Effect of Online Loan Technology on Individuals
Chapter One
Purpose of the study
The purpose of this study is to examine the effect of online loan technology on individuals. Specifically the study will:
- Determine individuals, level of patronage of online loan
- Assess the individual’s perception of the effectiveness of online loan
- Determine the relationship between access to loans and saving habit of individual
CHAPTER TWO
LITERATURE REVIEW
Introduction
This section will explore the various theoretical literatures concerning technological innovation and there effect on financial institutions, empirical literature on relevant studies done in this area will be discussed.
Theoretical Literature
Literature on effect of online loan technology on individuals are scanty and as such much literature will be drawn from other institutions in the same financial sector like banks, microfinance institutions and other financial intermediaries.
Financial Intermediation Theory
Financial intermediation is a process which involves surplus units depositing funds with financial institutions who then lend to deficit units. Matthews and Thompson (2008) identify that financial intermediaries can be distinguished by four criteria: first their main categories of liabilities (deposits) are specified for a fixed sum which is not related to the performance of a portfolio.
Second the deposits are typically short-term and of a much shorter term than their assets. Third high proportions of their liabilities are chequeable this implies that it can be withdrawn on demand and fourth their liabilities and assets are largely not transferable. The most important contribution of intermediaries is a steady flow of funds from surplus to deficit units.
In the traditional Arrow-Debreu model of resource allocation, firms and households interact through markets and financial intermediaries play no role. When markets are perfect and complete, the allocation of resources is Pareto efficient and there is no scope for intermediaries to improve welfare. Moreover, the Modigliani-Miller theorem applied in this context asserts that financial structure does not matter: households can construct portfolios which offset any position taken by an intermediary and intermediation cannot create value (Fama, 1980).
Such an extreme view that financial markets allow an efficient allocation and intermediaries have no role to play- is clearly at odds with what is observed in practice. Historically, banks and insurance companies have played a central role. This appears to be true in virtually all economies except emerging economies which are at a very early stage. Even here, however, the development of intermediaries tends to lead the development of financial markets themselves. (McKinnon, 1973).
The understanding of the role or roles played by these intermediaries in the financial sector is found in the many and varied models in the area known as intermediation theory. These theories of intermediation have built on the models of resource allocation based on perfect and complete markets by suggesting that it is frictions such as transaction costs and asymmetric information that are important in understanding intermediation.
Gurley and Shaw (1960) and many subsequent authors have stressed the role of transaction costs. For example, fixed costs of asset evaluation mean that intermediaries have an advantage over individuals because they allow such costs to be shared. Similarly, trading costs mean that intermediaries can more easily be diversified than individuals.
Financial intermediaries exist because they can reduce information and transaction costs that arise from an information asymmetry between borrowers and lenders. Financial intermediaries thus assist the efficient functioning of markets, and any factors that affect the amount of credit channeled through financial intermediaries can have significant macroeconomic effects. (Rothschild&Stiglitz,1976).
HELB acts as a financial intermediary in allocating finances from surplus sources which may include government and other philanthropists in form of loans, bursaries and scholarships to the deficit areas or agents i.e. the universities which need tuition fees to facilitate their programs and the students who need money for upkeep in those institutions of higher learning.
Information Asymmetry
The concept of asymmetric information was first introduced in (George, 1970) paper The Market for “Lemons”: Quality Uncertainty and the Market Mechanism. In the paper, (George, 1970) develops asymmetric information with the example case of automobile market. His basic argument is that in many markets the buyer uses some market statistics to measure the value of a class of goods. Thus the buyer sees the average of the whole market while the seller has more intimate knowledge of a specific item.
(George, 1970) argues that this information asymmetry gives the seller an incentive to sell goods of less than the average market quality. The average quality of goods in the market will then reduce as will the market size. Such differences in social and private returns can be mitigated by a number of different market institutions.
This theory is based on the notion that the borrower is likely to have more information than the lender about the risks of the project for which they receive funds. This leads to the problems of moral hazard and adverse selection (Matthews & Thompson, 2008). These problems reduce the efficiency of the transfer of funds from surplus to deficit units.
Numerous authors have stressed the role of asymmetric information as an alternative rationalization for the importance of intermediaries. One of the earliest and most cited papers, Leland and Pyle (1977) suggests that an intermediary can signal its informed status by investing its wealth in assets about which it has special knowledge.
CHAPTER THREE:
RESEARCH METHODOLOGY
Introduction
This chapter presents the research methodology that was used in conducting the study. They include, the research design, population, sample, data collection, validity and data analysis.
Research Design
Research design entails the methods used to conduct the research. This study used the descriptive research design since it helped in the description of the phenomena under study. This type design is applicable in obtaining information about the current status of the phenomenon with respect to variables or conditions in a situation. It also involves the correlation study which investigates the relationship between variables. This research design summarizes the various variables under the study.
Population
A population entails a collection of items to be investigated Mugenda (2005). The population of study comprised all the four commercial banks in using mobile loan technology , but due to small size of the population no sampling was conducted. CBN(2010).
CHAPTER FOUR
DATA ANALYSIS, FINDINGS AND INTERPRETATION
Introduction
This section presents the analysis of the data obtained. This study used the secondary data of the commercial banks. This section presents the analysis of the data obtained. This study applied the secondary data for the commercial banks. In section 4.2 data was analysed in terms of descriptive statistics and in section 4.3, data was analyzed in terms of inferential statistics which included correlation analysis regression analysis and the analysis of the variance and section 4.4 presents discussions of the findings.
Descriptive Statistics
The independent variables analyzed here included the capital adequacy, liquidity, interest rates, total mobile loan applicants and the total amount of mobile loans while the dependent variable was the return on assets. The means, standard deviations, the minimum values, the maximum values of the variables under study were tabulated as shown below.
CHAPTER FIVE:
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
Introduction
This chapter provides a summary, conclusion, recommendations for policy, limitations of the study and recommended areas for further research.
Summary of the Findings
The objective of this study was to establish the effect of effect of online loan technology on the individual bank financial performance. The study established that a strong relationship exist between capital adequacy and the financial performance of the commercial banks. This is based on the fact that capital is a major driver of the banks business. Capital is key especially when a bank is faced with adverse situations. The capital of the commercial banks is capable of creating liquidity this is based on the fact that the bank deposits are in most cases prone to bank runs due to the fact that they are very fragile. When the bank capital is greater, it is able to reduce, any chance of financial distress, which negatively affect the commercial banks in the long run. The main source and cheap fund for capital, adequacy comes from the adequate deposits, which will guarantee the commercials banks of risk free situations for example the market and operational risks which the commercial banks are exposed to. The mitigation of these risks is key because it will ensure the customer deposits are projected.
The capital adequacy is a major indicator of the internal strength of the commercial banks which will enable them to withstand any losses in cases of the occurrence of a crisis. The ratio of the capital adequacy has a direct impact on the profits of commercial banks because it determines its exposure to risks hence the financial performance. There was a negative relationship between liquidity and the financial performance of commercial banks. Liquidity is a major factor that determines the financial performance of commercial banks. It shows the capacity of commercial banks to be able to meet any obligations that are due and that is majorly of the depositors.
Interest rates were found to be positively related with the financial performance from the study. On average the interest rates which were charged by the commercial banks remained the same over the years. The trend of performance of the different variables under study which included total mobile loan applicants, total amount of mobile loans, interest rates, capital adequacy, liquidity and return on assets was captured by the descriptive analysis. The ANOVA was employed to determine how strong the model was in the analysis. Based on the analysis of the regression statistics, the research concluded that the five factors which include total mobile loan applicants, total amount of mobile loan interest rates, capital adequacy and liquidity affected the financial performance of commercial banks. The five independent variables were able to explain their influence on the commercial banks up to 47.4% and the rest is contributed by other factors not considered in this study meaning the model was significant.
Conclusions
From the study, a weak negative relationship was found to exist between total mobile loan applicants and the return on assets, the correlation , coefficient was found to be –
0.103 which was also not significant because the P value of 0.667 was found to be statistically insignificant (P>0.05). A negative relationship exists between total amount of mobile loans and return on assets, the correlation coefficient was -0.221 and again the relationship was not significant. The P value was 0.349 which is greater than 0.05. A positive relationship exist between interest rules and return on assets, because the correlation coefficient was 0.167 although the relationship was weak. This relationship was not significant (p>0.05).
The capital adequacy is positively related with the return on assets, the relationship was moderate. The liquidity of the commercial banks was found to be negatively correlated with the financial performance which was measured by the return on assets. From the descriptive statistics it was evident that the total mobile loan applicants have been increasing over the years. The total amount of loans transacted by the mobile phones has been increasing at an increasing rate for the years under study. Based on the data from the findings, on average the total amount of mobile loans has been increasing since the adoption of mobile lending by the commercial banks. The rate of interest charged by the commercial bank over the years that were studied remained constant over the years which were studied.
The capital adequacy of the commercial banks that were analyzed shows that on average, the capital adequacy posted mixed results. It shows that the amount of own fund that was available in supporting the bank’s business was changing over time. The ability of the commercial banks to meet its obligations posted mixed results from the findings of the study .The financial performance of the commercial banks posted mixed results over the years that were analyzed . There was no common trend for the financial performance.
Based on the outcome of this research, it concludes by saying that mobile lending contributes positively to the financial performance of commercial banks in Kenya. This is based on the fact that a number of variables studied proved the existence of positive relationship between mobile lending and financial performance and they included interest rates, capital adequacy and liquidity. This implies that interest rates directly affect the financial performance. The higher the interest rates the better the financial performance and the proportion of total capital to total asset is also another component that affect the financial performance. This is in agreement with Okumu (2013) who argued that stiff competition in the banking sector has led to emergence of alternative strategies like mobile lending to better the financial performance.
Recommendations
From the outcome of this research, the study recommends the adoption of mobile lending by the policy makers. This is based on the fact that due to technological advancements many business entities are switching from the physical branch networks to technology enabled networks due to the benefits associated with them. The effect of mobile lending
can be made more significant if sufficient changes are made in terms of the adoption and full implementation of this technology. This study recommends the adoption of mobile lending because it support the bank focused theory which states that commercial banks can derive more benefits from adopting technologies such as mobile lending in the provision of services to their customers. Mobile lending is anytime banking since customers are able to transact anytime unlike the traditional normal banking procedures where customers must avail themselves into the banking halls or through the agency banking which is a waste of time
This study recommends the adoption of mobile lending, this new technology has increased the number of transactions undertaken by the mobile platform. Innovation is useful because it speeds up the work by ensuring maximum number of transactions are achieved. Commercial banks in Kenya which have adopted mobile lending have posted increased volumes of transactions.
The study recommends that all commercial banks in Kenya move with urgency by ensuring that mobile lending is adopted and implemented due to the benefits associated with mobile lending. From the findings of the study, only four commercial banks have fully adopted and implemented this mobile lending platform out of the possible 43 registered commercial banks in Kenya. This is also due to the fact that the population of people who can access the mobile phones are on the rise every single day.
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