THE IMPACT OF MOBILE BANKING ON SMALL AND MEDIUM ENTERPRISES

OWNED BY YOUTH IN KAKAMEGA TOWN, KAKAMEGA COUNTY

BY

PAUL JUMA OKUMU

(BCM/B/01-00365/2019)

MERCY K. MUSYOKA

(BCM/B/01-0100268/2019)
NITA CHEROP BERAH
(BCM/B/01-00332/2019)
SHARON CHEROTICH TERER
(BCM/B/01-00307/2019)
RAPHAEL OKELLO
(BCM/B/01-00324/2019)

A RESEARCH PROPOSAL SUBMITTED IN PARTIAL FULFILLMENT OF THE

REQUIREMENTS FOR THE AWARD OF THE BACHELOR’S DEGREE OF
BUSINESS COMMERCE IN ECONOMICS, SCHOOL OF BUSINESS, MASINDE
MULIRO UNIVERSITY.

APRIL 2023.
 DECLARATION

This proposal is our original work and has not been presented for a degree or any other award in any
other University.

Signature Date
PAUL OKUMU JUMA

MERCY K. MUSYOKA

NITA CHEROP BERAH

SHARON CHEROTICH TERER

RAPHAEL OKELLO

This Research project has been submitted for examination with my approval as University

Supervisor

Signature Date

SUPERVISOR: PROF. CHARLES TIBBS

ii
 DEDICATION

We dedicate this research project to our parents/guardians for their financial support, moral support and
courage, and advice that have seen us through.

iii
 ACKNOWLEDGEMENT

We wish to express our sincere gratitude to the Lord Almighty for giving us the courage, strength, good

health, and ability to bring this work to a final stage. We are deeply indebted to our families, siblings,

parents, and lecturers for their immense contributions in diverse ways toward the successful completion

of this proposal.

Our first appreciation goes to our family, for the wonderful support and words of encouragement

throughout this course.

Our deepest appreciation and thanks particularly go to our supervisor, (NAME?) for (his/her)

constructive suggestions, criticisms, and useful comments. Without their dedication, the work would not

have become a reality.

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TABLE OF CONTENTS....................................................................................................PAGE
DECLARATION............................................................................................................................ii
DEDICATION..............................................................................................................................iii
ACKNOWLEDGEMENT.............................................................................................................iv
TABLE OF CONTENTS................................................................................................................v
LIST OF TABLES.........................................................................................................................vi
LIST OF ABBREVIATIONS AND ACRONYMS......................................................................vii
ABSTRACT.................................................................................................................................viii
CHAPTER ONE
INTRODUCTION........................................................................................................................1
1.1 Background..............................................................................................................................1
1.1.1 Mobile Banking concept.......................................................................................................3
1.1.2 Small and Micro Enterprises concept....................................................................................4
1.1.3 Mobile Banking and Growth of SMEs concept.....................................................................6
1.2 Statement of problem...............................................................................................................9
1.3 Objectives of Study................................................................................................................11
1.4 Research Questions…………………………………………………………………..11
1.5 Value of the study...................................................................................................................11
CHAPTER TWO
LITERATURE REVIEW...........................................................................................................13
2.1 Introduction............................................................................................................................13
2.2 Theoretical Literature Review................................................................................................13
2.2.1 Mobile Banking Business models Theory...........................................................................13
2.2.2 Technology Acceptance Theory..........................................................................................14
2.2.3 Demand and Supply side twin theory..................................................................................15
2.3 Empirical Literature Review..................................................................................................16
2.3.1 Accessibility........................................................................................................................16
2.3.2 Transaction costs.................................................................................................................17
2.3.3 Security...............................................................................................................................18
2.4 Summary................................................................................................................................20

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CHAPTER THREE
METHODOLOGY.....................................................................................................................22
3.1 Introduction............................................................................................................................22
3.2 Research Design.....................................................................................................................22
3.3 Population of study.................................................................................................................22
3.4 Sampling Design....................................................................................................................23
3.5 Data Collection Instrument...................................................................................................25
3.6 Data collection procedure.....................................................................................................25
3.7 Pilot Study............................................................................................................................26
3.7.1 Data Validity.......................................................................................................................26
3.7.2 Data Reliability...................................................................................................................26
3.8 Data Analysis and Presentation..............................................................................................27
3.9 Model specification................................................................................................................27
4.0 Model evaluation....................................................................................................................27
REFERENCES...........................................................................................................................30

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 LIST OF ABBREVIATIONS AND ACRONYMS

CBK Central Bank of Kenya

CTF Counter-Terrorism Financing risks

GDP Gross domestic product

GOK Government of Kenya

KYC Know Your Customer

MSEs Medium and Small Enterprises

MMTS Mobile Money Transfer Service

R&D Research and Design

PIN Personal Identification Number

SIM Card Subscriber Identification Module Card

ATMs- Automatic Teller Machines

CCK Communication Commission of Kenya

ICT Information Communication Technology

MFI Micro Finance Institution

M-Pesa M-for Mobile and-Pesa for Money in Swahili

SMS Short Message Services.

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Abstract

Mobile banking service are created to help business streamline their operations and this, has received

immense adoption in Kenya since was introduced in the year 2007. Mobile Banking has marked a new

frontier in banking sector and mobile phone technology with an ever increasing number of Micro and

Small Enterprises using it in their transactions to enhance performance. However, it is not clear the role

Mobile Banking plays in the growth of MSEs. The majority of the MSEs owners use mobile banking as

opposed to formal banking for their daily transactions. The study will establish that the use of Mobile

Banking has contributed significantly to the growth of MSEs through increased sales volume and net

profits. In respect of conceptual framework, Mobile Banking transactional costs, accessibility, and

security have all been shown not to affect MSEs growth significantly through the service despite

increased enrolment in Mobile Banking services. The study will also reveal that the ease of use, cost-

effectiveness convenience security of the service, accessibility, and diversity have enabled MSEs to

continue to use Mobile banking services. This study will achieve its objective and obtain detailed

information arising from the role of Mobile banking on the growth of MSEs on youths owning businesses

in Kakamega County. The study will use a descriptive survey designed at finding out the impact of

Mobile banking on the youths of Kakamega town.

Keywords: Mobile Banking, MSEs, Accessibility, Costs, Security, Kakamega county, MSEs Growth.

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 CHAPTER ONE

Introduction
This chapter highlights the background of the study, statement of the problem, objectives, research
questions and conceptual framework.

1.1 Background of the study

Mobile Banking is a mobile based technology model for increasing financial services access which can
help people fight poverty through investing in productive assets and expanding business. Wambari and
Mwaura (2009), assert that in the developing world, 9 out of every 10 people are excluded from accessing
financial services. The financial sector in these countries considers poor people as not viable customers
because of their smaller transaction sizes while the majority live in remote areas beyond the reach of
banks. The introduction of mobile technology has opened an opportunity for banks to view the poor as
viable customers and offers great potential for reaching out to the poor (Wambari and Mwaura. 2009).

According to the Kenya National Bureau of Statistics (2015), more than 5,970,600 Kenyans have secured
jobs in the informal sector, which translates to roughly about 19% of the overall Kenyan population.
(Choi, 2016) the reason is less capital is required to start a business in such sectors also it is less
structured.

Mobile banking can be referred to as a means where customers communicate with the bank through a
mobile gadget, either a mobile phone or personal digital device that generates data communication
information (Barnes; Corbitt, 2003). Services offered by mobile banking have been designed to assist in
smooth business operations (Moans, 2009) since it was introduced in 2007 it has received intense uptake
in Kenya. The introduction of mobile telephones which use mobile networks which can reach deep into
remote areas has enabled the majority of poor people actcess financial services at low cost through mobile
banking. The mobile phones have many features and can be easily adapted to handle banking
transactions. Mobile network It is a banking service that uses a bank account and mobile
telecommunications network as a platform to carry out traditional banking services like account balance
checks, money transfers between accounts and making payments (Wanyonyi & Bwisa, 2013).
Affordability and accessibility have been attributed to its success (Moog,2010).
This technological invention is suitable for MSEs that encounter challenges that relate to business
operations, including limited affordable and accessible financial services. MSEs requirements for
settlement and services of transacting aren’t serviced well by conventional types of banks because for
them it’s difficult to and it’s not cost-effective for them to adopt a package from the bank that is full-

1
featured (Higgins, Kendall & Lyon, 2012).

Mobile Money Transfer Service (MMTS) subscribers all over the world are using virtual money for
transactions like remittances transfers, bill payment, receiving salaries and wages, loan transactions, and
payment for goods and services (Beza, 2010). The range of use of mobile money transactions and
services is expanding very fast due to mobile telecommunication innovations. Mobile money has
revolutionized the use of M-banking by; converting cash into virtual money and using it to make mobile
payments and in loan receipt and repayment, thus facilitating financial inclusion through M-banking
(Beza, 2010).

Mobile money has enormous potential for development impact due to its ability to facilitate financial
sector inclusion. Given opportunity to reach financial services the poor people can fight poverty in that
first, financial services will enable poor people to create employment or acquire asset. (for example,
investing in: enterprises, real estate, education or education/training which increases one’s job market
opportunities); secondly, financial services help reduce vulnerability to uncertainties like accidents,
sickness, theft, or drought (Yousif, Berthe, Maiyo & Morawczynski, 2012).

The money transfer services through mobile phone services have dramatically changed the lives of people
in the world. This comes from the new services of mobile phone SIM card that can act as a transaction
card and as an identification module for calls (Bangens, 2008). This new service enables the mobile
phone holder to withdraw or deposit cash from the bank, commonly known as mobile banking or simply
M- banking. This service is no doubt a new phenomenon to both developed as well as developing
countries and is surely hoped to transform the economy of states by reaching the banking services to
previously unbanked ( Bangens, 2008).

There has been diffusion of the mobile banking in developing countries and especially in Kenya and
South Africa. This is due to the wide acceptance to use of mobile money transfer which is easy to sign up
for, less expensive to use and the only slowdown factor is network coverage to some geographic locations
but is improving by having more network coverage (Kenny & Karemane, 2007).

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1.1.1 Mobile banking concept

Mobile banking is a product of the convergence of two technological advancements of the internet and
mobile phones (Barnes: Corbitt, 2003). Mobile banking is similar to Internet banking and is one of the
service packages a bank might offer its clients (Kim, 2008). The first mobile banking application dates
back to 1992 were used in Finland in payment of bills and querying bank account balances using mobile
devices which depended on mobile networks like Global Standard for Mobile (GSM) (Barnes : Corbit,
2003). The current platforms in use include Short message Service (SMS) and Wireless Application
Protocol (WAP) which are likely to make mobile banking key application choice for bank customers
interested in wireless data. The new mode makes it possible for customers to get financial help any place,
time and situation, hence making a change to the rule of inter-bank competition. Banks are more focused
on provision of services that are professional and personalized: they are no longer concerned with
coverage and number of outlets (Ibrahim, Joseph, & Ibex, 2016). The propagation of , and fast
advancement in systems based technology that are technology based, especially the ones that have
internet connections, are fast ones to experience change in element in the aspect of customer interaction
within a company (Parasuranam & Zink an, 2012).
Mobile communication has broadened the reach and coverage of communication and financial access into
the population that was excluded in receiving such services. Financial institutions have made effort to link
mobile , communication and financial services by developing mobile financial services Mobile Banking
provides an alternative channel for banking services using mobile devices which are enabled through
software to perform commercial transactions on either wireless internet or communication network
service providers platforms. The use of internet on the wireless mobile phones have provided wireless
data services like short messaging services on mobile devices(Barnes: Corbitt, 2003). The saturation of
mobile phones has provided banks and other financial institutions, an opportunity to deliver timely and
efficient services to many of their customers.

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Mobile banking is based on earlier concepts of mobile services channel extension using telephone
banking and internet banking aimed to reduce costs and break into online banking channels (Barnes;
Corbitt, 2003). Mobile banking has revolutionized the way financial service industries conduct
business by providing banks with new business models. Mobile phone users can conveniently carry out
banking transactions 24 hours a day because the user can access a mobile phone all time (Wambari and
Mwaura. 2009).Mobile banking has created large new markets for financial institutions offering value
added services. With Mobile Banking, banks can now provide a wide choice of services to their clients.
Mobile phones are the most promising way to reach the masses and create stickiness among current
customers due to their ability to provide services anytime, anywhere, high rate of penetration, and
potential to grow (Wambari and Mwaura. 2009).In the commercial domain mobile banking is one of the
mobile techniques that are developing mobile. Information technology and commerce applications have
been combined together in it. Since the introduction of mobile banking, consumers don’t have to visit the
banks to carry out transactions: they have also been able to obtain special services throughout. The main
method used to support mobile banking is through Short Message Services (SMS). SMS and mobile are
widely used because it saves time, can be used in varying locations, and are convenient (Venkatesh et al,
2003).

In Kenya, the sessional paper (2005), recognized the contribution of mobile phones and similar
technologies in economic development. Kenya has also encouraged the development of communication
infrastructure through the ministry of Information, Communication and technology and the
Communication Commission of Kenya (CCK). The introduction of mobile telephony in Kenya has seen
an increasing mobile banking activity of phone to bank transfer and vice versa. A more specific situation
is the use of Safaricom’s “till number “or “pay bill” options by customers to transact on goods and
services.

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 1.1.2 Micro and Small Enterprises (MSEs) concept

The definition of MSEs differs in countries and among researchers (Donner; Escobari, 2010). MSE can be defined
as any enterprise, with less than 50 employees and includes sole entrepreneur, part-time or home based entities.
Sole proprietorship or single businesses constitute the largest share of MSEs in developing world. Micro
Enterprises employing one to nine employees tend to be more than small entities which employ 11 to 50
employees (Mead; Leidhol, 1998). The concept of micro-enterprises was pioneered by Muhammad Yunus in19in
1976Bangladesh (Barnes;Corbitt., 2003). His idea was to help poor women to become economically self-
sufficient and end poverty. He established a bank (Grameen Bank) to offer credit to poor women and enable them
to start microenterprises (Barnes; Corbitt., 2003). A business is created through a single-handed effort of a
dynamic, hardworking entrepreneur (s) (Nichter; Goldmark, 2005). In developing countries like Kenya MSEs
have come up to complement the formal sector jobs creation for the poor. The MSEs provide income and growth
opportunities for entrepreneurs and employers (UNIDO, 2003). MSEs are key drivers of economic growth and
innovations. MSEs tend to grow due to profitable market opportunities. This growth increases job creation and
income per capita. (Nichter; Goldmark, 2005).
The capability of small and medium enterprises to get aid is the greatest challenge to date in the development of
new businesses and restricts others from growing and making expansions (World Bank, 2012). A major constraint
to small and medium enterprises’ operations is cash-flow management (Lennar and Bjorn, 2010). This statement
is in agreement with (Booster, 2008) who asserted that the collecting of debts, inadequate working capital, and
minimal sales are the top 5 constraints encountered by MSEs. The obstacles lead to MSEs lacking the financial
ability to expand and grow.

Most micro enterprises are not registered and are run with small capital investments from the entrepreneur’s
savings or family contributions. Similarly, small Enterprises can be defined as companies, Partnerships or
Entrepreneurships that employ between ten and fifty employees. (Labie, 2006).
Haan (2001) segmented the MSEs into three categories. The first segment is the traditional income-generating
activities like occasional trading and hawking, animal keeping, and basic crafts. These are seasonal, part time
businesses which serve local markets with local goods and services made using traditional technologies. The
second category is the Micro (MEs) consisting of small shops, metal works, and carpentry, tailoring, repair
services, and are family-based with one or few permanent workers. They used obsolete technology, semi- skills,
lacked management, and have no access to capital. They serve nearby markets and are found in large villages,
rural towns, and regional centers. Small Enterprises (SEs) employ 10 to 20 people and are both formal and
informal using modern technology. The formal SEs are licensed by the local governments and pay some taxes.
They include sawmills, garments, transport, building and construction, and agro-processing.

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The government of Kenya has recognized the growth of MSEs as the foundation blocks for industrial
development. The government through the ministry of industrialization has promoted the development of
MSEs by creating a special department for them . The government through the Sessional Paper of 2005
has also identified appropriate technology as a major limitation in the country for enjoying the benefits
resulting from the SME’s growth. Kenya’s Medium and Small Enterprises (MSEs) Act 2012 defines
Micro and Small Enterprises by the number of workers, the turnover, and Assets of the enterprises. The
MSEs Sector consists of business operators and entrepreneurs involved in formal and informal sectors
like Agriculture, Manufacturing, Trade, and Service. Micro-enterprises tend to employ nine or fewer
workers or have an annual turnover of less than Ksh 500,000 and have less than Ksh five million
invested in them. Small enterprises employ 10-50 workers or has annual turnover of kshs 500,000 to kshs
5 million (Government of Kenya, 2012).

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The 2003 Economic Survey in Kenya indicated a substantial growth in the MSE sector, as evidenced by
increase in employment in the Sector from 4.2 million persons to 6.9 million persons in 2002, accounting
for 74.2% of employment in Kenya. The survey also showed that sector contributed 18.4% of the GDP.
The Kenya Bureau of Statistics Survey (2005) indicated that five million people (19 % of the Kenyan
population) were employed in the MSEs informal sector an indication of major growth in MSE sector
which creates most of the new jobs. Malik (2004) argues that the MSEs constitute 98% of all businesses
in Kenya and absorb most labor force in the country. A baseline survey conducted in 2006 indicated that
MSEs in Kenya had grown from 910,000 in 1993 to 1.8 million in 2006 with 66% of the MSEs located in
rural areas and the majority of MSEs were in trade (64.8%).

1.1.3 Growth of Micro and Small Enterprises and the Mobile Banking concept.

Integration of banking services and mobile communication technology has resulted to mobile banking, a
service being performed via SMS, the Mobile internet or a special program downloaded to the mobile
device (Salzman, Palen & Harper, 2001). Mobile banking benefits include saving and borrowing by
customers in a cost-effective and secure manner. Examples of mobile banking services are; checking
account balances, accounts transfers, bill payments and loans repayments using mobile devices like
mobile phones (Venkatesh, 1999). This branchless banking model seem to have taken all small value
transactions from the banking halls therefore reducing transaction costs using non-bank outlets banks or
mobile operators’ agents perform banking activities using client’s mobile device which shows transaction
details to and from the bank (Salzman, Palen & Harper, 2001).

The convenience and security involved in the mobile money services have led to faster and easy money
transfers which in turn have increased economic activities (Zutt, 2010). Low costs, increased efficiency
and trust on the systems has included many people rural areas in receiving financial services therefore
increasing economic activities in those areas. It is easy for a trader to withdraw money from a bank
account and buy stocks without travelling to the bank. With the increased uptake of mobile phones, may
Kenyans with bank accounts have enrolled into mobile money service and most transactions are being
done using mobile money instead of cash. This has made MSEs streamline their operations to increase
efficiency and boost operations (Omwonsa, 2009). The MSE owners visit banks less often meaning they
have more time to spend running their businesses .More time in business means more customers being
served which in turn increases sales volume and therefore profits of the business. The lower transaction
costs using mobile money transfer influences the MSEs growth through savings made which are re
invested as working capital.

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The MSEs have benefited from the mobile banking through ;efficient use of time, on line control of
spending of finances, low costs of transaction, convenient, easy and cheap borrowing and repayments
(Sarker; Wells, 2004).The use of mobile phones by the mobile operators and the banks have enabled
MSEs expand deep into remote areas at low cost because the business owners can save their cash sales
and deposit them to their bank accounts using the phone, they can withdraw or borrow cash, from their
banks miles, away for re-stocking their goods at low cost. Use of mobile banking in running MSEs has
reduced costs, increased income and reduced risks, hence increasing their productivity (Mead;
Leidholm, 1998). The mobile phone adoption
,usage and influence has changed the MSEs operations and like any other user, MSEs use

mobile phone for social economic purposes thereby increasing their profits and enhancing social benefits
(Chogi, 2006).

The government of Kenya through the ministry of ICT has encouraged MSEs to join information
technology networks, in order to become competitive, be global and, and reach more markets through
accessing information from all corners in order to increase productivity, profitability, growth and
expansion (Wambari and Mwaura, 2009). Adeya (2003) noted that some businesses lack awareness of the
potential existing in the usage of mobile phones like the technological innovations that lower costs,
increase productivity, widen reach, ability and mobility. .Mobile phones can increase business networking
therefore substituting for long journeys, brokers, traders, and other business agents/middlemen ( Donner,
2005; Hughes and Lonie,2007).

One such technological development is the mobile money transfer known as M-Pesa launched in 2007
which is widely used by MSEs (Mbogo, 2010). Other recent mobile money transfer innovations used by
MSEs are Lipa na M-Pesa launched in 2013 to enable MSEs pay for goods and services using cashless
transactions. The availability of mobile phones and the banks products they offer has attracted Micro
enterprise operators in Kenya into use of mobile money services in transacting their businesses.
Introduction of M-Pesa services which depends on a short messaging service (SMS), provide a solution
for SMEs banking desires because they can use mobile phones to conduct their bank transactions, make
inquiries, make micropayments and apply credit.

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1.2 Statement of the Problem

New opportunities which are hard to neglect are created by advancement in the economy due to
technology being part of our daily lives, as a means of ensuring they survive majority of organization are
trying to find ways of taking in technology. For the purpose of raising efficiency and get a boost to the
growth of businesses through affordable, efficient and reliable money service support systems using
Mobile banking services, they lower the want for cash transaction and the risks that come with it.
Cashless transaction benefits include ;fewer chances of frauds and criminal doings and mobile money
technology (Wish art, 2006) have increased adoption rates, (Moog, 2010)
Studies by Central Bank of Kenya (2010) indicates that most bank customers are using mobile banking
applications like PesaPap of Family Bank; Pata Cash of Kenya Post Office Savings Bank and KCB
Connect of Kenya Commercial Bank to access basic banking service like; deposits, withdrawals,
disbursement and repayment of loans, bills payments, funds transfer, balance checking and querying
mini bank statements.

Financial analysts argue that great diversification of the financial market services tend to: enhance
competition in the financial market; increases revenue avenues for financial institutions and also reduces
the cost of carrying out financial transactions among businesses .This enhances effectiveness in
operations between the business, customers and the bank and the business that use mobile banking which
encourages growth of businesses (Caporaso & Madeira, 2012). Majority operators of small and medium
enterprises find bank accounts to be inconveniencing since it means they have to leave their businesses
for them to make a transaction at the bank ; this made necessary for Small and Medium Enterprises
operators to use Mobile banking. Since launch of mobile money transfer system in 2007, the mobile
payment system has become famous with both the unbanked and banked population. Small and Medium
enterprise operators in Kenya have embraces the use of the mobile banking as a means of carrying out
transactions in their businesses because mobile phones are cheap and the affordability of the mobile
banking services they offer. Arena and Kahoka (2007) made a conclusion that sole type of proprietors and
small and medium enterprises in Kenya did benefit largely from the revolution of mobile phone
revolution because it enabled them to save and have access to more clients and new services.

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A lot of research exists on the role of traditional banking services on the performance of MSEs in Kenya,
but little has been done in mobile banking services and their effects on the growth of MSEs. Some of
these studies include Njenga (2009) on mobile phone banking experiences in Kenya, Nyang, Momanyi,
and Moenga (2013) on the effect of E-money transfer on liquidity of MSEs, Wanyonyi, and Bwisa (2013)
on the effect of virtual money transfer services on performance of MSEs in Kitale municipality, Jack and
Suri, (2014) on transaction costs and risk sharing as evidenced from Kenya’s E-money revolution. None
of these studies has been carried out on the impact of mobile banking services on Small and Medium
enterprises owned by youths in Kakamega town, Kakamega county.
This study will therefore aim at answering the following question:-

What is the impact of Mobile banking services on small and medium enterprises owned by youth in
Kakamega town, Kakamega County?

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1.3 Objectives of the Study

1.3.1 General objective

The key objective of this study will be to establish the impact of mobile banking services on Small and
Medium Enterprises owned by youths Kakamega County.
1.3.2 Specific objective

The following specific objectives will guide the study:

 To establish the extent to which small and medium enterprises have adopted mobile banking in
Kakamega county.

 To establish the extent to which the MSEs utilize the different services offered by the mobile
banking platform.

 To find out the association between use of mobile banking services and small and medium
enterprises performance.
1.4 Research Questions
The study will seek to answer the following research questions.

 To what extent have MSEs adopted mobile banking in Kakamega county?

 To what extent are MSEs in Kakamega county using different services offered by mobile
banking services?
 What is the association between mobile banking adoption and the performance of MSEs in
Kakamega county?

1.5 Value of the Study

The study will benefit the following: owners of MSEs in Kakamega County will understand the roles
played by mobile banking and develop necessary measures to optimize the benefits of mobile banking;
Financial institutions in Kakamega County will use the findings of this study to develop policies to
enhance development of new services in mobile banking and provide a broader range of services needed
by MSEs in Kakamega county; The Kakamega county government will use the findings of this research
to develop policies that regulates the business operations between the SMEs and the service providers;
Future academic researchers will use the results of the study for their empirical review.

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 1.6 Conceptual Framework

This is a representation of the independent and the dependent variables in a diagram to show the

relationship between the variable. It lays out the primary factors, constructs, or variables, and speculates

association among them. An independent type of variable is the speculated reason for transformation in the

dependent variable. According to Cresswell, (2009), the variable which the researcher wants to explain is

the dependent variable. By studying the literature review, the following linkage between the independent

variable mobile banking services and the dependent variable MSE performance is developed.

Bill payments

Account balance inquiry

MSEs performance

Notifications of account activities

Moderating variable
Fund transfers to other mobile money services
 Gender
 Age
 Marital status
Airtime purchasers
 Education level

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SOURCE: (OWN CONCEPTUALIZATION, 2023)

The above figure shows two kinds of variables. In this study, the independent variable is the mobile banking
services; bill payments, account balance enquiry, notifications on accounts activities, transfers to other mobile
banking platforms and airtime purchases, while dependent variable is MSEs performance which the study will seek
to find how it is affected by the different independent variable, and the moderating variables are age, marital status,
gender, and education level.

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 CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction
Review of literature covers; theoretical review and empirical review including summary for the literature
review. The study will review available literature from journals, books, reports, and newsletters from both
developing and developed nations.

2.2 Theoretical Literature Review

This study will be based on the Mobile Banking Business Models theory, Merton’s Market Efficiency
theory of innovation, non-bank led theory of innovation, and Schumpeterian theory of innovation as
discussed below.

2.2.1 Mobile Banking Business Models Theory

Wambari and Mwaura (2009) assert that any model of mobile/branchless banking aimed at attracting low-
income people will depend on banking agents i.e. outlets that conduct financial transactions on behalf of
financial institutions. They argue that agent banking is a key part of the mobile banking business model
which tends to create a link between the banks and their clients. The new mobile banking business models
tend to give new market structures for offering existing products of financial services (savings, credits,
transactions). The banking business models theory classifies branchless banking into three models: Bank
focused model, Bank –the led model, non- bank-led model.

(i) Bank–Focused Model

Physical banks use low-cost delivery channels different from the traditional channels to offer banking
services to its customers. Examples are Automatic Teller Machines (ATMs), Internet Banking, and
Mobile phone banking, all aimed to offer specific banking services to bank clients.

14
(ii) Bank –Led Model
According to this model, financial services are offered using retail agents or mobile devices rather
than using physical banks. The model offers the opportunity to increase financial services inclusion by
offering cheaper various delivery channel, different trade partners (chain stores, telecom) who have the
capacity and unique market distinct from traditional banks.

(iii) Non- Bank Led Model

Here, the bank acts only as a custody of the excess money and the other service providers (e.g. telecom)
do all the transactions. Kumar, et al (2006) argued that here customers do not operate with a bank but
transact using mobile devices or prepaid cards and agents. Clients’ covert their funds into mobile money
stored in a virtual electronic money account not linked to an individual bank. This model is risky because
the regulatory environment of the non-bank operators might not give much importance to knowing your
customer or customer identification. This may provide leeway for Money Laundering and Terrorism
Financing (ML/FT).
Mobile baking business models’ theory is important to this study by helping in understanding the
alternative low-cost and more convenient branchless bank delivery channels and the inherent risks likely
when financial institutions allow their customers to operate mobile banking in their financial transactions.

2.2.2 Technology Acceptance Model (TAM)

This theory shows how and why users adopt a technology. Presented with new technology, users are
faced with several perceptions that affect their decision to use it. These are perceived usefulness (level of
accepting that certain technology will improve productivity) and perceived easiness of use (level of
accepting that using certain technology will be effortless) (Davis,1989). The two factors though determine
the adoption and usage of new technology, they are affected by other factors like security, cost,
accessibility, a n d trust (Lu,Yu, Liu and Yao ,2003). Perceived effortless of use influences users’
perception of the usefulness which both determines perceived use and the real use of the technology
(Viehland and Leong, 2007). This model has been commonly used to determine the level of acceptance
and use of technology depending on the user’s perception on usefulness and easiness of use (Richardson
and Ndubisi, 2002). This study used TAM as the study model and considered factors like accessibility,
low cost, and security. This theory is important to the study by explaining how small business owners
have adopted new technology in conducting their businesses. This is particularly the case where small
businesses make use of M-banking in their money transactions which has led to fast, secure, and more
accessible money transactions.
15
2.2.3 Demand and Supply-side Twin Theory

This model explains financial inclusion and financial literacy (Chakrabarty, 2011). Financial inclusion
provides financial markets and services demanded by people while financial literacy stimulates the
demand side. Growth in financial inclusion is driven by demand and supply factors (Mehrotra et al.,
2009). Banks are supposed to mitigate the supply-side processes that hinder poor people from accessing
the financial markets. On the demand side, factors like low income or asset holding prevent financial
inclusion. Lack of financial inclusion has resorted to many MSEs rely on personal savings or internal
sources to finance their businesses. The banks supply-side interventions are key to unlocking this
financial exclusivity and enabling MSEs to access to financial services. Most banks offer financial
products and services not customized to the informal sector, and provide rigid and complex documented
processes which deter technology availability an acceptance (Simiyu, 2015). With the introduction of
mobile phones, most of the current financial inclusion channels focuses on hand held devices. This theory
is applicable in this study because financial institutions have innovated mobile banking that has
opened up the financial market and created efficiency in financial transactions where money transactions
between MSEs and customers are done in a more speedily manner and at cost-effective ways, therefore,
enhancing the growth of the business from voluminous sales that they are making.

16
2.3 Empirical Literature Review

This chapter covers studies carried out on mobile banking services factors of accessibility, costs, and
security which have contributed to the growth of SMEs.

2.3.1 Accessibility

Accessibility, which means the ability to reach the intended services is a key advantage of mobile
payment services ( Pagani , 2004). MSEs have greatly benefited from using mobile money transfers with
agents spread throughout the country. Due to ease of accessibility, MSE owners rarely visit the bank
meaning they have more time in their businesses. With mobile banking , MSE owners can easily receive
or send money to their banks anywhere (Omwonsa, 2009). Most of the MSE owners know how to use
mobile payment services which demand no training before use and are easy to use.

Schierz, Schilke and Wirtz (2010) revealed that mobile technology usage has become part of users’ daily
life. Despite this, mobile payment is amazingly one of the rare mobile services being used, because
mobile payment services have not been fully accepted by clients. The study by Schierz, Schilke, and
Wirtz focused on variables affecting users’ acceptance of mobile payment services. The study results
indicated significant effects of compatibility. subjective norm, and individual mobility. The study
recommended more effort in marketing mobile payment services to attract clients’ perceptions of the
technology. Omwansa (2009) while studying M-Pesa progress in Kenya found that the respondents were
aware of the service. Mobile transfer services were found to be used by micro business owners because
they spend less time visiting the bank and therefore create extra time in managing their businesses. The
study also revealed that mobile services on money transfer were easy to use as they need no training were
very convenient when used.

17
2.3.2 Transaction Costs

Omwansa (2009) revealed that subscribers to mobile money transfers have adopted the technology
because it’s lesser cheaper to services at the banking hall. He asserts that sending money through mobile
phones is much cheaper than using banks and other money transfer channels like Securicor firms. The
lower transaction costs benefit is passed on to consumers (Mallat, 2007). Most MSEs owners have mobile
handsets easy to operate and with all functionalities required in mobile banking making the transaction
costs affordable and being below what banks charge.

Mallat (2007) while studying consumer usage of mobile payments used six focused groups’ sessions,
examined client acceptance of a new mobile payment service. . The study indicated that mobile payments
complimented small value cash payments and were more compatible with digital devices and service
purchases. The study, however, suggested that certain situational limitations like the absence of other
payment means or urgency of the service affected the benefits accruing from mobile payments. In this
study, time, place, independence, availability, remote purchases, and lack of queue were suggested as the
benefits accruing on the use of mobile payments. The study indicated a number of barriers to the
acceptance of mobile payments. These include high payment costs, complex payment procedures, limited
widespread me include acceptance, and perceived risks.

Jack and Suri (2014) in their study on Transactions Costs and risk Sharing on MSEs in Kenya revealed a
great reduction in transaction costs and entrepreneurs can now conduct financial transactions over the
phone without having to travel to banks. Njenga (2009), while studying Mobile phone banking on usage
experiences in Kenya found that there was a large business potential to be exploited in the Kenyan mobile
banking sector. The study found that most customers accepted the role played by the mobile banking
services in their daily activities. Njenga (2009) asserts that the mode of usage is mostly influenced by
missions and marketing strategies of M-Banking service providers. M-Banking users tend to use the
service in many ways depending on the nature of activities and urgency, however, the “hype factor” is a
unique dimension of use. Here, the usage of mobile banking is caused by excitement and imagination
originating from the M-banking utilization environment. Banks might be better off by offering the service
at lower costs to entice more customers and not focus on high charges which scare off potential
customers. This way banks can increase their revenue sources through increased transactions volume.

18
2.3.3 Security

In mobile banking, users’ perception on the security and trust to the payment service providers is
necessary (Siau et al., 2004: Mallat, 2007).The mobile transactions safety involves; lack of delay of
transactions, completeness of the transactions, customer identification, and confidentiality of the customer
information. Users of mobile banking transactions are more concerned with security and safety which
revolves around the use of PIN and security codes (Nam, Yi, Lee, and Lim, 2005). Shon and Swatman,
(1998), assert that the key requirement for any electronic financial transaction is confidentiality,
authorization, data integrity, and non-reputation. Other security features include users’ anonymity and
privacy (Jawyawardhena and Foley, 1998: Shon and Swatman 1998: Mallat, 2007). Njenga (2009)
argues that the demand for high mobile banking usage depends on wide network coverage and quality
network connections. This ensures easy, speedy, and cheap access to mobile transactions affordable to all
prospective partakers. With wide network coverage and good connections, new MSEs can be opened in
deeply remote areas and existing MSEs owner can expand their businesses in areas that could have been
unreachable without the network operation.

19
Omwansa (2009) found that losing a mobile phone does not mean loss of one’s money because one’s
mobile money account cannot be accessed without a correct personal identification number (PIN).
Mobile banking proves to be both a convenient and safe service that users carry around their E-
money and can withdraw cash any time at a minimal fee without inconvenience. To use a mobile payment
system, one should strongly believe in safety and trust in the providers of the payment system. Users of
any payment system are primarily concerned with the Security and safety of mobile payment transactions.
Safety means lack of delay or incompleteness of a transaction and non-disclosure of private information
payment transactions. These security and privacy issues are ensured through the use of the secret code for
personal identification for every single M- banking transaction. Omwansa recommended that customer
information confidentiality, transaction authentication, data integrity, and security were the sole
requirements for any financial transaction in a mobile banking environment.

Merritt (2011) revealed that mobile money transfer has inherent risks, just like all other retail payment
systems of, privacy and security, money laundering, user protection, fraud, credit, and liquidity. The study
found that mobile money services were minimizing the inherent risks in cash-based payment services,
thereby increasing openness in cash flows, and enabling risk management through the regulation of the
payment systems. The study w i l l recommend consideration of numerous issues in order to minimize
the risks that may be posed by mobile phone payments. Other non-bank key players involved in mobile
payments, like telecom firms, their agents, and technology vendors may pose more risks. The study noted
the existence of unique risks to telecom firms which may not be detected or monitored by the financial
institutions and their regulators due to experience limitations. The multiple regulations exercised on
banking and telecommunications sectors are to blame because they operate autonomously and have
limitations of joint cooperation so as to provide effective oversight on mobile money transfers. There is a
need to merge the two distinct sectors to form an effective joint regulatory environment across all sectors
involved in mobile money transactions. Mbogo (2010) applied the theory of the Technology Acceptance
Model (TAM) in his study on the impact of mobile payments on the success and growth of micro-
business in Kenya. The TAM model was extended to include other factors capable of predicting success
and growth in micro-businesses. The study revealed that acceptance of the mobile money transfer
technology and its influencing factors like accessibility, cost, convenience, and security were related to
perceived use and actual usage by the MSEs to improve their success and hence growth.

20
2.4 Summary

The effect of mobile technological innovation like mobile banking services depend primarily on
accessibility, costs, and security of the services being offered. The studies have shown that mobile money
transfer has resulted in secure and faster accessibility of funds to remote areas enabling entrepreneurs to
run businesses in those areas which were financially excluded before the mobile banking innovations. The
study also revealed that transaction costs have come down as a result of M-banking since only a small
fee is involved in money transactions. This has made it easier for MSEs to access or deposit funds
frequently to financial institutions and also save funds that are re-invested to grow businesses.
Entrepreneurs can now access credit or repay loans instantly at cheap transaction costs compared to when
they had to visit physical bank offices.
The adoption of M-banking in MSEs has also led to more security in conducting daily business. The use
of a cashless system of doing business has avoided unnecessary losses when carrying out transactions in
businesses. This means MSE owners in unsecured areas can transact large amounts of money in receipts
or payments without fear giving them the opportunity to expand their stocks of goods and offer more
services all over the region, hence more growth.

21
 CHAPTER THREE
METHODOLOGY

3.1 Introduction

This chapter covers the research plan, study population, study sample, sampling technique, and data
collection and analysis procedures.

3.2 Research Design

According to Orodho (2005), a research design is the procedures used by the researcher to select the
sample, administer the instruments (collection and measurement) and analyze the data. Kothari (2008)
asserts that research design involves data collection and analysis in consideration of relevance to the
research purpose and economy in procedure. Sapsford (2007) argues that survey research design is the
collection of quantifiable data from a sample frame for purposes of the description of identity
verifications that may point to casual relationships.
Dooley(2007) defines research design as providing information and solution to problems through
planning, organizing, collecting, and analyzing data. Robsons (2002) this method provides an accurate
picture of persons, situations, and even events.
This study will use a descriptive survey design which provides numerical descriptions and an in-depth
explanation of events as they occur, enabling in determining opinions, attitudes, and habits. This Survey
design is very economical, has a high turnaround in data collection, and can be used to identify
characteristics of the population from a sample so as to provide quantitative and numeric descriptions of
attributes of the population.

3.3 Population of the study

This is the specific population on which information is to be obtained. Ngechu (2004) asserts that a
population is a specified set of beings, things, services, elements, and events or households to be studied.
The portion of that population used in data collection is a sample (Denscombe, 2008). In this study the
population will be MSEs registered in Kakamega town, Kakamega county managed by the owners,
managers, and senior managers.

22
 3.4 Sampling Design

This is a process of obtaining sample units and sampling frame, setting sampling procedures and determining the
sample size for the study (Saunders et al., 2003). The sampling frame means the list of all population units from
which the sample units were selected (Cooper & Schindler, 2003). The sample size is determined by; the objective
of the study, the importance of the inquiry, available data, the usefulness of the study, what is credible, and the
time and resources available for the study (Patona 2002). The researchers will use a stratified sampling technique
to identify the sample. The sample will be selected randomly from the strata. This method of sampling is
applicable in studies where the sample is selected from a population that is not homogeneous (Orodho, 2003).
The sample was selected using the following formulae used by Mugenda and Mugenda (2003)

𝑁
𝑛= 1+
2
(𝑁×𝑒 )

Where N=The population

N= sample size
E=tolerance level of confidence or probability level of α=0.05

Given the population N=133 then the sample size n=140/(1+(140 *0.05*0.05))=105 The
selection of the sample was done across the MSEs using the formula:
(Number of items in the category*sample size) / Total population

23
3.5 Data Collection Instrument

Data will be collected from primary sources using a questionnaire, which is a data collection instrument
with a formal statement designed to obtain the necessary information. The questionnaire will consist of a
list of structured closed ended statements with Likert rating scales for each statement and a space
provided for the selection of choices of answers. Close-ended statements are good for collecting viable
quantitative data. A questionnaire will be preferred due to its efficiency, low cost, and easiness of
administration. The questionnaires will be completed using structured statements to be rated by the
identified respondents who will be briefed on their purpose and importance. The first section of the
questionnaire will collect the demographic details of the respondent; the second part will collect data on
the first objective, the third part on the second objective, fourth part on the third objective.

3.6 Data collection procedure

A questionnaire guide will be used as research instrument. This will be pre-tested for reliability and
validity before being administered by a research assistant. The respondents will be asked to provide their
background and their businesses. Respondents will be given a set of statements regarding the impact of
mobile banking on growth of their businesses to rate them on a scale 1 to 5 where one stands for strongly
disagree and 5 means strongly agree. The researchers will seek for permission to collect data from the
Chamber of Commerce chairman and obtain a research permit from the Masinde Muliro University,
School of business to collect data. The researchers will engage research assistants who will interview the
respondents according to the structured questions on the questionnaire and fill them. The exercise is
expected to take a period of two weeks to have the respondents interviewed and also ask the questions on
the questionnaires. This will help in having a higher response rate.

3.7 Pilot Study

The study will subject the questionnaire to validity confirmation where 10 MSEs from different categories
will be used to assess the validity of the instrument before it could be used to collect the data from the
sample. The pilot is set to determine whether the set objectives represent the concept of the study
(Mugenda & Mugenda, 2003).

24
3.7.1 Data Validity

Data Validity tests the goodness of measure (Zimund, 2000). Thietart (2001), claims that the key concerns
should focus on the relevancy and preciseness of the measured data and whether a generalization can be
drawn from the results. In this research, validity is concerned with the correctness of measurement by the
interviewer, the appropriateness of all the interview statements, and the alignment with the research
objective and purpose. Therefore, 10 questionnaires will be given to respondents which will help in
ascertaining whether the main aspect of desired information has been given by the respondents.

3.7.2 Data Reliability

Berg and Gall (1989) assert that reliability measures consistency in research methods. Silverman (1993)
points out several ways of ensuring reliability in research. These include pilot interview protocols and
questions; the use of fixed-choice responses; and systematic collection, transcription, and reporting of
field notes and transcripts for others to review. This study will use a sole observer to gain reliability. The
pilot study will be used to pre-test the research instruments for reliability. An understanding of the
instrument items by the respondents will be necessary in order to increase the instrument's reliability. The
pilot w i l l aim to correct any inconsistencies arising from the questionnaire, so as to ensure that the
instruments measured the intended. Reliability can also be increased in other various ways like
considering many similar items on a measure, testing a diverse sample of items, and using consistent
testing procedures. This study will use Cronbach (α= 0.7) to test on the reliability.

25
3.7.3 Data Analysis and Presentation

Here, raw data is put in order, coded, and organized so as to extract useful information from it. It helps one
to understand the contents of the data. Summarized data is used to support the opinions made with that data,
and summarization is done to present the data in a clear and understandable way. Data collected will be
analyzed by descriptive analysis where percentages, frequencies, mean and standard deviation will be
derived. The Likert rating scale will be used to analyze the mean, mode, and median scores while standard
deviation will be calculated to determine the extent of the growth of SMEs in Kakamega town as a result of
M-banking. The findings will be used to compile this report.

3.7.4 Model Specification

A multiple linear regression and correlation analysis was done on the three aspects of the mobile banking
services to test the degree of the influence of predictor variables on the dependent variables.. The
regression model was of the form.

𝛾 = 𝛽ₒ+βı Xı+β₂X₂+β₃X₃+е
Where: γ = Dependent Variable (MSEs Growth) B1…….
B 3= coefficient for independent Variables βₒ=the constant
X1= Security on mobile banking

X₂=Cost of mobile banking X₃=Accessibility of mobile banking

e = error term.

To measure the independent variables, a questionnaire will be administered by the interviewers to the
sampled respondent. The interview questions will be structured questions designed to obtained
information on MSEs growth, demographic characteristics, mobile banking accessibility, cost, and
security as perceived by the respondents. The growth of MSEs will be measured with parameters of sales
turnover, number of employees, and profitability levels. Mobile banking factor will be measured using
security, cost, and accessibility.

26
3.7.5 Model evaluation

In order to assess the significance of the model and to rule out the presence of bias in the prediction, a
diagnostic checkup will be done. The study will use Pearson’s coefficient of determination test to
determine the correlation of various variables. Coefficient of determination (R²), Beta weight F, and T
statics will be used to get parameters that determine the variations and strength of ties between the
variables input in order to measure the regression strength. The coefficient of determination (R²) will be
calculated to determine the explanatory power of mobile banking.

27
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