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The impact of ict on the banking sector in nigeria

Is There a Productivity Paradox? Visit for more related articles at Journal of Internet Banking and Commerce Abstract This research investigates the impact of investment in Information Technology IT on the financial performance of banks in Nigeria. The study covers post-Banking 2006-2010 consolidation period of 5 years. The population of the study comprises of all the 24 banks, and a random sampling of 10 banks was made.

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Four hypotheses were developed and tested in line with the proxies to the dependent variables. The effect of TR is positive and that of TC is negative on all the four financial performance measures, but the effect of IT investment on all the four financial performance variables is negative, which is not an expected sign.

This means that an increase on IT spending leads to a decrease in the financial performance of Nigerian banks, that is to say heavy IT investment does not increase banks profitability, hence there is existence of IT productivity paradox in the Nigeria banking industry. However a handful of studies Council of economic advisors, 2001; Mckinsey global institute, 2001 on the performance of IT in US banking show weak or non-existent links between IT spending and productivity specifically post-1995.

This confirms the persistence of productivity paradox in US banking industry, which refers to the absence of a positive impact of IT investment on productivity as originally identified by Solow, 1987. Surprisingly, some studies Griliches, 1997, Oliner and Sichel, 1994, and Jorgenson and Stiroh, 1995 support the thought of Solow 1987 in concluding that Information Technology may essentially affect negatively banks efficiency and may reduce productivity. This paradox noted by Solow 1987 was that "you can see the computer age everywhere these days, but in the productivity statistics".

Since 1970s to the time Solow was claiming that there was a huge deceleration in growth, technologies were becoming ubiquitous directly or indirectly invading nearly all sectors of the economy.

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The transformation implies that the Nigerian banking industry, which is dominated by commercial banks, has continued to invest heavily in IT products and services such as hardware, software,telecommunication, training, consulting, and outsourcing. Information technology acquisition and deployment is capital-intensive and requires deliberate commitment for success. Agboola and Salawu 2008 and Andoh-Baidoo and Osatuyi 2009 captures this commitment by noting that some banks have built private very small aperture terminal VSAT satellite systems to overcome the challenges posed by the lack of communication infrastructure in Nigeria.

Shu and Strassmanm 2005 conducted a survey on 12 banks in the US spanning the period 1989-1997. However, conversely, there are many studies approving the positive impacts of Information Technology expenses on business value. Kozak 2005 investigates the influence of the evolution in Information Technology on the profit and cost effectiveness of the banking zone during the period of 1992-2003. The study indicates optimistic relationship among the executed Information Technology.

Hit and Brynjolfosson 1996 documents the positive impact of IT on output and consumer surplus. Similarly, Barua, Kriebel Mukhopadhyay 1995 found that IT investment affects intermediate measures such as inventory turnover but found no evidence on the benefits extended to firm performance as measure by return on assets ROA.

As regard to banks, Markus and Soh 1993 found that not all banks achieve clear financial benefits from IT spending: The surprise confirmation of the productivity paradox in US banking system provides the major motivation for this study which set out to investigate the impact of investment spending on IT on the financial performance of banks in Nigeria.

Literature searches yield no much evidence of research about the relationship between IT spending and financial performance of banks in Nigeria. Though research studies abound for organizations abroad, Ogunsola 2005 observes that a wide gap in IT development and research exist between developed nations and developing countries including Nigeria. Nigerian banks are seeking competitive advantage in rapidly expanding globalized market and continue substantial investment in IT, expecting a rise in profitability as IT spending increases.

However, little or no knowledge exists that defines clearly the impact of investment in IT on the financial performance of banks in Nigeria. To overcome this, the study investigates the impact of investment in IT on the financial performance of banks in Nigeria using financial performance measures such as return on assets, return on equity, earning per share and net profit margin with IT cost and the number of ATMs as the independent variable.

In the past few years, banks in Nigeria have increasingly depended on the deployment of IT infrastructure to drive their processes in order to deliver superior financial performance to meet and surpass the impact of ict on the banking sector in nigeria expectations. With their transition to the e-business, e-commerce and e-banking platform, Nigerian banks are aggressively moving towards reduction of cash transactions Ovia, 2007.

It would be fascinating to know whether such investment in IT infrastructure when compared with other factors has led to remarkable improvement in the profitability of banks. Unfortunately, a survey of existing literature worldwide revealed conflicting results. Some studies show there is a significant positive relationship between investment in IT infrastructure and bank profitability, while other state the contrary.

Nigeria at 50: The Impact of Information Technology

Information systems in organizations thus provide information support for decision makers. Information systems encompass transaction processing systems, Management information system, decision support systems, and strategic information systems Laudon and Laudon, 2006. Information consists of data that have been processed and are meaningful to a user. Information Technology ITtherefore, produces information that supports the management functions of an organization Davis and Olson, 1985; Lucas, 1993; McLeod, 1995.

In recent years, the utilization of information technology has been magnificently increased in service industries, particularly, the banking industry, which by using Information Technology related products such as internet banking, electronic payments, security investments, information exchanges can deliver high quality services to clients with less effort, thereby enhancing their financial performance Berger, 2003.

  1. Business or accounting profit is often measured as a percentage of sales revenue, called profit margin. Retrived on March 20th, 2012 from.
  2. Economies of scale, high capital requirements, patents, or import protection enable some firms to build monopoly positions that allow above-normal profits for extended periods.
  3. Our Bank Account contains all information about the owner of this website. Through ATMs render obsolete many of the functions that used to be carried out at branch offices; they foster ongoing consolidation in the industry.
  4. As in the case of frictional or disequilibrium profits, profits that are due to innovation are susceptible to the onslaught of competition from new and established competitors Hirschey, 2008.

Ahituv and Neumann 1993 stated that an information system is a set of components people, hardware, software, data, and procedures that operate together to produce information that supports the operation and management functions of an organization. Laudon and Laudon 2006 defined IT as the study of information systems focusing on their use in business and management. There is a large body of literature on the general subject of information technology IT.

Clarke 1994 describes how the applications of IT have evolved over the years: Zuboff 1985 uses the terms automate, informate, and transform to categorize different ways IT can be used.

Automate is the label that covers transaction processing and other IT applications designed to support and facilitate normal everyday business processes. Informate describes management support, decision support, and data warehousing types of applications, while transform refers to IT applications that significantly change the market and business environment, often labeled as strategic applications.

Existing studies generally note that IT has three distinct features which can change dramatically the way work is organized Adler, 1992. They are automate, infomating and networking capabilities. Automation means the replacement of manual labor by the IT system accomplish menial work tasks.

The info mating ability refers to the capability of IT to generate the impact of ict on the banking sector in nigeria information of the work process. According to Zuboff 1988this info mating ability distinguishes IT from the automation technology which characterizes the early phase of industrial revolution: It [IT] provides a deeper level of transparency to activities that had been either partially or completely opaque.

In this way, IT supersedes the traditional logic of automation. Activities, events, and objects are translated into and made visible by information when a technology informates as well as automates. The introduction of direct banking and Internet-based financial services over the past decade has spurred profound changes in customer behavior and service expectations.

In today's Financial Services FScustomers demand immediate fulfillment. In short, they want to conduct real-time transactions from any location, through any device, for any product all at their convenience. At the same time, they demand consistent levels of service across all delivery channels. Brynjolfsson and Hitt 2000 stated that "Information Technology contribute significantly to firm level of output. Likewise they illustrated that Information System professionals are more than twice as productive as non-Information System professionals.

Although Information Technology IT expenditure is regarded as costly and risky, financial institutions are one of the largest investors in IT Robson, 1997.

ICT and Its Impact on National Development In Nigeria: An Overview

An interesting finding of Morton 1991 supported by Hitt and Brynjolfsson 1996 and by Hallgarten, Heyward, Ross and Tambini 2001is that benefits from IT do in fact exist, but are not captured by the organization. Several frameworks have been proposed to guide the choice among Information System evaluation methodologies.

Akoka 1981 uses the Gorry and Scott-Morton 1972 framework for IT as a contingency model for choosing among evaluation methodologies, proposing that structured operational control problems should be evaluated using costbenefit analysis, while unstructured strategic planning problems should be evaluated using an edictal reports and managerial assessment of system value. Mitra and Chaya 1996 found that IT investments reduce average production costs, and increase average overhead costs in firms.

Alpar and Kim 1990 reports that investments in information technology decrease total costs in the banking industry. Morison and Brendt 1990 found from government data that technology provides only marginal returns and concluded that there was over-investment in IT. A major assumption in the current study was that revenue and profit growth could be achieved through increased IT spending. IT infrastructure, which encompasses hardware, software, networks, and database, represents one of the core influences on IT implementation and applications to improve transaction processing, customer service, and organizational performance Brynjolfsson and Hitt, 2000.

It was broadened to include information exchange not only among men but also among machines as well as the exchange of signals in the animal and plant worlds. The pace of change brought by new technologies has had a significant effect on the way people live, work, and play globally.

Business organizations, especially the banking industry of the 21st century operates in a complex and competitive environment characterized by these changing conditions and highly unpredictable economic climate with Information and The impact of ict on the banking sector in nigeria Technology ICT is at the centre of this global change curve. In Nigeria, IT is playing great role in bank operations and decision making policies, and has the potential performance, to change the business process, towards greater financial performance.

Sophisticated information systems specifically the widespread use by management of personal computers that can tap into large centralized data bases that are linked together as part of the impact of ict on the banking sector in nigeria larger computer network is changing the way business is done in the Nigerian banking industry. Woherem 2000 revealed that Nigeria banks since 1980s have performed better in their investment profile and use of ICT systems, than the rest of industrial sector of the economy.

The study, however pointed out that whilst most of the banks in the west and other parts of the world have at least one PC per staff, Nigerian banks are lagging seriously behind, with only a PC per capital ratio of 0. Frank and Oluwafemi 2012 stated that studies have shown that effective and efficient use of Information Technology IT helps to distinguish between business equivalents.

For example, IT was an important distinction between banks that were doing well in the mid-1980s as compared to those that was less profitable Anandhi and Bharadwaj, 2000. Hence, the need to survive, for global relevance, to maintain existing market share and sustainable development has called for the exploitation of IT and its many advantages.

A list of IT services also includes internet banking, mail, telephone banking, and mobile banking. Accounting for a greater percentage of what could be regarded as IT in banks is its internetworking.

This internetworking refers to the internet, extranet and intranet and interbank networking. Intranet exists in branches such that transactions taking place in a branch is only accessible in that branch alone. For example, a branch has a VPN of 10. A transaction taking place at 108 networks is exclusively for that network, it cannot be seen from the 103 network. Extranet exists such that a customer is not restricted to the branch he opened his account. He could bank anywhere since such information is made securely available within the bank regardless of its network.

Internet is the unsecured channel wherein both the secured intranet and extranet exists. Here, every other information aimed for the public is made available since they are not confidential Frank and Oluwafemi, 2012. The financial sector has been an interesting case for service innovation as it moves towards using the web for commercial purpose through internet banking and IT. The impact of price clarity and consumer empowerment afforded by information technology eventually led to product and price competition.

IT has made banks not just being profitcentric but also customer-centric banks Accad, 2009. The web based banking operations has made it possible to accommodate functions and processes in other sectors like in government vehicle license registration and education payment of fees.

With the aid of information technology, banks are closer to their customers to find out what they really need and deliver such needs.

Information technology has made it possible for customers to gain access to their account balance, buy recharge cards and pay bills using their mobile phones anytime from anywhere.

Online banking allows customers to get their current account balance at any time. Information technology leads to a reduction in cash transactions which lead to reduction in crime Ovia, 2000. ICT acts as a tool for the actualization of various organizational activities in order to implement and enforce policies.

Also ICT was found to impact positively the speed of banking service delivery, as well as productivity and profitability. Today people of Nigeria can go to the internet and get any information they want.