THE IMPACT OF INTERNET BANKING ON PROFITABILITY OF COMMERCIAL BANKS IN NIGERIA (A CASE STUDY OF FIDELITY BANK PLC)
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THE IMPACT OF INTERNET
BANKING ON PROFITABILITY OF COMMERCIAL BANKS IN NIGERIA (A CASE STUDY OF
FIDELITY BANK PLC)
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Internet banking is one of the gifts to human beings by
computer technology. Use of computers have automated banking process and thus
has given birth to internet. Internet is a fast spreading service that allows
customers to use computer to access account-specific information and possibly
conduct transactions from a remote location - such as at home or at the
workplace. ATM cards, credit cards ,debit cards, smart cards ,all these have
eased human life up to such an extent that today life without these seems to be
hard, full of misery.
The increased adoption and penetration of Internet has recently
redefined the playground for retail banks. The retail banks are now offering
their services majorly through their internet branches. However, the effect of
internet banking on bank profitability mainly on the bank profitability has
remained an unstudied issue.
Internet banking is the conduct of banking business
electronically which involves the use of information communication technology
to drive banking business for immediate and future goals.
Daniel (1999) cited in Alhajri [1] describes internet as the
provision of banking services to customers through internet technology.
According to Basel Committee on banking supervision[2], internet banking is
defined to include the provision of retail and small value banking products and
services through electronic channels as well as a large value electronic
payment and other wholesale banking services delivered electronically Though,
Alsmadi and Alwabel [3] expressed that the definition of internet banking
varies among researchers partially because internet banking refers to several
types of services through which bank customers can request information and
carry out banking services..
However, the revolution in the banking industry in Nigeria
started with the advent of electronic devices to assist in the discharge of
quality services to bank customers. The introduction of these electronic
devices has increased competition in the industry which has gone a long way to
reducing customers’ waiting time for banking transactions. This innovation is
brought in by the use of computers and other networking gadgets. In Nigeria,
the networking started with the LAN (Local Area Network) MAN (Metropolitan Area
Network) and subsequently the WAN (Wider Area Network).
Generally, the automation of banks makes transaction and data
processing very easily accessible for quick management decision making. This
led to another level of benefit which ushered in what is today referred to as
internet banking. Internet banking helps the banks to speed up their retail and
wholesale banking services. The banking industry believes that by adopting the
new technology – internet, the banks will be able to improve customer service
level and tie their customers closer to the bank [4]. According to Simpson[5],
what actually motivates the investment in internet banking is largely the
prospects of minimizing operating costs and maximizing operating revenue.
Nevertheless, the adoption of internet banking (internet) has
brought major
challenges to the banking industry in terms of risk exposure.
The volume of deposits has increased as well as the fraudulent practices
experienced by Nigerian banks since its adoption in the economy. This is the
reason why Ovia[6] posits that Nigeria’s banking scene has witnessed phenomenal
changes, especially in the mid 1980s and these have manifested in the enormous
volume and complexity in product or service delivery, financial liberalization
and business process re-engineering. The effectiveness of deploying information
Technology in banks therefore can not be put to doubt. The fact remains that
the reality of using IT in banks is necessitated by the huge amount of
information being handled by these banks on a daily basis. On the customers’
side, cash is withdrawn or deposited, cheques are deposited or cleared,
statement of accounts are provided, money transfers etc. At the same time,
banks need up-to-date information on accounts, credit facilities and recovery,
interest, deposits, charges, income, profitability indices and other control of
financial information.
However, researchers have not given much attention to this
revolution occasioned by internet banking with regard to profitability
performance of banks.
The revolution in the banking industry in Nigeria occasioned
by the adoption of internet banking has compelled Nigerian banks to invest more
in assets to meet up ith competitive positioning. Since much earnings have been
retained to meet up this obligation, shareholders have been denied dividend
with the expectation that future dividend will be fatter.
The banking software is usually improved on short term basis
causing huge financial costs to the banks. To the capital providers, they
expect that there would be tremendous returns accruing from the project if
information driven technology (internet) is adopted. Going through annual
financial reports of Nigerian banks in recent years, they reveal that dividend
returns are dwindling while other performance indicators seem to be weak
contrary to the expectation of the shareholders or investors.
Generally, there appears not to be improvement on banks’
returns on equity and assets as speculated.
1.2 STATEMENT OF THE PROBLEM
The vast majority of the recent literature on electronic
money and banking suffers from a narrow focus. It generally ignores internet
banking entirely and equates electronic money with the substitution of currency
through electronic gadget such as smart cards and virtual currency. For
example, Freedman, (2000) proposes that internet banking and electronic money
consist of three devices; access devices, stored value cards, and network
money. Internet banking is simply the use of new access devices and is
therefore ignored. Electronic money then is the sum of stored value (smart)
cards and network money (value stored on computer hard drives). What is most fascinating
and revealing about this apparently popular view is that internet banking and
electronic money are no longer functions or processes, but devices.
Within this rather narrow scope for internet banking and
electronic money, there are nonetheless many research that address one or more
of the challenges facing it. Santomero and Seater (1996), Prinz (1999), and Shy
and Tarkka (2002), and many others present models that identify conditions
under which alternative electronic payments substitute for currency. Most of
these models indicate that there is at least the possibility for electronic
substitutes for currency to emerge and flourish on a large scale, depending on
the characteristic of the various technologies as well as the characteristics
of the potential users.
Berentsen (1998) considers the impact that the substitution
of smart cards for currency will have on monetary policy, arguing that although
electronic substitutes for currency will become widespread, monetary policy
will continue to work as before because this currency substitution will leave
the demand for central Bank reserves largely intact. Goodhart (2000) discusses
how monetary control would work in an economy in which Central Bank currency
has been partially or completely replaced by electronic substitutes.
Friedman (1999) point out that internet banking presents the
possibility that an entire alternative payment system, not under the control of
the Central Bank may arise. In an extreme variant of Friedman, King (1999)
argues that today computers make it at least possible to bypass the payment
system altogether, instead using direct bilateral clearing and settlement; the
responses to Friedman.
1.3 OBJECTIVES OF THE STUDY
The main objective of this study is to examine the impact of
internet banking on profitability of commercial banks in Nigeria, using
Fidelity bank plc as a case study. Specific objectives of the study are:
1. To examine the
relationship between Automated Teller Machines Installed and profitability of
Fidelity bank plc.
2. To examine the
relationship Point on Sale Channels issued and profitability of fidelity bank
plc.
3. To examine the
relationship between debit/credit cards issued to customers and profitability
of Fidelity bank plc.
1.4 RESEARCH QUESTIONS
In-order to achieve the stated objectives for the study the
following research will be asked:
1. What relationship
exists between internet banking and profitability of Fidelity bank plc?
2. Does internet
banking increase profitability of Fidelity bank plc?
3. What better ways
can profitability of commercial banks in Nigeria be improved?
1.5 RESEARCH HYPOTHESES
1. Ho: There is no
significant relationship between internet banking and commercial bank
profitability.
Hi: There is a significant relationship between internet
banking and commercial bank profitability.
2. Ho: Internet
banking decreases profitability of commercial banks.
Hi: Internet
banking increases profitability of commercial banks.
1.6 SIGNIFICANCE OF THE STUDY
The study will aid commercial banks in Nigeria to understand
banking in a new dimension. Revelations
from the study will highlight the various benefits of cashless banking
and how these measures if properly taken can reduce operations cost and
increase profitability. Apart from interest from loans and other investments
commercial banks partake in, this study will also introduce a new model for
banks to adopt-the customer convenience model. This model as presented in this
study will enlighten managers of commercial banks on how to serve customers
better while gaining their loyalty and money.
1.7 SCOPE OF THE STUDY
The study will cover internet banking investments (POS
channels, ATM channels) and profits after tax of Fidelity bank PLC from
2011-2014. The study could not cover other banks due to in-adequate disclosures
on Internet banking investments from these banks.
1.8 DEFINITION OF TERMS
Internet banking: is an electronic payment system that
enables customers of a financial institution to conduct financial transactions
on a website operated by the institution, such as a retail bank, virtual bank,
credit union or building society. Online banking is also referred as Internet
banking, internet, virtual banking and by other terms.
CBN: Central Bank of Nigeria
Profitability: The state or condition of yielding a financial
profit or gain. It is often measured by price to earnings ratio.
Return on Asset (ROA): This shows the percentage of how
profitable a company's assets are in generating revenue.
ROE: Return on equity (ROE) measures the rate of return for
ownership interest (shareholders' equity) of common stock owners. It measures
the efficiency of a firm at generating profits from each unit of shareholder
equity, also known as net assets or assets minus liabilities. ROE shows how well
a company uses investments to generate earnings growth. ROEs 15-20% are
generally considered good.
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