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.