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Name Umer Saleem
Registeration# 4463-FMS-MBA
Assignment Research Proposal
Date 26-04-2011
Research Proposal: Impact of Information Technology on Financial Performance of Banking Sector
_____________________________________________________________________________
IntroductionAs an emerged business trend, the vast applications of information technology (IT) on economic
organizations are immense and immeasurable. Organizational systems and functions are now
considered effortless and unproblematic because of IT. IT also expanded the opportunities
concerning product development processes or innovations that provide organizations with cost
and competitive advantages. In a much broader sense, information technology strengthens the
business value of every organization. The parameters of using IT for internal affairs have
profound impact specifically for core management responsibilities (Gunasekaran, et al, 2002).
Establishment of information systems is one of the primary techniques that businesses adapt
nowadays. The success in the management of information systems development project impacts
three key issues: quality, usefulness and usability. Generally, it is not known how information
technology affects the financial performance of the banking sector and these three key issues,
likewise, are not yet explored in the banking industry. This study proposes to investigate the
impact of IT and specifically the use of information systems on the financial performance of
banks.
Brief Literature Review
There are many studies on effect of IT on organization, firms, industries and banks performance.
Many of studies has shown that there is different result in considering IT effect on performance.
Some of studies about “productivity paradox” has show that there is a positive relationship
between IT investment and performance. Albadvi et al., in their study aims to present an
instrument to be used in such research and to study the role of two intervening variables
including organizational infrastructures and business processes reengineering in such a
relationship. In this research has been shown by regression analysis that organizational
infrastructures in firms under study has been invested in order to reach fulfillment of IT
potentiality and has been show that investment in IT can improve business processes and finally
improve organizational performance [6].
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(Berger, 2003), auditing firms can deliver high quality services to client with less
effort .Seifert and Wimmer (2001) stated some impact of functional economics to retail banks.
One is the increased need for banks to improve their monitoring functions, mainly to fulfill the
task of assessing and controlling risks, that primarily arising from lending relationships. Aside
from the challenges brought by ecommerce, there are also challenges of storing information of
customers to databases. That is, most of the bank's financial information is held in the form of
reports.
Mingfang & Richard considered effect of IT investment on firm performance by
linking with environmental dynamism, firm strategy and percentage of CEO/CIO.
The research results suggest that firms need to make greater investment in IT if
they are in more dynamic environments and are also pursuing more externally
oriented strategies. Furthermore, making investment in IT itself is not sufficient
Lin in another study, investigates whether IT capability of a firm can create
economic value and/or enhance profitability? This study distinguished IT investment
and IT capability and shown that IT capability is the base of competition among
firms in information industries such as banking .
Beccalli in 2007 investigated whether investment in information technology–
hardware, software and other IT services–influences the performance of banks? Also
investigated whether IT investment can improve business performance or not? The
findings of study indicate the existence of a profitability paradox and suggest that
banks should reduce their spending on hardware and software, and increase
outsourcing if they are to improve their profits performance.
William and Shreshta in another study investigated the impact of IT on the
productivity of commercial banks in Japan compared to the banks in other Asia-
Pacific countries. The results showed that Japanese banks consider the severity of IT
problems higher than Asia-Pacific banks. Japanese banks are significantly concerned
about the high costs of IT and information security.
Wesely and Strassman shown that information spending has the higher marginal
product than labor stands. This result suggests increasing IT investment and cutting
labor expenses.
Seifert and Wimmer (2001) stated some impact of functional economics to retail banks. One is the
increased need for banks to improve their monitoring functions, mainly to fulfill the task of assessing
and controlling risks, that primarily arising from lending relationships. Aside from the challenges brought
by ecommerce, there are also challenges of storing information of customers to databases. That is, most
of the bank's financial information is held in the form of reports.
(White, 1998) The interest in IT investments in the banking industry comes from
the intrinsic nature of banking activities: to process, manage, and strategically use
information. Several consequences arise. First, IT has facilitated the development of
new, more sophisticated financial products as well as the introduction of alternative
delivery channels to the traditional branch network
(De Bandt and Davis, 2000) IT shapes the ways in which banks carry out their
business, with the application of new and improved technologies expected to
reduce bank costs over time. Third, in the EU, the development of cost saving
technology, together with deregulation, has intensive financial sector competition.
As a result, rationalization and cost management are salient bank strategic
objectives.
(Carr, 2003). Within the IT literature, the competitive strategy theory does not
clearly
Predict either a positive or negative relationship between IT spending and
Profitability performance. To overcome this ambiguity, this paper combines and
extends { for the rest time - two large bodies of studies: the IT literature on the
economics of IT and the banking efficiency literature. At this purpose, we briefly
summaries this literature on the economics of IT, which examines the impact of IT
on portability measures in the short run by adopting a competitive strategy
framework
(Sambamurthy and Zmud, 1994). The limits of traditional financial accounting
measures in finding improved performance relating to IT spending likely stem from
their inability to quantify and incorporate the various unobservable impacts on such
features like: improved quality, customer services, speed and responsiveness,
product variety and so on.
A handful of studies (Council of Economic Advisors, 2001; McKinsey Global Institute,
2001) on the performance of IT investments in US banking show weak or non-
existent links between IT spending and productivity even in recent years (specially
post-1995). This confirms the persistence in the US banking industry of the
productivity paradox, which refers to the absence of a positive impact of IT
investments on productivity (as originally identified by Solow, 1987). This finding
appears counterintuitive as banks represent the industry with the highest
proportion of IT investments both in the US (Council of Economic Advisors, 2001)
and in the EU (European Information Technology Observatory, EITO, 1996-2002).
Problem Statement
The key question that the study will seek to answer is - how does IT impact the financial
performance of the banks? Other research questions are:
1) Do retail banks perceive IT as strategic and source of competitive advantage as it boost
optimum financial performance?
2) Which among the types of information systems - operational, high potential or support
maximizes financial performance of the banks?
3) How do information systems contribute in the achieving high financial performance
for the banks?
General Objective
The main aim of this study is to investigate the impact of IT and information systems on
banks' financial performance. In lieu with this, the research objectives are:
· To determine which among the type of information systems support banking businesses
leading to high financial performance of the banks
· Evaluate in what specific ways and to what extent do information systems could eventually
lead to high financial performance
5.0 Theoretical framework
Software
Hardware
Internet Banking
No of ATMs
Banking SMS
Phone Banking
--Financial Performance (ROE,EPS,)
--Operational Performance
Independent Variable Dependent Variable
Detailed structure variables
1. Software: It is the net investment bank in the software during the period i. It is one of the independent variables.
2. Hardware: It is the net investment bank in the computer hardware and equipment in the period i. It is one of the independent variables.
3. InBank: It is how the Internet used frequently by the Bank from a variable i. It is dummy variable, so that if the bank applies this property in the period i give (1), otherwise gives (0). It is one of the independent variables.
4. PhBank: It is how the idea of Bank answers phone frequently used by the banks. It is a dummy variable, so that if the bank applies this property in the period i give (1), otherwise it gives (0). It is one of the independent variables.
5. ATM: The number of ATMs owned by the bank in the period i. It is one of the independent variables.
6. CyBranch: Is the possibility of utilizing the bank branches electronic property in the period i. It is a dummy variable, so that if the bank applies this property in the period i give (1), otherwise (0). It is one of the independent variables.
7. SMS: It is how to use the bank to bank messaging feature. It is a dummy variable, so that if the bank applies this property in the period i gives (1), otherwise (0).
8. Size: It is referred to the size of the bank, measured by total assets in the period i. It is a control variable.
9. Deposits: It is a ratio of deposits to assets in the period i. It is a control variable.
10. Credit: Is the proportion of credit facilities to the assets in the period i. It is a control variable.
The impact of Information Technology on improving Banking Performance
1. The first Model is the Market Value-Added (MVA)
2. The second model is the Return on enquiry (ROE):
3. The third model is the Earning Per Share (EPR):
4. The fourth model is the Net Profit Margin (NPM):
5. The fifth model is the Operating Return on Assets (ROA):
The Effect of Information Technology on the Banks Efficiency
This questionnaire is designed for a research work from the department of Management & Accounting If. Please, FILL IN correct information, all the information will be treated confidentially and the information will be used for this research work only. Thanks.
Please tick [ ] or fill where appropriate.
SECTION A
1. Sex :
A. MALE [ ] B. FEMALE [ ]
2. Age:
A. 18-25 ( ) B. 26-35 ( ) C. 36- 45 ( ) D. 46 & above ( )
3. Educational qualification:
A. Matric ( ) B. Inter( ) C. Bsc/BA( ) D. Msc/PhD( ) E. Others Specify.......
4. For how long have you been using this bank?
A. 0- 2yrs ( ) B. 3-5yrs ( ) C. 6- 8 ( ) D. 9 & above( )
5. What type of account do you operate?
A. Current ( ) B. Savings ( ) C. Others specify
6. My Account here is mainly for
A. Business( ) B. Salary( ) C . Others specify ……………..
Strongly
AgreeAgree Neutral Disagree
Strongly
1.
IT/Computer is really helping this
bank
2.
I don’t think IT has effect on the
bank’s operation
3.I enjoy prompt and efficient service
delivery
4.
I will encourage my colleagues to
patronize this bank
5. IT does not increase prompt and
efficient service delivery
6.
To save or withdraw money is time
consuming
7.
I was once delayed in the bank
because the computer was down
8.IT makes enquiry about the state of
my account faster
9.IT/computer has a great positive
impact on the growth of this bank
10.
IT/Computer has reduced the
interaction of the Cashiers with
customers
11.IT/Computer encourages customers
to patronize this bank
12.Computer really speed up cashiers’
work
13. IT improve transactions
14. IT increases bank productivity
15. There is a need to improve the
services rendered by this bank