Determinants of the Adoption of Bancassurance Business...

International Review of Research in Emerging Markets and the Global Economy (IRREM)

An Online International (Double-Blind) Refereed Research Journal (ISSN: 2311-3200)

2019 Vol: 5 Issue: 1

1371 www.globalbizresearch.org

Determinants of the Adoption of Bancassurance Business Models by

Commercial Banks in Kenya

Josephat Nyanamba Kombo,

University of Nairobi, Kenya.

E-mail: [email protected]

Gregory Anditi Otieno

University of Nairobi, Kenya.

E-mail: [email protected]

_____________________________________________________________________

Abstract

The objective of this study was to establish the determinants of the adoption of bancassurance

business models by commercial banks in Kenya. The research used a descriptive survey

research design, using both primary and secondary data for the target population comprising

all commercial banks in Kenya. The study found out that the mean of bancassurance set up is

relatively high compared to other variables, and had the highest standard deviation. The

bancassurance sales commission had the highest correlation with the return on assets. From

the findings, the study concludes that an increase in bancassurance set up, sales commission

and administration costs would lead to improvement on the financial performance of the

commercial banks in Kenya. Therefore; the study recommends adoption of bancassurance

practices to improve banks’ performance. Policy makers should also undertake to understand

risks affecting the operations of the commercial banks to maximize performance.

___________________________________________________________________________

Key Words: Bancassurance, Commercial Banks, Performance, Return on Assets, Insurance

JEL codes: G21, G22, L25

mailto:[email protected]

mailto:[email protected]





1. Introduction

Bancassurance refers to involvement of banks in creation, distribution, and/or provision of

insurance products. In this case, banks play an intermediary role of sourcing insurance business.

It can also refer to financial services by banks and building societies that involve insurance

companies as their subsidiaries. Allen, (2007) & (Staikouras & Nurullah, 2008) note that it

exploits synergies between banking and insurance, leading to effective and efficient creation,

and distribution of banking and insurance products (Mwangi J. W., 2010).

Bancassurance is an innovation meant to complement existing banking activities. Its growth

and worldwide dominance can be attributed to mergers, takeovers and joint ventures between

banks and insurance companies. Emerging markets, changing employment patterns, growth in

disposable incomes, and longer retirement periods mean that consumers have increasingly

complex insurance and financial requirements, creating more opportunities for bancassurance.

Globally, many countries are reviewing their laws to allow for Bancassurance based on its gains

(Saunders, 2008). The success of bancassurance has been attributed to life insurance products,

which matches with personal banking financial products. Bancassurance works through a

process system that highlights consumer lifestyle changes, and household choices or events

which can easily be matched with banking transactions (Jamshaid, 2002).

1.1 Models of Bancassurance

There are different models of bancassurance across countries, depending on regulatory

constraints, relationships between banks and insurance companies among others (Karunakaran,

2006). The models can generally be divided into three categories (Mwangi J. W., 2010). In all

these categories, banks sell the products, collect premiums by direct debits into customer

accounts, and earn direct commissions from the transactions.

Integrated models take the form of a joint venture, where a bank partners with an insurance

company to exclusively sell specified insurance products. It can involve a case where an

insurance company builds or buys a bank or vice versa.

In non-integrated models, banks set up networks of financial advisers authorized to sell

regulated insurance products, similar to those offered/sold through other channels. The ‘tied-

agents’ exclusively sell products created by the bank’s (Mwaniki, 2008).

In open architecture models banks get non-exclusive distribution agreements with several

insurance companies. The banks choose one or several insurance providers for different types

of products, to different customer segments.

1.2 Bancassurance in Kenya

After years of regulatory hurdles, banks and insurance companies are recognizing untapped

bancassurance opportunities, especially in life insurance. The insurance product is currently





distributed through expensive channels and is yet to reach majority of potential consumers.

Thus, banks and insurance companies can make gains from bancassurance engagements.

The insurance industry in Kenya includes licensed companies, brokers, agents, banks, the

regulator, member association bodies, and service providers (Ombonya, 2013). The industry

gross written premiums was Kshs. 79.1 billion in 2010, and Kshs. 64.47 billion in 2009. Gross

earned premiums increased by 17.7 per cent to Kshs. 63.44 billion in 2010.

The adoption of insurance products in Kenya is generally low compared to developed

countries but favorable against most African countries. In 2009 it was 1.8%, against 0.4% in

Egypt, 0.5% in Nigeria and 2.6% in South Africa. According to AKI, (2011), the low uptake

may be attributed to limited distributions channels, low income levels, and/or lack of awareness.

There is a great potential for development and growth of bancassurance in Kenya (Mwaniki,

2008).

The use of bank branches provides efficient and effective means of expanding

bancassurance, because they have a deeper penetration (Venkitararamanan, 2000). Banks also

offers insurance companies access to credit. Recent acquisition of insurance companies by

banks in Kenya is key in development and growth of bancassurance in Kenya (Mwaniki, 2008).

1.3 Research Problem

Commercial banks generate revenues from their operation which determines their

performance (Mabvure et al., 2012). As a result of business environment dynamics, banks need

diverse business ventures, and financial services that boost their earnings, and overcome strains

on the interest income revenue (Kumar, 2006). Kiragu, 2014 notes that bancassurance is a

business venture that banks should be competing for to boost earnings. However, very few

banks are engaged in the venture yet the Kenyan market is liberal, and there are no stringent

bottlenecks in industry regulations (Anja et al., (2010)). Then the big question is what

determines the adoption of bancassurance by commercial banks in kenya?

1.4 Research Objectives

Previous studies have not reached a consensus on the effects of bancassurance on the

performance of commercial banks. Thus, the main objective of this study is to analyze the

determinants of the adoption of bancassurance business models by commercial banks in kenya.

1.5 Significance of the Study

This study aims to contribute to existing body of knowledge, stimulate further research in

bancassurance, and help policy and strategic decision makers with insights on financial market

liberalization, regulatory requirements, and alternative channels to increase adoption

bancassurance operations as a viable business strategy for enhancing the performance in

banking and insurance industries.





2. Literature Review

2.1 Introduction

There are a number of theories that focus on concepts and the rationale behind

Bancassurance. Previous studies have also focused on theoretical framework, and determinants

of bancassurance adoption.

Modern portfolio theory, developed by Markowitz, (1952), focuses on portfolio

diversification, where people hold an optimal combination of assets to reduce risk and earn

optimal returns. In this regard, bancassurance can be a diversification strategy which has

positive impacts on a Bank’s financial performance. According to Jongeneel, (2011)

bancassurance enhances customer loyalty; while Brealey & Myers, (2003) arguse that it

provides fee incomes to banks. These benefits are assets to the long term earnings of banks,

which leads to economies of scale.

The theory of financial intermediation considers the transfer of funds from lenders to

borrowers (Alexandru & Marius, 2009). This involves informational asymmetry, transactional

costs, and monetary regulation (Bert & Dick, 2003). Guttentag & Lindsay, (1968) and Arthur

& Iris, (2003) note that regulation influences liquidity and performance, hence banks and

insurance companies, can take advantage of efficiencies to reduce transaction costs, and

increase customer loyalty (Alexandru et al., 2009). Benston & Smith, (1976) argues that this

can also be achieved through economies of scale and efficient resource allocation.

2.2 Profitability of Commercial Banks

Success of bancassurance strategy depends on generation of positive net benefits. Göran,

(1995) shows that perfrmance of bancassurance depends on low set-up costs; rapid growth in

sales commissions (through large volumes instead of high prices); identification of acceptable

outlays for sales promotion (to bank customers and staff), and low administration costs. The

focus on low administrative costs is the most successful strategy for bancassurance.

Staikouras and Nurullah (2008) found that banking and insurance entities have more

similarities that favour joint production and business synergies. Through diversification,

bancassurance ensures efficient resource allocation to manage risks and lower costs (Hughes,

Lang, LJ, & Moon, 1999).

According to McKillop, Glass, & Morikawa, (1996), different cost function specifications

lead to different efficiency results when evaluated from bank and insurance perspectives. In

this regard, Bergendahl, (1995) notes that banks look for efficient resource allocation and

products optimization, while insurance companies look for additional marketing channels. This

makes bancassurance an insurer's alternative marketing channel.





2.3 International Empirical Review

Jongeneel (2011) analyzed drivers of bancassurance by comparing different bancassurance

business models, analysis of previous studies, and a quantitative country-level assessments. The

study analyzed the impact of market concentration; internet usage; insurance market size; level

of deregulation; and bank’s branch networks, on Bancassurance. The results show that

insurance market size, branch density, and internet usage constrain uptake of bancassurance.

Chiang, Hung- Chi, & Wen-Chin, (2013) evaluated three key factors that influence the

success of bancassurance in Taiwan. The study adopted the modified Delphi method and

analytical hierarchy process. The results revealed that, while it was important to identify areas

of high importance and low importance, neither was sufficient alone.

Lovelin & Sreedevi, (2014) evaluated Bancassurance in India to identify customer

awareness and perception on bancassurance, and factors affecting purchase of insurance

products from banks. The study findings show that majority were not aware of the concept of

bancassurance. The study also shows that customer loyalty, positive tax benefits, and loan

requirements are factors influencing purchase of insurance products.

2.4 Local Empirical Review

Mwangi (2010) assessed the determinants of growth of bancassurance in Kenya. The study

noted that only a fourth of the banks in Kenya engaged in Bancassurance. The study shows that

factors influencing adoption of bancassurance are a larger market share; supplementing core

business, customers’ access to related services from one point, and efficiency and effectiveness

in business operations. The study therefore concludes that bancassurance increases sales,

market share, outreach to strategic customers, and leads to improvements in operations.

Nyathira, (2012) assessed effects of financial innovations on commercial banks’ financial

performance, using a causal research design for banks in Kenya. The results show that financial

innovation is positively correlated to profitability of banks. This was supported by high uptake

of efficient financial systems instead of less efficient systems.

Omondi, (2013) analysed the determinants of adoption of bancassurance by commercial

banks in Kenya. The results of the study showed that adoption of bancassurance was influenced

by need for new revenue streams, diversification, and economies of scope. There was a

significant positive relationship between these factors and the adoption of bancassurance.

Nyakundi, (2013) evaluated management perception of bancassurance as a risk mitigation

strategy at Equity Bank Limited. He sought to establish if the Bank and Insurance Companies

can mitigate management problems through bancassurance model as an alternative source of

revenue, customer acquisition, and customer retention. The results showed that bancassurance,

as risk mitigation strategy, was a good source of revenue, customer acquisition and retention.





2.5 Summary of Literature Review

In the era of banking sector competition, bancassurance can be a key factor

influencing a customer’s bank of choice (Kumar, 2007). The modern portfolio theory

emphasizes the need to diversify financial services in order to mitigate risks. The

financial intermediation theory shows that bancassurance can be used by banks to

increase their demand deposits.

Previous studies have focused on importance of bancassurance, and have identified

various factors that lead to its growth and adoption; as well as management perception

of bancassurance in banks. Studies focusing on the role of bancassurance have

concluded that bancassurance is a good avenue for customer acquisition and retention,

increasing market share, and attracting more investors.

From the review, we note that previous studies have not analysed the factors that

determine the adoption of bancassurance in consideration of how bancassurance affects

the performance of commercial banks. This study aims bridge this gap by investigating

the effect of bancassurance on the financial performance of commercial banks in

Kenya.

3. Methodology

3.1 Research Design

This study adopted a survey research design to collect data from 43 commercial banks in

Kenya, as defined by (Mugenda & Mugenda, 2003). This method allows effective, and efficient

collection of data by use of questionnaires. Quantitative secondary data for five years (2010-

2014) from Central Bank of Kenya annual reports, financial statements of commercial banks,

and Kenya National Bureau of Statistics (KNBS) has also been used.

3.2 Analytical Model

Regression analysis was used to establish the determinants of bancassurance business model

for commercial banks in Kenya, as represented in the equation below:

𝐘 = 𝛃𝟎 + 𝛃𝟏𝐗𝟏 + 𝛃𝟐𝐗𝟐 + 𝛃𝟑𝐗𝟑 + 𝛆𝐭 (1)

Where:

Y = Financial Performance (Measured by ROA, Net Income/ Total Assets)

β0 = Constant;

β1 - β5 = regression coefficients;

X1 = Set up (Likert Scale)

X2 = Sales Commissions (Likert Scale)

X3 = Administration Cost (Likert Scale)

εt = Error term;





The analysis was done using multiple correlations to show the association between research

variables, and multiple regression analysis to establish the relationship between the variables

in the regression equation.

3.3 Data Validity and Reliability

According to Mugenda and Mugenda (2003), accuracy of data depends on data collection

instruments in terms of data validity and reliability. Validity test was achieved by pre-testing

the instrument used to collect data, while reliability was determined by use of Cronbach Alpha

throguh the Split-Half technique.

3.4 Test of Significance

T-tests using SPSS have been used in this study, with the requirement that normality of the

data is not violated. The p-values from the multiple regression analysis were used to test for

significance of the relationship between variables, 5% confidence level.

3.5 Limitations and Further Areas of Study

This study is limited to 5 years under study, and may not apply across all time periods due

to data variations, changes in policies, and other factors affecting banking and insurance in

Kenya. Secondly, scope of study only covered variables from Kenya. Furthermore, the study

did not investigate the effect of governance on financial performance of the commercial banks.

Consequently, the study recommends similar studies in other financial institutions and in other

countries, in addition to comparative studies on bancassurance practices and governance of

commercial banks.

4. Data Analysis, Empirical Results and Discussions

4.1 Introduction

The research data was sampled, collected, and analyzed to determine the adoption of

bancassurance business models by commercial banks in Kenya. 93% of the survey target (43

banks) responded to the questionnaires, a significant response rate for statistical analysis. The

questionnaires sought to establish the institutional background information of respondents, their

position in the organization, and the type of bancassurance being offered.

Majority of the respondents (50%) were Finance Managers, 25% were Chief Finance

Officers, 17.5% were Branch managers, and 7.5% were other officers. The position of the

respondent is important in verifying relevance of information provided.

4.2 Descriptive Statistics

Descriptive statistical summary of the research data involving the mean, minimum,

maximum, and standard error are presented in Table 4.1. The results show that adoption of

bancassurance models is quite high. Return on assets for the commercial banks had a mean of

2.73, with a maximum of 5.64, and a minimum of -6.97. The bancassurance set up for

commercial banks had a mean of 4.19, a maximum of 5.00 for set-up, and a minimum of 3.51.





The bancassurance growth had a mean score of 3.91, the maximum growth being 4.98, while

the minimum was 1.18. The bancassurance administration expenses of commercial banks

averages at 3.74, with a maximum of 4.95, and a minimum of 2.50.

Table 4.1: Descriptive Statistics of Research Variables

N- Valid Mean Std. Deviation Min. Max.

Return on Assets 40 2.7251 0.31260 – 6.9713 5.6412

Bancassurance Set Up 40 4.1921 1.27100 3.5144 5.0000

Bancassurance Growth 40 3.9112 0.91501 1.1755 4.9772

Bancassurance Administration Expenses 40 3.7453 1.2518 2.4992 4.9513

Source: Research findings

4.2.1 Bancassurance Set Up

The results in Table 4.2 show that majority of the respondents (with a mean of over 3.9)

strongly agreed that adoption of bancassurance models by commercial banks increases market

share, supplements of core banking business, creates effectiveness and efficiency in operations,

and provides customers with related financial services.

Table 4.2: Bancassurance Set Up

Statements Mean Standard

Deviation

1. Increase in market share (bank accounts) 4.19 0.66

2. To supplement core business 4.51 0.61

3. Effectiveness and efficiency operations 4.39 0.94

4. Customers getting related services under one roof 3.88 0.93

4.2.2 Bancassurance Growth in Sales Commission

The results in Table 4.3 also show that majority of the respondents (with a mean of over 4.2)

strongly agreed that effective adoption and growth of bancassurance is influenced by increase

in sales, increase in sales commissions, increased premiums, and increase in bank branches.

Table 4.3: Bancassurance Growth


Deviation

1. Increase in Sales 4.29 0.67

2. Increase in Sales Commission related to bancassurance 4.61 0.72

3. Increased premiums received for insurance 4.49 0.68

4. The No. bank branches increased to handle insurance services 4.68 0.67

4.2.3 Bancassurance Administration Expenses

The descriptive results as shown in Table 4.4, show that majority of the respondents (with a

mean of over 3.74) strongly believe that although adoption of bancassurance has increased

stationery costs, it has increased the revenue base of banks and increased cross marketing.





Table 4.4: Bancassurance Administration Expenses


Deviation

It has increased stationery costs 3.29 1.07

It has increase revenue base for the bank 4.49 0.98

It has enabled cross marketing hence saving on marketing costs 4.08 0.67

The paid for sales agents have increased 2.37 0.98

The number of employees have increased 4.13 0.87

The number of branches opened has increased 4.26 0.53

The training expenses relevant to bancassurance has grown 2.38 0.93

4.3 Regression Analysis

A multiple regression analysis was conducted to establish the determinants of the adoption

of bancassurance business models by commercial banks in Kenya.

Table 4.5: Model Summary

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

0.813 0.724 0.615 0.67120

The regression analysis shows that the model is well fitted; 72.4% of the dependent variable

are explained by research variables. The coefficient of multiple determinations shows that

61.5% of the variations in performance of commercial banks are explained by influence of

bancassurance set up, bancassurance growth in sales and bancassurance administration costs.

Table 4.6: Summary of One-Way ANOVA

Model Sum of Squares df Mean Square F Sig.

1 Regression 5.62 4 1.655 5.721 0.003

Residual 31.61 36 0.351

Total 37.230 40

From the ANOVA, the regression model is significant at F= 5.720 and P = 0.003. This

confirms that the model is reliable, and statistically significance; and can therefore be relied

upon to explain effects of bancassurance on performance of commercial banks in Kenya.

Table 4.7: Coefficients of Regression Equation

Unstandardized

Coefficients

Standardized

Coefficients

t Sig.

B Std. Error Beta

(Constant) 0.192 0.331 2.762 0.016

Bancassurance Set Up 0.507 0.118 0.146 7.463 0.015

Bancassurance Sales Commission 0.448 0.142 0.126 3.887 0.029

Bancassurance Administration Costs 0.312 0.126 0.145 4.904 0.021





These coefficients lead to development of the following regression model which relates the

predictor variables (independent variables) and the dependent variables;

Y = 0.192+ 0.507X1 + 0.448 X2 + 0.312X3+ ε (2)

Where,

Y = Performance (Measured by Return on Assets)

α = Constant, measuring long term performance without effect of independent variables

X1 = Bancassurance Set Up Costs

X2 = Bancassurance Growth in Sales Commission,

X3 = Bancassurance Administration Costs,

e = Error Term,

The regression test results presented in the table 4.7 indicate that, all the coefficients are

positive, and statistically significant within the 5% significance level. Thus, the independent

variables have a significant influence on the performance of commercial banks.

Thus, the model indicates that, without the influence of the bancassurance services, the

Performance of pension schemes using ROA would be 0.1932. It also shows that, a unit increase

in risk management environment activities would result to 0.806 times increase in the pension

schemes performance. Thus the two variables are positively related with a magnitude of 0.806

explaining the extent of influence to the dependent variable.

All the variable coefficients were significant, and in terms of magnitude, the findings

indicate that internal control had the highest influence on performance of pension schemes

measured using Sharpe ratio, followed by risk management environment, followed by risk

monitoring, followed by risk measurement, while risk mitigation had the least influence on

performance of pension schemes measured using Sharpe ratio.

4.4 Discussion of the Findings

The study established a significant relationship between bancassurance and the performance

of commercial banks in Kenya. This is based on a strong positive correlation between

performance and bancassurance practices i.e. correlation with set up costs (0.507); sales

commission (0.448); and a moderate correlation with bancassurance administration costs

(0.312). The R-Square and adjusted R-Square show that there is a strong effect between

financial performance and the bancassurance practices. Based on these results, we conclude

that performance of commercial banks in relation to bancassurance practices is positively

related to the low set-up costs, sales commission and economies of scale in administrative costs.

5. Summary, Conclusion and Recommendations

Bancassurance is important to Kenya because it drives the penetration of insurance in the

economy; providing a major avenue for distribution of insurance products. Secondly, it

improves the performance of banks, reduces transaction costs, and thus drives financial access

and inclusion. This study shows that adoption of bancassurance models is quite high in Kenya.





The study established that financial risk management and internal controls have a strong impact

on the financial performance of commercial banks followed by risk mitigation practice. These

undertakings increase revenue generation and the performance of insurance and commercial

banks. This is why privately managed pension funds have a positive premium given the level

of risk compared to short-term alternative investment instruments.

The study concludes that performance of commercial banks in relation to bancassurance

practices is positively related to the low set-up costs, sales commission and economies of scale

in administrative costs. Thus the factors that determine the adoption of bancassurance in Kenya

are set-up costs, sales revenues, and low administrative costs.

This study acknowledges the publication of the Bancassurance Regulations 2018, which aim

at streamlining the operations of bancassurance business in Kenya. Commercial banks

previously operated under regulations governing insurance brokers. However, the published

regulations now give the Insurance Regulatory Authority (IRA) powers to supervise

commercial banks offering insurance services.

5.1 Recommendations of the Study

The study recommends that commercial banks in Kenya should adopt bancassurance to

improve their financial performance. Secondly, commercial banks should improve the working

relationships with insurance companies. Lastly, we recommend regular evaluation of

bancassurance practices and services by the commercial banks in view of Bancassurance

Regulations 2018 to ensure that the regulators play their supervisory role effectively.

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