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The Competitiveness of the Banking Industry in Kenya

Literature review

Banking institutions have gained immense importance and significance to the development of the national economy; a factor that motivates players in this sector to implement frameworks that will see them gain competitive advantage. As an organizational construct, competitive advantage when defined in the banking industry perspective implies to many measures and terms which are inconsistent the sector’s institutional construct. Globally, through the provision of credit, deposit and operating revenues facilities, the banking institutions manage to stimulate national economic growth (Khan & Khalique, 2014). The sector’s significance cannot be ignored especially for financing high profile investment portfolio which have the capacity to generate greater revenues to expand the national reserves of various countries. During times of economic adversities and recessions the banking industry comes in to hedge risk and finance tangible investments. Banks are therefore required to be well-capitalized so as to offer the much sought after funds for sustainable development. The kind of support that the sector provides to national economic growth explains why players are striving to attain a competitive advantage.

The concept of competitive advantage is very broad as it deals with finding the right process which will help the organization be in the lead among competing firms. In a wider perspective, competitive advantage is known by very many synonyms such as creativity, innovation, corporate social responsibility, competitive intelligence, and strategic planning. The concept is further viewed as a phenomenon that defines organizational progress. The paper discusses the various aspects of banking sector competitiveness including corporate social responsibility (Khan & Khalique, 2014).

Corporate Social Responsibility and Bank Competitiveness

Mocan et.al. (2015) sought to understand the concept of corporate social responsibility and its application in the banking industry. According to the report, CSR is becoming the best solution for the integration of moral principles in the execution of banking activities. CSR as defined by Soana (2011), it entails the voluntary incorporation of both environmental and social concerns into the decision-making process of an organization. CSR has therefore been applied progressively in the sector of banking for being perceived as a major tool for creating a positive image while attracting new customers on top of the current clients (Mobarek & Fiorante, 2014).

Social corporate responsibility’s integration to the banking sector supplements ethics and hence perceived as a tool of communication with the public and therefore no need to insert this in the bank policy. Many banking institutions engage in corporate social responsibility activities such as paying school fees for bright students from needy families. The Romanian banking sector’s CSR practices are divided into four basic categories namely culture, art, social, education, and environment. More importantly, engaging in CSR allows banks to improve the products that relate to the needs of the society (Sarkar & Sensarma, 2016).

The study also found out that CSR activities help attract new clientele as well as maintaining the current and existing customers. There is also increased motivation among the employees hence contributing to higher levels of innovation and creativity. Creativity is much needed for the sake of coming up with new and improved products and services that will fascinate clients and therefore attract their loyalty. Additionally, CSR helps improve the relationship between the bank and key stakeholders which to a large extent are the members of the public. Besides increased loyalty, CSR also increases social integration and banking reputation (Mobarek & Fiorante, 2014).

Another survey conducted by Fernandes et.al. (2018), sought to understand the relationship between bank governance and performance through the review of theoretical and empirical literature. The study further opines that corporate governance is directly related with the level of performance in the banking industry. Due to the global financial crisis and the series of high profile financial scandals that have been reported, it is important to investigate the relationship between corporate governance and organizational performance. The report concludes that the board of the bank is responsible for both the success and failure of any bank. The numerous characteristics of the board of directors determines how certain functions will be performed in the organization (Sarkar & Sensarma, 2016).

Every organization has a certain prescribed code of conduct within and without the organization. Business culture therefore defines the nature of association between the employees as well as management, customers, shareholders, suppliers, and other critical stakeholders. In so doing, trust has to be paramount in ensuring that long-term performance of firms is attained (Jelagat, 2013). Additionally, trusting other people’s honesty has reduced in the current business world especially with the number of financial scandals that have been reported in mainstream local and international media. These scandals have involved both large and small corporations causing huge financial losses to the stakeholders and investors’ money (Mwando, 2013).

Cohn, Fehr & Maréchal, (2014) found out that employees of banks in the international scene are always perceived to behave honestly wherever they are in the bank environment. They act honestly because are in a controlled environment. However, when their professional identity as bank employees is rendered salient, these employees tend to uphold dishonesty. Once dishonesty creeps in, these employees will engage in fraudulent activities to defraud the bank or organization they work for billions of money. The study concludes that the prevailing banking culture undermines and weakens the norm of honesty that ought to prevail in this crucial industry (Chavan & Gambacorta, 2016).

There is a close interrelationship and association between customer loyalty, satisfaction, and service quality within the banking industry’s context. Majority of the organizations are forced to implement a customer-focused strategy in order to be able to compete effectively with peers (Jelagat, 2013). This strategy therefore raises among other things the importance of satisfying the needs of customers as a way of retaining and attracting and retaining new and current customers respectively. Customer satisfaction takes different turns and dimensions as it concerns the banking industry.

Customer centric approach is a business strategy that aims at providing the clients a positive experience both after and before service with the aim of instigating a repeat sale. Customer loyalty is an integral part of improving the profitability of the firm in essence, customer centric strategy is not all about giving the customer the best of service but also the experience has to begin from creating awareness through the process of purchase till post-purchase. It is therefore entails putting the client first and hence the core of an organization’s core. Customer centered strategy incorporates the designing of customer experience, empowering employees, setting performance measurement metrics, understanding the customer, and obtaining feedback from customers continuously to know what they need.

The quality of service delivered by the banking institution in question helps induce increased customer loyalty. Customer loyalty is an important aspect and therefore ingredient to the profitability of any firm. There are so many benefits of maintaining a loyal customer base as elaborated below; One of the little known benefits of building and maintaining loyal customers is that, at a certain point, they will develop a level of immunity to your pricing that can help you set higher standards without losing customers. Apple is a great example for this phenomenon. Even though their computers and mobile devices have continuously increased in prices, their customer base not only continued to stay loyal to them, but because of the perceived higher value of the product became even more passionate about the brand. From a business and revenue perspective, this is undoubtedly one of the biggest benefits of customer loyalty (Edirisuriya, Gunasekarage & Perera, 2018).

Another hidden benefit of having loyal customers is that, over time, you will be able to make more accurate sales forecasts. This is one of the biggest challenges new businesses face when starting out; there is simply not enough data to accurately predict how many people will actually end up paying for a product or service (Masila, Chepkulei & Shibairo, 2015). Once you are able to establish a loyal customer base, though, it will be much easier to collect data and measure behavioral patterns of returning customers and their repetitive habits. These increasingly accurate financial projections will also allow you to reduce risk in regards to cash flow, inventory management, and investment into the development of new products and services. As you can see, there are many benefits to customer loyalty. In fact, it can make your entire business operation more efficient and effective.

The analysis reveals that service quality and customer satisfaction are important antecedents of customer loyalty and customer satisfaction mediates the effects of service quality on customer loyalty. These findings suggest that there are non-linear relationships between three constructs and emphasize the need to treat customer loyalty management as a process which includes plenty of factors interacting with each other (Edirisuriya, Gunasekarage & Perera, 2018).

Cooke et.al. (2016) seeks to investigate the connection between employee resilience and organizational performance.  Even though there is little that is known regarding to the extent to which a high-performance work system (HPWS) can contribute to the enhancement of employee engagement in the workplace. The research therefore attempts to understand how best the organization can engage its employees to improve their level of performance hence profitability. The Chinese banking industry formed a point of reference for the researchers in their quest to unravel the connection between the two subjects (Momeni, Kheiry & Dashtipour, 2013).

The research came up with three important hypotheses through the deployment of the job demands-resources model. Additionally, the researcher engaged the strategic/high-performance human resource management theory to come up with study hypotheses. However, the study concludes that through the use of effective models, employee resilience has the potential of increasing the performance of both the organization and individuals (Robert, Lyria & Mbogo, 2016).

The study further identifies that valuing employees is just the starting point to developing a resilient workforce. It is therefore a fairly less expensive affair to undertake especially owing to the fact that it potentially makes employees feel recognized thus appreciated at the workplace. The researcher goes ahead to point out that implementing well-being initiatives that are spearheaded by the employees themselves will increase workplace civility. Also investing in projects that vehemently support the development of human capital helps improve the level of employee resilience (Chavan & Gambacorta, 2016).

Van Leuvensteijn (2014), identified in his study an effective tool for measuring the competitiveness of an industry. His study concentrated on the American sugar industry. The report further identifies the various strategies used by the sugar refinery to compete with its peers. Some of the strategies used include price wars to edge out the major rivals. Further, the author is capable of demonstrating that the Boone Indicator to be the most effective tool for measuring competitiveness as compared to the elasticity-adjusted Lerner index (Momeni, Kheiry & Dashtipour, 2013).

Bikker & van Leuvensteijn (2014) present a whole chapter to introduce how competition based on firm profits can be measured. The model suggested puts into consideration the impact caused by the aggressive interactions between players in an industry as well as intensified barriers to entry. According to the authors, the measure or model suggested theoretically supersedes in robustness the price cost margin technique. Hence giving insights into the weaknesses and shortcomings of the price cost margin method of measuring competition (Edirisuriya, Gunasekarage & Perera, 2018).

The concentration of Malaysian banking industry is at a declining trend; structurally speaking, Malaysian banks are more competitive due to less market concentration. In terms of efficiency, the DEA results reveal that Malaysian banks are operating below their capacity at 40 per cent of efficiency. Thus, Malaysian banks could reduce their utilization of inputs by 60 per cent to operate on the efficient frontier. Next, the results offer support to ESH, which implies that market concentration and banking efficiency determines the profitability performance of Malaysian commercial banks (Alhassan, 2015).

Apart from corporate social responsibility activities, banks can also engage in product diversification to improve their competitiveness and become the source of economic development that is expected of them. Among income diversification activities, securities trading income has a significant positive influence on bank risk while other categories have no influence. With respect to assets diversification, non-interest-bearing assets and loans given to government were found to have a significant positive influence on bank risk, while mortgage loans and non-classified loans have opposite influences. However, the impacts of securities trading income and loans given to the government are mainly confined to private sector banks and state-owned banks, respectively (Edirisuriya, Gunasekarage & Perera, 2018).

From the review of literature on banking sector competitiveness, the researcher identifies a few gaps in research that can be worked on by other researchers. These research gaps form the research questions for this study and the researcher shall endeavor to dig into them by employing various techniques of investigation. An analysis of efficiency scores by two categories of bank size suggests that large banks have high cost and profit efficiency compared to small banks (Muthinja, 2016). A non-linear relationship is found between diversification and efficiency while size was also found to be important in enabling banks exploit the potential benefits of income diversification.

Research Questions

  1. Of what impact has internet banking been to the banking sector competitiveness in Kenya?
  2. What is the relationship between employee performance and banking industry competitiveness?
  3. Does process automation improve the competitiveness of the banking sector?
  4. What is the potential of corporate social responsibility in improving banking industry competitiveness?

In answering these questions therefore, the researcher shall endeavor to conduct an extensive cross-sectional study on reports and researches conducted by other scholars on the same topic. Additionally, the researcher shall conduct interviews on bank employees as well as financial experts to seek their first-hand opinion on the issue (Aduda & Kingoo, 2012). Besides interviews, the researcher shall also use focus groups to deliberate on what strategies that can be employed to improve the banking industry’s competitiveness. The focus groups will also deliberate on the use of corporate social responsibility initiatives to attract new customers as well as improving the image of the bank (Jeong & Yoon, 2013).

Bank liquidity is a crucial concept in ensuring that the commercial banks fulfill their part of the bargain. Commercial banks provide credit, deposits and liquidity assistance to both the state and private citizens who later invest in infrastructural projects (Cooke et.al. 2016). The general role of commercial banks in the global context is to offer savings services to the constituents hence promoting a savings culture in a country. The banks traditionally attract depositors through the introduction of attractive services and schemes as well as rewards in form of interest. Additionally, commercial banks assist in capital formation hence promoting the expansion of various industries across the globe (Aduda & Kingoo, 2012). Despite all the good functions of banking to the economy, the sector is adversely affected by the rampant cases of financial fraud that are on the rise in the recent past (Alhassan, 2015).

Fraud has deprived the affected banks of resources and the ability to dispense their functions appropriately. Fraud hinders the important function of commercial banks’ ability to smooth trade as well as generating employment opportunities (Muthinja, 2016). Banks through the creation of credit automatically promote investment in various industries which offer employment opportunities to millions of young people searching for employment. However, fraud cause the loss of funds that would have enabled the banking system to extend credit facilities to the various industries that are crucial to the development, growth and expansion of the economy (Cooke et.al. 2016).

According to Sarkar & Sensarma (2016), emerging economies seriously need to investigate the implications of policies they set to govern the banking sector. This thorough look is important because any new bank planning to enter the industry has to evaluate its strategy and making sure it is carefully coordinated to achieve the prudential application in assisting the economy grow in a tremendous way. Employee resilience is reflected in adaptive, learning, and networking behaviors in the workplace. A resilient employee leverages work resources in ways that benefit the organization and also contribute to personal well-being and growth (Jeong & Yoon, 2013). Further, employee resilience is not merely a trait and it can be developed. Individual characteristics, contextual factors, and moderate levels of exposure to adversity contribute to psychological resilience. In turn, a resilient mind-set supports the ongoing development and enactment of resilient behaviors (Alhassan, 2015).

More importantly, resilient behaviors contribute to effective crisis management, and they may become more salient in response to a crisis. Nevertheless, these behaviors are largely proactive and occur independently from adverse events, ensuring organizational preparedness and innovation. Employee resilience is not contingent on exposure to a significant adverse event.

References

Aduda, J., & Kingoo, N. (2012). The Relationship between Electronic Banking and Financial Performance among Commercial Banks in Kenya. Journal of Finance and Investment     Analysis, 1(3), 99-118.

Alhassan, A. L. (2015). Income diversification and bank efficiency in an emerging market. Managerial Finance41(12), 1318-1335.

Bikker, J., & van Leuvensteijn, M. (2014). A new way to measure competition JANBOONE. In A New Measure of Competition in the Financial Industry (pp. 68-92). Routledge.

Chavan, P., & Gambacorta, L. (2016). Bank lending and loan quality: the case of India.

Cohn, A., Fehr, E., & Maréchal, M. A. (2014). Business culture and dishonesty in the banking industry. Nature516(7529), 86.

Cooke, F. L., Cooper, B., Bartram, T., Wang, J., & Mei, H. (2016). Mapping the relationships between high-performance work systems, employee resilience and engagement: A study      of the banking industry in China. The International Journal of Human Resource Management, 1-22.

Edirisuriya, P., Gunasekarage, A., & Perera, S. (2018). Product diversification and bank risk: Evidence from South Asian banking institutions. Applied Economics, 1-21.

Fernandes, C., Farinha, J., Martins, F. V., & Mateus, C. (2018). Bank governance and performance: a survey of the literature. Journal of Banking Regulation19(3), 236-256.

Jelagat, E. (2013). Challenges facing the implementation of change strategies at Kenya Commercial Bank Group Ltd. M.B.A Project, University of Nairobi.

Jeong, B. & Yoon, T.E. (2013). An empirical investigation on consumer acceptance of mobile banking services, Business and Management Research, 2 (1), pp. 31-40.

Khan, M. W. & Khalique, M. (2014). A Holistic Review of Empirical Studies of Strategic Planning and Future Research Avenues. International Journal of Academic Research in   Economics and Management Sciences, 3(6), 53-72.

Masila, C. k., Chepkulei, B., & Shibairo, P. M. (2015). The impact of Agency banking on customer satisfaction: A survey of Agent banks in Kenya. International Journal of    Economics, Commerce and Management, 3 (6)

Mobarek, A. & Fiorante, A. (2014). The prospects of BRIC countries: Testing weak-form market efficiency. Research in International Business and Finance, 30(C), 217-232

Momeni, M., Kheiry, B. & Dashtipour, M. (2013). Analysis of the effects of electronic banking    on customer satisfaction and loyalty (Case study: Selected branches of Melli Bank in     Tehran). Interdisciplinary Journal of Contemporary Research in Business, 4 (12). Available at http://journal-archives31.webs.com/230-241.pdf

Muthinja, M.M. (2016). Financial Innovations and Bank Performance in Kenya: Evidence From Branchless Banking Models. Ph.D. Thesis. University of the Witwatersrand,     Johannesburg

Mwando, S. (2013). Contribution of agency banking on financial performance of commercial banks in Kenya. Journal of Economics and Sustainable Development, 4(20), 26-34.

Ngo, V. M., & Nguyen, H. H. (2016). The relationship between service quality, customer satisfaction and customer loyalty: An investigation in Vietnamese retail banking       sector. Journal of Competitiveness.

Robert, K. M., Lyria, R., & Mbogo, J. (2016). Influence of corporate social responsibility on financial performance of industries listed at Nairobi securities exchange, Kenya.

Sarkar, S., & Sensarma, R. (2016). The relationship between competition and risk-taking   behaviour of Indian banks. Journal of Financial Economic Policy8(1), 95-119.

Van Leuvensteijn, M. (2014). The Boone-indicator: Identifying different regimes of competition for the American Sugar Refining Company 1890-1914. Tjalling C. Koopmans Institute8(37).

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