Financial inclusion using traditional banking channels and its effect on financial performance of commercial banks in Kenya
Keywords:
commercial banks, financial inclusion, financial performance, KenyaAbstract
Commercial banks play a vital role in resource allocation and as such financial inclusion is significant
to banks existence and subsequently to their financial performance. This study sought to establish the
degree of financial inclusion using traditional banking channels, determine financial performance of
commercial banks and find out the effect on financial Inclusion on financial performance of commercial
banks in Kenya. This study focused on the supply side whereas most of the studies are on the demand
side thus extends the frontiers of knowledge on effects of financial inclusion on the commercial banks
from a developing country context and has implications for theory, policy and practice. The theories
that underpinned this study were the financial intermediation theory and asymmetric information
theory. A sample of 30 commercial banks for a 9-year period from 2005-2013 were analysed. A
financial inclusion index was computed and three financial performance measures Return on Assets
(ROA), Return on Equity (ROE) and (Net Interest Margin (NIM) were computed and separately
regressed with the Index of Financial Inclusion to test the effect. The study revealed that the level of
financial inclusion in Kenya as depicted by the index of financial inclusion was low during the study
period with a progressive marginal increase. Results on performance of commercial banks in Kenya
from 2005-2013 was average and consistent throughout the study period. The study also indicated that
financial inclusion had a statistically significant positive effect on all the three measures of bank
performance. The study recommends that commercial banks should take an active role in increasing
financial inclusion as it is consistent with banks’ profit motive. The use of an index of financial inclusion
by banks that incorporates the new delivery channels is also recommended
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