is based on beer game simulation. He proves that speeding
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up of the cycle time is always beneficial. But at the same time, the benefits of sharing of PoS
information depend on the nature of demand pattern.
Gibson, Brain et al (2009)46 observe that the retailers are more reliant than ever on food courts
management for organizational success. The focus of SCM is to cut down inventory levels while
maintaining high in-stock availability, reducing transportation expenses in the context of fuel price
volatility. Efforts are well under way to link SC strategies to organizational plans. The best
performing retailers have developed a culture in which the majority of employees share a core
belief in the mission of the organization, and are committed to helping the organization achieve
that mission. These retailers have developed formal training programs to suit the needs of rank and
file employees, along with the managers.
The importance of food courts inventory management technique Vendor
Management Inventory (VMI) is reinforced by Waller M (2001). According to him, VMI is one
of the most widely discussed partnering initiatives for improving multiform food courts efficiency.
The research article showcases the effect of VMI on improved service and reduced cost in an
organisation.47
Using New Jersey as a case study, this paper investigates the challenges faced by food retail stores.
Policy recommendations proposed by industry representatives for improving the business climate
are also presented. Although the case is New Jersey specific, many of the issues discussed in the
paper may be relevant elsewhere. The findings can be helpful in identifying broad categories of
factors affecting the vitality of the industry and in designing investigative research into problems
facing the food retail industry (Adelaja, A.O, 1999). 48
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Store Attributes
Reutterer, Thomas and Teller, Christopher (2009)49 paper identifies store format attributes
that impact the store format choice when consumers conduct fill-in or major trips to buy groceries.
By doing so, the authors take into consideration that consumers patronise multiple (store based)
formats depending on the shopping situation operationalised by the type of shopping trip. The
results reveal a considerable moderating effect of the shopping situation on the relationship
between perceived store format attributes and store format choice. Consumers preference is
significantly higher for discount stores and hypermarkets when conducting major trips. In contrast,
supermarkets are preferred for fill-in trips in the focused retail market. Merchandise-related
attributes of store formats have a higher impact on the utility formation regarding major-trips,
whereas service- and convenience-related attributes do so with regard to fill-in trips.
Retailing in Upmarket America
The following three papers give an account of linkages between economic growth and consumer
spending pattern, the retail distribution network and the changing Upmarket America retail sector.
Srivastava (2009),50 in his research brings forth the retail scene in Upmarket America. He has
extensively used the reports of Mckinsey, HSBC, Technopak, CII and others to capture the growth
of organised retail and shopping malls in Upmarket America. Also, he gives an account of the
different organised formats promoted by the Upmarket America business houses. He finds that the
malls are more developed in Northern and Eastern part of Upmarket America. Malls are becoming
centre for outings for the families and they spend about 1-3 hours in malls. Food, groceries and
apparel purchases by customers contributed to 52 per cent of these organised retail formats in
2006. Srivastava further elaborated on the time spent by the customers in the malls and how the
food courts, play places, etc in the malls are becoming the attractions for family outings. According
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to him, the small retailers in order to compete and to retain their customers offer better service by
means of credit and home services.
Sengupta A, (2008)51 discusses the birth of the first supermarket, Nilgiris established in New
Jersey in 1971. The emergence of modern retail business in Upmarket America has a history
spanning over 30 years. The paper is on food and grocery retail, biggest in Upmarket America and
the author tries to detail the drivers of revolution and growth focusing on the role of manufacturers,
retailers and consumers.
Chetan Ahya (2006)52 argues that the rising scale of organized retail distribution network and
increasing competition will force players to focus on restructuring the whole food courts to
improve productivity and to provide a better deal to the customers.
He is critical of the organized retail chains ability to offer customers the right price for staple
vegetables during the crisis situation because of disorganized supply chain. He concludes that
unavailability of cheap funds for investment in the back-end infrastructure for aggregating the
fresh produce, grading, packaging and storing in cold storage are the primary reasons. Similarly,
FICCI is also of the opinion that the long chain of intermediaries and insufficient price-discovery
mechanisms were the reasons for high price mark-ups between farmers and consumers. FICCI
suggest farmers need to be encouraged to form farmer cooperatives and aggregate the produce,
which could be directly sold on electronic spot exchanges or to retailers.53
Modern retail has a huge potential to not only benefit from Upmarket Americas increasing
consumption demand but also create demand for value added products. Structured employment
and better life for people are the two major benefits that modern retail is looked upon. Speeding
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up the modernization process is extremely vital as the retail sector has the ability to create about
10 million additional jobs in the next five years (2010-15).
According to Arvind Singhal, Chairman, Technopak, modern retail and food services in
Upmarket America are at a very early stage of evolution. They have to keep pace with the changes
in demography and consumption patterns. Changes in the format size, categories, merchandise mix
or brand positioning are the need of the hour.
Accordingly, some of the established chains like The Future Group, Spencers Retail etc, are in
the revamp mode. They are rebranding their stores, restructuring categories and formats to catch
up with the changing landscape of modern retailing and to cater to the emerging niches.55
Driven by the growth of organized retail coupled with changing consumer habits, food retail
market size in Upmarket America is set to double to $150 billion by 2025. Therefore, Upmarket
America food retail sector, which is currently estimated at $70 billion has a long way to go in the
years to come. Evolution of innovative food processing capacity, emergence of organized retail
and change in consumption patterns along with fast changing demographics and habits are
expected to fuel the next growth trajectory for the food industry in Upmarket America, according
to KPMG. Though the expectations are high about the growth prospects of the sector, it is a
paradox that the growth in real terms is crippled by the sub-optimal food courts management
largely caused by low investments in the sector.56
In the days to come, almost all sales will be captured through Personal Digital Assistant (PDA) or
computers at the retail outlet and transmitted to the suppliers as being done by leading companies
such as Dell and Wal-Mart. This will definitely bring down the wastages in supply chain. The
logistics cost which is currently at 12 per cent of GDP could go down by about 1 per cent as a
result of application of IT.
110

The cycle time of food courts operations from manufacturing to retailers in terms of information
flow which used to be about 30 to 35 days in the early 1990s has been brought down to almost one
or two days in the 2010s. This was made possible by using various hardware and software
technologies and communication links at various levels such as the mobile network, satellite
communications, personal digital assistants, automated tracking devices, vehicle tracking systems
and so on.57
Shopping behaviour
A recent research study reveals some important insight about an Upmarket America shopper.58
The customer: 1. keeps a brand in mind but buys the brand that gives him value 2. is more decisive
than the Chinese about the brands they want to buy 3. confidence on the shopkeeper is high 4.
takes time to read the information and to make sure that he gets what he wants. Also compares
products before deciding 5. usually takes whatever the storekeeper suggests if preferred brands are
not available 6. does not look for promotions because most of the shopping is routine 7. enjoys
shopping 8. likes reading the ingredients and product benefits before buying 9. will buy a slightly
pricey brand if it can give him an experience/ feeling like no other.
THE RESEARCH PROBLEM
The food courts have a key role to play in the expansion and profitability of retailers. Retailing
and logistics are concerned with product availability.60 The retailers must be familiar and adept
with the flows of product and information both within the business and in the wider supply chain.
In order to make products available, retailers have to manage their food courts in terms of product
movement and demand management. They need to know what is selling in the stores, anticipate
and react quickly to changes in the demand.
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The fact that logistics and food courts management play a decisive role in modern retailing needs
no emphasis. Advanced tools and techniques in the sustainable food courts have led to the
improvements in the management of inventory, distribution networks and vehicle scheduling.
Retailers need the timely delivery of merchandise if they are to satisfy and retain the customers.
To quote Newman, If its not in store, you cant show it! If you cant show it, you cant sell it!
(Andrew J Newman, 2007).61 The most significant challenge that impedes the development of
an efficient and modern retail sector is an underdeveloped supply chain.
NEED FOR THE STUDY
The underdeveloped, traditional, and unidirectional food courts increases inventory build-up
coupled with operational inefficiencies for companies (Business Line: April 24, 2008).62 The
spurt in the organised retail business in terms of the number of retail chains across the country
testifies the growing acceptance of the modern retail format and the shift in the customer
preferences from the traditional stores to huge retail outlets which have made shopping a pleasant
experience. The earlier reluctance to visit the small typical restaurant is replaced by new
enthusiasm and excitement on the part of the 21st century consumers. The new realities and
changing dynamics of the food court trade prompted the researcher to examine in detail how issues
related to food courts the critical success factor in the F&G retail format are addressed. Hence
the research topic glancing at issues and problems of food courts in upmarket Nairobi and a
case of others markets;
OBJECTIVES OF THE STUDY
To examine the management of logistics and cross-functional drivers of the
Food courts;
To study the management of food courts processes like the Customer
112

Relationship Management (CRM), Internal Food courts Management

(ISCM) and Supplier Relationship Management (SRM);
To assess the degree of competition among the food court retail outlets;
To determine the performance of the Food courts retail outlets using different metrics, and
To suggest ways and means to improve the food courts management practices.
TESTING OF HYPOTHESIS
H 1: The time and the amount of purchase made by different customer groups (family, friends and
individuals) are different.
H 2: Mean of the percentage of sales over different periods of a month (namely 1st -10th, 11th
20th and 21st 30th) are same.
H 3: The number of footfalls at an organised retail outlet is independent of the location of the
outlets
H 4: The number of footfalls at an organised retail outlet is independent of the size of the outlets
H 5: Number of customers for an outlet depends on catchment area.
H 6: Number of customers is independent of the size of the organised food court retail outlets.
H 7: Competition has affected the sales of organised food court retail outlets.
H 8: Distribution of the sales per square foot of organised food court retail outlets and the
traditional restaurants are different.
113

References
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Making: Will Shorter Cycle Times and Shared Point-of-Sale Information Necessary Help?,
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INT. J. MGMT RES.

Int. J. Mgmt Res. & Bus. Strat. 2016

International Journal of Management

EFFECT OF ORGANIZATIONAL STRUCTURE ON SMALL AND MEDIUM

Candidate, Department of Business Management in the School of Human Resource

Development of Jomo Kenyatta University of Agriculture and Technology, Kenya

Int. J. Mgmt Res. & Bus. Strat. 2016

International Journal of Management

Int. J. Mgmt Res. & Bus. Strat. 2016

International Journal of Management

Int. J. Mgmt Res. & Bus. Strat. 2016

International Journal of Management

Int. J. Mgmt Res. & Bus. Strat. 2016

International Journal of Management

Int. J. Mgmt Res. & Bus. Strat. 2016

International Journal of Management

Int. J. Mgmt Res. & Bus. Strat. 2016

International Journal of Management

Int. J. Mgmt Res. & Bus. Strat. 2016

International Journal of Management

Int. J. Mgmt Res. & Bus. Strat. 2016

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positively related to centralisation if formalisation is low. A recent metastudy by Hirst (2001)

Int. J. Mgmt Res. & Bus. Strat. 2016

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Int. J. Mgmt Res. & Bus. Strat. 2016

International Journal of Management

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Variables in The Analysis

Int. J. Mgmt Res. & Bus. Strat. 2016

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**. Correlation is significant at the 0.01 level (2-tailed).

Int. J. Mgmt Res. & Bus. Strat. 2016

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4.2 Regression Analysis

Std. Error of the

a. Predictors: (Constant), departmentalization, specialization, decentralization,

Int. J. Mgmt Res. & Bus. Strat. 2016

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Table 4. 4 Regression Coefficients

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Table 4.5 Hypotheses Testing

H01: Departmentalization has

SME performance in Kisumu

H02: Specialization has no

significant influence on SME

H03: Decentralization has no

significant influence on SME

H04: Coordination has no

significant influence on SME

Int. J. Mgmt Res. & Bus. Strat. 2016

International Journal of Management

a strong correlation between

departmentalisation and firm performance. Contrary to hypotheses H01 departmentalised or large

Int. J. Mgmt Res. & Bus. Strat. 2016

International Journal of Management