DIGITAL BANKING AND FINANCIAL
PERFORMANCE IN NIGERIA’S COMMERCIAL BANKING SECTOR: THE CASE OF ZENITH BANK PLC
ABSTRACT
This study investigates the impact of digital banking on the profit performance of commercial banks in Nigeria, using Zenith Bank Plc as a case study. The analysis employs annual time series data from 2005 to 2024, sourced from Zenith Bank’s financial statements. To examine both short- and long-run dynamics, the study utilizes the Autoregressive Distributed Lag (ARDL) model, complemented by Fully Modified Ordinary Least Squares (FMOLS) and Dynamic Ordinary Least Squares (DOLS) for robustness. Unit root tests indicate that the series are integrated at levels I(0) and first difference I(1). The ARDL bounds test confirms a long-run relationship between digital banking indicators and bank profitability. Findings from the ARDL estimations reveal that digital banking components exert both positive and negative significant long-run effects on profitability, with short-run adjustments occurring at 21% and 14% speeds in the two models. FMOLS and DOLS results corroborate these findings, further establishing the dual nature of digital banking’s influence on profitability while addressing endogeneity and heterogeneity issues. Notably, ATM usage is found to have a negative long-run effect, while mobile banking and POS adoption positively influence profitability. These findings support prior literature but enhance it by providing a more robust methodological framework. The study concludes that while digital banking is a catalyst for profitability, its impacts are mixed, necessitating targeted strategies to maximize its benefits. Recommendations include improved ATM placement, enhanced customer education, and stronger public-private efforts to promote e-banking adoption.
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
1.1 Background of the Study
1.2 Statement of the Problem
1.3 Objectives of the Study
1.4 Research Questions
1.5 Research Hypotheses
1.6 Scope of the Study
1.7 Significance of the Study
CHAPTER TWO
REVIEW OF RELATED LITERATURE
2.1 Conceptual Literature
2.1.2 Point of Sale (POS)
2.1.3 Mobile Banking
2.1.4 Return on Assets (ROA)
2.1.5. Cyber-Crime Threat and
Other Challenges for Digital Banking in Nigeria
2.2 THEORETICAL REVIEW
2.2.1 Technology Acceptance Model
(TAM)
2.2.2 Resource-Based View (RBV)
2.2.3 Agency Theory
2.2.4 Transaction Cost Economics
(TCE)
2.3 EMPIRICAL REVIEW
2.4 RESEARCH GAP
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 Research Design
3.2 Definitions of the Variables
3.3 Model Specification
3.4 Robustness Check Model – FMOLS
AND DOLS
CHAPTER FOUR
EMPIRICAL RESULTS AND DISCUSSION
OF FINDINGS
4.1 Data Description
4.2 Testing for Stationarity
4.3 Testing for Long-Run
Relationships
4.4 Testing for Stability
4.5 Estimation of the ARDL
Long-Run Impact
4.6 Estimation of ARDL Short-Run
Dynamics
4.7 Robustness Check – Analysis of
FMOLS and DOLS Results
4.8 Discussion of Findings
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSION
AND RECOMMENDATIONS
5.1 Summary of Findings
5.2 Conclusion
5.3 Recommendations
References
Appendixes: Regression
Results
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF STUDY
Digital banking has emerged as a
significant trend in the banking industry in recent years, with technological
advancement enabling banks to offer a range of digital services such as online
banking, mobile banking and digital payments. Digital banking has transformed
the way customers interact with their banks, providing them with convenient and
efficient ways to access banking services. (Ayuma and Munywoki 2012), in their
research discovered that in Kenya, the transformation of carrying out
transactions traditionally to a digital form has led to globalization due to an
increase in competition among businesses. According to Ekekwe (2016), in an
investigation carried out, it showed that technology and digital transformation
is the greatest weapon to ensure that the banking industry survives. It also
showed that for banks to maintain their competitive edge, it has to personalize
their services in order to attract and retain their customers, and that these
services should be of high quality and at a low cost.
The impact of digital banking on the
profitability of commercial banks has been an area of interest for researchers
and industry professionals. While digital banking has the potential to increase
revenue and reduce costs for banks, the extent of its impact on bank
profitability is not well understood.
(Olusegun .S.O. and Oluwatoyin .A.O. 2021) examined the effect of
digital banking on commercial banks. They investigated that digital banking can
positively effect the banking system and it's development. (Hua .M. and Liu
.G.2018); the impact of mobile banking on bank performance: evidence from
china, investigated the impact of mobile banking on the performance of Chinese
banks and provided insights into the factors that influence the adoption of
mobile banking by customers. (Gupta .A. and Sharma .S. 2018); Digital banking
adoption in India, an empirical study, provided a depper insight into the
potential benefits of digital banking in commercial banks.
Understanding the relationship
between digital banking and bank profitability is critical for commercial banks
to make informed decision about their digital banking strategies. Moreover,
with the increasing adoption of digital banking by customers, it is essential
for banks to understand how they can leverage digital banking to improve the
profitability and remain competitive in the market. (Luo .X. et al 2010) in
their study; examining multi-dimentional and multi-faceted risk in initial
acceptance of emerging technologies; an empirical study of mobile banking services,
examined the factors that influences the initial acceptance of mobile banking
services by customers and also provided insights into the benefits of mobile
banking for banks. (Alhassan .A. and Nartey .E.N. 2020); the effect of digital
banking on the financial performance of commercial banks in Ghana, examined the
possible impact of digital banking on the banking environment. (Khatun .F. and
Rahman .M.A. 2021) examined the impact of digital banking on the profit
performance of commercial banks in Bangladesh. (Ongore V. O. and Kusa .G. B.
2013); determinants of financial performance of commercial bank in Kenya,
examined the factors that can be used to examine the relationship between
digital banking and bank profitability.
Therefore, this study aims to investigate
the impact of digital banking on the profit performance of commercial banks.
The study will examine the relationship between digital banking and bank
profitability, focusing on factors such as revenue growth, cost reduction and
customer retention. The findings of this study will provide insights into how
commercial banks can leverage digital banking to improve their performance in
the competitive market.
1.2 Statement of the Problem.
The banking industry has witnessed a
significant shift towards digital banking in recent years, with commercial
banks investing heavily in digital technologies to provide customers with
convenient and efficient banking services. According to Ngango et al (2015),
before the introduction of digital banking, bank customers complained of
wastage of time due to the long queue, waiting to be served and also delay in
payment of cheques as representatives of different banks waited in the clearing
houses for settlement of their dues. In the study of Njogu (2014), it was reported
that bank managers celebrated the introduction of digital banking as it
resulted to new market opportunities, increased account sales, wider market
reach and increased efficiency. According to the bank supervision annual report
(2015), information technology was expected to minimize time, distance, space
and expenses, thus expanding access to affordable financial services. According
to Kinoti (2015), the dynamic banking environment has been associated with
changes such as personalization of customer services, changes in technology and
competition. Investigation by Rono (2015), showed that these changes forced
commercial banks to adopt going digital in order to gain a competitive
advantage by making transactions easier for their customers.
However, in the previous researches
conducted, there are similar problems, such as cost of operation and customer’s
adoption. According to Aduda and Kingoo (2012), it was discovered that's there
is an ongoing debate among researchers as to whether the adoption of digital
banking can actually improve banks performance with the reason that adopting
it, requires a complementary investment in the skills and technology to ensure
its effectiveness and efficiency, which would reduce the banks performance. It
also gave insight on the decreasing rate at which customers are adopting the
digital system, due to fear of fraudulent practices online such as money
diversion and hacking of account and also low network coverage to get a quick
service.
However, despite the apparent gains,
digital banking has been unable to achieve the expected impact on the banking
sector.
1.3 Objectives of the Study.
The main objective of the study is
to examine the relationship between digital banking and the profit performance
of commercial banks in Nigeria for the period 2012 to 2022, using Zenith bank
PLC as a case study. The specific objectives are to:
i.
Examine
the relationship between Automated Teller machine (ATM) expenditure and the
profitability of commercial banks in Nigeria.
ii.
Investigate
the relationship between Point of Sale (POS) expenditure and the profitability
of commercial banks in Nigeria.
iii.
Examine
the relationship between Mobile Banking expenditure and the profitability of
commercial banks in Nigeria.
1.4
Research Questions.
In the light of the objectives of
the research, the following research questions were considered pertinent:
i.
To
what extent does a relationship exist between Automated Teller machine
expenditure and the profitability of commercial banks in Nigeria?
ii.
How
far does Point of sale expenditure influence the profitability of commercial
banks in Nigeria?
iii.
To
what extent does a relationship exist between the Mobile banking expenditure
and the profitability of commercial banks in Nigeria?
1.5 Research Hypothesis
i.
H01: There is a positive relationship
between the adoption of Automated Teller machine expenditure and the
profitability of commercial banks in Nigeria.
ii.
H02: There is a positive relationship
between the adoption of Point-of-Sale expenditure and the profitability of
commercial banks in Nigeria.
iii.
H03: There is a positive relationship
between the adoption of mobile banking services expenditure and the
profitability of commercial banks in Nigeria.
1.6 Scope of the Study.
This study will investigate the
relationship between the adoption of digital banking services and the
profitability of commercial banks, using point of sale (pos), automated teller
machine (atm) and mobile banking as independent variables and return on assets
as dependent variable. The study though majorly focusing on Zenith bank PLC,
will cover all commercial banks in Nigeria that have adopted digital banking
services and have publicly available financial statements. The data for the
study will be sourced from the annual report and financial statement of commercial
banks in Nigeria spanning from 2012 to 2022. The analysis will be conducted
using regression analysis technique to determine the impact of digital banking
on the profitability of commercial banks in Nigeria.
The geographical scope of the study
will cover all regions of Nigeria, including the North, East, West and South to
investigate any regional variations in the adoption of digital banking
services. The time scope of the study will cover a 10 year period from 2012 to
2022 to investigate the long term impact of digital banking services on the
profitability of commercial banks in Nigeria. Overall, the study aims to
provide insight into the impact of digital banking in Nigeria, which can help
inform policy decisions and guide future investment in digital banking
technologies.
1.7
Significance of the Study
The study aims to provide useful
information to academics and researchers in the field of banking and Finance.
It aims to contribute to the existing body of knowledge on digital banking and
profit performance of commercial banks and also provide empirical evidence on
it's impact to the banking industry.
The study findings will also be
useful to regulators and policy makers in the banking industry. They will use
the information derived to design effective policies that will enhance the
performance of commercial banks in Nigeria.
This study will also be valuable to
commercial banks in Nigeria. It will provide them with information on the
impact of digital banking on their profit performance. This will assist them in
making informed decisions on the adoption and implementation of digital banking
strategies.
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