Banking[1]

CHAPTER ONE BACKGROUND OF THE STUDY 1.0 Background In recent years, retail banking has increasingly gained popularity in Kenya due to various changes in the market. Retail banking has been defined as the provision of cluster products and services by banks to consumers and small businesses through branches, the Internet and other channels (Ashcraft, 2005). This is as opposed to corporate banking, which consists of different banking services to large companies, governments or other big institutions. There are various forms of banking namely corporate, commercial, retail banking and investment banking therefore banks can offer more than one form of banking. Banking industry in Kenya is divided into three categories: banks, micro-finance institutions, foreign exchange bureaus and non-banks financial institutions. There are forty-six bank and non-bank financial institutions, fifteen micro-finance institutions and forty-eight foreign exchange bureaus. Thirty-five of the banks, most of which are small to medium sized, are locally owned. A few large banks most of which are foreign-owned, though some are partially locally owned, dominate the industry. Six of the major banks are listed on the Nairobi Stock Exchange (PWC report, 2007) The commercial banks and non-banking financial institutions in Kenya offer corporate and retail banking services but a small number, mainly comprising the larger banks, offer other services including investment banking (PWC report, 2007). Retail banks exist to service the financial needs of business and society. The deregulation of financial services markets in the 1980s, and in particular the growing focus of both consumers and producers on quality, has created a process of structural change in the banking industry. Retail banking is a commodity service and the effects of these changes are therefore experienced by most of the population. (Llewellyn,1992).

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Indeed, by the late 1990s, the mainstream banks started restructuring their services towards wealthier people, and savings services became wealthier people, and savings services became sufficiently expensive that even middle-income people sought cheaper alternatives. From the year 2002 there has been renewed interest from the banks in reaching the mass of middle-income salaried individuals such as teachers and civil servants and this market segment is quite competitive (Johnson, 2004).

In the last four years there has been increased competition from new entrants into the banking industry, forcing banks to cut costs and improve efficiency through automation and price rationalization (Paulson and McAndrews, 1998). While the banks have been forced to cut costs and improve efficiency, there is increasing internal and political pressure on banks to expand their products and services to the un-banked and under-banked.(Bitner, et al 2000). Due to the competitiveness of the banking industry many banks which were doing corporate banking changed to partially or completely to retail banking. This is evident from a lot of advertisements made by banks using various forms and also by use of sales people, who have tried to convince many individuals to open accounts ((Banking supervision Annual Report,2005).

Banks which have actually incorporated retail banking in Kenya are CFC, Standard chartered, Barclays, National bank of Kenya, Kenya Commercial Bank, Consolidated bank, NIC bank, Co-operative bank of Kenya.(PWC Report,2005). Changes in Retail Banking since 2002 Retail banking has been undergoing dramatic operational transformation in the recent years. Mergers and acquisitions, increased competition, and new regulatory requirements have driven banks to rethink their retail strategies. It has become important for retail banks to leverage technology to optimize sales and fulfilment

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processes, manage distribution channels, and streamline operations to acquire, satisfy, and thereby retain customers. (Chen, 1999) The retail finance sector is currently one of the most competitive in the banking industry. However, in order to succeed in such a dynamic market place, Berry (2007) argues that the skills required to be a successful retail banker are many and varied: ability to demonstrate a deep understanding of consumer needs and revenue generating methods, ability to develop new market entry and customer retention strategies, application of new business models and translating them into revenue generating projects and programmes. Financial institutions that are interested in tapping underserved households need new strategies to segment the large under banked market. The rise in the number of financial institutions that are designing new initiatives to pursue the under banked consumer market illustrates the recent realization of retail banking (Karty and Stewart, 2006) Rapid technological advances have introduced significant changes in retail banking. Bank branches alone are no longer sufficient to provide banking services to cater for the needs of today’s sophisticated and demanding customers. The provision of banking services through electronic channels (e-channels) namely ATMs, personal computer banking and phone banking have provided an alternative means to acquire banking services more conveniently. (Howcroft et al, 2002) Other changes that have been used by the banks to penetrate into the market is the use of downscaling. Under the concept of downscaling the banks are trying to modify their services to meet the needs of the low- income earners. Low-income markets can be served on a “sustainable” basis, that is, with full cost recovery and a market return, without subsidy. As a result, in a growing number of countries, the formal financial sector has begun to take notice and to service these traditionally marginalized sectors. (Young et al, 2005)

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1.1 Problem statement Retail banking in Kenya in the past years had been severely underdeveloped and marginalized, since the majority of Kenyans live below the poverty line and cannot afford the luxury of an idle Ksh 1000. Banks mainly made their money from corporate clients and huge government deposits. Since many Kenyans were marginalised from retail banking, they had to develop alternative avenues of finance and investments for example co-operatives and welfare organizations (CBK Amendment Act, 2000) In the past three years Kenyan banking sector has progressed towards increasing retail banking and decreasing the corporate banking. This is evident in the efforts banks are putting to attract retail customers through advertisements and sales promotions (Financial standard, 2006). This study therefore intends to find out the extent of successfulness of offering retail banking. To measure the aspect of success, the study will look at the number of individuals with bank accounts as compared to accounts of large companies, parastatals and government

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1.2 Objectives of the study 1. To determine the extent of successfulness of retail banking as used by selected banks in Nairobi. 2. To identify factors that have led to the successfulness of retail banking as used by banks. 3. To identify the challenges facing these banks in implementing retail banking.

1.3 Research questions The study is carried out to answer the following questions: 1. To what extent is retail banking successful as used by selected banks in Nairobi? 2. What are the factors that have successfully led to the use of retail banking by these banks? 3. What are the challenges facing these banks in implementing retail banking?

1.4 Significance of the study This study will benefit the bank managers since it will identify an opportunity that has not been ventured into by many banks. This opportunity therefore can help them diversify their risks and improve the profitability of their operations. The paper also will help under banked in the long run. This is because when the banks identify potential opportunity i.e. retail banking they will try to fill in the gap and the underserved market will get an opportunity to use services provided by these banks. Other researchers interested in the problem under this study will also benefit, as the research will lay a platform on which further research on the topic can be undertaken

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CHAPTER TWO LITERATURE REVIEW 2.0 Introduction Literature review will document the extent of retail banking by commercial banks that have opted to expand into retail banking as a new line of business. This chapter also analyses the factors that have enhanced the use of retail banking and the challenges faced. Retail banking is the cluster of products and services that banks provide to consumers and small businesses through branches, the Internet, and other channels. As this definition implies, banks organize their retail activities along three complementary dimensions: customers served, products and services offered, and the delivery channels linking customers to products and services (Ashcraft, 2005). In banking today, as in other service industries, managers must remain alert to constant environmental changes, and be ready to redefine their corporate mission and reformulate their marketing policies, plans and strategies to meet the needs of the evolving, complex marketplace (Karty and Stewart,2006). The retail finance sector is currently one of the most competitive in the banking industry. However, in order to succeed in such a dynamic market place, Berry (2006) argues that the skills required to be a successful retail banker are many and varied: ability to demonstrate a deep understanding of consumer needs and revenue generating methods, ability to develop new market entry and customer retention strategies, application of new business models and translating them into revenue generating projects and programmes. A successful product development, effective distribution and efficient marketing programme can make a real difference to the retail bank’s performance and impact on its bottom line.

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2.1 The extent of successfulness of retail banking in Kenya Many studies have been carried out in other countries to explain the successfulness of retail banking. Stewart (2006) argues that over time retailing and retail banking have developed side by side, albeit far from independently. There are several intersection points. The most important ones are centered round the point of sale (POS) and the customer payments of purchased goods. Holmberg and Suslin (2001) argues that at the time of the deregulation of the financial market in the mid of the 1980s there was a clear-cut borderline between retailing and banking. Retail banking was developed by investors who perceived opportunities to exploit gaps in financial markets. Foreign and government owned banks were generally conservative in their lending policies, they concentrated only on the multinational corporations(MNCs) and other large corporate customers (Harvey, 1993). In recent years, retail banking has become a key area of strategic emphasis in the U.S. banking industry, as evidenced by rising trends in retail loan and deposit shares on commercial bank balance sheets and a continuing increase in the number of bank branches (American banker, 2005) The U.S. banking industry is experiencing renewed interest in retail banking. These activities—broadly defined as the range of products and services provided to consumers and small businesses—have grown in importance over the past several years. Retail-related positions now account for larger shares of commercial bank balance sheets, and the number of bank branches continues to grow. The recent focus on retail contrasts sharply with industry views held during the 1990s, when banks’ attention turned to broadening products, diversifying revenues, substituting alternative delivery channels for branches, and offering a multitude of financial services to all types of retail, corporate, and wholesale customers. (White, 2005)

In Western economies it is widely recognized that retail banking is becoming a more competitive business everyday. Banks are realizing that revenue growth cannot be taken for granted anymore, and that survival will not simply be a question of turning 7

revenues into reasonable profits, but to actively secure that flow of revenues in the first place. In other words, banks must shift their focus away from the singular obsession with efficiency of recent years, and return their gaze to revenue growth, market share, and put back in the center of attention the very source of that revenue: the customer. (Stewart, 2006) Niche marketers have a competitive advantage in today’s highly segmented financial services market. The consumer marketplace is continuing to fragment into smaller subsets of needs and behaviours, which is affecting the way banks and other financial institutions market products and services (Laurino, 1993). Success stories indicate that low-income markets can be served on a “sustainable” basis, that is, with full cost recovery and a market return, without subsidy. As a result, in a growing number of countries, commercial banks are beginning to take notice and to service these traditionally marginalized sectors through retail banking. This experience suggests that local formal financial institutions have a business incentive to serve this market segment.( Arora and Sukhwinder,2005) Approaching new customer segments as a potential source of additional revenue – mainly lower, but secured income segments - retired people and public institutions employees (e.g. teachers) as potential target groups for simple and low volume loan products (cash loan, credit card) can expand the revenues of the bank. . (Klinkers, 2001). Retail banking is a relatively a new market opportunity for many banks in developing countries like Kenya. Interest in the social, economic and business potential of lowincome market segments has grown and financial products have been created to meet their needs. These financial services include loans for business and personal use, savings and other deposit products, remittances and transfers, payment services, insurance, and potentially any financial product or service a bank can offer to this market segment. The market segments include, low-income salaried employees, day laborers, pensioners, and poor households, which have historically been un-served or underserved by banks. The products and services can be targeted to meet the financial

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needs of the households as well as their income generating activities. (Drake et al, 2005). Many commercial banks in Kenya are beginning to examine retail banking as an opportunity to explore and are even changing their operations from corporate banking to retail banking. This is because there is stiff competition in the banking industry that have forced them to diversify into new markets. These banks do not only initiate this form of banking but they always want to be successful. 2.2 Factors that have led to retail banking in Kenya Retail banking has been triggered off by a number of factors namely multiple distribution channels, cross-selling services and liberalization of financial sector. 2.2.1. Multiple distribution channels The rapid pace of development in information technology and communications (ICT) has offered a wide range of delivery channels in retail banking. Banking institutions need to exploit opportunities that arise for these developments to bring significant gains to their customers. The successful banking institutions will therefore be those that are able to derive most from information and communications technology development. The winners will be those that are able to harness the capability of ICT in making decisions in terms of business alignment, work management and better customer relationship. (Central bank of Kenya, 2003) The efforts to optimize distribution channel strategies have led banks to place renewed focus on their branch networks and concentrate on transforming them into centers for high value product sales and advice. A key driver for branch renewal is the imperative for delivering optimum advice to improve cross-sell and up-sell rates and further the aim of becoming providers of integrated financial solutions. In doing so, banks are faced with the challenges of replacing antiquated IT infrastructures in branches and enabling them to deliver sales and advice. Furthermore, banks will have to transform traditional teller roles in branches into seller and customer relationship manager roles either by replacing or training existing staff. (McDonald, 2003) 9

In the last 5 years, many financial institutions in Europe have implemented advanced technological platforms , introducing a number of interactive marketing channels: ebanking, Internet banking, mobile banking and ATMs. he research has shown that sustainable profitability in the banking sector depends on mastering the skills of managing and integrating customer relationships across multichannels, by using advanced data and communication technologies (Kirby, 2001; Yulinsky, 2000). An important factor in the introduction of additional banking channels was the progress of information technology applications, especially Internet and mobile communication (Hadidi, 2003; Isarescu, 2001). The increased informatization of society has determined a transition toward an e-payments economy, in which money is perceived as information stored or transmitted through various communication channels (Pastore, 2001). The organization segments the market in terms of priority channels, promoting distinctive offers for each type of customer. In time, the search for greater convenience makes customers access various channels, depending on personal needs and circumstances. These multichannel customers expect and request a similar level of service from every delivery channel. On the other hand, the necessity to improve customer loyalty through personalized customer relationship management determines the financial institutions to introduce a unique platform technology, integrating the information flows from all existing channels (Martz, 2003). The banks are therefore adopting a multichannel approach, which is characteristic for a fully informatized economy in which information has become the primary strategic asset for building and maintaining competitive advantage. According to rational channel planning models (e.g. Stern and Sturdivant, 1987; Stern et al., 1996), retail banks should identify profitable customer segments attracted to branch banking, telephone banking, PC banking and Internet banking or combinations thereof. Based on this knowledge, they have to decide which distribution channels they want to offer their present and future customers. Hence, they have to predict both the consumer acceptance of these distribution channels and the dominating distribution channel strategies of their competitors.

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In nearly all banks in the United States, internet banking usage enjoys strong growth rates. Nordic countries are most advanced, whereas Southern European countries seem to be lagging behind. Currently, the internet is most attractive for the distribution of standardized products whereas more complex products are almost exclusively distributed via branches. However, this is likely to change as more and more customers become familiar and equipped with modern and cheap telecommunication and internet services. At the same time, the currently limited supply of cross-border online banking services (especially those offered by specialist providers such as internet banks) is another major factor restraining market development (Meuter, 2000) Finance and banking are information-intensive industries, which can be positively transformed by the development of ICT. However, a 1999 World Bank (Purcell & Toland, 2003) survey reported the average on-line banking penetration for developing countries to be only 5%. The main challenges encountered by developing countries in implementing multichannel banking activities are (Hadidi, 2003) • The ability to adopt global technology to the local requirements • The ability to strengthen the public support for e-finance • The ability to create the necessary level of regulatory and institutional frameworks • The ability to mainstream SMEs toward e-finance. Despite the sound theoretical basis of the multichannel banking strategy, the banks implementing it have encountered unexpected problems and challenges (Martz, 2003). First of all, the customers did not adopt the new interactive channels, such as internet banking or mobile banking, with overwhelming enthusiasm. Many customers have continued to rely on bank branches as their main channel of banking services, occasionally using alternative channels, when convenient. Second, by introducing new banking channels, some banks have lost the direct contact with the customer. This problem was created mainly by the incapacity of these banks to properly integrate the

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interaction with clients across all the banking channels available. The use of different IT systems has created important barriers against the sharing of customer data by various operational departments, which is specific for multiple-channel organizational configurations. These difficulties highlighted once more the necessity of a clear, focused strategy for multichannel banking operations, and the need for a unique IT platform for integrating information flows and customer databases. Despite the growing interest in the introduction of multichannel financial marketing, there is little research regarding the development and implementation of multichannel banking strategies in developing economies. Most of the articles dealing with this subject present only general information, without attempting to analyze primary and secondary data in a systematic way (Baliamoune, 2004; Efinance, 2001, Hadidi, 2003;) In Kenya this multiple distribution is growing faster due to the rapid development in Information technology. Although there are many forms of distribution not all people have been banked thus the study will find how banks are successful by using many distribution channels. 2.2.2 Availability of Cross-selling services Cross-selling services refers to the practice of providing other services that potential banking clients might find useful in addition to the traditional banking services currently being provided by banks. Cross-selling services can be useful marketing tools for banks to reach segments of the population that do not yet use traditional banking services.(Deborah and Young,2005) According to Vogel (2005) the following are examples of services that could be provided are: Money orders, consumer lending, overdrafts account, mortgages, affordable alternatives to payday loans, consumer lending and mutual funds Free tax preparation assistance to low-income individuals 12

In fast growing markets, such as the Central European countries, banks still compete to gain significant market share which lets them create a customer base for further cross selling initiatives and thus enhance revenues. Due to the fact that the market grows at a double digit pace (e.g. Polish retail mortgage loan portfolio growth amounted to almost 41% for the first nine months of 2006) and competition is getting more intense, repackaging of financial products is necessary for growth of revenues. (Hirschland, 2002) Although loans and deposits are the primary products, retail banking units provide a range of other financial services to consumers and small businesses. For individual consumers, these services include sales of investment products (such as mutual funds and annuities), insurance brokerage, and financial and retirement planning. For small businesses, they include merchant and payments services, cash handling, insurance brokerage, and payroll and employee benefits services.(McDonald,2003) Retail banks can reach a large number of the currently unbanked by providing services that commonly are used by that segment of the population. Such access allows individuals to avoid the high cost of fringe financial services, such as check cashing and payday loans - ultimately benefiting the whole community when those savings are reinvested in families and communities. (Harper, 2005) Banks view retail banking as a strong opportunity for cross-selling products. Depending on a bank’s overall strategy, it may enter traditionally marginal markets with one or many products. For example, banks may be mobilizing deposits and accepting utility payments from individuals with low income, but may not have considered lending to customers at a lower rate.(Drake et al,2005) Although loans and deposits are the primary products, retail-banking units provide a range of other financial services to consumers and small businesses. For individual consumers, these services include sales of investment products (such as mutual funds and annuities), insurance brokerage, and financial and retirement planning. For small businesses, they include merchant and payments services, cash handling, insurance brokerage, and payroll and employee benefits services.(Dick,2006) 13

In addition to new product development, banks find opportunities to cross-sell existing financial services. Loan proceeds are typically disbursed into savings accounts that clients also use to make their payments, leaving a residual balance that may grow over time. (Keasey ,2003). Depending upon the laws and regulations to which a particular bank is subject, banks can offer services that potential clients might find appealing. These services might include income tax preparation, low or no fee checking/savings accounts, lower fee money transmission and check cashing services and convenient money deposits into foreign bank accounts. Experience has shown that the strategy of cross-selling is a highly effective means of reaching unbanked communities (Jennifer et al, 2003). According to Barney(2002) multi-channelling has benefits as well as disadvantages. Advantages - Customers can choose how and when contact with the bank is wanted - Different channels appeal to different types of customers and thus customers can easily choose they channel of their choice. Cost savings, because of relatively cheap virtual channels Disadvantages - Customers become more anonymous - Customers can switch more easily between banks this is because there is low cost of switching. - There is a high investment in ICT systems -Complexity of control Many banks in Kenya are putting in more efforts by trying to differentiate their products and services to suit and innovating more. This study therefore will find out whether this strategy of offering several services and products is fruitful especially to retail bankers. 2.2.3

Liberalization of financial markets

Competition is growing in retail banking, however, as new banks enter the market under banking laws that allow more freedom of entry and a less repressed regulatory 14

environment. The struggle to survive is forcing many of these banks to look at new markets, and the deregulation of financial markets is creating an environment in which these opportunities can now be explored for the first time.(Churchill and Berenbach,1997) With the advent of structural adjustment and financial liberalization in the 1980s, banking industry expanded rapidly in the Western economies thus all interest rates had been deregulated, creating the opportunity to freely charge the higher, more realistic interest rates required for lending to individuals with low income at a below – market rate. (Almeyda and Gloria, 1996) Studies also show that the change of the political regime in Romania, in December 1989, oriented the national policy toward the development of a free-market economy. The creation of a complex financial and banking sector has represented an important priority in this context. Before 1990, the Romanian banking system was limited to a handful of banks that managed the financial operations of state enterprises, and by the national savings banks that were servicing the needs of the population. After the fall of the communist regime, the country attempted to open its structures toward the world and to adopt the models used in industrialized countries.( McNamara, 2003)

Policy makers are increasingly concerned by the relative lack of retail banking in Europe. For many, the long-term success of the “Single Market” depends on bringing the benefits of economic liberalization in a tangible form to consumers and the public at large (McDonald,2003). Liberalization and deregulation of the Greek banking industry, mainly of the retail sector, has intensified competition, which is particularly noticeable in the area of banking charges (Gortsos , 1992). In developing countries like Kenya liberalization has not been achieved and thus some initiatives to enhance access to financial services. These initiatives include promoting

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market discipline through targeted communication of bank lending rates, fees and charges. This initiative is expected to result in increased competition in the banking sector with attendant lowered costs and enhanced access. When the banking rates and fees are lowered the banks can easily enter into retail segments by pricing their products at considerable price to their customers( Ahmad and Buttle, 2002).

2.4 Challenges faced by banks in implementing retail banking New entrants to retail banking confront significant challenges even in a purely domestic environment, in particular due to economies of scale and network effects that apply to the industry. At low volumes and numbers of clients, new entrants suffer higher marginal and average costs (Bergman, 2002) According to the survey carried out by Baliamoune ( 2004 ) on Vodafane bank in Europe, retail banking involves a lot of difficulties. Retail banks firstly face challenges achieving profitability while financing the large fixed investments often needed in order to establish a service and acquire clients. Although the Internet has reduced the importance of having a local presence, branch networks continue to be important, and costly. Secondly, retail banks may be subject to important constraints on competition and innovation in the provision of payment services. A new entrant working through existing networks may be unable to diverge from established practices and pricing. But in seeking to introduce new payment instruments, they would face very significant challenges due to the strong network features of payment services and the market power of the existing collaborative payment organizations that dominate most European countries. Too risky: Bankers perceive individuals with low income can cause a bad credit risks. This is because clients cannot repay their loans. The perception is that clients with low income do not have stable, viable businesses for which for which to generate repayment. Moreover, these potential clients lack traditional collateral to guarantee their loans. Banks also do not appropriate technologies to serve these clientele i.e

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correct screening mechanisms to separate good from bad credit risks. (Chakravorti et al, 2006).

Heavy investment:Retail financial services require heavy investments in information technology and branch network IT systems represent significant fixed costs for retail banks. And the investments can be important even if a bank is serving just a small numbers of clients. IT systems have increasingly enabled banks and other financial services providers to automate processes for large volume standardized services, increasing the role of economies of scale. New entrants may need to acquire a large number of clients before they are able to break even while charging competitive market rates. (Massoud, 2004). Branch networks are still important means of acquiring and serving clients, in particular for higher margin products for which clients still demand (or require) advice. And within a limited area, there may be increasing returns to branch network size – i.e. clients may be more inclined to choose a bank that has numerous branches in the areas in which they work and live. This will be costly for banks to initiate.( Alistair and Tang,2005). Client acquisition can be slow and expensive. Acquiring clients is expensive, both in terms of time and money. Marketing costs can represent a significant portion of total costs during the early stages of development for a new financial services provider. The quicker a critical mass of clients can be acquired, the sooner a new operator can break even. Hence many foreign expansion strategies are based on a ‘stepping-stone’ model, building on existing networks or following other strategies associated with smaller up-front investments and lower risks; alternatively, expansion abroad is conducted through acquisition of an existing client base (Rochet and Tirole,2000)

Socio-economic and Cultural Barriers: According to bankers, micro and small enterprise clients have difficulty approaching a bank because they lack education and do not possess business records to demonstrate cash flow. In many developing countries, social, cultural, and language barriers do not allow for an easy relationship

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with a modern banking institution. It is hoped, however, that with a more widespread diffusion of innovations in financial methodologies, reducing the risks and costs of micro lending, more banks will begin to incorporate micro entrepreneurs into their portfolios( Aladwani, 2001). Although retail banking has been practised in Kenya for several years, it might be successful due to some challenges and thus the study will therefore find out factors that hinder its successfulness.

Conclusion Success stories indicate that low-income markets can be served on a “sustainable” basis, that is, with full cost recovery and a market return, without subsidy. As a result, in a growing number of countries, commercial banks are beginning to take notice and to service these traditionally marginalized sectors through retail banking ( Arora and Sukhwinder,2005). According to Chakvavorti et al (2006) bankers perceive individuals with low income can cause a bad credit risks. This is because clients cannot repay their loans.In his perception retail banking cannot actually succeed compared to corporate banking.These two researchers have different perceptions and thus the study will find out whether this form of banking is successful. There are conflicting researches on the factors that facilitate the successfulness of retail banking e.g. according to Yulinsky (2000) research regarding multiple distribution channels showed that introducing a number of interactive marketing channels such as e-banking, internet banking, mobile banking and ATMs has enabled banks to reach to many individuals who were under-banked. While other studies show that multichannel is only theoretical. This is because many customers have continued to rely on bank branches as their main channel of banking services (Martz,2003).This therefore gives the need to undertake the research and find out whether multichannel is one of the factors which facilitate the use of retail banking by banks

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CHAPTER THREE

RESEARCH METHODOLOGY 3.1 INTRODUTION This chapter discusses how the study will be conducted, explaining the methods and steps that will be used to conduct this research. The basis of any meaningful research depends on the methods and procedures employed in data collection and a clear definition of the target group of respondents. 3.2 RESEARCH DESIGN This will be a qualitative research. Qualitative research is concerned with subjective assessment of attitudes, opinions and behaviour. This type of research also provides an understanding of how or why things are as they are. 3.3 POPULATION The population of interest involves selected banks in Nairobi, which were dealing with corporate banking but now have changed to include retail banking. According to Financial standard (2006) there are 15 banks, which have actively incorporated retail unlike the past three years. The target population in the banks are the marketing managers. 3.4 SAMPLE DESIGN Since the population is small i.e. fifteen banks a census will be carried out to give appropriate results.

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3.5 DATA COLLECTION Primary data will be collected using interview guide. The researcher will carry out indepth interviews with the marketing managers, one from each bank. The interview guide will be structured into 4 sections. Section A will include demographics questions, section B will involve questions on general perspective of managers on retail banking, section C include questions on factors that have led to the use of retail banking and section D will include questions on challenges facing banks in implementing this form of banking.

3.6 DATA ANALYSIS Information collected will be arranged according to themes. Analysis will be done using content analysis

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CHAPTER 4 4.0 DATA ANALYSIS AND PRESENTATION 4.1 INTRODUCTION In this chapter the researcher gives a full account on the findings of the conducted research. Analysis and interpretation of these findings is also given. Response The population of the research was fifteen banks. The response rate was only ten banks, in each of these banks one marketing manager was interviewed. Interview was carried out by booking an appointment with the marketing managers so that the researcher with the interviewee would have face to face discussions. 4.2.1 The target market for the banks According to the interview carried out each bank has its own target market. Standard chartered bank The bank targets the following: Corporations, companies, personals and SMEs Co-operative bank This bank aims at serving only individual bankers and small and medium enterprises (SMEs). According to the marketing manager the bank has changed its market from corporate banking to retail banking. Kenya commercial bank (KCB) According to the marketing manager, in the past 3 years the bank has been actively involved in retail banking. It also offers their services to corporations, companies and SMEs.

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Barclays bank This is a market leader in retail bank and thus most of its services is for individual bankers. The bank is also aggressively growing its corporate business i.e. corporate banking in order to offer numerous world-class financial services. National bank of Kenya The bank has divided its services into three groups where it can serve its customers more efficiently. This include: Retail banking: This targets individuals and small businesses such as partnerships and sole proprietors. Corporate and institution banking: This mainly serves corporations i.e. companies owned by the government. It also targets institutions such as schools, colleges and hospitals. CFC bank It is a medium sized bank focused on providing banking financial services to commercial, corporate and retail customers including large corporate institutions, parastatals, non-governmental organizations, diplomatic missions and multi-nationals. Commercial bank of Africa It targets corporations, institutions and individual customers. East Africa development bank The bank serves individuals and SMEs. NIC bank The bank aims at serving all customers in the market. This is because they serve individuals, corporations, companies and SMEs. Consolidated bank of Kenya Ltd It serves individual bankers, SMEs and corporations. Equity bank The bank serves only individuals i.e. retail banking. K-rep bank It targets individuals with low incomes and entrepreneurs. 4.2.2 The range of products offered by banks Standard chartered bank Bank overdrafts, Consumer lending, Mortgages 22

Co-operative bank Consumer lending Kenya commercial bank Insurance premium finance, standing orders, travellers’ cheques, money transfer, salary and credit payments, personal loans, KCB card products such as payroll card, students card, travel card, credit cards such as local and international classic cards, gold card and MasterCard products Barclays bank Home loans, Business solutions loan, Barclaycard, Barclays foreign currency account La Riba current account for Muslims National bank of Kenya Overdrafts, asset financing, business loans, personal loans, tax collection/transmission Payroll processing and distribution. CFC bank Asset financing, personal loans, overdrafts, Import and export letter of credit facilities bills and invoice discounting Commercial bank of Africa Personal secured and unsecured loan, overdrafts, CBA premium financing, visa electron debit card, personal and business credit cards. NIC bank Bank overdrafts and consumer lending. Consolidated bank of Kenya Ltd Bank overdrafts, consumer lending and money orders. Equity bank Bank overdrafts, consumer lending, mortgages, standing orders, remittance processing, treasury bills, bank guarantees Range of products offered in retail banking Standard chartered bank Overdrafts, secured and unsecured loan, deposit plus and debit cards. Co-operative bank

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Loans such as biashara plus loan, hekima savings account and co-op insurance finance. Kenya commercial bank Personal loans ,insurance premium finance KCB prepaid card products such as payroll card, students card, travel card, credit cards such as local classic card, international classic card, gold card and MasterCard products Barclays bank Home loans, Barclaycard, la Riba current account for individual Muslims

National bank of Kenya Loans such as car loan, NBK personal loan, HELB loan (education),cards such as local and international credit cards and Visa debit cards. CFC bank Fixed deposit, savings and current accounts, personal loans, asset financing and trade services. Commercial bank of Africa Lending products: personal Secured loans and overdrafts, personal unsecured loans and overdrafts facility, motor loans, home loans, CBA premium financing. Card products and services: visa electron debit card, personal credit cards(classic& gold) and business credit card(silver and gold). Investment products: Offshore products and unit trust. Deposit products: The personal savings account, current account, deposit account and safe deposit lockers. East Africa development bank Loan, trade financing, equity investments, asset financing, real estate and property development, agency for donor funds, loan guarantees, eligible sectors NIC bank Overdrafts, standing orders, foreign exchange transactions, loans, insurance premium finance, foreign fare accounts, asset financing and insurance brokerage Consolidated bank of Kenya Ltd Loan: Solid loop, asset financing, personal loans and overdrafts 24

Products: solid plus account, solid E-cash account, dream saver account and foreign currency account. Services: Kenswitch ATMs, Pesa point ATMs and M-systems Equity bank Bank overdrafts, consumer lending, mortgages, standing orders, remittance processing, treasury bills, bank guarantees Factors that have made banks successful in retail banking Standard chartered bank According to the manager, consumer-banking business continuously meets the challenges of developing new products and services to match the specific requirements of customers. To offer customers a greater banking convenience, the bank has introduced many modern banking facilities that include: Evening banking, largest 24-hour ATM network, Visa Debit Card, Internet banking, e-statements, SMS banking and 24-hour BillsPay service. This form of banking also has been successful because of the quality service offered by the bank, which has earned the bank good reputation among the customers. Co-operative bank The bank has many branches countrywide and its activities are centralized. This has enabled bank to grow rapidly especially in personal banking. It has also committed significant resources to boost service delivery to customers. Multiple channels of distribution such as ATM network has been expanded to successfully reach customers. Kenya commercial bank Branch network: The bank ahs the widest network of outlets in the country compared to other banks. All these branches provide a whole range of retail banking and financial services. It has also approximately 119 ATMs which enable customers to withdraw their money 24 hours. The bank also co-operates with external economies. It has over 400 correspondent banks throughout the world. This enables the customers to be served even when they are out of the country. Provision of quality and customer friendly services has geared towards mobilizing many individuals to open an account with the bank. This quality service has also ensured consistent growth in customer deposit that have in turn provided a strong reservoir for steady growth in customer borrowings every year. 25

Barclays bank The bank has many outlets countrywide. All the outlets are computer linked making it possible for customers to access their accounts from any branch as if it were their own home branch for all their cash and cheque transactions. The bank also has a lot of ATMs approximately 82 in number. The bank also is able to provide its services without much regulation on interest rates and bank charges .This has enabled the bank to impose their rates which suit their individual customers. National bank of Kenya The bank has structured its products to suit its customers. It also offers a variety of products and services which are affordable to all customers depending on their status i.e. low, middle and high income levels. The bank also has branches and ATMs which enable them to serve many customers more effectively and efficiently. CFC bank The bank offers a variety of products to the customers. What has actually made the bank successful in retail banking is that it can grant unsecured loans and oversrafts to individuals. It also has minimum requirement on loan borrowing compared to other banks. The bank has also invested much on ATMs network for example their ATMs are divided into CFC ATMs, MasterCard ATM and Pesa points ATMs. Commercial bank of Africa The bank is continuously innovating new products for the retail segment. In the past two years the bank has reported an increase in their customers due to the new product know as offshore investment which gives the customers an opportunity to invest in other countries. The loan granted by the bank also has attractive interest rates and flexible investment periods. NIC bank The bank has a variety of products and services. It has a good reputation of granting of loans to individuals who want to acquire assets .The bank grants loan and keeping their pricing competitive. 26

Consolidated bank of Kenya It offers a service built on personalised and specialised banking solutions.It aims at offering the best quality and according to the manager the bank has reported huge turnover through its quality service offered. It has employed modern technology that will greatly benefit their customers in efficient delivery of financial services. The banking technology includes: a). Bankmaster and Branch Power – Real time, online banking solutions enabling ‘branchless’ operations. b). M-Systems - Money Transfer Services. c). Cheques / funds transfer – Electronic funds transfer. d). Swift Connectivity - Connectivity to a worldwide community of financial institutions that is the leader in communications solutions that enable inter operationability between its members, their market infrastructures and the end user community.

Equity bank It has a lot of branches countrywide and thus can reach many customers. The bank also has many channels of distribution for example Internet banking, ATMs and e banking. The bank is therefore able to capture many individuals through these forms of distribution. The extent of successfulness of retail banking According to the interview carried out most banks have similar response on their successfulness in retail banking. The following five banks had the same responses: Barclays, Standard chartered, Cooperative bank, KCB and Equity banks. They rate retail banking as an excellent form of banking. They use the following aspects to analyze this form of banking: Number of accounts operated: Accounts are many compared to other form of banking. These accounts are active i.e. there is a lot of transactions taking place daily either deposit or withdrawals are made. Loans offered: Individuals borrow at a higher rate with a given interest rates, which are competitive. Repayment rate also is good.

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Variety of products offered: Since there is a lot of competition these banks have designed a lot of products. Statistics show that the most active market for these new products is the retail segment. Branch network: These banks have integrated systems which allow individuals to access their accounts everywhere. The banks also offer the same products in all their branches and this has given positive results in retail segment The marketing managers of the following banks had the same responses: CFC, NIC, Consolidated, Commercial bank of Africa and National bank. They rate retail segment as good and the reasons for not being excellent is as follows: These banks do not operate in all parts of the country and thus it caters for only few individuals. Banks like NIC, Consolidated and Commercial bank of Africa operates only in three towns and thus cannot most of the unbanked who are not located in the three towns. Since the core service offered by these banks is consumer lending, the results have shown that the repayment rate is lower compared to lending to companies and corporations. They argue that they have not been impressed by these market segment and they would prefer corporate and institutional banking Challenges facing banks in offering retail banking Standard chartered bank The main challenge facing bank is that lending to retail segment is too risky. This is because individual with low income can cause bad credit risks. The bank also does not have appropriate technology to serve this clientele i.e. correct screening mechanisms to separate good from bad credit risks. Co-operative bank Since the bank is facing too much competition from SACCOs, it has been forced to repackage its products and invest much on innovation. This has actually decreased the returns since most of it is used in capital investments. Kenya commercial bank Over the past two years the bank has rapidly invested in branch networks outside the country this has really taken a lot of capital from the bank compared to the returns. Equity bank The bank has found out that socio-economic and cultural barriers have hindered their operations. While trying to serve the under banked, this market segment has difficulty 28

in approaching a bank because they might not posses business records to demonstrate cash flow. Consolidated bank of Kenya ltd The bank find heavy investment in multiple distribution channels to be too expensive compared to the returns from these investments. The bank also does not have enough experienced and qualified employees who can influence the market to open an account with their bank. CFC bank The bank commands a small portion in the market. This is because its branch and ATM network is only located in three towns i.e. Nairobi, Naivasha and Mombasa. Their retail activities do not reach many individuals in the country and thus their returns are not as high compared to those of other banks offering the same service. Barclays bank Slow acquisition of clients: Most individuals prefer other banks. This is because they belief that Barclays has high banking charges. Although the bank is trying to reduce their banking charges to suit all individuals from different income levels most of them still don’t take the advantage of this. Commercial bank of Africa The bank has invested so much on innovation of many products with the aim of selling them to retail segment but these customers do not make use of them. National bank of Kenya The bank closed most of its branches in many towns and thus customers find it hard to be served especially where there are no ATMs or branches. When the bank closed these branches the customers lost also trust in this bank and thus acquiring clients is difficult. NIC bank The main service offered in retail banking is lending and the bank has recorded many instances of bad credit risk. The bank does not have enough machinery to separate good from bad credit risk.

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REFERENCES Auguste, B.G., Y. Hao, M. Singer & Wiegand,M 2002, ‘The other side of outsourcing’, The McKinsey quarterly report, no. 1, pp. 53-63 Ahmad, R., Buttle, F. 2002, "Retaining telephone banking customers at Frontier Bank", International Journal of Bank Marketing, Vol. 20 No.1, pp.5-16 Akhavein, J., W. S. Frame, and White,L.J 2005. “The Diffusion of Financial Innovations: An Examination of the Adoption of Small Business Credit Scoring by Large Banking Organizations.”Journal of Business 78, no. 2 (March): 577-96. Aladwani, A.M. 2001, "Online banking: a field study of drivers, development challenges, and expectations", International Journal of Information Management, Vol. 21 No.3, pp.213-225. Almeyda, &Gloria, D.C. 1996, Money Matters: Reaching Women Entrepreneurs with Financial Services, Inter-American Development Bank, Washington. American Banker. 2005. “Citi Under Prince: Lots of Capital to ‘Redeploy.’” February 2. Arora, Sukhwinder S. and Malcom Harper, E 2005, Small Customers Big Market: Commercial Banks in Microfinance, ITDG Publishing, Warwickshire. Ashcraft, A. B. 2005. “Are Banks Really Special? New Evidence from the FDIC-Induced Failure of Healthy Banks.” American Economic Review 95, no. 5 (December): 1712-30.

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Berenbach, Shari and Craig Churchill, E 1997, “Regulation and Supervision of Microfinance Institutions: Experience from Latin America, Asia and Africa,” Microfinance Network Occasional Paper, no1. Bitner, M.J., Brown, S.W., Meuter, M.L. 2000, "Technology infusion in service encounters", Academy of Marketing Science, Vol. 28 No.1, pp.138-49

Bouma, J.J., M. Jeucken and Klinkers,L 2001, Sustainable banking: The Greening of Finance, Greenleaf Publishing group. Chen, T.Y. 1999, "Critical success factors for various strategies in the banking industry", International Journal of Bank Marketing, Vol. 17 No.2, pp.83-91. Crane, D.B. and Eccles, K.G. 1992, “Commercial banks: taking shape in troubled times”, Harvard Business Review, Vol. 65 No. 6, pp. 94-100.

Davis, S.I. 2000, Bank Mergers: Lessons for the future, MacMillan Press Ltd, London. Dick, A. A. 2006. “Nationwide Branching and Its Impact on Market Structure, Quality, and Bank Performance.” Business journal, no.2 pp. 567-92. Drake, Deborah and Robin Young, P 2005, “Banking at the Base of the Pyramid: A Microfinance primer for Commercial Banks.” Development Alternatives, Inc., www.microlinks.org Gavigan, K.1992, “Marketing financial services”, Institute of Bankers jornal vol 5 September 2 Hirschland &Madeline, D 2002, “Savings Operations for Very Small or Remote Depositors: Some Strategies”, conference paper,no 6.

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Howcroft, B., Hamilton, R., Hewer, P. 2002, "Consumer attitude and the usage and adoption of home-based banking in the United Kingdom", International Journal of Bank Marketing, Vol. 20 No.3, pp.111-21. Isern, Jennifer et al,D.C 2003, Inventory of Banks in Microfinance. Washington, D.C.: CGAP, 2003: www.microfinancegateway.org/files/18156_227_FFIs.pdf Llewellyn, D.T.1998, “Bank capital: the strategic Issues”, Banking World, Vol. 10 no. 1, pp. 20-5. Johnson, S. (2004). "The impact of microfinance institutions in local financial markets: a case study from Kenya." Journal of International Development 16(3): 501-517

Moody,S 1996. “U.S. Money Center Banks: Strategic Choices Defining the Future.” March. McDonald, O. & . Keasey, K 2003, The Future of Retail Banking in Europe: A view from the top, England. Milne, Alistair and Tang, L 2005, An Economic analysis of the potential benefits and dis-benefits of faster payment clearing. Produced for the Office of Fair Trading, UK. Morgan & Wyman,O 2004,. “U.S. Retail Banking and Consumer Credit: An Agenda for Growth”,Harvard Management Update,vol 5,no 2. Orlow, D. K., L. J. Radecki,&. Wenninger,J 1996. “Ongoing Restructuring of Retail Banking.” Federal Reserve Bank of New York Research Paper, no. 9634. Pottruck, D.S 1992., “Distribution systems as a strategic marketing weapon”, Retail Bankers Management Review, vol. 8,no 11. Sellers, R. 1994, “Getting it together in the electronic marketplace”, Bank Managementjournal, vol 9,no 6. Schroder&Barney,S 2002, The Hunt for Revenue Growth, Industry Report

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Shapiro, B.P., Rangan, V.K., Moriarty, R.T. & Ross, E.B1987., “Manage customers for profit (not just sales)”, Harvard Business Review, Vol. 65 No. 5, pp. 101-8. Standard and Poor’s. 2004. “Retail Sector Anchors Large Complex Banks in U.S.” October 4. Stewart, A., 2006, Accessing the American Dream: Utilizing Affinity Marketing to Reach Underbanked Populations,. Chicago. SchroderSalomonSmithBarney (2002), The Hunt for Revenue Growth, Industry Report Vogel, & Young 2005,. “State-Owned Retail Banks in Rural and Microfinance Markets: A Framework for Considering the Constraints and Potential.” Development Alternatives, Inc., 2005: www.microlinks.org Whitley, R 1991, The Customer Driven Company: Moving from Talk to Action, London. Young, & Drake,D 2005, “Banking at the Base of the Pyramid: A Microfinance Primer for Commercial Banks,” Bethesda, Maryland: . .

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APENDIX I Sample Cover Letter Date; ________________ Name (optional): _________________________ Job Title/Occupation: _____________________ Name of the bank: ______________________________ Address: _______________________________ Dear Sir/ Madam RE: A STUDY OF THE EXTENT OF RETAIL BANKING BY BANKS IN NAIROBI The researcher is a 4th year student studying Bachelor of Commerce in Strathmore University. This questionnaire is designed to study the extent of retail banking in Nairobi. The objectives of the study are to: To determine the extent to which retail banking is used by banks in Nairobi. To identify factors that have enhanced the use of retail banking To identify the challenges facing banks in implementing retail banking. Please note that the study will be conducted as an academic research and the information you provide will be treated in the strictest confidence and ethical principles will be observed to ensure confidentiality. The study outcomes of the research will not include reference to any individuals or organizations. The researcher requests the employee of the organization to kindly complete the questionnaire in order to ensure comprehensive analysis of the findings.

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In case of any clarifications needed, please do not hesitate to contact the undersigned on Tel: 0724-890350 or Email at [email protected] you very much for your invaluable contribution. Sincerely, Kitur Agnes

APPEDIX II Sample of Questionnaire Please tick in each box for the option that represents your appropriate response to each of the following questions. Section A 1.What is name of your bank? 2.What is your gender? 3.What is your position in the bank? 4.How long have you worked with the organization? 5.How many employees do you have in the bank? Section B 6.Who is your target market in your bank? SMEs ( ) Co-oporations ( ) Compnies ( ) Others Specify -------------------------------------------------------------------------------------------------------------------------------------------------7.What range of products do you offer? Bank overdrafts

( )

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Consumer lending Motrgages Money orders

( ) ( ) ( )

8.Do you offer any of the following products in retail banking? Overdrafts Loans Insurance brokerage

( ) ( ) ( )

9.How can you rate retail banking compared to other forms of banking in your bank? Excellent Good Average Bad

( ( ( (

) ) ) )

Section C 10.What are some of the factors that have made your bank successful in retail banking? a) Availability of multiple distribution channels ( ) b) Availability of variety of products ( ) c) Liberalization of financial sector ( ) Others, please specify -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------11.Which form of distribution channel do you prefer? a) ATMs b) E-banking c) Internet banking d) Mobile banking e) Branch banking Others, please specify -----------------------------------------------------------------------------------------------------------------------12.Why do you prefer this form(s) of distribution? --------- -------------------------------------------------------------------------------------------------------------------------

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( ( ( ( (

) ) ) ) )

13.What are some of the activities you undertake to attract more customers and to sell more products in the market? a) Differentiating the products to suit the needs of each market

( )

b) New products development

( )

c) Low pricing of products compared to your competitors

( )

d) Repackaging the existing products

( )

14.Do you have any government intervention in determing the price of the following services? a) Interest rates

( )

b) Bank charges

( )

Section D 15.What are some of the challenges you experience while carrying out your operations? a) Lending to SMEs is risky

( )

b) Heavy investment in multiple distribution channels is too expensive

( )

c) Client acquisition is slow and expensive

( )

d) Socio-economic and cultural barriers

( )

Others, please specify ---------------------------------------------------------------------------------------------------------------------------------------

16.Do any of the following pose a challenge in trying to serve under-banked? a) SACCOs

( )

b) NGOs such as K-rep bank

( )

c) Micro-finance institutions

( )

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THANK YOU FOR YOUR INVALUABLE CONTRIBUTION.

LIST OF BANKS 1. 2. 3. 4. 5. 6. 7.

CFC bank Barclays bank ABN Amro bank Standard chartered bank Consolidated bank Commercial Bank of Africa Kenya Commercial Bank

8. Citibank 9. Stanbic bank 10. NIC bank

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