THE EFFECT OF AGENCY BANKING ON THE FINANCIAL PERFORMANCE

OF COMMERCIAL BANKS IN UGANDA

A CASE STUDY OF EQUITY BANK

BY:

NAFISO AHMED OSOBLE

18/355/BBA-J

A RESEARCH REPORT SUBMITTED TO FACULTY OF BUSINESS AND

MANAGEMENT IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR
THE AWARD OF THE BACHELORS DEGREE IN BUSINESS
ADMINISTRATION OF INTERNATIONAL UNIVERSITY OF EAST AFRICA

AUGUST, 2021

ii
 APPROVAL

This is to certify that this report entitled “THE EFFECT OF AGENCY BANKING ON THE
FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN UGANDA: A CASE STUDY
OF EQUITY BANK” has been carried out by Nafiso Ahmed under my supervision and is
submitted with my approval for examination.

MR. OBOTH ALEX

…………………………………………. Date………………………….
SUPERVISOR

2
 DEDICATION

I declare this research report to my beloved parents and family. Thank you for the love you
have always shown to sacrifice the small meager resources for my academic success and the
advice and inspiration during my struggle. I am really grateful to you and may the lord
reward you abundantly.

3
 TABLE OF CONTENTS
STUDENT’S DECLARATION............................................................................................
iii
COPYRIGHT..........................................................................................................................
iv DEDICATION
......................................................................................................................... v
ACKNOWLEDGEMENTS ..................................................................................................
vi TABLE OF CONTENTS .....................................................................................................
vii LIST OF TABLES
................................................................................................................. ix LIST OF
FIGURES ................................................................................................................ x LIST
OF ACRONYMS AND ABBREVIATIONS ........................................................... xi
ABSTRACT............................................................................................................................
xii CHAPTER ONE
...................................................................................................................... 1
1.0 INTRODUCTION.............................................................................................................
1
1.1 Background of the Problem ............................................................................................
1
1.2 Statement of the Problem................................................................................................ 4
1.3 Objectives of the study.................................................................................................... 5
1.4 Significance of the Study ................................................................................................
5
1.5 Scope of the Study........................................................................................................... 7
1.6 Definition of Terms .........................................................................................................
7
1.7 Chapter Summary............................................................................................................ 8
CHAPTER TWO .....................................................................................................................
9
2.0 LITERATURE REVIEW ................................................................................................
9
2.1 Introduction...................................................................................................................... 9
2.2 Accessibility of banking services and financial performance ......................................
9
2.3 Low cost of service and financial performance........................................................... 14

4
 2.4 Increased customer transactions and financial performance ......................................
20
2.5 Chapter Summary.......................................................................................................... 25
CHAPTER THREE ..............................................................................................................
26
3.0 RESEARCH METHODOLOGY .................................................................................
26
3.1 Introduction.................................................................................................................... 26
3.2 The Research Design..................................................................................................... 26
3.3 Target population .......................................................................................................... 26
3.4 Sample and Sampling Techniques ............................................................................... 27
3.5 Data Collection Instruments ......................................................................................... 28

5
 3.6 Pilot Test ........................................................................................................................ 28
3.7 Data Collection Procedure ............................................................................................ 29
3.8 Data Analysis................................................................................................................. 29
3.9 Chapter Summary.......................................................................................................... 30
CHAPTER FOUR ................................................................................................................. 32
4.0 RESULTS AND FINDINGS.......................................................................................... 32
4.1 Introduction.................................................................................................................... 32
4.2 Reliability Test .............................................................................................................. 32
4.3 General Information ...................................................................................................... 33
4.4 Accessibility of Banking Services and Financial Performance..................................
35
4.5 Low Cost of Service and financial performance .........................................................
38
4.6 Increased Customer Transactions................................................................................. 41
4.7 Financial Performance .................................................................................................. 44
4.8 Regression Analysis ...................................................................................................... 45
4.9 Chapter Summary.......................................................................................................... 48
CHAPTER FIVE................................................................................................................... 49
5.0 DISCUSSION, CONCLUSIONS AND RECOMMENDATIONS .......................... 49
5.1 Introduction.................................................................................................................... 49
5.2 Summary ........................................................................................................................ 49
5.3 Discussion of key findings ............................................................................................
50
5.4 Conclusions.................................................................................................................... 53
5.5 Recommendations ......................................................................................................... 54
REFERENCES ...................................................................................................................... 55
Appendix I: Questionnaire................................................................................................... 59

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 LIST OF TABLES
Table 4. 1: Effect of accessibility of banking services on Financial Performance .............
37

Table 4. 2: Effect of Low Transaction Cost on Financial Performance ..............................

40

Table 4. 3: Effect of Increased Customers Transactions on Financial Performance ..........

43

Table 4. 4: Measures of financial performance .....................................................................

45

Table 4. 5 Model Summary ....................................................................................................

46

Table 4. 6: Analysis of Variance ............................................................................................

46

Table 4. 7: Coefficients ...........................................................................................................

47

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 LIST OF FIGURES
Figure 4. 1: Gender of the Respondents.................................................................................
33

Figure 4. 2: Age bracket of the Respondents.........................................................................

34

Figure 4. 3: Highest Level of Education of the Respondents ...............................................

34

Figure 4. 4: Duration of Operating Agency Banking ............................................................

35

Figure 4. 5: Low Transaction Cost and Financial Performance ...........................................

36

Figure 4. 6: Accessibility of Banking Services Influence on Financial Performance ........

36

Figure 4. 7: Low Transaction Cost of and Financial Performance ......................................

39

Figure 4. 8: Extent of Low Transaction Cost Influence on Financial Performance............

39

Figure 4. 9: Increase in the Number of Customers ...............................................................

42

Figure 4. 10: Extent of Customers Transaction influence Financial Performance .............

42

Figure 4. 11: Financial Performance in Equity Bank...........................................................

44

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 LIST OF ACRONYMS AND ABBREVIATIONS
ATMs: Automated Teller Machines

CBD: Central Business District

BOU: Bank of Uganda

CGAP: Consultative Group to Assist the Poor

DTMs: Deposit Taking

Microfinance FSD: Financial

Sector Deepening IT:

Information Technology MBS:

Mobile Banking Services

MMT: Mobile-Phone Money Transfer

PIN: Personal Identification Number

POS: Point-Of-Sale

ROA: Return on Assets

SACCOs: Savings And Credit Co-operative

SASRA: Sacco Societies Regulatory Authority

SPSS: Statistical Package for Social

Sciences

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 ABSTRACT
This part consider the background to the study, statement of the problem, objectives,
research hypotheses, conceptual framework, significance, scope of the study, and
definition of key terms. It also presents a review of literature on agency banking and
financial performance of commercial banks as well as the review of literature on
accessibility of banking services and financial performance, followed by literature on low
cost of service(deposit and withdrawal) and financial performance, increased customer
transactions and financial performance. In the study there was a summary and it also
considered the procedures and methodology used in analyzing and collecting the data in
the study. It contains the research design, the population of the study, sampling frame,
sampling techniques and the study’s sample size. In addition, it outlines data collection
methods and instruments used in addition to data analysis methods fit for the achievement
of the set objectives.
Agency banking as a replica has been very flourishing in boosting the commercial
banks’ performance in most developing states. Achievement stories have been witnessed
in Peru, Columbia, India and Brazil. This study sought to investigate the effect agency
banking had on the financial performance of Ugandan commercial banks in 2014. Equity
Bank was used as a case study. The study also sought to establish the effect of
accessibility of banking services, low cost of service and increased customer transactions
through agency banking. This study used a descriptive research design. The target
population of this study was 135 staff working at the headquarters of Equity Bank. This
study applied stratified random sampling to select 50% of the target population and
hence the sample size of this study was 97 respondents. Out of 97 respondents 84
responses were obtained which represent a
86% response rate. Semi structured questionnaires were used in research study to collect
primary data. A pretesting that involved 9 staff (10% of the sample size) was conducted
at Equity Bank at Kampala Road. From the pilot test findings, accessibility of
banking services, low cost of service and increased customers transactions had
Cronbach alpha of
0.724, 0.732 and 0.698 respectively. This clearly shows that the research instrument was
reliable. In the data analysis, descriptive statistics were used to analyze quantitative
data and the findings were presented in bar charts, pie charts and tables. Content analysis
analyzed data that is qualitative in nature and the findings presented in a prose form.
The relationship between the dependent and the independent variables was determined
using a multivariate regression analysis.
xiii
The relationships in the study were positive and significant. The relationship between
accessibility of banking services and financial performance of Equity Bank had a
coefficient of 1.251 and a p-value of 0.000. In addition, the relationship between low
cost of service and financial performance of Equity Bank had a coefficient of 0.800 and
a p- value of 0.000. Further, the relationship between customer and the financial
performance of Equity Bank had a coefficient of 0.311 and a p-value of 0.008.

The study concludes that there is a positive and significant relationship between
accessibility of banking services, low cost of service and customer transactions as a
result of agency banking and financial performance of Equity Bank. Banking using
agency banking e x c e l s i n s e r v i c e q u a l i t y a n d s e r v i c e d e l i v e r y . Agency
b a n k i n g h a s l o w infrastructural cost and hence reduction in cost. Efficiency and
convenience in operation in agency banking have increased the banks customers'
transactions.

The study recommends that commercial banks in Uganda should increase the number of
agents in estates and in the rural areas. This study also recommends that commercial
banks should also lower the charges of making transactions in agency banks. To
improve the adoption of agency banking, commercial banks in Uganda should improve
customers’ perception by making more advertisements and increase promotion activities.

xiii
 CHAPTER ONE
INTRODUCTION

1.1 INTRODUCTION

This chapter considers the background to the study, statement of the problem, objectives,
research hypotheses, conceptual framework, significance, scope of the study, and
definition of key terms.

1.2 Background of the study

As a result of globalization, liberalization and scientific development, banks like
any other institution have been facing numerous challenges. These challenges have
made them to hunt for appropriate strategies to improve their development and survival;
therefore, agency banking has become one of key strategies used in the banking industry
around the globe (Ivatury & Ignacio, 2008).

According to Burgessy and Wong (2005), the growth of IT has affected almost
each aspect of life; among them being the banking industry. The coming up of mobile
banking has changed and redefined the way banks were running. Since technology is
now regarded as the major input for the institutions achievement and as their
main proficiencies, banks, be it local or foreign, are channeling their finances more on
offering clients with the fresh technologies by means of mobile banking. According to
Diniz, Birochi and Pozzebon (2012), technological development has not only
influenced lifestyle but has had an impact on the way clients do their banking. In the
ancient days, banks were making use of mobile vehicles to take services to their
clients particularly those in rural areas. Thereafter, they shifted to making use of the e-
mail as well as internet services to offer services to their clients. The last decade, has
seen an unbelievable expansion in mobile growth in developing countries (Atandi,
2013). Nevertheless, of great significance is that whereas the mobile phone provides a
number of features such as the likelihood of mobile banking, approximately half of the
global populations have not accepted mobile banking and monetary services or they
have been denied the same (Vutsengwa & Ngugi, 2013).

Developing countries like Uganda have been increasingly adopting branchless banking
as a way of providing banking services to numerous unreached populations particularly
xiii
low- income families (Ndungu & Njeru, 2014). Revolutionary banks, microfinance
firms and mobile operators began experimenting agency banking networks in different
states around the globe in the 20th century. The development of agent banking is
apparent in numerous states all over the world, like Australia where post offices operate
as bank agents, France where corner stores are utilized, Brazil where lottery outlets are
used to offer financial services, in South Africa, Philippines and Nigeria (Siedek, 2008).

The Bank of Uganda annual report (2011) shows that over 7 million mature Ugandans
from the rural setting are either not banked or they are under-banked. This is partially as
a result of the huge cost of sustaining the branches of the bank and the low turnover of
business operations in rural areas - a condition which makes development of fresh
branches in the rural setting a less productive undertaking. According to Bank of
Uganda Annual Report 2017/2018, the most current information available shows that
only 19% of mature Ugandans indicated having accessibility to an official, controlled
financial firms whereas more than a third (38%) showed no accessibility to yet the most
elementary form of unofficial financial service. This leaves a fraction of over 80%
outside the range of the reach of conventional banking. The unexpressed demand for a
reasonably priced and dependable way of holding finances while making sure that
threat levels are consigned to the lowest level is constantly unfolding. A structure
with the potential to eliminate the historical impediments of cost and free accessibility
which have for long hindered ready clients of banking services suggests immediate
consideration and interest. In Uganda the execution of agent banking services is
evidence to this reality (Ndungu & Njeru, 2014).

Mobile technology has significantly entered rural areas in Uganda and is expected to be
on an increasing trend in the coming years. Banks and other financial institutions which
have conventionally depended on physically setting up branches to offer banking
services are now moving towards the taking up of mobile banking services (MBS) as a
structure of branchless banking. This has the effect of reducing banking cost.
Technology has thus offered huge openings to service providers to provide the clients
with immense flexibility. Ultimately, banks have adopted branchless banking like
internet banking, mobile banking and ATMs; among others (Burgessy & Wong, 2005).

Mobile money services and Agent banking are displayed by the financial partners as the
solution to incorporating the informal sector in the conventional financial structure
xiii
(BoU report, 2011). Morawczynski (2007) indicates that monetary inclusion of the
minimum income category is expected to make easy the financial welfare of the
banking industry since it will help the majority of the informal sector individuals to
receive credit and accumulate savings. BoU report (2010) states that agency banking
shows an excellent development chance to banks by widening low-cost essential bank
accounts to a huge number of presently unbanked population in Uganda (BoU report,
2010). Since it is likely to be determined by reducing costs, the fact that the retail
systems have by now built up relationships with the heavily populated and the
capacity of the retail systems to offer accessibility with no difficulty, also present
development opening to banks.

An agent bank is a retail channel contracted by a bank or a mobile network entity to do

customers’ transactions. Instead of a branch cashier, it is the proprietor or a worker of
the retail channel who does the transaction and conducts the clients deposit,
withdrawals, funds transfer, and bills payment, check account balance, or takes delivery
of government payments or an express deposit from their work place (Vutsengwa &
Ngugi, 2013). Uganda altered its banking policies in January 2010, to enable
commercial banks give their services by means of third-party dealings. The agents
function as satellite branches (Mwenda, 2013).

Nevertheless, in Uganda, the acceptance of agent banking has not been well
acknowledged by the intended beneficiaries who are the micro and small enterprises in
the Uganda rural areas who were anticipated to gain from this scientifically inventive
service (Barasa & Mwirigi, 2013). In the extent that it has been noted that there is a
rise in expansion of agent banking services customers have not entirely utilized the
existing agents at their areas to reduce transaction costs caused by travelling to
conventional branches and the time wasted on queues so as to be served. It is also clear
that, banks have not entirely seized the opportunity of agent banking to discover every
market segment at reduced running costs.

Equity Bank Uganda Limited was created in 2008 when the Equity Group Holdings
Limited purchased Uganda Microfinance Limited, a Tier II, Ugandan Microfinance
Company for an all-share price
Of US$27 million. Equity Bank (Uganda) launched under its new brand on 30 March
2009. Equity Bank Uganda Limited has its headquarters in Uganda's capital city,
xiii
 Kampala, with over 30 branches in other parts of the country, including major towns like
Jinja, Hioma, Lira, Mbarara, Mbale and Arua.

Equity Bank has gone through fast expansion in the last three years and is setting itself
as the affiliation bank. This expansion has also resulted to challenges mostly on the basis
of existing systems, measures, structures and processes. For over a decade, Equity Bank
has been vigorously engaged in funding individuals and firms in Uganda. To raise its
competitive advantage, the bank has embraced agency banking as well as mobile
banking (Equity Bank, 2014).

1.4 Statement of problems

Currently, in Uganda, the business setting has changed just like in other parts of the
globe and it has been caused by high competition amongst the parties involved and the
banking sector. Competition between commercial banks has made the banks to
become more inventive. Majority of the innovations took place between the years 2006
to 2010. Some of these innovations are internet banking, credit cards, mobile banking,
ATMs, youth accounts, children accounts, women banking, Sharia banking, and the
most recent agency banking (Mwenda, 2013).

According to CGAP (2011), agency banking as a replica has been very flourishing in
boosting the commercial banks’ performance in most developing states. Achievement
stories have been witnessed in Peru, Columbia, India and Brazil. Besides, Njuki (2012)
states that, in Uganda agency banking has enabled banks to increase profits and spread
out financial services. As a result of the increased competition of banking services in
Uganda presently, Equity Bank is among the commercial banks in Uganda that have
adopted agency banking replica. Dedicated to seize the opportunity of the cost-reduction
and ease of access caused by the agency banking replica, Equity Bank in the last two
years started an aggressive entrance into this segment.

Despite the great achievement o f agency banking internationally and its execution by
different commercial banks in Uganda, there are numerous difficulties experienced by
the agency banking replica. Initially, its poor use is seen to frustrate its continued use
and burry the Vision to financial reach for the unbanked (Birch, 2008). Additionally,
most of the banks that have embraced agency banking have realized that agents do not
xiii
 have the ability to deal with huge cash transactions and that they are not investing on
security strategies resulting to poor client acceptance of agency banking (Vutsengwa &
Ngugi, 2013). Additionally, liquidity setback resulted to disappointment and is among
the reasons why the acceptance of these structures derails than expected.

However, despite its continued implementation by various banks in Uganda including

Equity Bank, there was no empirical evidence to show how it influences the
performance of commercial banks in Uganda. For banks to invest in agency banking,
they need to know how it influences performance and the expected challenges and
how they can be mitigated. The study therefore sought to show the effect o f
agency banking has on the financial performance of Ugandan commercial banks using
Equity Bank as the case study.

1.5 Objectives of the study

1.5.1 General objective
The general objective of this study was the establishment of the effect of agency
banking on the financial performance of Ugandan commercial banks.
1.5.2 Specific objective

The specific objectives of the study are;

i. To establish the effect of accessibility of banking services through agency

banking on the financial performance of commercial banks in Uganda.

ii. To find out the effect of low cost of service (deposit and withdrawal) through
agency banking on the financial performance of commercial banks in Uganda.
iii. To determine the effect increased customer transactions through agency
banking on the financial performance of commercial banks in Uganda.

1.6 Research Questions

The Research questions of the study are;

i. What is the effect of accessibility of banking services through agency banking on

the financial performance of commercial banks in Uganda?

xiii
 ii. What is the effect of low cost of service (deposit and withdrawal) through
agency banking on the financial performance of commercial banks in Uganda?
iii. What is the effect increased customer transactions through agency banking on
the financial performance of commercial banks in Uganda?

1.7 Significance of the Study

A great deal of literature globally argues that banking in Africa does not seem to be
growing in the desired levels and direction; this study will be of great importance to
various stakeholders. The research finding will also be of paramount benefit to various
individuals and institutions since agency banking is still a new concept in Uganda, this
research will help highlight issues that might emerge in the implementation and even after
the implementation finally This will help commercial institutions come up with the policies
and procedures that handle issues before they became big problems as to gain full potential
of this innovation.

xiii
1.8 Scope of the Study
The study seeks to establish the effect of agency banking on the financial performance
of commercial banks in Uganda. The study will be limited to three variables: accessibility
of banking services, low cost of service and increased customer savings. The study will
also be limited to Equity Bank headquarters situated at Kampala road, Kampala.
1.8.1 Time scope
This study is focused on reviewing the literature about the study phenomena available
between the periods of 3 years from 2017 to 2019. However, the actual data collection will
take a period of two (3) months, when the data will be collected, analyzed, interpreted and
presentation of the final dissertation will be done.

1.9 imitations
1.9.1 Cultural difference
Understanding the culture of people within equity bank where I seek to undertake my
research may be a key problem. Some questions may be very sensitive to people depending
on their cultural background

1.9.2 Language
Being an international student, it may be a limitation in interacting with respondents and to
understand the people well leading to misinterpretation and poor data quality.

1.9.3 Lack of equipment

Some equipment such as recording devices among others may be a constraint. Also, gadgets
for communication and networks in some areas will most likely hinder my activities.

1.9.4 Transport fare

The process of collecting data involves movement from one place to another frequentlty.so
to finance these maybe a problem for me.

Employees operating on tight schedules; some respondents may not be able to complete the
questionnaire in good time and this overstretches the data collection period. To mitigate this
limitation, I would make use of network to persuade targeted respondents to fill up and
return the questionnaires.

xiii
1.10 Definition of Terms

Financial Institution

A financial institution, by definition, is an institution charged with the responsibility of

offering financial services for its members or clients. They are regulated by their
respective governments and include financial service providers, commonly commercial
banks (Alfansi and Sargeant, 2000).

Commercial Bank
A financial institution that provides banking service and other financial services. It can
also be referred to a financial institution that holds a banking license (Vutsengwa and
Ngugi, 2013).

Branchless Banking
The delivery of financial services outside the conventional bank branches using
information and communications technologies and nonbank retail agents. Branchless
banking has emerged as a way of offering a new distribution channel which facilitates
financial institutions and general commercial actors alike in offering financial services
outside customary bank premises (Mwenda, 2013)

Agency Banking
A business of performing as an agent or intermediary in the act of either accepting
deposits or installments, lending of funds or discounting notes receivables or concluding
contracts of exchange transactions (Burgessy & Wong, 2005).

Agent
An agent is an entity contracted by an organization and is duly approved by the Central
Bank to offer the services of the organization on behalf of the organization (CBK Agency
Guideline). In this paper, the term refers to any third party acting in representation of a
bank whether pursuant to service agreement, an agency agreement, or other similar
arrangement.

xiii
1.3 Conceptual Frame work

INDEPENDENT VARIABLE DEPENDENT VARIABLE

AGENCY BANKING FINANCIAL PERFORMANCE OF

 Low cost of services COMMERCIAL BANKS
(deposit and  Profitability
withdrawal)
 Increase customer transaction
 Efficiency and
( deposit and withdrawal)
effectiveness
 Accessibility of banking  Increase number of accounts.
services

Intervening variables

Government policy
Economic situation
(inflation)

1.11 Chapter Summary

This chapter presents the introduction to the study. The study starts with outlining the
study’s background, the statement of the problem follows, objectives of the study are
next, followed by the research questions together with the significance of the study, scope
of the study and lastly the definition of terms.

xiii
 CHAPTER TWO
LITERATURE REVIEW

2.1 Introduction

This chapter presents a review of literature on agency banking and performance

of commercial banks. The chapter begins with a review of literature on accessibility
of banking services and financial performance, followed by literature on low cost of
service and financial performance, increased customer transactions and financial
performance a chapter summary.

2.2 Accessibility of banking services and financial

performance
2.2.1 Mobile and internet banking and financial
services

A study was conducted by Okiro and Ndungu (2013) pertaining to The Effect of Internet
and Banking Mobile on Performance of Financial Organizations in Kenya. The study, as
suggests the title, sought to determine the effect of internet banking and mobile on the
performance of financial organizations in Uganda by focusing on financial institutions
in Nairobi. The study investigated 30 financial institutions by assessing the role played
by internet and mobile banking in the performance of the institutions. The study
employed qualitative and descriptive methods research designs with the aim of having
a clear understanding of internet and mobile banking. The study collected qualitative
data from the managers, subordinate staff and also from customers of the 30 institutions.
These 30 institutions were arrived at by the use of stratified sampling. The sampling
process led to the 17 commercial banks, 11 SACCOs and 2 microfinance institutions
were sampled. Open and closed ended questionnaires were applied in the process of
data collection. The analysis of collected data was conducted through the use of both
qualitative measures and quantitative measures.

The study established that internet banking increased the turn out level of customers
(63.3%). Additionally, the study found out that 66.7% of the respondents’ shared the
opinion that internet banking had a positive influence on the performance of the
financial institutions. Cash withdrawal was the most commonly used mobile banking
service whereas purchasing commodities was the least commonly used. The study

23
concluded that of all financial institutions, commercial banks had adopted internet and
mobile banking

24
better than all the others. Also, the study concluded that due to the lack of infrastructure,
internet and mobile was faced with serious challenges since its inception. However, the
study still concludes that in spite of these challenges, there is notable increase in
effectiveness, efficiency and productivity. The study suggests that to overcome the
system failures experienced is through regular maintenance activities and the investment
in better infrastructure.

Another study was conducted on the same by Mutua (2012) under the title, Mobile
Banking Effects on the Financial Performance focusing on Commercial Banks in
Uganda. In this study, mobile banking was the focus in that it offers more accessibility
of financial services minimizing time and distance. The study also established that
through mobile banking transactional related costs and overheads were reduced therefore
improving financial p e r f o r m a n c e . The s t u d y u s e d d e s c r i p t i v e r e s e a r c h
des ign with a target population of 6 mobile phone network providers. Data was
obtained from the providers regarding the total amount transferred in the last five years.
The figure for the number of mobile users was regressed against the performance of the
ban k as was measured by the return on assets. The study further obtained secondary
data from the Central Bank of Uganda, Uganda Bureau of Statistics and the Central
Bank of Uganda. On the course of the study period, total amount of money transacted
through mobile transfer steadily increased to 118.08 billion from 0.006 billion. The
convenience offered by the service was perceived as the main cause of this success. The
study, contrary to other studies highlighted in this paper, found out that there was a
weak positive relationship between mobile banking and financial performance of
commercial banks. The study recommends that polices on mobile banking be given due
attention by policy makers in those commercial banks. Further, the study also
recommends that more attention be put on any advancement that may occur in the
mobile banking industry. Each bank should strive updated and abreast about mobile
banking.

2.2.2 Agency banking

A study was conducted by Aduda, Kiragu and Ndwiga (2013), regarding the
relationship between agency banking and financial performance. Banks and other
institutions dealing in financials have invested in expansion strategies and consequently
they have succeeded in establishing many branches. However, the challenge of gaining
access to formal financial services by clients still remains a big challenge to good
performance by many
25
firms. Customers in rural and remote areas travel long distances to access financial
services a fact that makes banking and other financial services unpopular in such areas.
This has led to poor performances by some institutions making the new legislation by
the central bank allowing banks to contract third party networks, a welcome idea. The
study used descriptive research design by using secondary data obtained from the
commercial banks in Uganda that have already adopted agency banking. The study
used a population of 10 commercial banks practicing agency banking. These
commercial banks were Co - operative Bank, Equity Bank, KCB Bank, Family
Bank, Post Bank, Equity Bank, Diamond Trust Bank, NIC Bank, Citibank and
consolidated Bank. These banks individual financial performances were used to extract
their respective financial performance indicators. Additionally, the CBK also provided
annual reports and supervisory reports on these banks which were very useful in
determining the number of agents registered under each bank. Also, these reports
provided the information on the total transactional value that was conducted through
the respective agents of the banks.

The variable of interests basically were the deposit transactions and cash withdrawal
conducted through agents, staff cost to revenue ratio, cost to income ratio, return on
assets and number of active agents. The study found out that out the banks studied, co -
operative bank, Equity Bank and Uganda Commercial Bank showed significance
performance index. Other banks, however, did not show the performance index as the
aforementioned. Further, the findings showed that there was increase in the annual
performance of those banks with agency banking from the year 2008 to 2011. This
implied that agency banking was progressively improving leading up to a significant
increase in financial performance of those banks. The study established that Equity
bank had the highest number of agents in 2011 with Co-operative Bank coming second.
Equity Bank also registered the highest number of agents in the same year. This shows
that the bank was continuously performing through the aid of agency banking leading to
improved financial performance. From the findings made by the study, it can be
concluded that most of the banks in the country have not adopted agency banking with
only 11 out of the 43 licensed and only 8 out of the licensed rolled up with the agency
banking service. Further, it can be concluded from the findings that Equity Bank is
the most performing commercial bank when it comes to agency banking followed by
Cooperative Bank and Uganda Commercial Bank. Agency banking has significantly and
positively influenced performance of commercial banks.

26
A study conducted by Kirui, Okello and Nyikal (2012), served to show the role played
by mobile phone money transfer (MMT) systems in increasing accessibility of
financial services especially to farmers in rural areas. The study noted that the transfer
of money through this system is cost effective and quick. This system offers a secure and
easy platform through which small savings majority of the rural population can access.
The study focused on smallholder agriculture since it is not well documented. The
study focused on the financial intermediation of those individuals in the society who are
excluded or are inaccessible, through the use of ICT. The study used propensity score
matching method to examine the impact of MMT services agricultural
commercialization. The study used cross-sectional data obtained from 379 multi-stage
households randomly selected in Western, Central and Nyanza provinces of Uganda.
The study established that use of MMT services increased to a significant the level of
annual household input use by
$42, household agricultural commercialization by 37% and household annual income
by
$224. The study concluded that MMT services helped to resolve the market failure
experienced by farmers especially due to lack of adequate access to finan cial
services. The study recommended the Ugandan MMT model be emulated by creating an
enabling environment for the success of the MMT initiatives.

Calleo (2014) did a study on accessing the unbanked prospects through

branchless banking in Africa. The main objective of the paper was to evaluate the use
of branchless banking in providing a cost-effective and secure solution to gain new
customers. The study population was nations in Africa like Uganda, Egypt and Congo
among others. They established that in general, 23% of adults in the Africa region own
a bank account. In Africa, there is a large discrepancy in account ownership: in Sub-
Saharan Africa, 24% of adults reported having an account at a formal financial
institution, though this ranges from 11% in Central Africa to 51% in Southern Africa.
In the Central African Republic and Democratic Republic of Congo, more than 95%
of adults do not enjoy banking services. In North Africa, 20% of adults have an
account at a formal financial institution ranging from 10% in Egypt to 39% in Morocco.
The study attributed the reasons for this large unbanked population in Africa to
poor infrastructure geographical and inaccessibility, with many of the unbanked
individuals living in remote rural areas. This, coupled by the high cost of banking
services and a lack of financial understanding and education, makes very strong barriers

27
to banking for poor rural populations. The study further established that other factors
that influence accessibility to financial services

28
include ease of access and proximity, basic financial education, low barriers to entry
and a flexible approach to repayment and savings schedules.

Younus (2013) conducted a study on branchless Banking as an outlet of

economic freedom for all. He argued that banking was a complex business in the past
and only a limited number of wealthy persons were its customers. Too much
personal presence requirements and procedures for safe banking, gave restricted access
to common man to bank financial services. In Uganda more than 700 million people are
enjoying branchless banking financial services. In Philippines and South Africa this
banking is also growing gradually and enabling the communities to manage their
financial affairs with ease on their door step and saving transportation time and cost. In
Pakistan, branchless banking financial services are rapidly growing and in 2012 there
were 1.4 million mobile accounts which represented 15% growth than the year 2011.
Through this mode of banking, there is an enormous opportunity to bank the
unbanked transactions. Rural population in remote areas particularly women
entrepreneurs can make use of branchless banking for economic freedom. This freedom
enables women in rural areas in decision making in life and will earn equality for them.
Undoubtedly branchless banking is a window of economic freedom for all in country
like Pakistan.

Lawal and Abdulkadir (2010) did a study on branchless banking as a remedy for
reaching the unbanked in Kwara State, Nigeria. This study was conducted to determine
whether branchless banking can be a solution to reaching the unbanked citizens in
Kwara State. In accomplishing this objective, questionnaires were disseminated to three
hundred respondents that spread across six villages in the State. Z-score statistical test
and Percentages were used to analyze the data collected for the study. The analyses of
responses collected shows that majority of the respondents do not have a bank account.
Based on this, the study amongst others recommends that both the banks and regulatory
bodies should guarantee that banks extend their points of presence to the rural areas and
also confirm that all the relevant infrastructures required for branchless banking services
are put in place in areas whereby there are large numbers of unbanked citizens.

29
2.3 Low costs of service and financial
performance
2.3.1 Convenience and Reducing
Cost

A study was conducted by Ngigi (2012), on the effect of financial innovation on

financial performance of Kenyan commercial banks, provides rele vant information to
this study. The study concentrated on the introduction and adoption of more efficient
and real time systems of finance by the commercial banks. Financial innovation
involves a host of new services and new products, new production methods and new
forms of organization including internet exclusive banks and agency banking. With
regard to new products, the study highlighted the exchange-traded index funds and
adjustable rate mortgages. New services included mobile banking, internet banking and
online securities trading. New production methods included credit scoring. Clearly,
financial innovation is more than one way embedded in the enhancement of financial
performance of financial institutions, and not just banks. Most of the strategies involved
in financial performance focus on improving accessibility, convenience and reducing
cost of operation as much as possible. These facts make this study by Ngigi (2012), very
essential and relevant.

The study sought to assess the effect of financial innovation on the financial
performance of commercial banks as the key players in the banking sector over a time
span of 4 years. The study noted that the financial industry in Uganda has underwent a
wide range of transformation all a i m e d at improving f i n a n c i a l
performance of m a n y financial institutions. Yet in spite of that, the study
holds that the relationship between financial innovation and financial performance is not
always positive correlated because there are cases of negative correlation between the
two being reported. A casual research design was utilized in this study. This type of
research design was deemed appropriate to this study as it is unobtrusive and the act of
research does not affect the results of the study. The population of the study was 43
commercial banks, which about all the commercial banks in Uganda by June 30th 2012.
The study used secondary data obtained from the annual reports for the respective
banks published by the Central bank. The study used financial innovations as the
independent variable while financial performance was the dependent variable. The study
results pointed out that financial innovation was positively correlated to profitability
particularly regarding commercial banks. This was highly supported by the high uptake

30
of the modern, more efficient and low costs systems in replacement of the less efficient
traditional systems. Evidence for this was provided by the study as, the negative
correlation between Automated Clearing House (EFTs and Cheques) and Real Time
Gross Settlement throughput over time. The study recommends that more efficient
systems of payment should be devised and developed amid adequate regulation.

Another study focusing on effects of financial innovation on the financial performance

of deposit taking SACCOs in Nairobi County was conducted by Njeri (2013). The study
noted that good financial performance is a subjective measure of how effectively a firm
can utilize its assets from its basic mode of business to generate maximum revenue. The
study chose to focus on SACCOs given that many SACCOs were being phased out by
the new entries in the industry. Therefore, the study sought to identify the benefits
that SACCOs enjoyed when they adopted various financial innovations in terms of
organizational sustainability and profitability. The study sought to establish
the relationship between financial innovation and financial performance of deposit
taking SACCOs located in Nairobi County. The study studied a population of 44 deposit
taking SACCOs in Nairobi County. The Sacco Societies Regulatory Authority (SASRA)
supervisory reports were the source of the secondary data use in this study. This data
was between 2008 and 2012. Data analysis techniques were applied to the study to help
in the reduction of data to manageable levels, to search for patterns, to apply
statistical techniques and to come up with a summery. The study found out that
SACCOs have begun using money transfer methods such as Orange money, MPESA
and Yu money but they had not linked them with their back office financial databases.
The study further found out that SACCOs were gradually adopting internet banking.
Through this, the usage of information technology, ICT infrastructure, internet and
websites have increased and so has their financial performances. The technological
advancements highlighted above are lead to financial performance improvement
through increasing of efficiency and reducing costs of operations.

According to Nyandiere (2006), system implementation comprises of five phases

namely hardware selection, acquisition and installation, User training, file
conversion/creation and system changeover/ adoption. The user may acquire the
software and hardware directly from a developer and manufacturer respectively, or may
also purchase them from an intermediate supplier. He further argued that the
following financing methods are accessible for companies planning to implement
new systems; purchasing, where the
31
buyer attains ownership of item after full payment of amount agreed. Leasing
alternatively involves formation of an agreement between lessee and leaser or
detailing the length of time to use the equipment, the use of equipment and the
periodical payment. Third method of financing is renting, which is a single agreement
where one party agrees to use another party's resources at definite periodical
payments. The agreement is however, not as binding as that of a lease agreement
(Nyandiere, 2006).

A company may be guided by several factors, while choosing the appropriate software.
These factors include, user requirements, where the selected package or software
should fit requirement of the user as closely as possible. Moreover, processing time
involves the response time, for instance if the response time of software is slow the user
might take the software or package to be unsuccessful. The third factor is
documentation. Software should always be accompanied by manual. The manual
should be easy to understand by non-technical person. However, the manual should not
have technical jargon. Software should also be user friendly. The package should have
clear on screen prompts to make easier to use, menu driven and extensive facility on
screen help. The software should also have in-built controls which may include
validation checks, password options, trace facilities or audit trails etc. Other factors
that should be taken into account include; the software should be up-to-date, for instance
it should have modifications or corrections according to business procedures, one should
account for whether the user could freely modify the software without violating
copyright, one should cater for how many users can use the software and the duration it
has been the market, Compatibility of the software refers to how the integration of a
software with other software specifically the operating system and the user programs
is, Portability refers to how the software runs on the computer of the user and
whether the software needs upgrading the hardware, and Cost being the users
consideration of the financial position to establish whether it can buy the software
required for effective operations instead of the least cost package software
available rationale (Nyandiere, 2006).

Training of the user is significant before system adoption is carried out so that the
system users can acquaint themselves with the system and the hardware before the actual
adoption. The purposes of user training are to decrease errors emanating from
learning through trial and error, to endear the system more to the users, to

32
enhance security by reducing accidents leading up to destruction of data, to enhance
quality of

33
services and operation to the users, to reduce the cost of repairs by minimizing
accidental destruction of data or hardware and to ascertain efficiency in system
operation when it goes live. The persons to be trained include system operators, middle
managers, senior managers and all those affected by the system indirectly or
directly. Training should cover recruited personnel and current staff (Nyandiere, 2006).
Through training, the staff becomes more efficient in their work reducing accidents and
wastage of time. In the long run, this improves the financial performance of an
institution.

System maintenance is carried to improve the system flexibility and adaptability.

Flexibility refers to minor changes in a system so as to cope up with the growth in
business transaction volume. Adaptability refers to changing a system so as to benefit
the user from advances in both hardware and software technology. System maintenance
may include adaptive maintenance, corrective maintenance, perfective maintenance,
replacive maintenance and preventive maintenance. Corrective maintenance is typically
a change effected in a system in reaction to detected error or problem. Its objective
is to make certain that the system remains functional. Perfective maintenance is a
modification to perfect a system, to enhance its performance on the basis of response
time to user request or to adjust a system interface to make a system friendlier to the
user. Adaptive maintenance refers to changing a system to cater for a change in its
functional environment. Preventive maintenance is conducted on a system to ascertain
that it can withstand increased workload. It helps in safeguarding data and software
integrity. Replacive maintenance it is conducted on a system when a system is near
obsoleteness e.g. due to poor design, lack of documentation or age. Ultimately, system
maintenance leads to reduction of costs to considerable levels. In turn, reduced costs
create an avenue for an institution to better their financial performance.

2.3.2 Effectiveness and Efficiency

A study done by Ndiema (2008) sought to establish the effect of agency banking on the
financial performance of Kenyan commercial banks. Ndiema (2008), postulates that the
twenty first century has been riddled with by rapid growth and application of technology
that involves innovative ways of doing business, in a way that enhances effectiveness
and efficiency with improved productivity/ profitability and reduced cost. The banking
sector in Uganda has come across developmental innovations that includes; ATM,

34
women oriented banking, mobile banking, internet banking, credit card youth oriented
accounts,

35
children accounts, sharia compliant banks in recent past agency banking since may
2010. This study sought to find out how agency banking has improved the financial
commercial banks performances especially in Kenya. The researcher was driven by
objectives namely; to establish the extent of implementation of agency banking an
d financial performance and to determine the challenges facing commercial banks at
implementation of agency banking. The researcher appraised relevant literature and
conducted a descriptive research design survey study to establish the effect of agency
banking top financial performance of commercial banks. The results of the study
indicate that largely, agency banking had been implemented by commercial banks
performing agency banking. That agency banking has enhanced the financial
performance of commercial banks in Uganda with regard to profitability, establishing
branches and reduced employment cost. Chi-square test was used to carry out a
cross-tabulation to find out the relationship between bank operation cost and bank
financial performance because of implementation of agency banking. The value for the
association between bank operation cost and bank financial performance was obtained
as 13.04as a result of agency banking with 4 degrees of freedom and the significant
result. Agency Banking has also its share of challenges that was in general agreed that
there was room for improvement and with time overcome the challenges.

Mwangi (2013) evaluated the role agency banking plays in Ugandan commercial banks
performance. Keen to take advantage of the accessibility and cost-saving brought
about by the model of agency banking, Ugandan financial institutions have embarked
on an aggressive entry into this segment over the last one year. However, it is yet
to be documented how this model has contributed to the performance of these banks in
Uganda. This study’s objective was to evaluate the role played by agency banking in the
good or bad performances of commercial banks in Uganda. The study‘s specific
objectives were; to evaluate the impact of liquidity on the commercial banks
performance attributable to agency banking, to establish the impact of cost on the
commercial banks performance attributable to agency banking, to assess the effects of
security on commercial banks performances attributable to agency banking. A
descriptive research design was used for the study. The study targeted banks offering
agency banking services in Uganda. In Uganda as at that time, the number of
commercial banks offering agency banking were four. The study population was forty
branch managers of the selected banks. Both qualitative and quantitative data was
collected and descriptive statistics was used to analyze this data.

36
The descriptive statistical tools used included; standard deviations, frequencies,
percentages and mean which aided the researcher to describe the data. Additionally,
advanced statistical technique (inferential statistics) was also taken into
consideration. Analysis of the data was done by use Ms. Excel and SPSS (Statistical
Package for Social Sciences). The presentation of the quantitative reports obtained was
by means of tabulations, graphs and charts. Qualitative data obtained from open ended
questions was analyzed using content analysis. The data was presented in a prose
form. The study depicted that some of the regulations effects on the performance of
commercial banks attributable to agency banking were executive management and board
of directors, quality control and accountability. The study concluded that infrastructure
security and cost influence the performance of commercia l banks attributable to
agency banking to a very great extent. Therefore, the study recommends that Agency
banking should be accorded more attention on measures of security including risk-based
approach and that the banks should seek better ways of screening their agents to make
sure that large cash transactions handling is carried out effectively on their behalf. It is
also recommended that banks explore other services, other than only money transfer
to enhance their performance through agency banking such as: operating systems
secure enough and capable of conducting real time transactions, generating an audit
trail, and protecting data integrity and confidentiality.

2.3.3 Financial Inclusion

A study done by Njagi (2014) sought to establish how agency banking contributed to the
financial performance of Ugandan banks. He holds that more than 6.5 million adult rural
Ugandans are either unbanked or under-banked. This can be attributed to the lowly
paying business transactions done in rural Uganda and the high cost needed to
sustain bank branches in rural Uganda which makes the establishment of new
commercial banks in rural Uganda a non-profitable venture. Due to this, technology has
provided opportunities for service providers in the banking sector to enable customers
enjoy greater banking flexibility. Agency banking has a number of technologies that
enable banking service providers to keep tract of the transactions made by retail banking
outlets. This study was guided by directions of previous researches carried out abroad in
an effort to establish the influences of agency banking on commercial banks’ financial
performances in Uganda. This study employed a descriptive survey. The study’s
population was 9 Commercial

37
Banks that offered agency banking in Uganda. The study further selected 4
senior managers from individual bank therefore forming a sample size of 36 respondents
used in this particular study. Semi structured questionnaires were administered as a
means of collecting primary data. Pilot study was as well undertaken to test the
reliability and validity of the instrument that was used. Using of descriptive
statistics using SPSS (Version 20), quantitative data collected was analyzed and
presented through percentages, standard deviations, means and frequencies. Graphs, bar
and pie charts and the use of prose form were methods used to present information
in this study. The study also established that low transaction costs that were obtained
due to the use of agency banking had a positive effect on the financial performance
of Ugandan commercial banks. The study further found out that customers could
easily access financial services due to the use of agency banking. This led to a positive
impact on the financial performance of the Ugandan commercial banks.

2.4 Increased customer transactions and financial

performance
2.4.1 Withdrawal
Transactions

A study done by Ndirangu (2013) to establish the effect of agency banking on Kenyan
commercial banks established that there was an upsurge of agent outlets in the banking
industry. This was established after an observation of a dramatic rise in the number and
value of transactions done by in customer and new service banking numbers. The
productivity of the banking sector has also hiked. The empirical problem in the study
was whether there was a relationship that existed between Agent activities in terms
of the value transacted and banks profitability. There are agency banking questions that
still remain unanswered in regards to why commercial banks are venturing into new
business models and the advantages and disadvantages of these new models. Thus
the major objective of the study was to establish the impact of agency banking on
Ugandan commercial banks financial performance. The research design was by means
of a census that covered 100% of the banks that were licensed as at 31st December
2012 to conduct their business in agency banking. The study total population was 44
banks while the sample was made up of 10 banks that were licensed to operate in
Kenya. The sample banks were already conducting agency banking in the country by
the end of the research time frame. data analysis of the study was conducted using
regression analysis to establish the relationship between agency banking determined

38
by the number of agency agents, loan repayments withdrawal transactions done via
agents and the financial performance of the commercial banks established by the return
on equity of the banks.

The study undertook data analysis using regression analysis to find the
relationship between agency banking going by the number of agents and withdrawals
transactions and loan repayment carried out via agents and the financial performance of
banks as assessed by return on equity. The study established that there was no direct
correlation between the commercial banks number of agents, the ensuing volume of
transactions (withdrawals) and the banks financial performance as revealed by the return
on equity of the banks. The significant low R Square for both 2011 and 2012 years
further supports the weak correlation between the independent variables and the
predictors as shown in the regression analysis models. Correlation between predictor
variables is considered to be in existence if their coefficient of correlation is greater
than 0.5. This establishes that there are other factors not included in the scope of the
current study that contribute to the commercial banks that operate agency banking
financial performance. The main recommendations of the study was for the
improvement of the supervision on the new service segment, banks should also allow
agents to perform other core activities so as to make sure that the agents capabilities are
well utilized. The banks should also improve security for the agents to ensure that they
can handle larger volumes of cash and be able to penetrate deeper into the society.

2.4.2 Deposits
Transactions

A study done by Ndwiga (2013) sought to explore the effect of agency banking
on financial performance of Kenyan commercial banks. Various sources of secondary
data were utilized for the study. Individual banks‟ annual reports on financial
performance were used to extract indicators on financial performance. Supervisory
reports and CBK's annual report were also utilized to establish the registered number of
agents and the value of total transactions attained through the agents. The variable
of interests were: the deposit transactions done through agents; cost to income ratio
which implies measuring cost efficiency using agency banks; number of active agents;
return on assets (ROA) to measure profitability; and, staff cost to revenue ratio to
measure the human resource cost reduction due to agency banking. The data was
collected for a three-year time span: 2010 to 2012. The findings revealed that out of all

39
the banks that have rolled up th e service, Co-operative bank, Equity bank and
Uganda Commercial Bank show significant

40
performance index. Further, the findings showed that annual performance significantly
improved. This implies that agency banking is improving continuously leading to
substantial increased financial performance in those banks that have rolled up the
service due to its efficiency and convenience in operation. The study established a
positive strong effect between agency banking and financial performance. The study
recommends further that commercial banks should embrace fully agency banking
through embracing of enhanced technology for information security to make it more
reliable to customers.

Kamau (2012) conducted a study seeking to establish the relationship between agency
banking and Uganda’s commercial banks financial performance. The business
environment has been altered and it has been characterized by stiff competition
amongst the players and in Uganda the banking industry is no exception. Innovation has
been borne out of the stiff competition between commercial banks. Most of such
innovations were presented in the period between the year 2006 and 2010. These
included ATMs, credit cards, children accounts, internet banking, mobile banking,
women oriented banking, youth oriented accounts, Shariah compliant banking and
now introduced most recently within the Ugandan banking sector – agency banking.
The main purpose of this study was to establish the relationship between agency
banking and financial performance of Ugandan commercial banks. An agency bank
is a company/organization that acts to some extent on behalf of another bank. It thus
cannot extend loans or accept deposits in its own name; it acts as an agent for the
parent bank. Agency banking model necessitates commercial banks to depend upon
the existing infrastructure with regard to supermarkets, petrol stations and hotels to
reach out to customers. Increasing access to finance has been enhanced with the use
of innovation such as agent banking, which enables DTMs and commercial banks to
involve the services of third party outlets to provide specified financial services on
their behalf. From the secondary data, the study found that outlets of agency banking
had increased from 8,809 in 2010 to 9,748 active agents in 2011. The se specific
agents mad it possible to achieve a total volume of 8.7 million transactions
averagely valued at KSh 43.6 billion in the year 2011. These transactions were made up
mainly of cash deposits done at the various banking agency outlets. Regression a
nalysis was used to investigate the relationship between agency banking (in relation to
agents and deposit transactions numbers especially those done through the help of
agents) and the banks’ financial performance measured by the banks return on equity.

41
From the model of regression, all the independent variables were found to either
have negative or weak

42
correlation to the dependent variable. Consequently the study concluded that
agency banking does not contribute solely to increased Kenyan banks’ profitab ility
going by the secondary data reviewed for 2010 and 2011.

2.4.3 Other Transactions

Aduda, Kiragu and Ndwiga (2013) conducted a study to establish the relationship
between Agency Banking and Financial Performance of Kenyan Commercial
banks. Banking agents are equipped typically with a combination of point-of-sale (POS)
card reader, barcode scanner to scan bills for bill payment transactions, mobile
phone, Personal Identification Number (PIN) pads, and at times personal computers
(PCs) with access to the bank’s server via a personal dial-up or other viable data
connection. Clients transacting at the agent use bank card with a magnetic stripe or their
mobile phone to gain access to their bank account or e-wallet correspondingly.
Normally, identification of customers is done through a PIN, but at times biometrics
has been used. This research made use of the descriptive design method utilizing
secondary data collected from commercial banks in Uganda that had engaged in agency
banking in Uganda. The study’s population was as a result commercial banks in
Uganda undertaking agency banking. By the end of 2012, 10 banks had employed
agency banking with over 12,054 agents: Consolidated Bank (Conso Maskani);
Equity Bank; KCB Bank; Diamond Trust Bank Post Bank; Family Bank (Pesa Pap);
Co-operative Bank (Co-op Kwa Jirani); Equity Bank (Equi Duuka); Citibank and NIC
Bank. Secondary data sources were also used for the study. Individual banks’ annual
reports on financial performance were utilized in extracting financial performance
indicators. Supervisory reports and CBK’s annual report was used also to establish the
registered number of agents and the total value of transactions conducted through the
agents. The variable of interests were: the deposit transactions and cash withdrawal
conducted through agents; return on assets (ROA); number of active agents; to
measure profitability; cost to income ratio (to assess and analyze cost efficiency in
using agency banks); as well as, staff cost to revenue ratio to analyze the decrease of
human resource cost owing to agency banking. The data was gathered for the three-year
period: 2010 to 2012.

Oyugi (2015) conducted a study on how alternative financial delivery methods

influence the performance of commercial banks in Kenya. The financial delivery

43
methods included mobile banking, ATMs, agency banking and internet banking. The
study employed a

44
descriptive research design. The target population was 86 heads of IT and finance
departments in the 43 commercial banks in Uganda. No sampling was done as the
population was small. Semi-structured questionnaires were used to collect primary data,
which was later analyzed by use of descriptive and inferential statistics. The
study revealed that the adoption of alternative banking channels, including agency
banking, was good as they were uncomplicated and accessible. These alternative banking
methods were used in funds transfer, bill payments, loan repayment and cash
withdrawals. This led to an improvement of the financial performance of various
commercial banks. However, the adoption of these alternative banking channels has
been facing some challenges which include customers' lack of confidence, security
concerns and knowhow. Specifically, agency banking was found to improve both
withdrawal and deposit transactions in commercial banks. Agency banking was also
found to have led to an improvement in financial inclusion of the unbanked in rural
areas. However agency banking agents were found to be facing challenges such as
system failure, vandalism, poor user knowledge and additional costs. the study therefore
made recommendations that commercial banks in collaboration with central bank of
Uganda and agents should seek to minimize the risks such as fraud and vandalism that
affect both the agents and agency banking users.

Jagongo and Molonko (2014) did a study to investigate the role of agency
banking operations in the financial performance of commercial banks. They argued that
many financial institutions, including commercial banks, are getting huge profits from
people from the bottom part of the economic background. This has led to high
competition as most financial institutions employ various market entry methods to
venture in this market segment with an aim of maintaining their competitive
advantage. This study used a descriptive research design and census was done to
select all the commercial banks in Uganda. The findings revealed that by use of agency
banking commercial banks were able to increase their transactions, including cash
withdrawals, funds tran sfer as well as deposits, from people who were considered to
be of low income.

45
2.5 Chapter Summary

This chapter presents a review of literature based on the objectives of the study. The
chapter began with accessibility of banking services and financial performance,
followed by low cost of service, increased customer transactions and financial
performance. The next chapter provides the methodology that will be used in the study.

46
 CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction

This chapter presents the procedures and methodology used in analyzing and
collecting the data in the study. The chapter contains the research design, the
population of the study, sampling frame, sampling techniques and the study’s sample
size. In addition, the chapter outlines data collection methods and instruments used in
addition to data analysis methods fit for the achievement of the set objectives.

3.2 The Research Design

A descriptive research design was used in this research. According to Bryman (2003),
this is a scientific method involving observing and describing the behavior of a
subject without affecting it in any way. Furthermore, the study incorporated both
quantitative and qualitative research.

In addition, this study only focused on Equity Bank making a case study. According to
Creswell (2006), a case study allows for descriptive, explanatory or exploratory
analysis of a person, event or group. A case study facilitates the collection of plenty of
details that would otherwise be difficult to obtain by other research designs. The data
collected is normally of greater depth and a lot richer than the one obtained through
other research designs.

3.3 Target population

According to Cooper and Schindler (2006) a target population is a population having
the desired information. According to Krejcie and Morgan tables (1970), out of the total
population of 135, the study will employ a sample size of 97 respondents who will
actively participated in the study as shown in the Table 1 below. This sample size will be
appropriate as it enables triangulation of the findings to what took place in the selected
case. Simple random sampling is used in conjunction with purposive method to select key
subjects that participate in the study. Thus a sample size of 97 will be attained as below.
The target population of this study will therefore be 135 staff working in Operations
Department, Finance Department, Credit Department, ICT Department, Marketing
Department, and Human Resource Department.
47
3.4 Sample size

DEPATMENT STUDY SAMPLE SIZE

POPULATION
Operation department 50 45
Finance department 25 20
Credit department 20 12
ICT department 15 7
Marketing department 10 6
Human recourse 15 7
Total 135 97

3.5 Data Collection Instruments

Both secondary and primary data was used in this study. Primary data is the data collected
directly from actual experience, free from processing or any other type of manipulation
(Mugenda & Mugenda, 2003). Yin (2008) as well, stated that primary data can be
obtained by using qualitative data collection tools (focus group discussions, observations
and interview guide) and tools of quantitative data collection (questionnaires).

Semi structured questionnaires was also used in this research study. The questionnaires
comprised of both open ended or closed ended questions in order to enable the
respondent to express their opinions. Kothari (2004) postulated that questionnaire is a
cheap method to obtaining information particularly from a large group of respondents. It
also permits for anonymity. In this research, questionnaires will be used as they enhance
anonymity as some of the information needed is sensitive. Furthermore, questionnaires'
will be applied in this study since they are very efficient in terms of time, finances and
energy.
.

48
3.5.1 Validity Test
According to Carole and Almut (2008), validity is often defined as the extent to which an
instrument measures what it purports to measure. According to Amin (2005), content
validity refers to the degree to which the test actually measures or is specifically related to
the traits for which it will be designed. The content validity is determined by expert
judgment which requires experts in the area covered by the instrument to assess its content
by reviewing the process being used in developing the instrument as well as the instrument
itself and thereafter make judgment concerning how well items represent their intended
content area. Therefore, the content validity ratio will be used to calculate by the Content
Validity Index using the formula;

CVI = Total Number of items declared valid

Total Number of items in the Instrument

For an instrument to be accepted as valid, the average index should be 0.7 or above. (Amin,
2005).

3.5.2 Reliability Test

Reliability addresses the reliability of results (Golafshani, 2003). Weiner, (2007) defines
reliability as the degree to which a measurement technique can be depended upon to secure
consistent results upon repeated application. Amin, (2005) argues that internal consistency is
a commonly used form of reliability.

Therefore, the reliability of research instrument concerns the extent to which the instrument
yields the same result on repeated trails. Reliability refers to the consistency of measurement
and is frequently assessed using test and re-tests reliability method. Reliability will be
increased by including many similar items on measure by testing diverse sample of
individuals and using uniform testing procedure. Reliability will further enhance through use
of instrument triangulation technique. This is an acceptable method in survey research that is
qualitative in nature (Mugenda 1999). The reliability of the questionnaire will be tested
using the Cronbach’s Alpha Coefficient.

3.6 Data Collection Procedure

It is significant for the study to inform the respondents that the instruments applied will
ensure confidentiality and that the information was only for the Purposes of the study.

49
Additionally, an introductory letter was solicited from the University. Then, the
questionnaires will be administered through a method of drop and pick.

3.7 Data Analysis

According to Creswell (2006), the procedure of data analysis comprises of packaging the
collected information, putting it in order and arranging its main contents in a way that the
findings can be effectively and easily communicated. Quantitative and qualitative data
analysis will be used for the study.
After confirming that all data is correctly entered, descriptive statistics will be used to
analyze quantitative data. Descriptive statistics will include percentages, measures of
central tendencies (mean) and frequency distribution. Tables, bar charts and pie charts will
be used to present the data. Descriptive statistics facilitate the meaningful distribution of
measurements and to also describe, summarize data and organize (Mugenda & Mugenda,
2003).

3.8 Chapter Summary

The methodology th at w il l b e used in this study is presented in this chapter. The
chapter begins with the research design, followed with the population of the study that
specified the target population, the sampling design and the sample size. In addition, the
chapter provides the research procedures t o b e used, the data collection methods
and the methods used for data analysis.

50
 CHAPTER FOUR

DATA PRESENTATION, ANALYSIS AND INTERPRETATION OF FINDINGS

4.1 Introduction

This chapter focuses on data analysis and presentation of the findings. The findings
were arranged as per the objectives of the study. The purpose of this study was to
establish the effect of agency banking on the financial performance of Equity Bank. The
study also sought to establish the effect of accessibility of banking services, low cost of
service and increased customer transactions through agency banking on the financial
performance of Equity Bank. The research findings were presented in pie and bar charts
and also in form of tables.

Response Rate:
The study sample size was 97 respondents, out of which 84 responses were
obtained which represent a 86% response rate. According to Babbie (2007), 50% is
adequate for analysis and reporting and response rate of 70% and over is excellent and
hence the response rate in this study was enough to make inferences and conclusions.

4.2 Reliability Test

This pre-testing involved 9 staff (10% of the sample size). The test was conducted
at Equity Bank at Kampala Road. The respondents were randomly since statistical
conditions are not essential in the pilot study. The pilot study served the purpose of
testing the research instruments validity and reliability.

According to the findings, accessibility of banking services had a Cronbach reliability

alpha of 0.724, low cost of service had a Cronbach reliability alpha of 0.732
and increased customers transactions had a Cronbach reliability alpha of 0.698. This
clearly shows that the research instrument was reliable and hence no amendments were
needed.

Table 4. 1: Cronbach reliability alpha

Construct Cronbach reliability alpha (α)

Accessibility of banking services 0.724

Low cost of service 0.732

Increase customers transactions 51
 0.698

52
4.3 General Information
As part of the general information, the respondents were asked to indicate their
gender, age bracket, highest level of education and for how long Equity Bank had been
operating agency banking.

4.3.1 Gender of the Respondents

The respondents were asked to indicate their gender. The findings are presented in
figure
4.1 below.

Figure 4. 1: Gender of the

Respondents

From the findings, 54.8% of the respondents indicated that they were female while
45.2% indicated that they were male. This shows that most of the respondents in this
study were female.

4.3.2 Age bracket of the Respondents

The respondents were also asked to indicate their age bracket. The findings are
presented in figure 4.2 below.

53
Figure 4. 2: Age bracket of the
Respondents

According to the findings, 38.1% of the respondents indicated that they were
aged between 27.35 years, the same percent indicate that they were aged between 36 and
45 years, 11.9% indicated that they were aged between 18 and 26 years and the same
percent indicated that they were 46 years and above in age. This show that
most of th e respondents in this study were above 27 years in age.

4.3.3 Highest Level of Education of the

Respondents

The respondents were requested to indicate their highest level of education. The
findings are shown in figure 4.3 below.

54
Figure 4. 3: Highest Level of Education of the
Respondents

55
From the findings, 69% of the respondents indicated that they had undergraduate
education, 28.6% indicated that they had post graduate education and 2.4% indicated
that they had college education. This shows that most of the respondents in this study
had undergraduate education and hence they had the information required in
relation to agency banking and financial performance.

4.3.4 Duration of Operating Agency Banking

The respondents were further asked to indicate for how long their bank had been
operating agency banking. The results are presented in figure 4.4 below.

Figure 4. 4: Duration of Operating Agency

Banking

As indicated in figure 4.4 above, 95.2% of the respondents indicated that their bank had
been operating agency banking (Equi Duuka) for between 18 and 24 months and 4.8%
indicated for between 13 and 18 months. This shows that Equity Bank had been
operating agency banking (Equi Duuka) or between 18 and 24 months.

4.4 Accessibility of Banking Services and Financial

Performance
The study sought to establish the effect of accessibility of banking services
through agency banking on the financial performance of commercial banks in Uganda

4.4.1 Accessibility of banking services and Financial

Performance

56
The respondents were asked to indicate whether accessibility of banking services
through agency banking affect the financial performance of commercial banks in
Uganda.

57
Figure 4. 5: Low Transaction Cost and Financial
Performance

From the findings, 90.5% of the respondents indicated that accessibility of banking
services through agency banking affect the financial performance of commercial banks
in Uganda while 9.5% disagreed. From these findings we can deduce that accessibility of
banking services through agency banking affects the financial performance of
commercial banks in Uganda.

4.4.2 Extent of Accessibility of Banking Services Influence on Financial

Performance

The respondents were further asked to indicate the extent to which accessibility
of banking services through agency banking affect the financial performance of
commercial banks in Uganda.

58
Figure 4. 6: Accessibility of Banking Services Influence on Financial
Performance

59
From the findings, 38.1% of the respondents indicate that accessibility of banking
services through agency banking affects the financial performance of commercial
banks in Uganda to a very great extent, 33.3% indicated to a great extent, 21.4%
indicated to a moderate extent, 4.8% indicated to a little extent and 2.4% indicated to no
extent at all. From these findings we can deduce that accessibility of banking services
through agency banking affects the financial performance of commercial banks in
Uganda to a very great extent.

4.4.3 Effect of accessibility of banking services on Financial

Performance

The respondents were further asked to indicate the extent to which they agreed with
accessibility as being important in performance of agency banking in Equity Bank,
where 1 was strongly disagree, 2 was disagree, 3 was neutral, 4 was agree and 5 was
strongly agree.

Table 4. 2: Effect of accessibility of banking services on Financial

Performance

Mean Std.
Deviation
Agency banking is accessible, in terms of agency 4.0714 .70772
locations
and general national footprint
Agency banking excels in Service delivery 4.1190 .66595
Agency banking excels in Service Quality 4.1667 .61768
Agency banking improves its banking Environment 3.9524 .72652
There is great potential of using this in agent banking 3.9762 .71095
for
provision of banking services to unbanked community .72809
Agency banking has led to accessibility of financial 4.0000
service
to many customer in remote areas .67281
Accessibility of banking service through agency 4.0714
banking
has led to profitability of commercial banks .76047
Agency banking increases effectiveness and efficiency 4.0000
of
service delivery in commercial banks in Uganda
According to the findings, the respondents agreed with a mean of 4.1667 and a standard
deviation of 0.61768 that agency banking excels in service quality. The respondents also

60
agreed with a mean of 4.1190 and a standard deviation of 0.66595 that agency
banking

61
excels in Service delivery. Further, the respondents agreed with a mean of 4.0714 and a
standard deviation of 0.67281 that accessibility of banking service through agency
banking has led to profitability of commercial banks. In addition, the respondents
agreed with a mean of 4.0714 and a standard deviation of 0.70772 that agency
banking is accessible, in terms of agency locations and general national footprint.

The respondents also agreed with a mean of 4.0000 and a standard deviation of 0.72809
that agency banking has led to accessibility of financial service to many customer in
remote areas. Further, the respondents agreed with a mean of 4.0000 and a standard
deviation of 0.76047 that agency banking increases effectiveness and efficiency of
service delivery in commercial banks in Uganda. In addition, the respondents agreed
with a mean of 3.9762 and a standard deviation of 0.71095 that there is great potential
of using this in agent banking for provision of banking services to unbanked
community. Lastly, the respondents agreed with a mean of 3.9524 and a standard
deviation of 0.72652 that agency banking improves its banking Environment.

4.5 Low Cost of Service and financial

performance
The study also sought to find out the impact of low cost of service possible due to
agency banking on the financial performance of Ugandan commercial banks.

4.5.1 Low Transaction Cost of and Financial

Performance

The respondents were requested to indicate whether low transaction cost of

agency banking affects the financial performance of commercial banks in Uganda.
The results were as shown in figure 4.7 below.

62
Figure 4. 7: Low Transaction Cost of and Financial
Performance

As indicated in figure 4.7 above, 92.9% of the respondents indicated that low
transaction cost of agency banking affects the financial performance of commercial
banks in Uganda while 7.1% disagreed. From these findings we can deduce that low
transaction cost of agency banking affects the financial performance of commercial
banks in Uganda.

4.5.2 Extent of Low Transaction Cost Influence on Financial

Performance

The respondents were further asked to indicate the extent to which low transaction cost
of agency banking affects the financial performance of commercial banks in Uganda.
The findings were as show in figure 4.8 below.

63
Figure 4. 8: Extent of Low Transaction Cost Influence on Financial
Performance

64
From the findings, 40.5% of the respondents reported that low transaction cost of agency
banking affects the financial performance of commercial banks in Uganda to a great
extent,
38.1% reported to a very great extent, 16.7% reported to a moderate extent and 4.8%
reported to a little extent. The findings establish that low transaction cost of
agency banking does to a great extent affects the financial performance of commercial
banks in Uganda.

4.5.3 Effect of Low Transaction Cost on Financial

Performance

The respondents were also asked to indicate the extent to which they agree with the
statements relating to low transaction cost of agency banking and its effects on financial
performance of commercial banks in Uganda. The findings are presented in table
4.3 below.
Table 4. 3: Effect of Low Transaction Cost on Financial
Performance

Mean Std.
Deviation
Cost involved in transacting in agency banking is low 4.0476 .79007
compared
to banking hall
The cost of setting up the agency is transferred to agents and 4.1190 .85595
hence low cost of offering service
Agency banking has low infrastructural cost and hence 4.2857 .66896
reduction
in cost
Time spent in agency banking is low compared to the 4.2143 .67790
normal
banking
Cost involved in agency banking positively 4.1190 .66595
influence
performance of commercial banks
Agents prior experience with the banks customers is 4.2381 .65158
positively
related to both performance and survival
The presence of Equi Duuka help low income earners to save 4.1667 .72533
Equi Duuka Pricing help low income earners to save 4.2619 .66076
Agency banking reduces transactional related costs and 4.1667 .69131
overheads
From the findings, the respondents agreed with a mean of 4.2857 and a standard
deviation of 0.66896 that agency banking has low infrastructural cost and hence
65
reduction in cost. The respondents also agreed with a mean of 4.2619 and a standard
deviation of 0.66076

66
that Equi Duuka Pricing help low income earners to save. In addition, the respondents
agreed with a mean of 4.2381 and a standard deviation of 0.65158 that agents prior
experience with the banks customers is positively related to both performance
and survival. Further, the respondents agreed with a mean of 4.2143 and a standard
deviation of 0.67790 that time spent in agency banking is low compared to the normal
banking. The respondents further agreed with a mean of 4.1667 and a standard
deviation of 0.72533 that the presence of Equi Duuka help low income earners to save.
Additionally, the respondents agreed with a mean of 4.1667 and a standard
deviation of 0.69131 that agency banking reduces transactional related costs and
overheads.

Further, the respondents agreed with a mean of 4.1190 and a standard deviation
of
0.66595 that cost involved in agency banking positively influence performance of
commercial banks. In addition, the respondents agreed with a mean of 4.119 and a
standard deviation of 0.85595 that the cost of setting up the agency is transferred
to agents and hence low cost of offering service. Lastly, the respondents agreed with a
mean of 4.0476 and a standard deviation of 0.79007 that cost involved in transacting in
agency banking is low compared to banking hall.

4.6 Increased Customer

Transactions
The study further sought to determine the impact of increased customer
transactions through agency banking on the financial performance of Ugandan
commercial banks.

4.6.1 Increase in the Number of

Customers

The respondents were asked to indicate whether customer’s transactions in their

bank have increased as a result of agency banking. The results are shown in figure 4.9 b
elow.

67
Figure 4. 9: Increase in the Number of
Customers

From the findings, 92.9% of the respondents reported that customers transactions in their
bank had increased as a result of agency banking while 7.1% disagreed. From thes
e findings we can deduce that customers transactions in Equity Bank had increased
as a result of agency banking.

4.6.2 Extent of Customers Transaction influence Financial

Performance

The respondents were also asked to indicate the extent to which the increase in
the number of customers transaction influence the financial performance of your bank.
The results are shown in figure 4.10 below.

68
Figure 4. 10: Extent of Customers Transaction influence Financial
Performance

69
From the findings, 42.9% of the respondents reported that the increase in the number of
customers transaction influence the financial performance of Equity Bank to a very
great extent, 31% indicated to a great extent, 23.8% indicated to a moderate extent and
2.4% indicated to a little extent. From these findings we can deduce that the increase in
the number of customers transaction influence the financial performance of Equity Bank
to a very great extent.

4.6.3 Effect of Increased Customers Transactions on Financial P

erformance

The respondents were further asked to indicate their level of agreement with the
statements relating to increased customer transactions of agency banking and its
effects on financial performance of commercial banks in Uganda.

Table 4. 4: Effect of Increased Customers Transactions on Financial

Performance

Mean Std.
Deviation

volume of withdrawal transactions increases the 4.1429 .80873

bank
profitability
volume of deposits transactions increases the bank profitability 4.1667 .90292

number of active agents has been increasing 4.2381 .57286

Customers can pay their loans through agency banking 4.3095 .60073

Efficiency and convenience in operation in agency banking 4.2619 .58328

have increased the banks customers' transactions

According to the findings, the respondents agreed with a mean of 4.3095 and a standard
deviation of 0.60073 that customers can pay their loans through agency banking.
Further, the respondents agreed with a mean of 4.2619 and a standard deviation o f
0.58328 that efficiency and convenience in operation in agency banking have
increased the banks customers' transactions. In addition, the respondents agreed with a
mean of 4.2381 and a standard deviation of 0.57286 that the number of active
agents has been increasing. Additionally, the respondents agreed with a mean of
4.1667 and a standard deviation of
70
0.90292 that the volume of deposits transactions increases the bank profitability.
Lastly,

71
the respondents agreed with a mean of 4.1429 and a standard deviation of 0.80873
that the volume of withdrawal transactions increases the bank profitability.

4.7 Financial Performance

The respondents were asked to rate the financial performance of their bank after the
introduction of agency banking. The findings are presented in figure 4.11 below.

Figure 4. 11: Financial Performance in Equity Bank

According to the findings, 61.9% of the respondents indicated that the financial
performance of their bank after the introduction of agency b anking was good,
28.6% indicated that it was excellent and 9.5% indicated that it was moderate.
From these findings we can deduce that the financial performance of Equity Bank after
the introduction of agency banking was good.

4.7.1 Measures of financial

performance

The respondents were also asked to rate various measures of financial performance
in their bank after the introduction of agency banking.

72
Table 4. 5: Measures of financial performance

Mean Std. Deviation

Profitability 4.0952 .61348

Return on Equity 4.0000 .65859

Return on Assets 3.7381 .85192

Sales volume 3.8095 .85695

From the findings, the respondents rated profitability in their bank as good as shown by
a mean of 4.0952 and a standard deviation of 0.61348. The respondents further rated
return on equity in their bank as good. This is shown by a mean of 4.0000 and a
standard deviation of 0.65859. In addition, the respondents rated sales volume in
their bank as good as shown by a mean of 3.8095 and a standard deviation of 0.85695.
Lastly, the respondents rated the return on assets in their bank as good as shown by a
mean of 3.7381 and a standard deviation of 0.85192. From these findings we can deduce
that profitability, return on equity, sales volume and return on assets in Equity Bank after
the introduction of agency banking were good.

4.8 Regression Analysis

A multivariate regression analysis was used to establish the relationship between
the dependent and the independent variables.

The multivariate regression model

was:

Y = β0 + β1X1 + β2X2 + β3X3 + ε

Where; Y = financial performance; β0 = Constant Term; β1, β2, and β3 = Beta

coefficients; X1= accessibility of banking services; X2= low cost of service; X3=
increased customer savings; and ε = Error term

73
Table 4. 6 Model Summary

Model R R Square Adjusted R Square Std. Error of the

Estimate

1 .874a .764 .755 .31092

a. Predictors: (Constant), Increased Customer Transactions, Accessibility of Banking

Services, Low Cost of Service

The three independent variables (increased customer transactions, accessibility of

banking services and low cost of service) in this study, explain a variation 75.5% of the
financial performance of Equity Bank as represented by the adjusted R2. This therefore
means that other factors not studied in this research contribute 24.5% of the financial
performance of Equity Bank. This shows that there are other factors that influence the
financial performance of Equity Bank.

Table 4. 7: Analysis of Variance

Model Sum of Df Mean Square F Sig.
Squares

1 Regression 24.971 4 8.324 86.103 .000b

Residual 7.734 80 .097

Total 32.705 84

a. Dependent Variable: Financial performance

b. Predictors: (Constant), Increased Customer Transactions, Accessibility of

Banking
Services , Low Cost of Service

The results indicated that the model was significant since the p -value is 0.000 which
is less that 0.05 thus the model is statistically significance in predicting how
increased customer transactions, accessibility of banking services and low cost of
service influence the financial performance of Equity Bank. The F critical at 5% level
of significance was
2.4472. Since F calculated (86.103) is greater than the F critical. This shows that
the overall model was significant.

74
Table 4. 8: Coefficients

Model Unstandardized Standardized T Sig.

Coefficients Coefficients

B Std. Error Beta

1 (Constant) .884 .259 3.410 .001

Accessibility of 1.251 .136 1.295 9.196 .000

Banking Services

Low Cost of Service .800 .206 .725 3.880 .000

Increased Customer .311 .114 .299 2.736 .008

Transactions

a. Dependent Variable: Financial performance

The regression equation was;

Y = 0.884 + 1.251 X1 + 0.800 X2 + 0.311 X3 +

ε

The regression equation above has established that taking all factors into account
(increased customer transactions, accessibility of banking services and low cost of
service) constant the financial performance of Equity Bank will be 0.884 units.

The findings presented also show that there is a positive and significant
relationship between accessibility of banking services as a result of agency banking
and financial performance of Equity Bank as shown by a coefficient of 1.251 (p-
value=0.000). This shows that a unit increase in accessibility of banking services as
a result of agency banking would lead to a 1.251 improvement in financial
performance of Equity Bank.

In addition, there is a positive and significant relationship between low cost of service
as a result of agency banking and financial performance of Equity Bank as shown by a
coefficient of 0.800 (p-value=0.000). A unit increase in low cost of service as a result of
agency banking leads to a 0.800 improvement in the financial performance of
Equity Bank.

75
Further, the findings show that there is a positive significant relationship between
customer transactions as a result of agency banking and the financial performance
of Equity Bank as shown by a coefficient of 0.311 (p-value = 0.008). A unit increase in
customer transactions as a result of agency banking would lead to a 0.311 improvement
in the financial performance of Equity Bank.

This infers that accessibility of banking services as a result of agency banking

influences the financial performance of Equity Bank most followed by low cost of
service and increased customer transactions.

4.9 Chapter Summary

The results and findings of the study are presented in this chapter. The chapter
begins with an introduction followed by general information, increased customer
transactions, accessibility of banking services, low cost of service, financial
performance and regression analysis. Chapter five provides a summary of the
conclusions, recommendation, discussion and findings of the study.

76
 CHAPTER FIVE

5.0 SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS

5.1 Introduction

This chapter presents the discussion on key data findings, conclusion drawn from the
findings highlighted and recommendation made there-to. The conclusions and
recommendations drawn were focused on addressing the purpose of the study.

5.2 Summary

The aim of this study was to establish the effect of agency banking on the financial
performance of Equity Bank. The study also sought to establish the effect of
accessibility of banking services, low cost of service and increased customer
transactions through agency banking on the financial performance of Equity Bank.

This study applied kerish and morgan to select 50% of the target population and hence
the sample size of this study was 97 respondents. Both secondary and primary data was
used for the current study. Primary data was collected by use of semi structured
questionnaires were used in research study. Quantitative and qualitative data was
collected and used for this study. Descriptive statistics and inferential statistics analyzed
quantitative data. Descriptive statistics include percentages, measures of central
tendencies (mean) and frequency distribution. The data was then presented in tables and
in bar and pie charts. On the other hand, content analysis analyzed qualitative data from
open ended questions and the findings presented in a prose form. A multivariate
regression analysis was further used to establish the relationship between the dependent
and the independent variables.

The study established that there is a positive relationship between the accessibility of
banking services through agency banking and financial performance of commercial
banks in Uganda (p-value=0.000). In addition, the study found that accessibility of
banking service through agency banking has led to profitability of commercial banks
(90.5%). Further, the study found that agency banking is accessible, in terms of agency
locations and general national footprint (M=4.0714, σ=0.70772). Additionally, agency
banking has

77
led to accessibility of financial service to many customer in remote areas and it
increases effectiveness and efficiency of service delivery in commercial banks
in Uganda (M=4.1190, σ=0.66595).

The study also found that there is a positive relationship between low cost of service
through agency banking and the financial performance of commercial banks in Uganda
(p- value=0.000). The study also established that agency banking has low infrastructural
cost and hence reduction in cost (92.9%). Further, the study found that time spent in
agency banking is low compared to the normal banking and the presence of Equi
Duuka help low income earners to save (M=4.2143, σ=0.67790). Additionally, the study
found that agency banking reduces transactional related costs and overheads
(M=4.1667, σ=0.69131).

The study further established that there is a positive relationship between increased
customer transactions through agency banking on the financial performance
of commercial banks in Uganda (p-value = 0.008). The study established that customers
can pay their loans through agency banking (M=4.3095, σ=0.60073). Further, the study
found that efficiency and convenience in operation in agency banking have increased
the banks customers' transactions (M=4.2619, σ=0.58328). In addition, the study
established that the number of active agents has been increasing (M=4.2381,
σ=0.57286). Additionally, the study revealed that the volume of deposits and
withdrawals transactions increases the bank profitability (M=4.1667, σ=0.90292).

5.3 Discussion of key findings

5.3.1 Accessibility of Banking Services and Financial
Performance

The study sought to establish the effect of accessibility of banking services

through agency banking on the financial performance of commercial banks in Uganda.
The study established that accessibility of banking services through agency banking
affects the financial performance of commercial banks in Uganda to a very great
extent (38.1%). These findings agreed with Kirui, Okello and Nyikal (2012) findings
that mobile phone money transfer (MMT) systems in increasing accessibility of financial
services especially to farmers in rural areas have improved the financial performance of
commercial banks in Uganda.

78
The study also established that agency banking excels in service quality
(M=4.1667, σ=0.61768). The study also established that agency banking excels in
Service delivery (M=4.1190, σ=0.66595). These findings agree with Okiro & Ndungu
(2013) argument that internet banking, online banking and agency banking lead to a
notable increase in effectiveness, efficiency and productivity of commercial banks in
Uganda. Further, the study revealed that accessibility of banking service through agency
banking has led to profitability of commercial banks (M=4.0714, σ=0.67281). In
addition, the study found that agency banking is accessible, in terms of agency
locations and general national footprint (M=4.0714, σ=0.70772). These findings
concur with Kirui, Okello and Nyikal (2012) findings that accessibility to banking
services improves the financial performance of banks like profitability and sales.

The study also revealed that agency banking has led to accessibility of financial service
to many customer in remote areas (M=4.0000, σ=0.72809). According to Aduda, Kiragu
and Ndwiga (2013), customers in rural and remote areas travel long distances to
access financial services a fact that makes banking and other financial services unpopular
in such areas. This has led to poor performances by some institutions. The study als o
found that that agency banking increases effectiveness and efficiency of service delivery
in commercial banks in Uganda (M=4.0000, σ=0.76047). In addition, the study
established that there is great potential of using this in agent banking for provision
of banking services to unbanked community (M=3.9762, σ=0.71095). Lastly, the study
revealed that agency banking improves its banking Environment (M=3.9524,
σ=0.72652).

5.3.2 Low Cost of Service and financial

performance

The study also sought to find out the impact of low cost of service as a result of agency
banking on the financial performance of Ugandan commercial banks. The study found
that low transaction cost of agency banking affects the financial performance of
commercial banks in Uganda to a great extent (40.5%). These findings agree with
Calleo (2014) argument that low cost of service in commercial banks increases
the number of transactions and hence improvement of financial performance. The
study also established that agency banking has low infrastructural cost and hence
reduction in cost (M=4.2857, σ=0.66896). The study also found that Equi Duuka
Pricing help low income earners to save (M=4.1667, σ=0.72533).

79
In addition, the study revealed that agents prior experience with the banks customers is
positively related to both performance and survival (M=4.2381, σ=.65158). Further, the
study found that time spent in agency banking is low compared to the normal banking
(M=4.2143, σ=0.67790). These findings agree with Younus (2013) argument that the
cost of running a agency banking is low compared to the cost of running a bank branch.
The study also established that the presence of Equi Duuka help low income earners to
save (M=4.1667, σ=0.72533).

Additionally, the study found that agency banking reduces transactional related costs
and overheads (M=4.2857, σ=0.66896). These findings concur with Mutua (2012)
earlier findings that through agency banking, transactional related costs and overheads
are reduced therefore improving financial performance. Further, the study found that
cost involved in agency banking positively influence performance of commercial banks
(M=4.1190, SD=0.66595). In addition, the study established that the cost of setting up
the agency is transferred to agents and hence low cost of offering service (M=4.1190,
σ=0.85595). The study also established that cost involved in transacting in
agency banking is low compared to banking hall (M=4.0476, σ=0.79007).

5.3.3 Increased Customer

Transactions

The study further sought to determine the effect increased customer transactions through
agency banking had on the financial performance of Ugandan commercial banks.
The study established that the increase in the number of customers transaction influence
the financial performance of Equity Bank to a very great extent (43.9%). These findings
agree Younus (2013) argument that an increase in the number of transactions
increase the profitability of the bank. The study established that customers can pay their
loans through agency banking (M=4.3095, σ=0.60073). Further, the study found that
efficiency and convenience in operation in agency banking have increased the banks
customers' transactions (M=4.2619, σ=0.58328).
In addition, the study established that the number of active agents has been increasing
(M=4.2381, σ=0.57286). Additionally, the study revealed that the volume of deposits
transactions increases the bank profitability (M=4.1667, σ=0.90292). Lastly, the study
revealed that the volume of withdrawal transactions increases the bank
profitability (M=4.1429, σ=0.80873).

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 CHAPTER SIX

6.6 CONCLUSIONS AND RECOMMENDATIONS

6.1 Conclusion

6.1.1 What is the effect of accessibility of banking services through agency

banking on the financial performance of commercial banks in Uganda?

The study concludes that there is a positive and significant relationship between
accessibility of banking services as a result of agency banking and financial
performance of Equity Bank (p-value=0.000). The study, also, concludes that banking
excels in service quality and service delivery. In addition, agency banking has led
to accessibility of financial service to many customer in remote areas and hence an
increase in effectiveness and efficiency in service delivery. Agency banking is
accessible in terms of agency locations and general national footprint has led to
an increase in profitability of commercial banks.

6.1.2 What is the effect of low cost of service through agency banking on
the financial performance of commercial banks in Uganda?

The study also concludes there is a positive significant relationship between low cost of
service as a result of agency banking and financial performance of Equity Bank
(p- value=0.000). Agency banking has low infrastructural cost and hence reduction in
cost. Further, time spent in agency banking is low compared to the normal
banking the presence of Equi Duuka helps low income earners to save. In agency
banking, the cost involved in setting up the agency is transferred to agents and hence
low cost of offering service.

6.1.3 What is the effect increased customer transactions through agency banking
on the financial performance of commercial banks in Uganda?

Further, the study concludes that there is a significant positive relationship

between customer transactions as a result of agency banking and the financial
performance of Equity Bank (p-value=0.008). The study also concludes that customers
can pay their loans through agency banking. Further, efficiency and convenience in
operation in agency banking have increased the banks customers' transactions. In
addition, the number of active agents has been increasing and the volume of
deposits and withdrawals transactions increases the bank profitability.

81
6.2 Recommendations
6.2.1 Recommendations of the Study

6.2.1.1 What is the effect of accessibility of banking services through agency

banking on the financial performance of commercial banks in Uganda?

The study found that the agency banking improves accessibility to financial services.
The study therefore recommends that Equity Bank as well as other commercial banks in
Uganda should increase the number of agents in estates and in the rural areas. This can
be done by reducing the requirements of becoming a bank agent. The study also
recommends that the government of Uganda should improve security in towns, estates
and in the rural areas.

6.2.2 What is the effect of low cost of service through agency banking on the
financial performance of commercial banks in Uganda?

The study also found that agency banking reduces the cost of offering financial services
recommends that commercial banks should also lower the charges of making
transactions in agency banks. This will help to increase the number of
transactions made my customers through agency banking.

6.2.3 What is the effect increased customer transactions through agency banking
on the financial performance of commercial banks in Uganda?

The study also found that agency banking increases the number of transactions made by
customers. This in turn helps the customers to save more and hence the amount the bank
can loan increases. This helps to improve the financial performance of commercial
banks.

To improve the adoption of agency banking, commercial banks in Uganda should

improve customer’s perception by making more advertisements and increase promotion
activities.

6.2.4 Recommendation for further studies

This study was limited to Equity Bank in Uganda only. The study therefore
recommends that further studies should be conducted on the effect of agency banking on
the financial performance of commercial banks in Uganda with a survey on all
commercial banks in Uganda. The study also recommends further studies on the
challenges facing the adoption of agency banking by commercial banks in Uganda. The

82
study further recommends studies on the customer related challenges facing the adoption
of agency banking in Uganda.

83
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 Appendix I: Questionnaire

I am a student at International University of East Africa, as part of the

requirement for graduation, I’m undertaking a research to establish the "impact of
agency banking specifically on the commercial banks’ financial performance in
Uganda; a case of Equity Bank". I am therefore, kindly requesting for your support in
terms of time, and by responding to the questions below.

General Information

1. Please indicate your gender

Male [ ] Female [ ]
2. Indicate your age bracket
18-26 yrs [ ] 27-35 yrs [ ]
36-45 yrs [ ] 46 and above [ ]
3. State your highest level of
education
Secondary [ ] College [ ]
Undergraduate [ ] Post Graduate [ ]
4. How long have you been operating agency
banking?

0-6 Months [ ] 7-12 Months [ ] 13-18 Months [ ]

18-24 Months [ ] Over 2 Years [ ]

Accessibility of Banking Services and Financial
Performance

5. Does accessibility of banking services of agency banking affect the

financial performance of commercial banks in Uganda?
Yes [ ] No [ ]
6. To what extent does accessibility of banking services of agency banking affect the
financial performance of commercial banks in low transaction cost Uganda?
To a very great extent [ ]
To a great extent [ ]
To a moderate extent [ ]
To a little extent [ ]
To no extent [ ]

90
7. Please indicate the extent to which you agree with accessibility as being important in
performance of agency banking in Equity Bank. (Where; 1=strongly disagree,
2=disagree, 3=neutral, 4=agree and 5=strongly agree)

5 4 3 2 1

Agency banking is accessible, in terms of agency

locations and general national footprint

Agency banking excels in Service delivery

Agency banking excels in Service Quality

Agency banking improves its banking Environment

There is great potential of using this in agent banking for

provision of banking services to unbanked community
Agency banking has led to accessibility of financial
service to many customer in remote areas
Accessibility of banking service through agency banking
has led to profitability of commercial banks
Agency banking increases effectiveness and efficiency of
service delivery in commercial banks in Uganda

8. What are the effects of accessibility of finances on the financial performance of

Equity Bank?

............................................................................................................................. ..
............................................................................................................................. ..
............................................................................................................................. ..

Low Cost of Service and financial performance

9. Does low transaction cost of agency banking affect the financial performance
of commercial banks in Uganda?
Yes [ ] No [ ]

91
10. To what extent does low transaction cost of agency banking affect the
financial performance of commercial banks in Uganda?
To a very great extent [ ] To a great extent [
] To a moderate extent [ ] To a little extent [
] To no extent [ ]
11. To what extent do you agree with the following statement relating to low
transaction cost of agency banking and its effects on financial performance of
commercial banks in Uganda? (Where; 1=strongly disagree, 2=disagree, 3=neutral,
4=agree and
5=strongly agree)
5 4 3 2 1
Cost involved in transacting in agency banking is low
compared to banking hall
The cost of setting up the agency is transferred to agents
and hence low cost of offering service
Agency banking has low infrastructural cost and hence
reduction in cost
Time spent in agency banking is low compared to the
normal banking
Cost involved in agency banking positively influence
performance of commercial banks
Agents prior experience with the banks customers is
positively related to both performance and survival
The presence of Equity Duuka help low income earners
to save
Equity Duuka Pricing help low income earners to save
Agency banking reduces transactional related costs and
Overheads

12. What are the effects of low transaction cost of agency banking on the
financial performance of Equity Bank?

...............................................................................................................................
............................................................................................................................. ..
...............................................................................................................................

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Increased Customer Transactions

13. Do you think customers transactions in your bank have increased as a result of
agency banking?

Yes [ ] No [ ]

14. To what extent does the increase in the number of customer’s transaction
influence the financial performance of your bank?

To a very great extent [ ]

To a great extent [ ]
To a moderate extent [ ]
To a little extent [ ]
To no extent [ ]

15. To what extent do you agree with the following statement relating to increased
customer transactions of agency banking and its effects on financial performance of
commercial banks in Uganda? (Where; 1=strongly disagree, 2=disagree,
3=neutral,
4=agree and 5=strongly agree).

5 4 3 2 1
volume of withdrawal transactions increases the bank
profitability
volume of deposits transactions increases the bank
profitability
number of active agents has been increasing
Customers can pay their loans through agency banking
Efficiency and convenience in operation in agency
banking have increased the banks
customers' transactions

16. What are the effects of increased customers transactions as a result of

agency banking on the financial performance of Equity Bank?

...............................................................................................................................

93
 .............................................................................................................................
..
..............................................................................................................................
.

Financial Performance

17. How do you rate the financial performance of your bank after the introduction of
agency banking

Excellent [ ] Good [ ]

Moderate [ ] Bad [ ]

Poor [ ]

18. How do you rate the following measures of financial performance in your bank
after the introduction of agency banking? (Where; 1=poor, 2=bad, 3=moderate,
4=good and 5=excellent).

5 4 3 2 1
Profitability
Return on Equity
Return on Assets
Sales volume

94
APPENDIX II: TABLE FOR DETERMINING SAMPLE SIZE FROM A GIVEN
POPULATION
N S N S N S

10 10 220 140 1200 291

15 14 230 144 1300 297

20 19 240 148 1400 302

25 24 250 152 1500 306

30 28 260 155 1600 310

35 32 270 159 1700 313

40 36 280 162 1800 317

45 40 290 165 1900 320

50 44 300 169 2000 322

55 48 320 175 2200 327

60 52 340 181 2400 331

65 56 360 186 2600 335

70 59 380 191 2800 338

75 63 400 196 3000 341

80 66 420 201 3500 346

85 70 440 205 4000 351

90 73 460 210 4500 354

95 76 480 214 5000 357

100 80 500 217 6000 361

110 86 550 226 7000 364

120 92 600 234 8000 367

130 97 650 242 9000 368

140 103 700 248 10000 370

150 108 750 254 15000 375

160 113 800 260 20000 377

95
N S N S N S

170 118 850 265 30000 379

180 123 900 269 40000 380

190 127 950 274 50000 381

200 132 1000 278 75000 382

210 136 1100 285 1000000 384

Source: Krejcie & Morgan (1970, as cited by Amin, 2005)

Note.—N is population size. S is sample size.

96