EFFECTS OF MOBILE BANKING ON FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN UGANDA

CHAPTER ONE: INTRODUCTION

This chapter presents the background of the study, statement of the problem, purpose of the study, objectives, research questions, scope of the study, and significance of the study.

1.0 Background to the Study

In recent years, commercial banks have introduced innovative financial products and services aimed at improving efficiency, which remains a key objective in the banking sector. Mobile banking refers to the delivery of banking services through electronic mobile devices such as mobile phones and personal digital assistants (PDAs) (Porteous, 2006). Although different terms have been used in literature, this study adopts the term “mobile money” to describe the integration of mobile telecommunications and financial services.

1.1.1 Historical Background

Mobile banking has evolved significantly over time, expanding across financial institutions and other sectors of the economy. In the early stages of the 21st century, mobile banking services were limited to basic functions such as SMS alerts. However, it has since advanced to include more complex services such as fund transfers, balance inquiries, cheque deposits, bill payments, and payroll instructions via mobile devices (Vaidya, 2011).

The rapid growth of internet-based commerce has also contributed to the expansion of digital financial services. Digital money and electronic payment systems have increasingly complemented or replaced traditional banking instruments such as physical cash and cheques (Cohen, 2001).

Technological advancement has significantly transformed financial service delivery. Customers no longer need to physically queue in banking halls to perform transactions such as bill payments or fund transfers. Instead, many banks now collaborate with mobile network operators to deliver financial services more efficiently.

Automated Teller Machines (ATMs) were among the earliest forms of electronic banking in Uganda (Nyangosi et al., 2009). However, recent reports from the Bank of Uganda indicate that mobile banking has surpassed ATM usage due to increased mobile phone penetration, particularly among low-income earners (CBU, 2008).

According to Al-Smadi and Al-Wabel (2011), banks are increasingly prioritizing internet and mobile banking to improve efficiency and expand service delivery. Similarly, Okiro and Ndungu (2013) observe that mobile banking has become a dominant platform for financial transactions globally due to its convenience and accessibility.

1.1.2 Theoretical Background

This study is guided by theories related to financial innovation and banking performance, particularly Financial Intermediation Theory and Diffusion of Innovation Theory.

Financial Intermediation Theory explains the role of financial institutions in channeling funds between surplus and deficit economic units. According to Scholtens and Van Wensveen (2003), intermediaries exist due to market imperfections such as information asymmetry and transaction costs. Entrepreneurs often possess private information about investment projects, making intermediaries essential for risk management and financing viable ventures (Leland & Pyle, 1977).

The Diffusion of Innovation Theory, introduced by Rogers (1962), explains how new technologies are adopted within a social system over time. Bradley and Stewart (2002) argue that firms adopt innovations to improve competitiveness, reduce costs, and enhance efficiency. The adoption rate depends on factors such as relative advantage, compatibility, complexity, trialability, and observability (Rogers, 1995).

1.1.3 Conceptual Background

Internet banking refers to the use of the internet as a channel for delivering banking services (Frust, Lang & Nolle, 2000). Initially, it was mainly used for marketing financial products, but it has evolved to include services such as balance inquiries, fund transfers, and bill payments.

Although internet banking has expanded competition, it has also made customer retention more challenging due to reduced switching costs (Lin, Geng & Whinston, 2001). Mobile banking, on the other hand, refers to the provision of financial services through mobile devices (Okiro & Ndungu, 2013). It allows users to perform transactions such as account management, payments, and financial inquiries anytime and anywhere (Schofield & Kubin, 2002).

Financial performance refers to the extent to which an organization achieves its financial objectives over a specific period (Trivedi, 2010). It is commonly measured using indicators such as profitability, liquidity, productivity, and efficiency.

1.1.4 Contextual Background

Centenary Rural Development Bank (CRDB) was established in 1983 as a credit trust under the Uganda National Lay Apostolate and commenced operations in 1985. It was later licensed as a full commercial bank in 1993. The bank has grown to become one of Uganda’s leading microfinance-oriented commercial banks, serving over 1.3 million customers through an extensive branch and ATM network.

As of December 2014, the bank’s assets were valued at approximately USD 586.7 million (UGX 1.63 trillion), making it one of the largest financial institutions in Uganda. The bank has also embraced mobile banking technology, allowing customers to access services such as balance inquiries, deposits, and withdrawals via mobile platforms.

Mobile banking was introduced in Uganda in 2009, and by recent estimates, over 18 million users are actively using mobile financial services. The Bank of Uganda continues to support this innovation as a means of improving financial inclusion.

1.2 Statement of the Problem

Mobile banking has transformed financial service delivery by enhancing speed, convenience, and accessibility. However, despite its benefits, commercial banks continue to face challenges in fully leveraging mobile banking for improved financial performance.

Many small-scale businesses and individuals still struggle to access financial services due to limited collateral, low income levels, and inadequate financial literacy. These challenges affect their ability to effectively use mobile banking services for business growth and financial management (Higgins et al., 2012).

Despite the rapid growth of mobile banking in East Africa, limited research has been conducted on its effect on the financial performance of commercial banks (Kanyi & Maharaj, 2011). As a result, there is insufficient empirical evidence on how mobile banking contributes to bank profitability and efficiency, creating a research gap that this study seeks to address.

1.3 Purpose of the Study

The purpose of the study is to examine the effects of mobile banking on the financial performance of commercial banks in Uganda, with a case study of Centenary Bank.

1.4 Research Objectives

i. To identify factors that determine the performance of mobile banking.
ii. To examine factors that influence the financial performance of commercial banks.
iii. To identify different mobile banking techniques used by commercial banks.

1.5 Research Questions

i. What factors determine the performance of mobile banking?
ii. What factors influence the financial performance of commercial banks?
iii. What mobile banking techniques are used by commercial banks?

1.6 Scope of the Study

1.6.1 Geographical Scope

The study will be conducted at Centenary Bank, Najjanankumbi branch, Entebbe Road, Kampala.

1.6.2 Content Scope

The study focuses on mobile banking services and their influence on the financial performance of commercial banks in Kampala, particularly within the Central Business District.

1.6.3 Time Scope

The study will cover the period 2016–2017.

1.7 Significance of the Study

The study is expected to:

• Provide insights to banks on improving mobile banking service delivery.
• Assist customers in understanding the benefits of mobile banking.
• Serve as a reference for future researchers in electronic banking.
• Support policymakers and regulators in improving financial technology frameworks in Uganda.

1.8 Conceptual Framework

The conceptual framework shows that mobile banking influences the financial performance of commercial banks through dimensions such as electronic fund transfers, electronic financial statements, and electronic access to funds. These, in turn, affect outcomes such as profitability, cost reduction, customer satisfaction, and operational efficiency. However, this relationship is influenced by intervening variables such as government policy, level of competition in the financial sector, and economic development.

CHAPTER TWO: LITERATURE REVIEW

2.1 Introduction

This chapter reviews literature on mobile banking and its impact on the performance of commercial banks. It focuses on mobile banking services, theoretical perspectives, determinants of mobile banking performance, and factors influencing bank performance.

Mobile Banking

Mobile banking is a financial service provided through collaboration between financial institutions and mobile network operators. It enables customers to access banking services conveniently via mobile phones at any time and location. Services include balance inquiries, transfers, bill payments, and account management (Salzman, Palen & Harper, 2001).

Recently, banks have adopted branchless banking models where transactions are conducted through retail agents such as shops and airtime vendors. This has improved access to financial services, especially in rural and underserved areas.

Mobile banking offers benefits such as convenience, geographical accessibility, improved cash management, and enhanced security.

2.2 Theoretical Review

The study is guided by Innovation Diffusion Theory and Financial Intermediation Theory. Innovation Diffusion Theory explains how mobile banking is adopted across organizations based on perceived benefits, while Financial Intermediation Theory explains the role of banks in channeling financial resources efficiently within the economy.

2.3 Factors That Determine Performance of Mobile Banking

Mobile banking performance is influenced by technological advancement, level of mobile penetration, financial sector development, capital strength of service providers, managerial efficiency, and overall economic conditions. The expansion of mobile technology has significantly transformed banking operations and improved efficiency in service delivery.

2.4 Factors Influencing Bank Performance

Bank performance is influenced by both internal and external factors. Internal factors include capital adequacy, asset quality, management efficiency, and liquidity. External factors include market structure, competition, regulatory environment, and macroeconomic conditions. These factors collectively determine profitability and stability in commercial banks.

2.5 Mobile Banking Techniques

Mobile banking is supported by several technologies including:

• Electronic Data Interchange (EDI)
• Electronic Funds Transfer (EFT)
• E-mail banking services
• Smart cards
• Electronic hubs (E-hubs)
• E-marketplaces
• Electronic catalogs
• Material Requirement Planning (MRP) systems