Financial inclusion using traditional banking channels and its effect on financial performance of commercial banks in Kenya

Abstract

Commercial banks play a vital role in resource allocation and as such financial inclusion is significantto banks existence and subsequently to their financial performance. This study sought to establish thedegree of financial inclusion using traditional banking channels, determine financial performance ofcommercial banks and find out the effect on financial Inclusion on financial performance of commercialbanks in Kenya. This study focused on the supply side whereas most of the studies are on the demandside thus extends the frontiers of knowledge on effects of financial inclusion on the commercial banksfrom a developing country context and has implications for theory, policy and practice. The theoriesthat underpinned this study were the financial intermediation theory and asymmetric informationtheory. A sample of 30 commercial banks for a 9-year period from 2005-2013 were analysed. Afinancial 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 separatelyregressed with the Index of Financial Inclusion to test the effect. The study revealed that the level offinancial inclusion in Kenya as depicted by the index of financial inclusion was low during the studyperiod with a progressive marginal increase. Results on performance of commercial banks in Kenyafrom 2005-2013 was average and consistent throughout the study period. The study also indicated thatfinancial inclusion had a statistically significant positive effect on all the three measures of bankperformance. The study recommends that commercial banks should take an active role in increasingfinancial inclusion as it is consistent with banks’ profit motive. The use of an index of financial inclusionby banks that incorporates the new delivery channels is also recommended