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National Bank Of Kenya To Environmental Challenges Business Essay


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The financial industry has been growing at a rapid rate not only locally but also internationally. However the industry, especially retail banking has been facing many challenges which include internal and external environmental challenges and this has led to shrinking profit margins. These challenges calls for financial institutions to identify and adopt strategies which will give them better competitive advantage and the ability to cope with the constantly emerging environmental challenges in the industry if they are to remain in business.

As a result of these challenges, this study was carried out to identify environmental challenges faced by financial sector in Kenya and strategies that can be adopted to overcome these challenges. To achieve this, a case study of National Bank of Kenya was undertaken by interviewing senior and middle level staff to identify challenges and strategies adopted by the bank against internal and external environmental challenges.

Structured interview guide was used in collecting data from NBK staff in Nairobi head office and its branches within Nairobi city whereby a total of 12 respondents were interviewed which included 3 general managers, 4 divisional managers and 5 branch managers. Interview guide pretest was carried out a month before the actual data collection took place which also included a reconnaissance visit to selected NBK branches so as to familiarize and book an appointment. Data was analyzed using content analysis with numeric statistics analyzed using MS excel presented using graphs and tables.

Environmental challenges which include entry of new competitors, high cost of operations, unstable economic conditions, tight policies and regulations among other were identified. The strategies to overcome these challenges identified include new product development and branding strategies, adopting new marketing strategies, expansion, outsourcing, ICT infrastructure upgrade to list a few.

The study recommends the need for the financial industry to come together and address these issues together rather than individual bank handling these challenges. The study concluded by recommending further research on identification of effective strategies to be adopted by financial institutions.





ATM Automatic Teller Machine

BFUB Bank Fusion Universal Banking System

CBK Central Bank of Kenya

DFI's Development Financial Institution

GDP Gross Domestic Product

HRM Human Resource Management

ICT Information Communication Technology

IMF International Monetary Fund

NBFI's Non-Banking Financial Institution

NBK National Bank of Kenya

PBT Profit before Tax


1.1 Background of the Study

Organizations operate within an environment that influences its operation either positively or negatively depending on the nature of its business. As Porter (1996) explains, "many firms operate within an environment whereby they are expected to meet various stakeholders' expectations hence the need to formulate strategies that would help them meet this need" (p. 61). On the other hand organization operates within an environment with high competition which influences the firm's strategic process and hence determines the firm's achievement and purpose (Sharma, 2008).

Therefore the survival and success of an organization can be achieved if the firm has the resource capacity to create and align its strategies to the environmental challenges. This is not only influenced by the internal environment but also the external environment. Kumar (2006) explains that rapid technological change, easier entry by foreign competitors and the accelerating breakdown of traditional industry boundaries subject firms to new unpredictable competitive forces. He further adds that contemporary firms operating in a dynamic market contexts, often deal with these contingencies by implementing strategies that permit quick reconfiguration and redeployment of assets to deal with these environmental changes

Environmental influence has not spared the financial sector either, both locally and internationally. This was observed by Kumar (2006) when he explains that "environmental influence has necessitated the need for financial institutions to redefine their modes of service delivery and goals so as to maintain and remain relevant in the ever changing and dynamic environment" (p. 104-105). These changes therefore pose a lot of challenges to financial institution since this change comes with a cost.

As a result of changes in the business environment, strategies adopted by the firms whether locally or internationally need to have a quick response to the frequent changes that are normally experienced in the market. These responses has been referred by Chandler (1962) as adaptive strategies which mean it considers all the factors prevailing in the market at that particular time and its application brings forth a positive impact in the day to day running of business making the firm a profitable entity.

1.2 Strategic management

The term strategy is defined as the direction and scope of an organization over the long term which achieves advantage in a changing environment through its configuration of resources and competences with the aim of fulfilling stakeholder's expectations. (Johson, & Scholes , 2006)

Managers do not make strategic decision in a competitive vacuum. Their company is competing against other companies for customers. The competition is a rough and tumble process in which only the most efficient companies win out (Charles & Hill , 2008).

One of the key challenges manager face is to simultaneously generate high profitability and increase the profits of the company. The two authors further explain that to maximize shareholder value, managers must formulate and implement strategies that enable their company to outperform rivals-that give it a competitive advantage

1.2.1 Strategic Responses

According to Porter, (1996), strategic response refers to the process of creating a unique and valuable position with means of a set of activities in a way that creates synergistic pursuit of the objectives of a firm.

Firm's strategic responses refer to the processes employed by the executives of the firm in order to deal effectively with everything that affects the growth and profitability of the firm so that it can position itself optimally in its competitive environment by maximizing the anticipation of the environmental challenges (Olwany, 2011)

Johnson and Scholes (2002) distinguish strategic response into three categories: internal development strategies, acquisition strategy and joint development strategies. Internal development strategy according to them refers to the point where an organization develops through its own management new markets and new product. On the other hand acquisition strategy involves mergers between two or more companies and involves full ownership between two or more companies and involves full ownership of another company. Thirdly is the joint development strategy which implies that a firm can only achieve its objectives by co-operating with other companies (Johnson & Scholes, 2002). Therefore strategic response enables organizations to deal with increased turbulence and dynamism of the environment.

1.2.2 The Financial Sector in Kenya

Kenya's financial sector can be described as being relatively diversified in terms of the number of financial institutions. The financial system had 51 commercial banks, 23 Non-Banking Financial Institutions (NBFIs), 5 building societies, 39 insurance companies, 3 reinsurance companies, 10 Development Financial Institutions (DFIs), a Capital Market, 13 Forex bureau, and 2,670 savings and credit cooperative societies (Ngugi & Kabubo, 1998).

Kenya's economic performance weakened over the last decade because of the failure to sustain prudent macroeconomic policies, the slow pace of structural reform, and the persistence of governance problems. The often lax fiscal policy led to a rapid buildup of short-term government debt which, in combination with declines in the saving rate, translated into lending rates in excess of twenty percent in real terms. This, together with other high costs of doing business in Kenya - because of corruption, a deteriorating infrastructure, and an inefficient Parastatal sector (e.g., utilities, and transportation services) depressed investment and its effectiveness, and as a consequence economic growth, (International Monetary Fund, 2000)

The IMF (2000) report further explains that "since early 1998 Kenya's economic performance was mixed. It has achieved fiscal adjustment against the difficult backdrop of worsening terms of trade, a dearth of external financing, and adverse weather conditions. At the same time, the rescue of a major bank in late 1998 strained fiscal policy and temporarily weakened monetary policy. In this context, investor confidence has remained weak, and growth has continued to decline", the report concludes.

Kenya's banking industry registered a 16.9 percent growth in pre-tax profits, from 34.9 billion in June 2010 to 40.8 billion as at end of June 2011, according to information published in Central Bank of Kenya (CBK) website. This rate of growth has also led to increase in mode of service deliver from hall banking to street banking

Price Waterhouse Coopers (2012) publication explains some of the main challenges facing the financial sector today which include; new regulations imposed on financial institution by the Central Bank, for instance, the Finance Act 2008, which took effect on 1 January 2009 requires banks and mortgage firms to build a minimum core capital of KShs 1 billion by December 2012. This requirement was hoped to help transform small banks into more stable organizations.

Ngugi and Kabubo, (1998) further explain more challenges facing growth of Kenya's financial sector which include unpredictable inflation rates. They explain that inflation remained subdued in 1998 and in the first half of 1999, but it increased in the third quarter of 1999 mainly owing to increases in fuel and food prices as well as the lagged effects of the depreciation of the shilling. Real GDP growth slowed from 2.3 percent in 1997 to 1.8 percent in 1998, and it was expected to slow further in 1999, and unemployment continued to increase.

Financial Institutions play a very significant role in the Kenyan economy. Banks, for example usually meet the needs of high end investors by making available high amounts of capital for big projects in the industrial, infrastructure and service sectors of the economy. At the same time, the medium and small ventures must also have credit available to them for new investment and expansion of the existing units. 

1.2.3 National Bank Kenya

National Bank Of Kenya Limited was incorporated on 19th June 1968 .The main objective of its establishment was to help Kenyans to get access to credit and control their economy after independence (National Bank of Kenya, 2012)

National bank in the past has been operating below its capacity due to increased bad debts in loan portfolio amounting to 36 billion which was politically motivated that pushed the bank into massive losses in the late 1990s and early 2000. However this situation has changed since recently the bank posted a profit before tax (PBT) of Sh2.6 billion in the year 2011 compared to Sh2.1 billion in 2009, according to its audited financial statements. (NBK, 2012)

The financial changes outline by different authors above, explains some of the challenges that the financial sector is facing and in particular National Bank of Kenya. In this era of rapid technological development and changes in market environment, NBK, has to put its strategic responses right to enable it compete both locally and internationally

1.3 Research Problem

As Kenya's general economic condition deteriorated in the early 1980s, the financial sector performance also went down. Despite having a diversified financial system, financial savings remained at a low level. The share of domestic savings held as financial assets with the financial sector averaged 30% in 1984-1987, similar to the levels in the 1970s. Monetization of transactions fell from 34% to 30% and 29% in 1978-1980, 1980- 1984 and although NBFIs were mushrooming in the 1980s, the financial system continued to be dominated by the commercial banks with about 70% of the total loans and advances in 1988. In 1986, the sector faced a crisis with most of the institutions experiencing undercapitalization problems. The situation was attributed to the various constraints facing the sector and resulted in the mounting of a financial sector reform (Ngugi & Kabubo, 1998)

The above findings clearly show that financial sector has been experiencing various challenges which include both external and internal shocks. These challenges as outline by Ngugi and Kabubo, (1998) include central bank regulatory differences across financial institutions, especially between commercial banks and NBFIs, and among the financial instruments inadequate regulatory and legal frameworks for the financial system, together with weakness in prudential supervision weak monetary policy control by the central bank segmentation of the financial sector by activities. In the event that financial institutions fail to develop quick response mechanism against these challenges, this often results to these institutions registering losses, and losing its customer base to their competitors. It is this strategic decision that will determine whether the institution shall remain profitable in the current and ever changing market environment.

Franklin et al (2010) addresses some of the gaps in literature on the challenges facing financial sector. They point out that the poor state of African financial development raise a number of important questions on what went wrong with the financial reforms in Africa and on what could be improved. Is African financial development slow in itself, or is it merely a reflection of broader economic and policy failures? Are the levels of financial development achieved outside of Africa, in both developed and developing countries, achievable for most African countries? What factors have inhibited African financial development to this point? If those factors were corrected and financial development did take hold, would the finance-growth nexus hold in Africa as seen in other places? Understanding these issues is of crucial importance since, as well documented in the ample empirical evidence; there is a convincing linkage between financial development and economic development. They conclude by pointing out that there is virtually no rigorous academic research that addresses these questions. This research therefore seeks to find answers and document challenges faced by financial sector thus help in filling the knowledge gap in literature as pointed out above.

The research question guiding the research is what environmental challenges do financial sector in Kenya face and what strategic responses has been put in place against these challenges by financial institution in Kenya and in particular NBK.

1.4 Research Objective

The objective of the study is to identify environmental challenges facing financial sector and in particular National Bank of Kenya and the strategic responses adapted by the bank to overcome these challenges.

1.5 Value of the study

The results of this study has value in the academic field in that it will help in filling existing gaps in literature as relating environmental challenges experienced by organizations and in particular financial institutions. This is fundamental in academic field as it becomes a valuable repository of knowledge to academic scholars which include students, lecturers and researchers who will be able to refer to the document in the future while carrying out related studies.

The study will be of importance in policy making not only to the bank and other financial institutions but also government financial regulatory organ in developing and enacting policies which ensure sustainable operation of financial institutions in the country. External and internal environment has a great influence on operations by financial institutions, hence the results of the study will act as a guide to all stakeholders in the financial sector in developing operational policies which will ensure that any strategic responses adopted is effective in realizing objectives of financial institutions.

Furthermore, the study will be of great value in management practice in that the study will identify environmental challenges faced by financial institution in the current times and through its findings, the study will be able to recommend strategic responses that can be adopted by these institutions. In addition, having knowledge of these environmental challenges, management will be able to set their priorities and goals in line with the challenges they expect of face hence giving them better competitive advantage in the ever changing market environment.


2.1 Introduction

In this chapter, previous studies related to the topic were reviewed. This chapter begins with literature on concepts of strategy, Organization and the environment, internal and external environmental challenges and lastly strategic responses to these challenges.

2.2 The Concept of Strategy

Johnson and Scholes (2002) define strategy as the direction and scope of an organization over the long term which achieves the advantage for the organization through its configuration of resources within a challenging environment to meet the needs of markets and full fill stakeholder's expectations. The concept of strategy explains where the institution is aiming to achieve in the long term and organize which activities and resources that will have to be committed to achieve the intended goals.

Mintzberg (1994) defines strategy as a plan, a pattern, perspective and position. As a plan because strategy defines the means through which an organization moves from one state to another that is from bad to good state. Strategy is also defines as a pattern since it is concerned with repetitive actions over a period of time. Further, he defines strategy as a perspective since it provides a clear vision and a sense of direction of where the organization is heading to. Finally he defines Strategy as a position which means that organizations are willing to offer particular products and services to new markets other than the existing markets. This therefore implies that they are able to position themselves better in new markets by offering new products or services.

Chandler (1962) defines strategy as the determination of the basic long term goals and objectives of an organization and adoption of courses of action and the allocation of resources necessary for achieving these goals. He therefore considered strategy as a means of establishing the purpose of an organization by specifying its long term goals and objectives, action plans and resources allocation pattern or to achieve the set goals.

Porter (1987) views strategy as what makes the corporate whole add up to more than same of its business units .He further classifies strategy in two levels that is corporate level strategy and business level strategy .Corporate level strategy defines what kind of business the organization is in and also the managers should manage their various business units .On the other hand business level strategy explains how to create competitive advantage in each of the business unit in which the organization compete.

Thompson and Strickland (2007) argues that the concept of strategy defines the various approaches that top corporate managers use as to be able to able to achieve a better performance of the set of business in which the organization has diversified to. Therefore he emphasize on the role of key business units managers to influence the strategic decision of the business units that they head to achieve cross business synergies and turn them into a gain of competitive advantage to the organization.

Ansoff and Mcdonnel (1990) define strategic management as a process through which a firm manages its relationship with the environment in which it operates. It involves aspects of strategic planning and management of change. He argues that strategic management has the ultimate objective of developing corporate values and managerial capabilities and through it, the will focus the decision of the entire organization in one direction .Porter (1980) outlined very clearly that the concept of strategic management provides the central purpose and direction that has enabled management of organization to adopt the changing environment.

2.2.1 Strategic responses to challenges of competition.

Competition in the recent past has become one of the major challenge and factor that has contributed to the diverse strategic behavior among organizations in general. Organizations in Kenya are characterized by an aggressive competitive environment with a lot of competitors which calls from them to re adjust and adjust their strategies often so that they can become strategically fit.

This is more common so for example in the banking industry in Kenya which is characterized by intensive competition and show aggressiveness for customer satisfaction and customer loyalty. This has posed a lot of challenges to banks in Kenya hence there is need for banks to respond to these challenges which forces them to review their strategies so as to become strategically fit. This is because of the fact that whenever there is rise in competition it has a negative influence on prices of a firm's product ,its productivity and finally the wages due to employees will diminish leading to restructuring and downsizing of the organization as a result of the intensive competition.

Porter (1987) has outlined the various challenges and forces that firms face from gaining competitive advantage, they include: buyer and sellers bargaining power, threats of new substitute products and rivalry among products as out lined in his five forces model. He further defines the various strategies and strategic responses that can be used by firms to curb with the various challenges within the environment in relation to competition. They include: cost efficiency strategy, product differentiation strategy, focus strategy, avoidance strategy and low cost strategy.

Cost efficiency strategy, one of Porter's generic strategies is cost leadership .This strategy mainly focuses on how firms can gain competitive advantage by having the lowest cost in the whole entire industry (Porter 1987).He argues that in order to achieve low cost advantage, a firm must have a low cost leadership strategy, low cost manufacturing and more so a work force that is willing and committed to the low cost strategy. This helps to achieve cost efficiency strategy that will outperform competitors in the same markets. In relation to the banking industry this can only be achieved when banks put the cost of their services as low as possible so as to gain customer loyalty and customer satisfaction.

Product differentiation strategies refer to those strategies that strive to create unique products that cannot be easily matched or duplicated by other competitors. This can only be achieved if firm's have a resource-based view strategy (Porter 1985).This implies that the firms should have the resource capability to carry out product differentiation .This can only be achieved through innovation and faster speed of services offered to customers.

Pierce and Robinson (2007) argue that the differentiation strategies are aimed at achieving customer satisfaction and loyalty by stressing on attributes of a product that will allow firms to charge a premium price for their products.

Thirdly avoidance strategies focused on environmental change that aims to raise market entry cost. Muendo (2011) outlines that the challenges of competition within the environment that a firm is operating on may take the form of increased prices, buildup of capacity which may require companies to fore-go short term profitability in the hope that they will maintain a long term presence in the market.

Focus strategies refers to the type of strategic response whereby a firm targets a specific segment of the market (Thomas & Strickland, 2007) .They outline that a firm or organization can choose to focus on a selected customer groups and specific products that meets the criteria and the need of the selected customer groups. This would go a long way to ensure customer loyalty hence boost the profitability of the firms .Focus strategy depends upon an industry segment that should be large enough to have good growth potential that is of importance to the major competitors.

2.3 Organization and the Environment

The environment refers to the pattern of all the external and internal condition that influences or affects the life and development of an entity or a business organization. According to Johnson and Scholes (2007) they explain that the organizational environment encapsulates many different influences and hence there is difficulty in making sense of this diversity. They further argues that the environment is defined by it complexity which arises because of many of the separate issues in the business environment that are interconnected.

Porter (1985) observes that the global uncertainty in environmental changes increased dramatically in the 1970's due to fluctuating raw material, prices, swings in financial and currency markets, electronic revolution among others. Therefore by accepting this diversity and complexity of the environment, the organizational environment is defined in different layers.

The first general environmental layer is the macro environment layer which consist of the environmental factors that impact to a greater or lesser extent on almost all organizations, Scholes (2007). The macro-environment is defined by the PESTEL framework which can be used to identify how future trends in the political, economic, social and technological and legal environment might impinge on the organization. This would help identify the key drivers of change which differs from one organization to another.

Organization in the world today operate within an environment that is very dynamic and uncertain and this therefore calls for the need by the management to strategically position themselves in order to adopt to the various changes and dynamism of the environment

Kirapash (2010) explains that organization needs to look out for opportunities to exploit their strategic abilities and seek improvements in their business units building an awareness and understanding of current strategies and success. Porter (1985) defines the organizational environment into two categories: the external environment which is constituted by the forces that are outside the organizations control. These forces are non-specific but would otherwise affect the firms' activities and strategies. On the other hand, the internal environment; which consist of all the forces within the organization, and are within the organization control.

2.4 Internal Environment.

A firm internal environment refers to those aspects of the environment that are within the capability of the organizations. Pierce and Robinson (2007) has defined a firms internal environment as those elements within the organization that include the current employees ,the management and the corporate culture which defines the organization behavior .An organizations internal environment is defined by the firms mission statement which clearly describes the purpose for existence and generally explains the overall purpose which includes the attributes that would distinguish the organization from other organizations. Therefore we shall discuss the attributes that constitute the firms internal environment which includes the firms structure, Organizations culture, company policies and firms internal resources.

A firm's internal environment also includes the corporate structure of the organization which comprises of the hierarchical arrangements that will define the various tasks and people that are responsible for the activities going on within the organization. A firm structure helps to determine the flow of information between the management and the entire staff and therefore have an influence on the strategic decision making process of the firms

Secondly the organizational culture refers to various values that the organization stands for the culture of the organization defines what the core business of the firm are .Just as each person has a distinct personality, so does each organization. The culture of the organization distinguishes it from others and shapes the actions and behavior of the people working in the organization (Johnson & Scholes, 2007).

Thirdly a company policy refers to those guidelines that usually determine how certain situations within an organization are addresses .Thomas and Strickland (2007) argue that firms establish policies that provide guidance for managers who make decisions concerning the circumstances that occur frequently within the organization They further outline that company policies serve as an indication of a firms personality and should be aligned to its mission statement.

Finally firm's resources include the people, facilities, information machinery and equipment, and infrastructure. The most important and critical resources are the people that work within the organization and managers need to be professional in manage resources that are available to them .This implies that mangers needs to manage both human and non-human resources so that they can create value and be of great impact to the organizations environment.

2.5 External Environment

The success of firms in acquiring the needed resources and profitability, improving the quality of goods and services is all based on the impact the external environment has in the firm as a whole. It is in this regard that the firms choice of business strategies is moderated by the environment and that organizations that intend to meet or face the challenges of a rapidly changing environment require management decision that are founded on well-conceived strategies (Ward & Lewandaska, 2008)

Pierce and Robinson (2003) argue that organizations are not closed systems since they do not operate in a vacuum. They are instead open systems since they are likely affected by the environment in their operation. A firm's business environment can be broadly categorized into two categories: micro-environment and macro environment. The micro environment involves those stakeholders in whom the organization with on a regular basis such as suppliers, distributors, employees and customers (Muendo, 2011).He argues that these groups are stakeholders who have direct interest influence on a manager's decision making.

On the other hand a firm's macro-environment refers to all the factors that are outside the organization also known as the external environment. It includes all the relevant factors and influences outside the organizations boundaries. Therefore a firm's external environment is infinite and consists of all the elements outside the boundaries of the firm. The firm's environment provides all the required inputs for the firm from which the firm produces the outputs which is finally delivered to the environments (Wachira, 2011).The firm's remote environment comprises of all political, economic, social, cultural, technological, ecological and legal factors.

Political factors refer to the regulatory parameters within which a firm must operate and hence serves as a major consideration for managers when it comes to decision making. The knowledge of government regulation is gained through the scanning of remote environment which can help a firms avoid unnecessary confrontation with the laws that govern the environment. They include the tax laws minimum wage legislation, tariffs and quotas all of which constitute the legal framework.

Ecological factors refers to the relationships and the coexistence between the environment and other living creature such as the air, soil and water that support them (Wachira, 2011).He further suggest that threats to our life supporting ecology is caused principally by human activities, the industrial society and therefore poses a major threat to the public welfare hence need for environmental legislation and its impact on corporate strategies in Kenya. In Kenya, NEMA is tasked with the responsibility of carrying out environment assessment of any project that is undertaken by companies.

Technological factors refer to innovations which serves as a means through which firms can respond to the various technical challenges that a firm facing within the environment. It refers to all the creative adaptations that can suggest the possibilities for new products or in manufacturing and marketing techniques. (Hammer, 1996)

Economic factors refer to the nature and direction of the economy which the firm operates. It refers to all the factors within the economy that have a direct influence to the economy and affect strategic decision making by managers. They include the consumption patterns that are determined by the income levels hence firms need to evaluate the general availability of credit levels, interest rates, taxation rates and the propensity of people to spend money on certain products and services.

Social factors are the effects that affect the organization and involve beliefs, values, attitude, opinions and lifestyles of persons in the firms external environment as it is developed from cultural demographic , religion, educational and ethnic conditionality hence therefore firms should align their strategies to counter changes within the social factor.


3.1 Introduction.

This Chapter highlights the methodology that was adopted by the researcher in order to execute the study and realize its objective. It included the research design, data collection and data analysis.

3.2 Research Design

This research was conducted as a case study of National Bank of Kenya with the objectives of identifying environmental challenges facing financial sector the strategic responses adopted by National Bank of Kenya to respond to these challenges.

The researcher used an interview guide, interviewed management staff of Corporate Affairs, Finance, Credit, Human Resource and Information technology sections in the NBK head of office in Nairobi. Their observation and comments were noted and this was analyzed to come up with clear and elaborate answers to the research questions which the study sought to identify.

The interview guide was sent to the potential respondents at least two weeks before the actual interview. This is meant to give respondents ample time find answers to some of the questions if they didn't have instant answers. An interview guide pre-test was done with randomly selecting staff in one of the NBK branches where they will be interviewed and the responses noted, used to evaluate if the questions to be asked during the interview will be able to answer the questions that the researcher sought to find answers.

3.3 Data Collection

The researcher used an interview guide will be used in collecting data during the research process. Structured interview guide, outlining relevant questions which were necessary in providing sufficient information required to accomplish objective of the study were used. The researcher in person will carried out the interview.

Data was collected from the top level managers of NBK and to achieve this objective at least six respondents were targeted. They included General Manager-HR, manager-credit, Manager Finance, various branch managers within Nairobi region, manager ICT and manager corporate affairs. These respondents were resourceful enough to provide the required data.

The researcher further collected secondary data from published sources such as newspapers, websites, annual financial statements and the financial performance data available at the Nairobi Stock Exchange so as to compare and enrich the data collected from the interview.

3.4 Data Analysis.

Data was analyzed using content analysis guided by the objective of the study to establish the responses used by National Bank of Kenya to challenges within the environment. Content Analysis has been defined as "a research technique for the objective, systematic, and quantitative description of manifest content of communications" (Berelson, 1974). Content analysis is a research tool focused on the actual content and internal features of media.  It is used to determine the presence of certain words, concepts, themes, phrases, characters, or sentences within texts or sets of texts and to quantify this presence in an objective manner

The research specifically used issues of reliability and validity. Reliability of a content analysis study refers to its stability, or the tendency for coders to consistently re-code the same data in the same way over a period of time; reproducibility, or the tendency for a group of coders to classify categories membership in the same way; and accuracy, or the extent to which the classification of a text corresponds to a standard or norm statistically. (Berelson, 1974)

Advantages of content analysis are that it looks directly at communication via texts or transcripts, and hence gets at the central aspect of social interaction. This method of data analysis also allows for both quantitative and qualitative operations can provides valuable historical/cultural insights over time through analysis of texts. Limitation with this method is the fact that it can be extremely time consuming and also it is is subject to increased error, particularly when relational analysis is used to attain a higher level of interpretation.


4.1 Introduction.

The study had one main objective, which was to establish the strategic response undertaken by National Bank of Kenya to environmental challenges within the financial sector. Primary data was collected by interviewing senior and junior NBK staff in the Nairobi head office and five working branches. The data was analyzed in relation to the study's objective and the findings presented in the various categories below.

4.2 Study Population and composition

Respondents interviewed during data collection included three General Managers from National Bank Head office located at National Bank Building in Nairobi, five branch managers drawn from Times Tower branch, Hospital branch, Kenyatta avenue branch, Card Center and Kitengela branches were interviewed. The study population also included four divisional managers drawn from four branches which include Kitengela, Kenyatta Avenue, Hospital and Head office branches. The respondent's tenure is as categories and analyzed in the table below;

Table : Respondents Tenure





General Managers

20-30 years



Divisional Managers

10-25 years



Branch Managers

10-30 years






4.3 National bank of Kenya financial performance

The current banking environment is rapidly changing and the rules of yesterday no longer apply. The banks has to keep pace with rapid changes it faces every day and of critical importance is that if a bank is not in position to cope with these challenges there is high chance of the bank registering looses and in the long run many have to close its business.

Financial performance of NBK has been improving over the recent years. According to finance manager interviewed during data collection, he stated that financial performance of the banking had registered massive improvement since the year 2006. Despite this, the manager was categorical to point out that this process has not been a smooth ride. There have been stumbling blocks on its recovery path, but according to him, sound strategies adopted by the bank has brought financial success

In order to better understand the challenges and strategic responses put in place by NBK against environmental challenges facing financial sector in Kenya, its financial performance from the year 2007 to 2011 financial years were analyzed. These results were obtained from the finance officer of national bank and to ensure authenticity of the results, only end year audited results by were used for the analysis.

Table : National Bank of Kenya financial statistics 2007-2012

Profit and Loss Account






Total Interest Income






Total Interest Expense






Net Interest Income/Loss






Total Non-Interest Income






Total Operating Income






Total operating Expenses






Profit before tax and exceptional items






Net Non-performing Loans and advances






Total insider loans, advances and other facilities






Total Contingent Liabilities






Total Capital






Balance Sheet







Total Liabilities






Total Shareholders' funds






Source: NBK audited financial reports 2007-2011

Figure : National Bank of Kenya Balance Sheet Items 2007-2011

Figure 1 above shows performance trend of NBK balance sheet items from the year 2007 to 2011 as displayed in the Table 2 above. The summary presented in the bar charts in Fig 1 above shows that the bank has assets worth more than 4 million whereby in the bank invested a lot in increasing assets to a tune of nearly Ksh. 7 Million as per the year 2011. Total liabilities increased in the year 2011 probably due to high investment in acquiring more assets as reflected by high increase in assets in the year 2011 as compare to the other years. Share holders' funds increased slightly between the year 2007 and 2008, but dropped in the year's 2010 and 2011 as a result of the companies move to acquire more assets. However there was an increase in shareholders fund in the year 2009 as a result of the company's move to sale part of its assets which is corroborated by slight drop of assets in the same year.

Figure : National Bank of Kenya Profit and Loss performance 2007-2011

Figure : National Bank of Kenya Profit and Loss % change 2007-2012

Figure 2 and 3 above shows companies' Profit and Loss items performance trend from the year 2007 to 2011. Total of all the items in each category represented in the chart was used for analysis. An overview of the results indicate that profit before tax increased from the year 2007 to 2010 but there was a 9% drop in the year 2011 as compared to the year 2009. Net non-performing loans and advance decreased between 2007 and 2010 but increased minimally in the year 2011. Total operating expenses and income has been increasing from the year 2007. Company's capital shows an increasing trend with the year 2011 reaching Ksh10000 million.

4.6 Internal challenges faced by the bank.

Internal challenges refer to those challenges which arise within the organization daily operations and which are within the control of the organization. Some of the internal challenges identified during the study are as explained below:-

4.6.1 Cost of implementing the new ICT infrastructure

According to the general manager ICT, The ICT infrastructure adopted by the bank has brought great success in terms of service provision by the bank. However according to NBK product officer, there has been challenges in implementing the new technology. Information gathered points out that the bank Kshs.500 million in acquiring new systems. Apart from these cost, there is the cost of hiring trainers, length of time taken in training the staff and the upkeep cost for the staff during the training. Such cost adds more to the total expenses records.

4.6.2 Dishonest employees

The general Manager Human resource pointed out that the Success of any business lays with the staff who provide services to the customers and outlined how the management is able to set policies which will ensure the staff provides quality services in a transparent manner. However this has become a challenge in the financial sector where by the junior staff who are in most cases new graduates have a lot of experience with technology as compared to their bosses who may not be having wide experience with the use of technology. As the NBK information technology staff explains, this often leads to a scenario where the dishonest staff take advantage of this knowledge gap and perform transaction which defrauds the company lots of money, without the bank management realizing this, and if they do, then it is already too late. Some of these dishonest staff collaborates with criminals who pose as customers and steal money from the bank. This aspect according to the general manager strongly believes that it hinders the banks growth since they have to keep on dismissing and hiring new and competent employees which is hard to get from the market and poses a big challenge to the bank.

4.6.3 High cost of training staff

Further the general manager Human resource pointed out that In the 21st century, college education is not enough to ensure one performs his or her duties well in the work place. There are rapid external and internal changes that are frequently adopted by the financial sector and to keep pace with this, staffs have to be trained regularly to ensure they provide quality services to the customers. These changes include technological changes and adoption of new policies in the financial sector which means staffs are to be trained on this. However challenge comes in where the company has to use a lot of money in contracting firms with the skill to carry out the training. Other cost arise from the fact that the in facilitating the staff during the training in terms of meals and transport apart from the cost of hiring the venue. Additional a lot of time is used in carrying out this training and this means the few staff left to attend to customers are often under pressure to deliver.

4.6.4 Increased service breakdown

The general manager operations pointed out that one of the challenges the bank is facing is the issue of increased service breakdown. This has manifested itself through delayed approval of loans. He emphasized that NBK'S customers are deal seekers and they always look for a financial institution that can serve them within the minimum time possible. However, the approval of loans takes weeks or even months depending on the availability of the required documentation. This delay is costly especially when the customer or a firm has a limited time frame to demonstrate that it can raise the required capital to carry out a particular task. More over intrusive documentation is of concern. At the point of application for banking services, some banks are known to be too demanding on documentation. Customers feel that the documentation required (such as tax compliance certificate) before the approval of the much needed loans is an intrusion into their financial privacy. Discouraged by this exercise some customers have opted for other informal financial institutions that do not require too much detail. The operations manager also pointed out the bank has got challenges on flexibility which has a lot of impacts on customer preferences, as they are bound to react to the value added offerings. He noted Customers have become demanding and the loyalties are diffused since the bank is not serving them well need hence Customers want to have a sense of belonging that will keep them from seeking alternatives.

He noted that the financial sector and the economy in general economy has become increasingly competitive, and there is need for the bank to develop efficient products that can quickly satisfy a more demanding customer base and build long-term customer trust. Therefore the bank has a challenge to optimize both internal and external innovation, while seeking operational excellence at all levels. Therefore the marketing manager meeting these challenges would require new business and marketing strategies that boost revenues, improve operational efficiency, cut costs, and enhance the overall management of business. She emphasized that in today's banks are looking beyond traditional practices to new tactics and tools that analysts and thought leaders have identified as the best for the industry.

4.7 External challenges faced by the bank.

External challenges include those challenges that result outside the company's operations and which the company had very little control. It results from the company's interaction with the outside world in its process of service provision. The following are the external challenges which were identified during the research process:-

4.7.1 Competitive banking environment

The Marketing manager emphasized that increased competition within the financial sector has been one of the biggest challenges that the bank has faced is competition He further noted that with the liberalization of the central bank rules to the financial institution has caused Competition in the financial sector to rise at a phenomenal rate. This is mainly as a result of increased change of customer's needs, taste and differences. Other than customer base, the financial industry is also characterized by increased number of financial institutions within the industry that have competitively designed and packaged products that have pulled customers from the major banks to micro finance institutions and small banks within the industry. This situation has kept national bank of Kenya on its toes to innovate products packaged to meet the needs of the customers so as to maintain them. Different financial institution in the sector are developing attractive products and providing quality of service to their customer which means if a bank does not keep the pace with the competitive environment, there is likelihood of it being kicked out of business. Banks are investing in technology so as to reach and interact with their customers with a lot of ease. According to NBK marketing officer interviewed, she reckons that due to competition, NBK has lost a great deal of its customers to other banks. However she was categorical that the bank has put in place strategies to attack former and new customers.

4.7.2 Increased frauds and money laundering

The operations manager pointed out that technological innovations are taking place at a very high rate in all sectors of the economy and banking sector has not been left out. However with such advances, technology has become a double edged sword since despite great benefits it brings to the society, there is also the negative side whereby cases of technology abuse has risen. Banks are the latest victims of this crime where frauds and production of fake money has increased. Banks are losing huge sums of money through online transactions while at the same time production of fake money has become a challenge for the staff to differentiate real and fake money. Money laundering has become a set back to the financial sector since this has been done with a lot of ease by tech-savy individuals who carry out this practice without being easily detected. In addition, frauds involving staff and criminals have led to the banks losing billions of shillings and this has derailed banking operations. Despite tight security measures put in place, the hackers come up with new techniques which banks have not been able to outdo.

4.7.3 Spiral effect of Euro zone debt crisis

This refers to a period of time in which several European countries faced the collapse of financial institutions, high government debt and rapidly rising bond yield spreads in government securities. The European sovereign debt crisis started in 2008, with the collapse of Iceland's banking system, and spread primarily to Greece, Ireland and Portugal during 2009.

According to Chandler, (1962) African economies have benefited from stronger commodity prices and greater foreign direct investment. These gains were constrained by currency appreciation in some instances, and more importantly, by rising food prices. So the crisis did feed itself through the commodity channel and the commodities are a double-edged sword for African economies. When the global crisis set in, export growth from the Sub-Saharan economies declined from an annual average of 7.0 per cent between 2000 and 2007 to only 1.4 per cent between 2008 and 2010

However these did not only impact on Sub-Saharan economy, but its impacts was felt even by the local banks. As a remedy to the this debt crisis credit was restricted globally and trade volumes collapsed around the world hence the value of real exports of good and service declined causing the cost of trade to increase as a result of increase in cost of imports. The trade restrictions imposed by the European countries in order to salvage the falling economy affected financial sector in terms of decreased borrowing and investment. The cost of borrowing loans became so higher to be afforded by investor and members of public and this was made worse since the bank operation cost increased for example cost of acquiring assets increased dramatically forcing banks and other financial institution to impose strict regulations on loan borrowing. This according to marketing officer interviewed led to low borrowing, high cost of operations in the bank and the result was decrease in profits reported.

4.7.4 Political influence

Some branch managers pointed out that Banks and financial sector in general operate in an open economy. As a result of this, the banks often experience political influence in the process of their services provision. An interview with human resource manager of National bank emerged that since the government has a big share in the company, some strong and influential politicians usually take advantage by endorsing individuals of their own choice to certain managerial posts hence locking out qualified and experienced people from acquiring such posts. This often leads to poor decision making and policy implementation by such staff. In addition, political instabilities such as the one experienced in the year 2007 led to foreign investors shying away from investing in Kenyan banks since during such period, destruction of property caused huge losses on investors, whom the bank depends for its success.

4.7.5 Industry regulations

The constant evolution of local and international regulations is a major driving force in the banking industry. The central banking regulations on the lending rates, enactment of bills guiding local and international transaction, minimum central bank requirement and the instability of the local currency against foreign currency has been the other challenges experienced by banks. Hence introduction of these new oversight rules and bodies has had a far reaching implication on the growth and performance of the banking industry according to the NBK marketing officer.

4.8 Adaptive strategies adopted by the NBK.

Having analyzed some of the major external and internal challenges that that faced by NBK from gaining competitive advantage ,the study further reveals some of the strategic responses undertaken by national bank to respond to the challenges facing the financial sector. Some of the strategic responses were as follows;

4.8.1 Investment on information technology

The NBK is adopting a new core banking platform and updating its infrastructure to effectively support Kenyan businesses for example, accommodating changing regulatory requirements - which will attract new trade finance customers. At the same time, it will drive down operating costs through use of efficient technology.

In the year 2006, NBK expanded its ICT infrastructure where they were able to extend service provision to their customers through increasing the number of Automated Teller Machine (ATM). This was achieved through partnership with a third party service provider Pesa Point Limited. This arrangement made it possible for the bank to provide services to their customers beyond the areas covered by the Banks' ATM network.

More over the bank recently invested Kshs.2.2Billion to acquire a new banking system known as Bank Universal Fusion Banking systems. This was a great migration from the previous Branch Power System which had challenges especially offline issues. The new system has helped in centralizing operations apart from improving efficiency and effectiveness in the operations of the branches. According to the operations manager the BFUB system would help the bank go a long way to improving customer service and realize increased customer satisfaction.

The bank has also adopted mobile and internet banking so as to reach its customers wherever they are. The main reason for this according to customer care officer was to address most of the challenges which their customers, both locally and internationally experienced such as having to travel long distance looking for an ATM and long queues in the banking hall. The adoption of this technology has eased congestion in the banking halls, ability of customers to pay for their bills without having to visit the bank. On the positive note, this has seen the revenue of the bank rise as a result of transactions carried out using mobile and internet. In addition, adoption of this technology has put the bank a notch higher as compared to the other banks, who have also adopted the same technologies.

The bank recently acquired Bank Fusion Universal Banking System (BFUB) worth 2.2 Billion in the year 2011 to enhance networking between its branches and the head office. The system has the capability of allowing transactions carried out in the branch transferred automatically to the head office and to other branches. This has created a central network of all the company's transaction thereby enhancing efficiency in meeting customers' needs in terms of making deposits, withdrawal and more important reducing cost of time spend in getting these services. The BFUB systems have also led to increase accuracy by minimizing errors and decrease chances of frauds occurring.

4.8.2 Product innovation and Development.

According to the marketing manager and some of the branch manager interviewed in the study noted that part of the strategic responses that the bank has undertaken to responf to a competitive environment is Product innovation and development .The bank has gone a long way to incorporate new products to the existing range of products. This has come about as a result of increased competition and increased diverse customers' needs accompanied with increased market niche. To start of the of bank has made efforts to launch new products which included the Taifa accounts, pinnacle accounts, Al-mumin savings accounts for Muslims, Superchama accounts to add to the existing range of saving accounts available to their customers. Other than saving accounts the bank has made efforts to improve their lending product which includes Superchama loans and stima loan that were not in their loan portfolio. More over more strategic responses observed included the review of the mortgage policy that would include mortgage for commercial and construction purpose other than the mortgage for residential purpose.

Further During one of the interviews with the sales manager, it came to my attention that the bank has in the recent past developed new and attractive products. These include different personal and corporate banking accounts which meet diverse customer needs. Loans offered by the bank also come with favorable interest rates and payment periods which attract customers. The bank has also been running promotions where customers are encouraged to save money in their accounts and by doing this, the stand a chance of winning lots of prices. This has led to increased savings thereby widening loan lending base of the bank. All this products have proved to be very attractive and have gained a lot of appreciation to both the existing and new customers according to the product manager interviewed.

Sim-ple banking is a new product developed by NBK Banking which allows its customers to receive short messages on their mobile phones containing up to-date information about latest transactions on their Accounts, as well as information about new developments on products and services offered by National Bank to his customers. It is the new Mobile Banking Service from National Bank, offering access to more than three times as many Bank Functions as any other service currently in the market in Kenya and the aim is to offer accessible.

4.8.5 Advertising and marketing strategy

The company has diversified its marketing strategy through using different channels of advising their products and services. Some of the means adopted by the bank is through internet where the company has made its website user friendly by making it easy for customers to get information quickly on the products that are being offered by the bank. In addition, the bank has adopted the use of radio and Television, agents and through facilitation sporting major competitions such as athletics. Through such means, the company has been able to reach out to large audience with information of their new products.

4.8.6 Expansion strategy

The General manager Operations pointed strongly feels that the bank needs to make the banks presence needs to felt in every corner of the country and the region as a whole .Therefore in respect to this The bank has gone a long way to increase its branch network from 37 to 53 branches between the year 2007 and 2011. The reason for doing this, I found during the interview was the fact that the bank was focused on reaching out to middle and low class customers hence increasing its customers base to approximately 3 million.

4.8.7 Outsourcing

As a result of rising cost in terms of service provision to

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