DIGITAL BANKING AND FINANCIAL PERFORMANCE IN NIGERIA’S COMMERCIAL BANKING SECTOR: THE CASE OF ZENITH BANK PLC

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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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