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

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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