THE IMPACT OF INTERNET BANKING ON PROFITABILITY OF COMMERCIAL BANKS IN NIGERIA (A CASE STUDY OF ECO 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 ECO 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 ECO bank plc.
2. To examine the relationship Point on Sale Channels issued and profitability of ECO bank plc.
3. To examine the relationship between debit/credit cards issued to customers and profitability of ECO 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 ECO bank plc?
2. Does internet banking increase profitability of ECO bank plc?
3. What better ways can profitability of commercial banks in Nigeria be improved?

1.5 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.

1.6 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 ECO 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.