Impact of Technological Innovation in Commercial Banks in Kenya.... an Evaluation of Customer Satisfaction

IMPACT OF TECHNOLOGICAL INNOVATION IN COMMERCIAL

BANKS IN KENYA: AN EVALUATION OF CUSTOMER SATISFACTION

PRESENTED

BY

FAITH

SUPERVISOR:

A MANAGEMENT RESEARCH PROPOSAL SUBMITED IN PARTIAL

FULFILMENT OF THE REQUIREMENT FOR THE AWARD OF A

DEGREE IN MASTER OF BUSINESS ADMINISTRATION (MBA),

SCHOOL OF BUSINESS, UNIVERSITY OF NAIROBI

SEPTEMBER, 2011

DECLARATION

This research project is my original work and has not been submitted for any award in any other

university.

Faith

This project has been submitted with my approval as University Supervisors.

Lecturer

ii

TABLE OF CONTENTS

DECLARATION......................................................................................................................................... ii

LIST OF ABBREVIATIONS......................................................................................................................v

CHAPTER ONE..........................................................................................................................................1

INTRODUCTION.......................................................................................................................................1

1.1 Background to the Study.......................................................................................................................1

1.2 Information technology and IT innovations in banking sector...............................................................2

1.3 IT innovations in Kenya banking sector................................................................................................4

1.4 Forms of IT innovations and their effects on service delivery...............................................................4

1.4.1 Automated Teller Machines (ATMs)..............................................................................................4

1.4.2 Telephone Banking.........................................................................................................................5

1.4.3 Personal Computer Banking...........................................................................................................5

1.4.4 Internet Banking.............................................................................................................................6

1.4.5 Branch Networking.........................................................................................................................6

1.4.6 Electronic Funds Transfer at Point of Sale (EFTPoS).....................................................................6

1.5 Statement of the problem.......................................................................................................................7

1.6 Purpose of study....................................................................................................................................7

1.7 Importance of the study.........................................................................................................................8

CHAPTER TWO.........................................................................................................................................9

LITERATURE REVIEW............................................................................................................................9

2.1 Introduction...........................................................................................................................................9

2.2 Customer Satisfaction..........................................................................................................................10

2.3 Significance of Technological Innovations..........................................................................................11

2.4 Empirical Studies.................................................................................................................................11

CHAPTER THREE...................................................................................................................................14

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RESEARCH METHODOLOGY..............................................................................................................14

3.1 Introduction.........................................................................................................................................14

3.2 Research Design..................................................................................................................................14

3.3 Population............................................................................................................................................14

3.4 Sampling Design.................................................................................................................................15

3.5 Data Collection....................................................................................................................................15

3.6 Data Analysis......................................................................................................................................15

REFERENCES..........................................................................................................................................19

APPENDICES...........................................................................................................................................21

APPENDIX I: LETTER OF INTRODUCTION.......................................................................................21

APPENDIX II: QUESTIONNAIRE..........................................................................................................22

APPENDIX III: LIST OF INSURANCE COMPANIES...........................................................................27

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LIST OF ABBREVIATIONS

v

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

The world banking and financial system is in the throes of a transformation caused by increasing

globalization and deregulation. Technological innovations such as those available in ATMs,

phone banking, Internet banking, and smartcard applications are taking place at an

overwhelmingly fast pace in the global banking industry.

Banking can be traced back to the year 1694 with the establishment of the bank of England. The

bank was started by a few individuals who were actually money lenders with an aim of lending

money at interest. Most of us have experienced some form of bank transactions in our lives. In

Kenya, almost every one over the age of 18 has at least one account with the bank. The services

most of us are familiar with include savings, loans, investments and credit card. The banking

industry in Kenya is steadily expanding. It started in 1896 with the National Bank of India

opening its first branch. Standard Chartered Bank opened its first branches in Mombasa and

Nairobi in January 1911.The Kenya Commercial Bank was established in 1958 with Grindlays

Bank of Britain merging with the National Bank of India. The Cooperative Bank of Kenya was

established in 1965 for the express purpose of providing financial services to Co-operative

societies. Three years later, National Bank of Kenya (NBK) was incorporated (Ojung’a 2005).

There is about one Automated Teller Machine (ATM) for every 100, 000 people in Kenya

according to a paper presented at a South African university by Central Bank of Kenya (CBK)

official. Currently, there are 43 commercial banks for 33million Kenyans (www.sun.ac.za).

Massive, rapid, technological innovations (Norton, 1995) are replacing the traditional branch

teller. With greater competition brought by deregulation, globalization and widespread mergers

and acquisitions taking place in the banking sector, more branches are being closed down and

replaced by self-serviced banking (SSB) facilities like the ATMs as part of a larger

rationalization exercise. Even with the massive branch network, the use of phone banking and

Internet banking is strongly promoted by the banks in addition to ATMs. In today’s commercial

banking environment information technology, effective service delivery and customer

satisfaction are an indispensable competitive strategy. Furthermore, the stiff competition and the

compression of the interest rates, has forced banks to set up and put into effect all necessary

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decision support technological systems. This enables them to dynamically plan new locations,

evaluate their performance, forecast customers’ attitude to new offered products and services,

estimate clients’ switching behavior, and finally provide marketing support to their

geographically separate branches.

The banking sector has been the backbone of every country. It implements and brings about

economic reforms. Any change in this sector through technology has a sweeping impact on any

country. The developments in information collection, storage, processing and transmission

technologies have influenced all aspects of the banking activity. The history of technology is the

history of the invention of tools and techniques. The 19th century saw astonishing developments

in communication technology originating in Europe. In 20th century information technology

developed rapidly due to the scientific gains directly tied to military research and development,

as they did in part due to World War II. Despite the fact we have just entered into the 21st

century technology is being developed even more rapidly, marked progress in almost all fields of

science and technology has led to massive improvement to the technology we currently possess.

Information technology (IT), also known as information and communication(s) technology

(ICT), is a term that describes the combination of computer technology which is hardware and

software with telecommunications technology such as data, image and voice networks.

According to Henry C. Lucas, JR. (1997) Information technology refers to all forms of

technology applied to processing, storing and transmitting information in electronic form. The

physical equipment used for this purpose includes computers, communications equipment and

networks. Effective service delivery is important and has a great influence on customer

satisfaction, improving sales and market share (Joseph & stone, 2003). Commercial banking is at

a stage where customer perceptions and preferences have a very important impact on a bank’s

success. Customer satisfaction is a measure of how products and services supplied by a company

meet or surpass customer expectation.

The integration of world economies has opened an array of business opportunities as well as

challenges for firms. Increased standardization activity reflects, among other factors, demand by

consumers for safer and higher quality products, technological innovations, the expansion of

global commerce and the increased concern by many governments to societal and welfare issues.

Firms in service sectors such as banking are under constant pressure to perform better, cheaper

and faster. The developments in information and communication technology (ICT) are radically

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changing the way business is done. Electronic commerce is now thought to hold the promise of a

new commercial revolution by offering an inexpensive and direct way to exchange information

and to sell or buy products and services. This revolution in the market place has set in motion a

revolution in the banking sector for the provision of a payment system that is compatible with the

demands of the electronic marketplace (Abor, 2005).

1.2 Measuring Customer Satisfaction

Customer satisfaction is generally defined as a feeling or judgment by customers towards

products or services after they have used them (Jamal and Naser, 2003). Customer satisfaction in

service industries has been approached in two ways; satisfaction as a function of disconfirmation,

and as a function of perception (Davis and Heineke, 1998). The confirmation or disconfirmation

paradigm views customer satisfaction judgments as the result of consumer perceptions of the gap

between their expectation and perception of actual performance (Parasuraman et al., 1994).

Does technology innovation improve customer satisfaction in the retail banking industry?

Wayland & Cole (1999), consider customer knowledge and customer-connecting technology as

the foundations of customer connected strategy. The customer-connecting technology refers to

technologies for the creation of an on-line system (e.g. Internet), a self-service system (e.g.

ATMs) and a customer care system (e.g. call centre). According to them, these technologies are

increasingly capable of supporting strategic change by expanding the potential customer base,

defining new roles in the value chain, and promoting collaboration and inter-dependency among

suppliers and customers. This study aims to find out if such customer-connecting technology

helps to create more satisfaction among bank customers, thus expanding the potential customer

base and promoting collaboration and interdependency as pointed by Wayland & Cole.

1.3 Understanding Customer Delight and Outrage

In the banking industry, several questions arise in the efforts to understand customers. Why

customers are satisfied and why are they not? Is it the consumer psychological state, consumer

characteristic or bank attributes/technological services? There are numerous studies on

understanding customer satisfaction from the marketing perspective but comparatively

psychological explanations of such behaviour are little explored. This study seeks to explain our

findings from the perspective of the internal state of the customers. It also intends to fill the gap

in providing plentiful attributes of banking services and how it can lead to satisfying bank

customers effectively. There are two schools of thought that explain the satisfaction level of

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customers (Schneider & Bowen, 1999). The Met-Expectations Model assumes that by meeting

expectations, customers can be satisfied. Exceeding customer expectation causes customer

delight. Expectation levels are dynamic and are always gearing upward. Personal expectations

are related to personal standards and can be difficult to measure. On the other hand, the Needs-

Based Model suggests that the customer would be satisfied if the three basic customer needs -

security, justice and self-esteem are met. This model believes that needs centre on the customer's

internal state but meeting expectation focuses only on the attribute of a delivery and not the

customer.

1.4 Information technology and IT innovations in banking sector

Innovations in information processing, telecommunications, and related technologies – known

collectively as “information technology” (IT) – are often credited with helping fuel strong

growth in the many economies (Coombs et al, 1987). IT is defined as the modern handling of

information by electronic means, which involves its access, storage, processing, transportation or

transfer and delivery (Ige, 1995). According to Alu (2002), IT affects financial institutions by

easing enquiry, saving time, and improving service delivery. In recent decades, investment in IT

by commercial banks has served to streamline operations, improve competitiveness, and increase

the variety and quality of services provided.

According to Fisher (1998), technology when applied in today's banking environment falls into

three specific categories: customer independent (a technology that involves a customer

conducting and completing a transaction with a bank entirely independent of any human contact

with the institution e.g. ATMs, phone banking and Internet banking); customer assisted (a bank

employee will use customer-assisted technology as a resource to complete a transaction e.g. call

centre's customer service officers will use a Customer Relationship Management (CRM) System

to understand a customer's profile and provide instant responses to customers' queries on the

banking transactions and up-to-date billings (Gutek & Welsh, 1999)); and customer transparent

Customer technology which represents the real core of bank operations and customers never see

it but expect it.

If the innovated technology meets the customer expectation, then the customer remains silent. If

expectations are not met, however, the customer will be very quick to contact the bank to provide

feedback or lodge a complaint. A prime example is the non-receipt of checking account

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statements. Both the process and technology are transparent to bank customers yet they have

such an expectation. For example, if the issue of such statements was delayed by a technical

hitch, customers may feel outraged that their normal standard service expectation has not been

met. This study focuses on technology innovations like ATMs, phone banking and Internet

banking. These belong to the first and second categories studied by Donnelly (1992).

1.5 Common Forms of Technological Innovations and their effects on service delivery

1.5.1 Automated Teller Machines (ATMs)

According to John McGill (2004), an automated teller machine (ATM) is a computerized

telecommunications device that provides the customers of a financial institution with access to

financial transactions in a public space without the need for a human clerk or bank teller. ATMs

are known by various casual terms including automated banking machine, money machine, bank

machine, cash machine, hole-in-the-wall and cash point (Lockett and Littler 1999). ATMs

typically connect directly to their ATM Controller via either a dial-up modem over a telephone

line or directly via a leased line. Jane Blake (2000) observes that, on most modern ATMs, the

customer is identified by inserting a plastic ATM card with a magnetic stripe or a plastic

smartcard with a chip, which contains a unique card number and some security information, such

as an expiration date. Security is provided by the customer entering a personal identification

number (PIN). ATMs are placed not only near or inside the premises of banks, but also in

locations such as shopping centers/malls, airports, grocery stores, petrol/gas stations, restaurants,

or any place large numbers of people may gather as observed by Maxwell (1990).

Davies, Moutinho and Curry (1996) notes that, automated Teller Machines (ATMs) are the most

frequently used electronic distribution channel that allows bank clients to perform their main

banking transactions, such as access their bank accounts in order to make cash deposits and

withdrawals, as well as purchasing mobile cell phone prepaid credit 24hours a day. Most ATMs

are connected to interbank networks, enabling people to withdraw and deposit money from

machines not belonging to the bank where they have their account or in the country where their

accounts are held thus enabling cash withdrawals in local currency (Maxwell, 1990). Many

banks charge ATM usage fees. In some cases, these fees are charged solely to users who are not

customers of the bank where the ATM is installed; in other cases, they apply to all users

(Lustsik, 2003).

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ATMs were introduced first to function as cash dispensing machines. However, due to

advancements in technology, ATMs are able to provide a wide range of services, such as making

deposits, funds transfer between two or accounts and bill payments. Banks tend to utilize this

electronic banking device, as all others for competitive advantage. ATMs also save customers

time in service delivery as alternative to queuing in bank halls, customers can invest such time

saved into other productive activities. ATMs are a cost-efficient way of yielding higher

productivity as they achieve higher productivity per period of time than human tellers (an

average of about 6,400 transactions per month for ATMs compared to 4,300 for human tellers

(Rose, 1999). Furthermore, as the ATMs continue when human tellers stop, there is continual

productivity for the banks even after banking hours.

1.5.2 Telephone Banking

Telephone banking is a service provided by a financial institution which allows its customers to

perform by telephone are known as phone banks (Cronin, 1997). Mostly telephone banking uses

an automated phone answering system with phone keypad response or voice recognition

capability (Jane Blake, 2000). To guarantee security, the customer must first authenticate

through a numeric or verbal password or through security questions asked by a live

representative located in a call centre or a branch, although this feature is not guaranteed to be

offered 24/7. John Wiley (1997) points out that, telephone banking representatives are usually

trained to do what was traditionally available only at the branch such as loan applications,

investment purchases and redemptions, chequebook orders, debit card replacements and change

of address. With the obvious exception of cash withdrawals and deposits, it offers virtually all

the features of an automated teller machine. Telephone banking provides services such as

account balance and list of latest transactions, transfer of funds between a customer's accounts,

electronic and instructions to issue bank cheques (Davies, Moutinho and Curry, 1996).

“Telebanking (telephone banking) can be considered as a form of remote or virtual banking,

which is essentially the delivery of branch financial services via telecommunication devices

where the bank customers can perform retail banking transactions by dialing a touch-tone

telephone or mobile communication unit, which is connected to an automated system of the bank

by utilizing Automated Voice Response (AVR) technology” (Balachandher et al, 2001).

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According to Leow (1999), telebanking has numerous benefits for both customers and banks. As

far as the customers are concerned, it provides increased convenience, expanded access and

significant time saving. On the other hand, from the banks’ perspective, the costs of delivering

telephone-based services are substantially lower than those of branch based services. It has

almost all the impact on productivity of ATMs, except that it lacks the productivity generated

from cash dispensing by the ATMs. For, as a delivery conduit that provides retail banking

services even after banking hours (24 hours a day) it accrues continual productivity for the bank.

It offers retail banking services to customers at their offices/homes as an alternative to going to

the bank branch/ATM. This saves customers time, and gives more convenience for higher

productivity.

1.5.3 Personal Computer Banking

“PC-Banking is a service which allows the bank’s customers to access information about their

accounts via a proprietary network, usually with the help of proprietary software installed on

their personal computer”. Once access is gained, the customer can perform a lot of retail banking

functions. The increasing awareness of the importance of computer literacy has resulted in

increasing the use of personal computers. This certainly supports the growth of PC banking

which virtually establishes a branch in the customers’ home or office, and offers 24-hour service,

seven days a week. It also has the benefits of Telephone Banking and ATMs (Abor, 2005).

1.5.4 Internet Banking

The idea of Internet banking according to Essinger (1999) is: “to give customers access to their

bank accounts via a web site and to enable them to enact certain transactions on their account,

given compliance with stringent security checks”. To the Federal Reserve Board of Chicago’s

Office of the Comptroller of the Currency (OCC) Internet Banking Handbook (2001), Internet

Banking is described as “the provision of traditional (banking) services over the internet”.

Internet banking by its nature offers more convenience and flexibility to customers coupled with

a virtually absolute control over their banking. Service delivery is informational (informing

customers on bank’s products, etc) and transactional (conducting retail banking services).

As an alternative delivery conduit for retail banking, it has all the impact on productivity imputed

to Telebanking and PC-Banking. Aside that it is the most cost-efficient technological means of

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yielding higher productivity. Furthermore, it eliminates the barriers of distance / time and

provides continual productivity for the bank to unimaginable distant customers.

1.5.5 Branch Networking

Networking of branches is the computerization and inter-connecting of geographically scattered

stand-alone bank branches, into one unified system in the form of a Wide Area Network (WAN)

or Enterprise Network (EN); for the creating and sharing of consolidated customer

information/records (Abor, 2005).

It offers quicker rate of inter-branch transactions as the consequence of distance and time are

eliminated. Hence, there is more productivity per time period. Also, with the several networked

branches serving the customer populace as one system, there is simulated division of labour

among bank branches with its associated positive impact on productivity among the branches.

Furthermore, as it curtails customer travel distance to bank branches it offers more time for

customers’ productive activities.

1.5.6 Electronic Funds Transfer at Point of Sale (EFTPoS)

An Electronic Funds Transfer at the Point of Sale is an on-line system that allows customers to

transfer funds instantaneously from their bank accounts to merchant accounts when making

purchases (at purchase points). A POS uses a debit card to activate an Electronic Fund Transfer

Process (Chorafas, 1988).

Increased banking productivity results from the use of EFTPoS to service customers shopping

payment requirements instead of clerical duties in handling cheques and cash withdrawals for

shopping. Furthermore, the system continues after banking hours, hence continual productivity

for the bank even after banking hours. It also saves customers time and energy in getting to bank

branches or ATMs for cash withdrawals which can be harnessed into other productive activities.

As the importance of innovation in developing countries increases, so does the need for research

on the subject. Evidence from the literature reviewed above shows that existing discourse on

diffusion of IT innovation in banking sector has failed to focus much attention on rapid changes

in IT development and its corresponding effect on service provision in developing countries like

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Uganda. The available evidence from African countries has been in Nigeria. This study therefore

closes this gap by presenting the effects of it innovations on service delivery drawing from a

least developing country, Uganda.

1.6 Technological innovations in Kenya banking sector

In the Kenyan’s banking industry due to competition, IT investments and adoption has become a

very important component in achieving organizational. In recent past therefore, electronic and

communications technologies have been used extensively in banking for many years to advance

agenda of banks. The earliest forms of electronic and communications technologies used by the

banks were mainly office automation devices. Telephones, telex and facsimile were employed to

speed up and make more efficient, the process of servicing clients.

However, with coming of new partners in banking industry, competition intensified and the

personal computer (PC) got proletarian, Kenya banks begun to use them in back-office

operations and later tellers used them to service clients. The advancements in computer

technology have led to application and adoption new IT investments that have changed the

banking landscape in the country.

Arguably, the most revolutionary electronic innovation in this country has been the ATM. In

Uganda, banks with ATM offerings have them networked and this has increased their utility to

customers. The ATM has been the most successful delivery medium for consumer banking in

this county. Others technological innovations in banking sector include internet banking,

telephone banking, Electronic funds transfer, among others.

1.7 Statement of the problem

The fast-changing competitive environment, globalization, economic changes, regulation,

privatization and the like demands that banks are run efficiently and effectively by continuously

engaging in technological innovations. Emergence of new technologies, products, markets and

competitors places demand on any organization to apply any skills necessary to remain

competitive and achieve competitive advantage. Every well managed bank to undertake

technological innovations which will enable it to have a competitive edge over the others. These

innovations are intended to facilitate a firm’s sustainability in the face of growing competition

and external threats. The information and communication technologies are revolutionizing the

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banking sector over the years. The rapid development and commercialization of Information and

Communication Technologies (ICTs) banking industry has prompted banks to increasingly adopt

these technologies. This is based on the expectation that the new ICT based technologies and

processes would lead to an improvement in their operating efficiencies and customer service

levels.

When customers evaluate the quality of the service they receive from a banking institution they

use different criteria which are likely to differ in their importance, usually some being more

important than others. While several criteria are important only a few are most important. These

determinant attributes are the ones that will define service quality and hence customer

satisfaction from the consumer’s perspective (Parasuraman, A.et al., 1988). The banking

industry has already been depicted (Parasuman et al., 2001) as exhibiting little market orientation

and fulfilling services with little regard to customer needs as well as including branches

dissimilar in efficiency. Long lines, limited time for customer servicing, transaction errors,

excessive bureaucracy, and security and network failures have been said to be the most frequent

problems using banking services (Smith, 1999). This highly lower customer’s perception on the

quality of service offered and hence reduces customer satisfaction and the bank’s profitability

and credibility.

One question relates to whether automated, telephone and Internet banking represent positive

change and are satisfactorily serving the customers. Whilst technology can save time and money

and eliminate errors, thereby addressing certain issues associated with changing cultural and

social trends, it can also minimize direct customer interaction and any associated service value to

be gained (Bitner,2001). According to Joseph et al. (2003), reliable and accurate banking

services; customer services; personalized services; and accurate records are some of the factors

which are considered by the customers in their choice of a given type of service delivery

channel. Since the year 2000, technology has increasingly been innovated in the delivery of

services in the Kenya banking industry. The adoption of technology into service industries, more

so in banking is becoming a strong trend as service providers are now being urged by industry

bodies to invest in technology. The small business segment (retail and corporate services) has not

been an easy one for the main banks to target and a number of studies have highlighted

imperfection in service provision and problems regarding service quality and customer

satisfaction (Ennew et al., 1993; Smith, 1989; 1990). Particular problematic areas include

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knowledge and understanding, providing explanations for decisions, queuing, charges, collateral

requirements, network failure and insecurity. Due to this, customer satisfaction levels are at all

time low, dragging the bank’s image, credibility and staff morale down (Joseph et al., 2003).

As the importance of innovation in developing countries increases, so does the need for research

on the subject. Evidence from the literature reviewed above shows that existing discourse on

diffusion of IT innovation in banking sector has failed to focus much attention on the impact of

these technological innovations on customer satisfaction in commercial banks in Kenya. Among

other studies include relative importance of technology in service delivery in banking (Adrienne

et al., 2003) which concluded that technology provides a different type of value and the benefits

to be gained are largely efficiency based. Mugambi (2006) also attest that researches have been

done on areas of service excellence and customer satisfaction in the banking industry. However,

there is no study in Kenya that has looked at the impact of technological innovation in

commercial banks in Kenya with reference to customer satisfaction. This study therefore, seeks

to investigate the relationship between technological innovations and customer satisfaction in

commercial banks in Kenya.

1.8 Purpose of study

The broad objective for this study is to evaluate the relationship between financial innovation

and growth in the insurance companies in Kenya. The study will be guide by the following

specific objectives;

i) To establish the forms of financial innovations employed by insurance companies in

Kenya.

ii) To establish the relationship between financial innovations and growth in the insurance

companies in Kenya.

iii) To establish the factors influencing the rate of financial innovations by insurance

companies in Kenya.

The main objective of this study was to ascertain the IT innovations BOA has implemented since it merged with Bank of Africa group and how these has impacted service delivery.

Objectives of the study (i) To examine the extent of bank’s innovativeness in information technology in B.O.A(ii) To examine the level of service delivery in B.O.A in relation to IT innovations

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(iii) To examine the employees’ perception of the effects of IT innovations on service delivery in B.O.A

What is the relationship between technology and service quality? Which are the factors that lead to customer preference of different service delivery channels? The specific objectives were:

To establish the relationship between technology and service quality in banking industry; andTo determine the factors that lead to customer preference of different electronic banking channels.To investigate from Kenya customers the various technologies adopted by their banks.To study internet banking usage in KenyaTo explore the perceived utility of SMS bankingTo analyze the banking services adopted by Kenyan customers through mobile phones

1.9 Importance of the study

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According to Yasuharu (2003), implementation of information technology and communication

networking has brought revolution in the functioning of the banks and the financial institutions.

It is argued that dramatic structural changes are in store for financial services industry as a result

of the Internet revolution; others see a continuation of trends already under way. In a study

conducted by Irechukwu (2000) in Nigeria, he lists some banking services that have been

revolutionized through the use of ICT as including account opening, customer account mandate,

and transaction processing and recording. Information and Communication Technology has

provided self-service facilities (automated customer service machines) from where prospective

customers can complete their account opening documents direct online. It assists customers to

validate their account numbers and receive instruction on when and how to receive their cheque

books, credit and debit cards (Agboola, 2004). The ICT products in use in the banking industry

in many developing and developed include Automated Teller Machine, Smart Cards, Telephone

Banking, MICR, Electronic Funds Transfer, Electronic Data Interchange, Electronic Home and

Office Banking (Agboola, 2002).

Why doesn’t everybody innovate is a common question in business literature? It is widely

recognized that innovation is key to the economic performance of firms. Innovative firms grow

faster in terms of employment and profitability. An innovation is an idea, practice, or object that

is perceived to be new by a person or adopting entity. The innovation is not seen as something

periodical that happened by accident nor something that results from the action of an individual

agent. Innovation is seen as the result of an interactive and non linear process between the firm

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and the environment. When an innovation emerges, diffusion unfolds which entails

communicating or spreading of the news of the innovation to the group for which it is intended

(Okunoye et al, 2007). Adoption however is the commitment to and continued use of the

innovation. The diffusion of innovations theory provide explanations for when and how a new

idea, practice or newly introduced information and communication medium is adopted or

rejected over time in a given society (Okunoye et al, 2007).

Innovation is the generation, acceptance and implementation of new ideas, processes, products or

services. This study is concerned with product innovation, i.e., new products and the

organizational processes that precede their launch. What is then to be considered ‘new’? When is

it ‘new enough’ to be considered an innovation? The literature provides several frameworks to

classify product newness, e.g., from incremental to radical innovations. This study, however, is

concerned with product innovation as a phenomenon, rather than with product innovations with a

certain degree of newness. This includes significant improvements in technical specifications,

components, and materials, incorporated software, user friendliness, or other functional

characteristics. Product development is used as a term for the span of innovation activities

leading to, or that are intended to lead to, product innovation.

According to Agboola (2004), the application of information and communication technology

concepts, techniques, policies and implementation strategies to banking services has become a

subject of fundamental importance and concerns to all banks and indeed a prerequisite for local

and global competitiveness. ICT directly affects how managers decide, how they plan and what

products and services are offered in the banking industry. It has continued to change the way

banks and their corporate relationships are organized worldwide and the variety of innovative

devices available to enhance the speed and quality of service delivery (Agboola, 2004, 2001).

However, most research about innovation focused on manufacturing industries though increasing

attention has been paid to innovation in service industries recently (Gallouj, 2002; Howells and

Tether, 2004; Miles, 2004). The survival of an enterprise in the age of knowledge-based

economy depends on how to improve their organizational innovation capability. Technological

innovation is the key variable and means of differentiation between logistics service providers.

Commercial banks can increase their performance by employing new technologies. They should

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employ new information technologies to raise their service capability in the e-commerce age

(Agboola, 2001).

CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

This chapter provides theoretical and empirical information from publications on topics related

to the research problem. It examines what various scholars and authors have studied written

about technological innovations in reference to customer service and customer satisfaction.

2.2 Information Technology

Technology can be referred to as the application of knowledge for the execution of a given task.

It entails skills and processes necessary for carrying out activities (works) in a given context. ICT

encompasses computer systems, telecommunication, networks, and multimedia applications

(Frenzel, 1996). It came into use in the late 1980’s replacing earlier terms like Electronic Data

Processing (EDP), Management Information System (MIS), although the latter terms are still in

use (Frenzel, 1996).

Joseph and Stone, (2003) point out that, effective service delivery is important and has a great

influence on customer satisfaction, improving sales and market share. Commercial banking is at

a stage where customer perceptions and preferences have a very important impact on a bank’s

15

success. Customer satisfaction is a measure of how products and services supplied by a company

meet or surpass customer expectation.

In the effort to deliver effective services, the banking sector undertakes numerous approaches

and among them is the innovation and use of information technology. Information technology is

a medium that has revolutionized banking and everyday operations at the click of a button thus

enabling sophisticated product development, better market infrastructure, implementation of

reliable techniques for control of risks and reaching geographically distant and diversified

markets (Marion, 2008).

2.3 Customer Satisfaction

Lariviere & Poel (2004) observe that, if the performance falls short of expectations, the customer

is dissatisfied. If the performance matches the expectations, the customer is satisfied (Oliver,

1981). If the performance exceeds expectations, the customer is highly satisfied or delighted (De

Moubray, 1991). The high level of competition in the banking industry has placed an even

greater emphasis on customer satisfaction. Nowadays understanding and reacting to changes of

customer behavior is an inevitable aspect of surviving in a competitive and mature market

(Smith, 1990). Customers complain when they are dissatisfied with product they have bought or

a service they have received (Yeung et al., 2002). This means that the absolute number or

percentage of complaints can be the indicators of customer dissatisfaction (Smith, 1990). If an

organization succeeds in reducing customer complaints to zero, it indicates that customer

dissatisfaction had been eliminated (Oliver, 1981). However, it is important to recognize that

reducing dissatisfaction is not always the same as achieving satisfaction (Dabholkar, 1994).

In businesses where the underlying products have become commodity-like, quality of service

depends heavily on the quality of its personnel. This is well documented in a study by Leeds

(1992), who documented that approximately 40 percent of customers switched banks because of

what they considered to be poor service. Leeds further argued that nearly three-quarters of the

banking customers mentioned teller courtesy as a prime consideration in choosing a bank. The

study also showed that increased use of service quality/sales and professional behaviours (such

as formal greetings) improved customer satisfaction and reduced customer attrition.

Indeed, customer satisfaction has for many years been perceived as key in determining why

customers leave or stay with an organisation. Organisations need to know how to keep their

16

customers, even if they appear to be satisfied. Reichheld (1996) suggests that unsatisfied

customers may choose not to defect, because they do not expect to receive better service

elsewhere. Additionally, satisfied customers may look for other providers because they believe

they might receive better service elsewhere. However, keeping customers is also dependent on a

number of other factors. These include a wider range of product choices, greater convenience,

better prices, and enhanced income (Storbacka et al., 1994). Fornell (1992), in his study of

Swedish consumers, notes that although customer satisfaction and quality appear to be important

for all firms, satisfaction is more important for loyalty in industries such as banks, insurance,

mail order, and automobiles.

Ioanna (2002) further proposed that product differentiation is impossible in a competitive

environment like the banking industry. Banks everywhere are delivering the same products. For

example, there is usually only minimal variation in interest rates charged or the range of products

available to customers. Bank prices are fixed and driven by the marketplace. Thus, bank

management tends to differentiate their firm from competitors through service quality. Service

quality is an imperative element impacting customers’ satisfaction level in the banking industry.

In banking, quality is a multi-variable concept, which includes differing types of convenience,

reliability, services portfolio, and critically, the staff delivering the service.

2.4 Significance of Technological Innovations

The paper titled “Why do people use Information technology? A critical review of the

technology acceptance model” by Paul Legris, John Ingham, Pierre Collerette (2003), suggested

Technology Acceptance Model 2 (TAM2). TAM had proven to be a useful theoretical model in

helping to understand and explain use behaviour in IS implementation. It examined the

mediating role of perceived ease of use and perceived usefulness in their relation between

systems characteristics (external variables) and the probability of system use (an indicator of

system success). A new and improved version of Davis’s model: TAM2 was used that included

subjective norms, and was tested with longitudinal research designs. Analysis of empirical

research using TAM shows that results were not totally consistent or clear. Research has shown

that the influence of some factors on intention to use IS, varies at different stages in the IS

implementation process. It was concluded that TAM is a useful model, but has to be integrated in

to a broader one, which would include variables, related to both human and social change

processes.

17

2.5 Empirical Studies

The purpose of the paper named “Impact of Information Technology management practices on

customer service”, by Jahangir Karimi, Toni M. Somers and Yash P. Gupta (2002) was to gauge

whether IT management practices differ among firms where IT has a major role in transforming

marketing, operations, or both, which gave the firms advantage by affecting customer service.

Several research hypotheses were tested using data obtained from a survey of 213 IT-leaders in

the financial services industry. The results clearly indicated that the IT leader firms had a higher

level of IT management sophistication and a higher role for their IT leaders compared to IT-

enabled customer focus, IT-enabled operations focus, and IT-laggard firms. The study concluded

that IT management practices differed among IT leader firms, IT-enabled customer focus, IT-

enabled operations focus and IT-laggard firms. This paper was silent on other aspects of IT like

functional integration, technological integration, etc., besides customer service.

A.P. Sebastian Titus and Albin D. Robert Lawrence (2004) in their paper titled “Customer Focus

in Banking Services” had stressed on importance of customer relationship management. The aim

of the banks should be to retain the existing customers and acquire the new customers. In order

to add value to the services offered, the banking industry has to efficiently and effectively utilize

the technology with an eye on the cost of product and the services offered. To win the customers,

the modern banking should integrate technology and deploy marketing strategies that would

enable banks to maximize profits through customer satisfaction. In market with fierce

competition providing the customers with value addition is the only way to achieve complete

sustained customer satisfaction.

Joshua Madan Samuel (2003) in his paper titled “CRM – With special emphasis on financial

services and banking”, emphasized about growing need of managing customers better in

banking. CRM applications applied in banking were customer knowledge, sales effectiveness,

customer retention, customer segmentation, product presentation, customer fulfillments,

customer acquisition, channel management, marketing intelligence, campaign management. The

processes need to be redesigned in order to be able to utilize CRM for the customers and

organizational benefits. The three S’s of banking i.e., Size, Speed, Service; are better managed

by CRM. In the world of banking CRM technology was the answer to the question of increased

growth with less cost.

18

In paper titled “Capturing the customer’s voice-A case study in banking” by S.K. Bhattacharyya

& Zillur Rahman (2002), customer needs and wants in a bank were properly emphasized.

Customer needs were categorized as Basic needs, Performance needs and Excitement needs. The

various banking services like Tangibility, Reliability, Competence, Courtesy, Understanding

customers, Communication, Access, Responsiveness, Credibility, and Security; were related with

these needs. This paper helped to identify how customers perceived services of a bank.

Agboola (2001) studied the impact of computer automation on the banking services in Lagos and

discovered that Electronic Banking has tremendously improved the services of some banks to

their customers in Lagos. The study was however restricted to the commercial nerve center of

Nigeria and concentrated on only six banks. He made a comparative analysis between the old

and new generation banks and discovered variation in the rate of adoption of the automated

devices. Aragba-Akpore (1998) wrote on the application of information technology in Nigerian

banks and pointed out that IT is becoming the backbone of banks’ services regeneration in

Nigeria. He cited the Diamond Integrated Banking Services (DIBS) of Diamond Bank Limited

and Electronic Smart Card Account (ESCA) of All States Bank Limited as efforts geared

towards creating sophistication in the banking sector. Ovia (2000) discovered that banking in

Nigeria has increasingly depended on the deployment of Information Technology and that the IT

budget for banking is by far larger than that of any other industry in Nigeria. He contended that

On-line system has facilitated Internet banking in Nigeria as evidenced in some of them

launching websites. He found also that banks now offer customers the flexibility of operating an

account in any branch irrespective of which branch the account is domiciled. Cashless

transactions were made possible in our society of today.

19

CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction

This chapter describes the research methodology of the study. It describes the research design,

sampling design, target population, data collection procedures, analysis management and the

ethical considerations in the study.

3.2 Research Design

Research design refers to the arrangement of conditions for collection and analysis of data in a

manner that aims to combine relevance to the research purpose with economy in the procedure

(Babbie, 2002). In addition Kothari (2004) observed that research design is a blue print which

facilitates the smooth sailing of the various research operations, thereby making research as

efficient as possible hence yielding maximum information with minimal expenditure of effort,

time and money. The author noted that, research design deals with the decision regarding: What

techniques were used to gather data? What kind of sampling strategies and tools were used? How

time and cost constraints were dealt with? The function of research design therefore is to provide

for the collection of relevant evidence with minimal expenditure of effort, time and money.

This study will use a descriptive design. This design refers to a set of methods and procedures

that describe variables. It involves gathering data that describe events and then organizes,

tabulates, depicts, and describes the data. Descriptive studies portray the variables by answering

who, what, and how questions (Babbie, 2002).

20

3.3 Population

A population is a group of individual persons, objects or items from which samples are taken for

measurements, it is the group the investigator wishes to make inferences from (Babbie, 2005).

The target population will be senior managers in marketing, underwriting, ICT, and finance from

9 insurance companies (Appendix III) of the 44 licensed insurance companies as at end of

December 2009 (AKI report, 2009). In addition, this study will be carried in Nairobi since all the

selected insurance companies have their headquarters in Nairobi and this will facilitate collection

of adequate information of the research subject area by the researcher.

3.4 Sampling Design

A sample is a sub-set or part of the target population; sampling is a process of selecting subjects

or cases to be included in the study of the representative of the target population (Mugenda and

Mugenda, 1999). Stratified random sampling technique will be used to obtain the study sample.

The target population will be divided into four strata of senior managers in: marketing,

underwriting, ICT, and finance. From the 44 licensed insurance companies, the researcher will

select five (5) large, five (5) medium, and five (5) small insurance companies. A total sample of

fifteen (15) respondents consisting of four (4) senior managers (one each stratum) in each

insurance company under each category of large, medium, and small will be used for this study.

This method will be suitable since various respondents will divided into subgroups as per the

study to represent the senior managers without bias on either group.

3.5 Data Collection

The research instrument in this study will be questionnaires. Both open and closed ended

questions were applied to collect primary data. Creswell (1994) noted that, data collection

methods for primary data include: structured and semi-structure questionnaires, mailed

questionnaires, structured and semi-structured interviews (personal and telephone interviews),

observation and focus group discussions. Questionnaires are the most commonly used methods

when respondents can be reached and are willing to co-operate. These methods can reach a large

number of subjects who are able to read and write independently.

The questionnaire will consist of sections geared to obtain the respondent’s opinion in strategic

control. Respondents to be interviewed will hold at least the level of an underwriting manager at

the respective insurance companies and who is actively involved in financial innovation

21

processes. The respondents will be expected to give an insight into the financial innovation in the

respective insurance companies.

3.6 Data Analysis

In order to analyze collected data Miller (1991) observed that, a researcher needs to have the

following information about the statistical data analysis tools namely: descriptive, inferential and

test statistics. The author observed that, descriptive statistics are used to describe data collected

from a sample. The mean, median, percentages and standard deviation are the most commonly

used descriptive statistics. The author further observed that, inferential statistics are used to make

inferences from sample statistics to population parameters. These tools help the researcher to

generalize the findings from the sample to the target population.

The data will be analyzed by use of descriptive statistics such as mean scores, frequencies, and

percentages. Statistical Package for Social Sciences (SPSSv17) will be used to aid in qualitative

analysis in this study. The researcher will examine the completed questionnaires. The

information for each item on the questionnaire will be processed and reported through a

descriptive narrative. This will be accomplished by use of frequencies. The results will be

presented in charts, graphs and tables. Quantitative and Qualitative analysis techniques will

therefore be applied. The data was then presented in form of tables and charts.

22

23

Others

Organizations are aware that service quality provides strategic competitiveness in dynamic

business environment. Literature provides significant relationship between service quality and

firms’ performance based on improved productivity, increased market share, enhanced

customers’ attraction and satisfaction, loyalty, improved staff morale, and sustained profitability

(Lassar et al., 2000). Research has found that service quality in banks is critical for satisfaction

and retention of customers (Jabnoun & AlTamimi, 2003). Keeping in view the significance of

service quality as a means of competitive advantage and organizational sustainability, the banks

are pursuing multidimensional approaches to improvement in service quality to attract and retain

customers (Newman, 2001).

According to Castleberry and Resurreccion (1989), the physical location of banks’ delivery

channels influence perception of customers about quality. Consistent delivery of services,

physical dimensions and staff interaction with customers, trustworthy processes and procedures

24

positively affect delivery of services quality (Sureshchandar et al., 2002). Pleasant customer

interaction with staff significantly affects customers’ perception of quality (Yavas et al., 1997).

In response to this requirement, banks have initiated flawless delivery processes to reduce

delivery timings to improve service quality.

Jabnoun, N., & Al-Tamimi, H.A.H. (2003). Measuring perceived service quality at UAE

commercial banks. International Journal of Quality and Reliability Management, 20(4), 458- 72.

Castleberry, S., & Resurreccion, A. (1989).Communicating quality to consumers. Journal of

Consumer Marketing, 6(3), 21-89.

Sureshchandar, G., Rajendran, C., & Anantharaman, R. (2002).The relationship between service

quality and customer satisfaction – a factor-specific approach. Journal of Services Marketing,

16(4), 363-79.

Yavas, U., Bilgin, Z., & Shemwell, D. (1997).Service quality in the banking sector in an

emerging economy: a consumer survey. International Journal of Bank Marketing, 15(6), 217- 23.

25

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Donnelly, J (1992). Management Lessons: From the Customer's Side of the Counter, USA:

Prentice Hall.

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Maxwell (1990).Resolution of banking Disputes.

Cronin, MaryJ. (1997)Banking and Finance on the Internet.

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Gutek, B & Welsh, T (1999). The Brave New Service Strategy: Aligning Customer

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Fisher, D M (1998). Understanding Bank Technology: The Customer and the Expectation' in:

Managing the New Bank Technology, Ed. Seymann M R, Singapore: Toppan.

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Oliver, R. (1981), "Measurement and evaluation of satisfaction process in retailing setting",

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73.

Wayland, R E and Cole, P M (1997). Customer Connections, Boston: Harvard Business School Press.

Schneider, B & Bowen, D (1999). Understanding Customer Delight and Outrage. Sloan Management Review, Vol 41, pp. 35 - 44.

Parasuraman, A., Zeithaml, V., Berry, L. (1994), "Alternative scales for measuring service

quality: a comparative assessment based on psychometric and diagnostic criteria", Journal of

Retailing, Vol. 70 No.3, pp.201-30.

Dabholkar, P. (1994), "Technology based service delivery", Advances in Service Marketing and

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Jamal, A., Naser, K. (2003), "Factors influencing customer satisfaction in the retail banking

sector in Pakistan", InternationalJournalofCommerce &Management, Vol. 13 No.2, pp.29-53

Frenzel, C.W. (1996), Information Technology Management, Cambridge: Thomson Publishing

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Joseph, M., and Stone, G., (2003).An empirical evaluation of US bank customer perceptions of

the impact of technology in service delivery in the banking sector. International Journal of Retail

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MarionKimtai (April, 2008) “Banking the Unbanked”, The standard Newspaper

Leeds, B. (1992). 'Mystery Shopping' Offers Clues to Quality Service. Bank Marketing, 24(11),

November, pp. 24-27.

Reichheld, F. F. (1996). Learning from Customer Defections. Harvard Business Review,

March/April, pp. 56-69.

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Storbacka, K., Strandvik, R and Gronroos, C. (1994). Managing Customer Relationship for

Profit: The Dynamics of Relationship Quality. International Journal of Service Industry

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Ioanna, P. D. (2002). The Role of Employee Development in Customer Relations: The Case of

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Jahangir Karimi, Toni M. Somers and Yash P. Gupta (2002). named “Impact of Information

Technology management practices on customer service”

A.P. Sebastian Titus and Albin D. Robert Lawrence (2004). “Customer Focus in Banking

Services”

Agboola, A. A. (2001) “Impact of Electronic Banking on Customer Services in Lagos, Nigeria”

in Ife Journal of Economics and Finance. Department of Economics, O.A.U, Ile-Ife, Nigeria, vol.

5, Nos. 1&2

Aragba-Akpore, S. (1998): ‘The Backbone of Banks’ Service Regeneration’, Moneywatch, July

22, p23.

Ovia, J. (2000):’From Banking Hall to E-Platform’, Financial Standard, January 15.

Cronin, MaryJ. (1997)BankingandFinanceonthe Internet

Jane Blake(2000) ATMSecurityMeasures

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29

APPENDICES

APPENDIX I: LETTER OF INTRODUCTION

The Respondent,

P.O. Box ......,

Dear Sir/Madam,

Re: Request for Research Data

I am a Postgraduate student at the University of Nairobi pursuing a Master of Business

Administration (MBA) program. My research project topic is “Relationship between Financial

Innovation and Growth in Insurance Companies in Kenya”. The purpose of the research is to

assess the growth insurance companies as a result of their financial innovations.

The attached questionnaires have been designed to help the researcher gather data from the

respondent with respect to this purpose. You have been identified as one of the respondents.

Kindly facilitate the data collection necessary by answering the questions precisely and

accurately as possible. The information sought is purely for academic purposes.

Yours truly,

Student Supervisor

30

Mr. Robert Karanja. W. Mr. Mirie Mwangi

Email: [email protected]

Cell phone +254720 967 196

31

APPENDIX II: QUESTIONNAIRE

Section I: Demographic Information

1. Name of your insurance company (optional)

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

2. What is your gender? (Tick as appropriate)

Male ( ) Female ( )

3. What is your designation in the

company? ..............................................................................................................

4. For how long have you worked in that position? (Tick as appropriate)

a) Less than 2 years ( )

b) Between 2 to 5 years ( )

c) Between 6 to 10 years ( )

d) Over 10 years ( )

5. What is your level of education? (Tick as appropriate)

a) Secondary Level ( )

b) College Level ( )

c) University First degree ( )

d) Master’s degree ( )

e) Other (Specify)................................................................

Section II: Company information

6. When was the company incorporated?

i) Less than 5 years ago

ii) Between 5 and 10 years ago

iii) Between 10 to15 years ago

iv) Between 15 to 20 years ago

v) More than 20 years ago

7. What is the gross written premium of your company? ………………………….

Section III: Products

8. How often do you review your products? (Tick appropriate)

a) Quarterly ( )

32

b) Semi- Annually ( )

c) Annually ( )

d) Bi-annually ( )

e) Other (specify) ( ) …………………………………

9. Averagely, how many new products were launched by your company in the following years?

Year 2005 2006 2007 2008 2009

No. Of Products

10. Please circle the appropriate number in the appropriate column to indicate the degree to which you either agree or disagree with the following as objectives of innovating new products in your insurance company.

Objectives of innovationsStrongly disagree

disagree to some extent

Neither agree nor

disagree

Agree to

some extent

Strongly agree

a) To suit customer’s needs 1 2 3 4 5b) To increase market share 1 2 3 4 5c) To increase profitability 1 2 3 4 5d) To remain competitive 1 2 3 4 5e) To comply with the regulation 1 2 3 4 5f) Due to technological advancement 1 2 3 4 5

11. Are the products mainly? (Tick appropriate)

a) Tailor-made ( )

b) Totally new products ( )

12. To what extents have the products in the market been successful? (Tick appropriate)

i) Not at all ( )

ii) Less extent ( )

iii) Fair extent ( )

iv) Large extent ( )

v) Very large extent ( )

33

13. a) Have new products contributed to the growth in your company? (Tick appropriate)

Yes ( ) No ( )

b) If yes, to what extent?

i) Not at all ( )

ii) Less extent ( )

iii) Fair extent ( )

iv) Large extent ( )

v) Very large extent ( )

Sectional III: Operation System

14. a) Are all the operations automated? (Tick appropriately)

Yes ( ) No ( )

b) If no, are there plans to automate tasks that are carried out manually?(Tick appropriately)

Yes ( ) No ( )

15. a) Does your insurance company have branches? (Tick appropriate)

Yes ( ) No ( )

b) If yes, are you branches inter-connected in terms of your IT systems? (Tick appropriate)

Yes ( ) No ( )

c) Do you have other IT sub-system? (Tick appropriate)

Yes ( ) No ( )

16. How often do you review your operations system(s)? (Tick appropriate)

a) Quarterly ( )

b) Semi- Annually ( )

c) Annually ( )

d) Bi-annually ( )

e) Other (specify) ( ) …………………………………

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17. a) Have your IT systems contributed to the growth in your company? (Tick appropriate)

Yes ( ) No ( )

b) If yes, to what extent? (Tick appropriate)

i) Not at all ( )

ii) Less extent ( )

iii) Fair extent ( )

iv) Large extent ( )

v) Very large extent ( )

Section IV: Bank Assurance

18. a) Is your company affiliated to other financial institutions? (Tick appropriate)

Yes ( ) No ( )

b) If yes, which of the following is your insurance company affiliated with?

i) Bank ( )

ii) Insurance company ( )

iii) Both bank and insurance company ( )

iv) Other (specify)…………………………………….

c) If yes in 16(a) above, what was the reason for affiliation? (Tick appropriate)

i) To have countrywide presence ( )

ii) To increase market share ( )

iii) Other (specify)..............................................................

19. a) Do you offer joint products with the affiliated institutions? (Tick appropriate)

Yes ( ) No ( )

b) Has the partnership in 17(a) contributed to growth in your company? (Tick appropriate)

Yes ( ) No ( )

35

b) If yes in 17(b) above, to what extent? (Tick appropriate)

i) Not at all ( )

ii) Less extent ( )

iii) Fair extent ( )

iv) Large extent ( )

v) Very large extent ( )

36