Abstract:
Information Technology is widely used in development and outspreading of banking
options. Banking sector is more into digital banking in the current world. A number of
studies are carried out on digital banking worldwide. In Sri Lankan context, a quantitative
analysis on the bank performance and digital banking aspects was not found. This study
attempts to fill this gap by analyzing quarterly data from year 2010 to 2018. Data were
obtained from Payment and Settlement Department of Central Bank of Sri Lanka and
Central Bank Web site. Bank performance is identified by the return on assets (ROA)
before tax. From number of digital banking aspects, the variables used in this study are,
number of internet banking transactions, number of point-of-sale (POS) machine
transactions and number of mobile banking transactions (MOBT). Time effectiveness and
the cost effectiveness of digital banking is discussed in the study. Augmented Dickey
Fuller Test was used to check the stationarity of the variables. Since the stationarity test
revealed that all the four variables become stationary at the 1st difference, cointegration
of the variables were drawn through Johansen Cointegration Test. Trace test indicated
four cointegration equations and Max-Eigen Statistic test indicated only one cointegration
equation at the 5% level. Hence Vector Error Correction Model (VECM) was fitted to
determine the long run equilibrium. Model showed that there exists a very stable long run
association that, when the system is deviated from the equilibrium, it is corrected by
63.36% increase in the ROA per quarter. Impulse Response Function was employed to
illustrate the importance of each digital banking aspect to banking sector profitability
when a shock is imposed to the system. It is observed that the POS transactions affects
profitability positively, while internet banking and mobile banking showed a negative
impact on profitability. In the short run, internet banking and POS transactions showed
an association with profitability. This study recommends that adequate consideration
must be given to digital banking in policy implementation with regards to banking sector.
Citation:
Arseculeratne LVMN (2019). Impact of digital banking on banks' profitability : study on Sri Lankan banking industry [Master’s theses, University of Moratuwa]. Institutional Repository University of Moratuwa. http://dl.lib.uom.lk/handle/123/16771