CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF 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. (Adedeji et al
2007)
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)
Daniel
(1999) Cited in Alhajri (2008) describes internet as the provision of banking
services to customers through internet technology. According to Basel Committee
on banking supervision (2008), 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 (2011)
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 (Yang and WhiteField, 2005). According to
Simpson(2002), 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(2001) posits
that Nigeria’s banking scene has witnessed phenomenal changes, especially in
the mid 19805 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 cannot be put to doubt. Daniel (2009)
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. Daniel (2016)
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 with 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. Daniel Akpan (2007)
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 virtual currency. For substitution of currency through
electronic gadget such as smart cards and of three banking and electronic money
consists 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.
1.3.0 OBJECTIVES OF THE STUDY
The
main objective of this study is to examine the impact of internet banking on bank
performance. Specific objectives of the study are:
i.
To examine the relationship between Automated Teller Machines Installed and bank
performance
ii.
To examine the relationship Point on Sale Channels issued and bank performance
iii.
To examine the relationship between debit/credit cards issued to customers and
bank
performance
1.3.1 RESEARCH QUESTIONS
In-order
to achieve the stated objectives for the study the following research questions
will be asked:
i. What are the relationships Automated
teller machines installed and bank performance?
ii. How the relationship point on sale
channels issued affect bank performance?
iii. To examine the relationship between
debit/credit cards issued to customers and bank performance?
1.3.2 RESEARCH HYPOTHESES
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.
Ho:
Internet banking decreases profitability of commercial banks.
Hi:
Internet banking increases profitability of commercial banks.
1.4 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.
1.5 SCOPE
OF THE STUDY
The
study will cover internet banking investments (POS channels, ATM channels) and
profits after tax of Nigeria Banks from 2013—2016. The study could not cover
other banks due to in- adequate disclosures on Internet banking investments
from these banks.
1.6 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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