Effect Of E-banking On Bank Profitability
[A STUDY OF GUARANTY TRUST BANK PLC ENUGU]

2.3.1 Types and Delivery Channels of Internet Banking

Internet banking can be classified into three basic types. These are; internet banking, smart card banking and mobile/telephone banking.

Internet banking: this is a category of e-banking service where customers’ instructions are taken and attended to through the internet. Internet baking gives customers the possibility of enjoying banking services from the comfort of their homes and offices. This means that customers can purchase goods by ordering from the net, instruct their bank to pay the vendor the amount, and the products are delivered to the buyer.

Smartcard banking: this is the conduct of banking transaction through the use of

E-cards such as; ATM cards, debit cards, credit cards. The smartcard system makes it easy for a customer to have access to cash and carry out inquires, and conduct transfers without visiting the banking hall.

Mobile/telephone banking: this involves the use of mobile phones or fixed wireless phones to conduct banking business.

Benefits of Internet

Rogers, (1995) states that the rate of adoption of a new innovation is associated to (perceived) relative advantage: the greater the perceived related advantage, the faster the adoption. Secondly, the desire to improve organizational performance is seen to be a provision for technological change: however, the advantages of internet banking includes a board range of functions, and includes; electronic mail improves communication between individuals and the bank, between banks and external parties, and between banks. Ovia, (2001) is of the view that online banking services have now become a birthright of the customer as the customer demands the flexibility of operating an account in a y branch of a bank irrespective of which branch the account was opened. With internet banking, customers would enjoy sitting in the comfort of their homes and offices and with a personal computer, log onto their bank’s servers and transact banking activities.

Internet Banking Risks and Control

Every financial institution should have guidelines based on their scope and level of sophistication in the internet technology.

Characteristically, internet banking increases the exposure of banks, such as transaction, strategic, reputation and compliance risk amongst others. As information systems become more connected and interdependent, the risk of computer intrusion will increase.

Possibly, this is the most challenging aspect of the new electronic delivery system. Banks with weak physical and system security substantially increase their risk, many of which could bring to their collapse. Possible results include direct currency loss, change reputation, improper disclosure, and law suits or regulatory sanction. The consequence of any breakdown even momentarily and for whatever reasons, could be devastating. Okafor, (2006).

Bank Profitability

Bank profitability simply implies whether a bank has fared well within its trading period to realize its trading objective. Usually, stock prices and its behavior are deemed to reflect the performance of a firm. This is a market indicator and may not be reliable always. However, the size of the bank, the volume of deposit and its profitability could be considered to be a more accurate performance indicator. For the purpose of this study, Return on Equity capital (ROE) and the Return on Assets (ROA) are used to access bank profitability.

These ratios are signs of management efficiency, and rate returns. Nikolai and Bazley, (1997) state that the amount of net income earned in relation to total assets is an indicator of how efficiently a company uses its economic resources. They further stressed that when the ROE is higher that the ROA, the company has a favourable financial leverage.

 Özataç and Nwobodo, (2010) studied the internet banking in Northern Cyprus at a period of time 2004-2009, in a panel data of 22 retail banking. They also used ROE and ROA as dependent variables. In this case, two other ratios were included: the CA- ratio of total credit to total assets and the CD-ratio of total credit to total deposits used to test the link between Internet banking and performance. The model resulted with a low link between the variable and the absence of multi co-linearity among variable. The main conclusion was that the CA and CD ratios both resulted with negative relationship while using the internet. Despite the internet banking increases the performance in different sectors, the authors entail that in case of these two ratios they were not used wisely or properly. Another study by Onay and Ozsoz, (2012) used a panel data in 18 deposit banks in Turkey, in a period of time from 1990-2008 in the emerging market center. They wanted to test that internet adoption had a negative effect on profitability in the beginning of the adoption year, and the positive effect on the deposit and credit branch. In their model they are using some other basic variables as Interest Income, Non-interest income, Branch profit, Branch deposit, and Branch credit, Perno as a log of the number of personnel per branch and Internet as dummy. They suspected for endogeneity thus they used four exogenous variables for Internet dummy as: Large if the banks' asset are in the fourth quartile, State if the bank is government owned, Foreign if the bank is foreign owned, Listed if the bank is listed on the stock exchange. Their test was realized in 2SLS in a Probit model. The conclusion is that performance of banking sector in an emerging market is different as in emerging markets the adoption of Online banking reduces the bank's profitability. Another finding is that the internet adoption has a positive effect on branch profitability, in deposit and loans as that is the second prove that they tested. The main issue is that the market has its own limit or ability, as in emerging market it is more difficult to adopt and increase the performance while in developed markets is easy and more effective. That is why in an emerging market the physical network is still present. According to Hernando and Nieto, (2006) they also used Instrumental Variable for Internet banking adoption dummy. Their study is done in 72 commercial banks of Spain from 1994 till 2000. They aim first to prove that internet banking adoption, reduce the overhead expenses and the cost reduction results the increase of profitability’s bank. The model is using the same variable as other study, but here we have two equation first want to know the effect on performance variables and second they use branch's performance due to online banking adoption. Instrumental Variables for Internet dummy are seven exogenous variables as (HOUSEHOLD, URBAN, FINANCIAL_GROUP, LARGE, LISTED). The same Instrumental Variable is used for the second model. In the model without Instrumental Variable they see that adoption of Online Banking is having a positive effect in terms of ROA and ROE also there is a lower staff cost significant after a half year of adoption in both estimation. But with the Instrumental Variable there seems to give more complete information as the expenditure is significantly decreasing over a period of 12 months or one year. There is evidence of efficiency improvement in general expenses in the first model, while the second model seems to increase the number of 7 branches due to adoption of online banking in the first six months as it imply that internet adoption is more complementary issue and not fully substitute for physical branches.