International Journal of Scientific Engineering and Science

Volume 3, Issue 7, pp. 56-60, 2019. ISSN (Online): 2456-7361

Impacts of Financial Innovations on Financial

Performance Evidence of Electronic Banking in
Africa
Jingqin Zu1*, Ying Gu2, Kaodui Li1, Osei-Assibey Mandella Bonsu1
1
School of Finance and Economics, Jiangsu University, Zhenjiang 212013, China
2
Business School of Wuchang University of Technology, Wuhan, 430063, China
Corresponding Author: Jingqin Zu, jing qin2019 @126.com

Abstract— The study examined the impacts of financial innovation on banks profitability performance by means of electronic banking services
in Africa from the period of 2015-2018. The study employed the dynamic panel data method and GMM estimations via a panel data regression
model. The findings revealed that there is a strong persistence in a reliable manner for both ROA and ROE. The results further show that,
positively, bank cards and ATM affect banks financial performances with the exception of POS terminal and internet banking. More
importantly, the profitability of most African developing countries affected the percentage number of ATMs to the number of branches and is
highly important. Certain policies were discussed.

Keywords— Innovations, Electronic banking, financial performance, Africa.

However, the new existing financial institutions products

I. INTRODUCTION made to customers is significant. In Africa, the technology-
Financial institutions have witnessed colossal dynamism over based applications such as mobile banking, internet banking,
time. A terrific deal of transformation has been hugged in the and Automated Teller Machine (ATM), Point of Sale Purchase
field that has prompted the growth of money-related items, (POS), and App store as cited in ((Tam and Oliveira 2016))
exercises and ranked structures that have to intensify and provides clients of financial institutions imperative edge in the
expanded the productivity of the monetary framework. conveyance of subsisting products. These innovations are
Globally, financial organizations and financial systems are in accessible to every African financial institution's products and
the throes of changes caused by escalating globalization and services with low-cost banking works for 24 hours to 7 days.
deregulation. In the financial sectors, financial innovations The induction of technology-based applications has greatly
such as mobile banking, internet banking, and Automated impacted the Africa financial sectors positively. It has caused
Teller Machine (ATM), Point of Sale Purchase (POS), and financial institutions effective and transparent share of
App store, mobile money, internet banking, agency banking grievances. Since the emergence of the stated technology-
are taking place at a massive fast place. (Tunay, Tunay et al. based applications in Africa, it has caused the dependence of
2015).According to Nofie (2011), innovations in the banking branches to dwindle. According to (Al-Smadi and Al-Wabel
sector is the emergence of a new or best product. In fact, 1970), these qualities escalates the day to day activities in
innovation lowers the cost of manufacturing current financial financial institutions, thus encourages institutions to take
service. Akamavi (2005) also states that innovation in the electronic-based services for clients.
financial services industry has resulted in latest basic The technology-based products provide opportunities for
modifications, including: deregulation, Increased competition, financial institutions to have important cost advantages, ease
2 greater costs of creating new products and the fast pace of nether risk and increasing profitability than the traditional way
technological innovation, more challenging clients and of banking. Moreover, various studies conducted depicts that,
corporate consolidation. electronic-based applications products of financial institutions
The approach of innovation and changing financial affect financial performance; Okiro & Ndungu, 2013, (Shaikh,
conditions have warranted this transformation. The liberalized Glavee-Geo et al. 2017), thus yielding returns for institutions
domestic regulation escalated global competition, increase when invested in the short run. In fact, the expected findings
innovations in the new financial methods, and the volatile are not noticed in most developing countries in Africa
expansion in internet banking, and information technology especially in the banking community due to the fact that,
decimated for this change. In fact, this transformation has customers prefer traditional based banking to electronic-based
impeded escalating pressure on managers and employees to banking. Therefore, the current study investigates the effects
improve productivity and organizational financial of electronically based applications on banks financial
performance. performance in West Africa countries from the period of
Financial innovations have greatly impacted the financial 2009-2018.
market in relating to the establishing up new and big The rest of the papers are as follows. The next paper
opportunities for the shareholders, thus developing new review prior studies. Following the prior studies section is the
products and services to improve new markets.

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 International Journal of Scientific Engineering and Science
Volume 3, Issue 7, pp. 56-60, 2019. ISSN (Online): 2456-7361

methodology of the study. The fourth section analyzes the amenities of branches and the limitedness of Automated Teller
results and the last section concludes the study. Machines. (Fadoju, Evbuomwan et al. 2018)
However, in emerging economies, internet banking has
II. LITERATURE REVIEW been operated by big financial institutions (Malhotra and
BatizLazo and Woldesenbet, 2006 as mentioned in (Stoica, Singh, 2006, 2009, as cited by(Akhisar, Tunay et al. 2015).
Mehdian et al. 2015), financial innovations are used by banks This makes the big individual owned banking institutions
as powerful strategic instruments to surpass the competition received a higher deposit, thus low branches and less fixed
and have become an important channel for financial assets lead to internet banking. (Akhisar, Tunay et al. 2015)
institutions to enhance their performance and maintain their According to Malhotra and Singh 2007, financial
market efficiency. It intrigues the imperativeness in studying institutions resulting in internet banking boost the low market
the relationship between financial institutions performance share and as results, rivals speed up the induction of
and banking performances. competitive works in this area. With respect to the positive
A financial institution competitive advantage effects on the performance of the role of cost-effectiveness is
distinctiveness can be known due to successful innovations internet banking is terrific. For example, Kagan et al 2005,
especially in a highly unstable working environment thus Abaenewe et al. 2013, transactions executed by a branch of an
placed banking institutions a unique competitive position and organization can be reduced when the same works are done on
lead to higher level financial performance. (Roberts and Amit, websites, or Automated Teller Machine (ATM). It can be seen
2003). Porter, (2004) admonished that, this can only be that the services cost associated with internet, technology and
ascertained by continual innovation and enlargement of the electronic banking reduces average operational cost, overhead
products. physical costs endured by financial organizations.
Innovation is vividly a significant approach in any industry Innovations are classified as intensive electronic banking
of the modernized economy. Over the years, financial services for financial institutions, their distributions ways are
innovation has made a substantial impact on the banking more but having a cost below the sector average. (Pigna,
sectors to have new and innovative products and services. 2002). Moreover, electronic amenities utilized by financial
According to Hayashi & Klee, 2003), innovations in institutions is significant and a terrific deal as in cost per
developed countries over the years includes negotiable CDs, transactions reducing along the emerged infrastructure.
Eurodollar accounts, Eurobonds, sushi bonds, floating-rate According to (Oyewole, Abba et al. 2013), education plays a
bonds, puttable bonds, zero-coupon bonds, stripped bonds, crucial role in contributing to the success of the internet and
options, financial futures, options on futures, options on electronic banking. The level of education of customers
indexes, money-market funds, cash-management accounts, including the working of the Institution’s websites, ATM
income warrants, collateralized mortgages, home equity loans, machines are strong factors due to internet banking. For
currency swaps, floor-ceiling swaps, and exchangeable bonds. example,(Brush, Dangol et al. 2012); Sullivan, 2000, too much
The significance of technology-based banking is escalating use of internet banking will emerge when customers level of
day and day. It is irrefutable that technology-based banking education is very high. Therefore, in developing economies,
gives banks relatively low risk and cost advantage thus the utilization of electronic and technology-based banking is
ensures high returns. not at its peak as long as the services cost will impact banks
Empirically, prior studies have done addressing the effects profitability.
of the financial performance on the profitability of financial Research has been resulted to clients who are inclined
institutions which proffer electronic banking products. For toward electronic banking show that clients are creating the
instance, Sullivan (2000), DeYoung (2001), Hasan (2002), ability to use such administrations. Then again, the use of
Pigni et al. (2002), Arnaboldi and Claeys (2008), Ciciretti et customers digital banking administrations also affects the
al. (2009), Weigelt ve Sarkar (2012) as cited in (Liébana- economic institutions expense and revenue structure.
Cabanillas, Nogueras et al. 2013), in their studies on the Not all financial institutions in the segment have increased
effects of electronic and internet banking applications depicted productivity segment productivity when banks used
that, electronic banking applications needs advanced comparative electronic administrations and did not frequently
technology increasing the overall profitability of the banks in consider the company boundary. Interestingly, when banks
the United States and other European countries. Thus, the provide comprehensive services banks then decrease operating
technology way of banking has an important positive effect on costs and expand income (Dubois et al. 2011, Brush et al.
the development of competition in financial institutions and 2012).
performances. Research has been led to customers who incline toward
In Arnaboldi and Claeys, 2008, Ciciretti et al. 2009, electronic banking demonstrate that customers create abilities
internet banking applications make bank to build the in the utilization of such administrations. Then again,
orientation of technological innovations up. In most utilization of electronic banking administrations of customers
developing economies, the absence of technology-based likewise influences the expense and income structure of the
banking amenities seized effects of the expected cost- financial institutions. All financial institutions have not
effectiveness and profitability. It is not available solid impacts expanded productivity in the segment when the banks utilized
on the profitability of electronic and technology banking comparative electronic-based administrations and not
activities as results of the inadequate data technology considering the business limit commonly. Interestingly, when

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 International Journal of Scientific Engineering and Science
Volume 3, Issue 7, pp. 56-60, 2019. ISSN (Online): 2456-7361

banks give integral services banks then operational costs Bond Test of the null hypothesis of no second-order auto
decreasing and incomes expanding (Dubois et al. 2011, Brush relationship in the disturbance term. (Roodman, 2006, 2008;
et al., 2012). Goddard et al, 2011; (Huang and Hou 2019)
III. RESEARCH DESIGN IV. ANALYSIS, DISCUSSIONS AND RESULTS
The study used descriptive research design. The 4.1 Descriptive Statistics.
descriptive research approach includes the gathering of data The table below depicts the descriptive statistics of the
that describe and establish, tabulates, depicts and defines the variables. It gives the summary of the mean, standard
data. deviation, maximum and minimum results of the variables
3.1 Model Specification acquired from BIS (Payment systems Statistics), and the
World Bank (World Development Indicators), and
The study used panel regression model to determine the
International Monetary Fund (IMF), specifically at the
impacts of electronic banking products on financial
Financial Soundness Indicators.
institutions performance in West Africa countries.
ROA it   it  perit   0  1Cardsit   2 POSit  TABLE 1: Descriptive analysis
(1)
3 ATM it   4 Internet Bankingit   it Variable Mean Std. Dev. Min Max
ROA 1.156 0.943 -1.350 5.000
ROE it   it  perit  0  1Cardsit   2 POSit  ROE 12.552 9.551 -45.7 44.5
(2) POS 921.011 1387.956 0.0001 10632.1
3 ATM it   4 Internet Bankingit   it Cards 386.854 1067.425 0.0001 8427.8
Where ROA it and ROE is a particular economy financial Internet Banking 14.851 24.776 0.0001 83.000
ATM 0.446 0.574 0.0001 3.805
institutions system as in financial performance, Cardsit is
period the with a country released a total banks cards (bean it From the table, it is vivid that, the average of (1.156) and
debit credits, credit credits, master cards etc.), Posit existing (12.552) are attained by banks in Africa on their financial
POS terminal number, ATM is the automated teller machine performance represented by ROA and ROE respectively. It
and it is the ratio of ATMs to the number of branches and emanates with a range of (2.45) stanch from a minimum of
Internet banking represents the sum of customers who benefit (47.05) for the banks on their total assets and minimum of
from internet banking happenings. (49.5). Meanwhile, an average of 921.01 of the banks was by
At this point, αit is the equal constant, π is persistency affected by POS with a minimum of (0.000) and a maximum
coefficient, β0 are the coefficients of the descriptive variables of (10632.1)
and εit is the error term embodies white noise features. It is seen from table 1 that, descriptive statistics of some
variables revealed significant differences for the reason that,
3.2 Data Collection and Study Sample. the sample for the study was made up of different structure
The study used all the developing economies or countries economies.
in West Africa for the period of 2015- 2018. The electronic
banking data of individual countries were attained from BIS TABLE 2: Correlation Matrix
ROA ROE POS Cards ATM Intn. Bank.
(Payment systems Statistics), and the World Bank (World ROA 1
Development Indicators). However, performance data of the ROE 0.895 1
banking organizations were obtained from the International POS 0.0811 0.033 1
Monetary Fund (IMF), specifically at the Financial Soundness Cards 0.0000 0.0102 0.6705 1
Internet
Indicators). The sampled countries for the analysis is Banking
-0.5401 -0.3683 -0.1962 -0.1415 1
displayed as an appendix. ATM -0.0767 -0.0583 -0.1522 -0.0881 -0.0141 1
3.3 Data processing Procedures
From the table (2) above, the correlations of the variables
In processing data of the study, we used the system of the study were tested by means of the correlation
dynamic panel method as analysis method. Arellano and coefficient. It is not astonishing that Return on Equity and
Bover (1995) and Blundell & Bond (1998) is broadly used to Return on Assets are in elevation correlation positively as a
examine bank financial performance. In reducing the likely result of the performance metrics calculations. It is shown that
biases, the system GMM estimator is chosen since the samples the number of customers using internet banking has a strong
are infinite. Goddard et al, 2011; (Akhisar, Tunay et al. 2015). relationship with virtually all variables excluding Automated
The system in which wrapped levels and lagged distinct of Teller Machine (ATM), but depicting outstanding negative
instruments variables centered on the GMM estimator. It is relationships with all other variables
mandatory to demonstrate that, the instruments validity and
second-order auto relationship in error terms are not used to 4.2 Discussions
ensure for continual estimations. With this, two tests are In table 3, the generalized method of moments (GMM)
performed respectively. A Hansen (1982) test for instrument systems estimations which are based on the model equations
validity as used by (Akhisar, Tunay et al. 2015), which is and is however presented. In this table, financial performance
robust to heteroscedasticity in the troubled term; and Arellano- of banks signified by return on equity (ROE) and return on

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 International Journal of Scientific Engineering and Science
Volume 3, Issue 7, pp. 56-60, 2019. ISSN (Online): 2456-7361

assets (ROA) both estimated distinctly for the dynamic panel card is comparatively weak but positive effects banks
model. We used Wald test and the findings shows that, all the profitability, going along with an indirect contact which is
coefficients of the model is significant statistically. tremendously significant for financial institutions in Africa.
TABLE 3: Estimation of system panel dynamic data. V. CONCLUSIONS AND IMPLICATIONS
ROE ROA
Coefficient. z Test Coefficient. z Test The study investigated the impacts of financial innovation
Per-it 0.47879 34.95 *** 0.36609 17.02 *** on banks financial performance using electronic-based
Cards 0.00008 2.43 *** 0.00366 8.35 *** banking on Africa from the period of 2015-2018. The study
ATM 0.16801 4.66 *** 3.30665 4.12 *** used panel data and it was analyzed using dynamic panel data
POS -0.0002 -12.5 *** -0.00259 -11.52 ***
Internet Banking -0.00464 -1.84 * -0.0754 -3.43 *** methods of the sample developing countries in Africa. The
Constant 0.56749 11.78 *** 7.79359 12.42 *** study also used GMM estimator in the analysis to gives more
Observation 154 154 reliable and effective findings.
Wald Test 1355.2 [0.0000] 655.94 [0.0000] The findings show that it is not astonishing that Return on
Sargan Test 17.45826 [0.9784] 20.2305 [0.9460]
Equity and Return on Assets are in elevation correlation
ROE positively as a result of the performance metrics calculations.
Arellano-Bond Test Coffin. z Test It is also shown that the number of customers using internet
AR (1) -2.4546 [0.0097 banking has a strong relationship with virtually all variables
AR (2) -1.3489 [0.1739] excluding Automated Teller Machine (ATM), but depicting
ROA
Arellano-Bond Test outstanding negative relationships with all other variables. The
AR (1) -1.6616 [0.0764] results further revealed that Return on Equity (ROE) and
AR (2) -1.1547 [0.1683] Return on Assets (ROA) both estimated distinctly for the
***denotes significance at 1%, while ** denotes significance at 5% and dynamic panel model. With the utilization of the Wald test, it
*denotes significance at 10% z tests respectively. shows that, all the coefficients of the model is significant
statistically.
From the table above, the findings specify that the correct The findings reveal that the number of POS and internet
set of contributory variables were designated for the models as banking services by the customers negatively affected
well as the Wald tests show that the general implication of the profitability. This issue can be understood as the sample had
model is high. Moreover, there is no problem with the residues distinct in electronic banking infrastructure and socio-cultural
in the Arellano-Bond test in second-order autocorrelation and traits of customer's behavior in the countries.
GMM estimator is real technically. This studies confirms with Moreover, the findings indicate that ATM affects banks
a study conducted by Goddard et al, 2011; and (Akhisar, profitability at all-out. Banking institutions are increasing the
Tunay et al. 2015). number of ATMs and this leads to the increase of banks
The findings also depict that, there is a powerful profitability and eventually decreasing operational costs of
persistence for both ROA and ROE in a reliable way. The banks. This is based on the number of branches opened, so the
findings indicate that, with the exception of POS and internet findings are not astounding. Adding to that, banks card is
banking, bank cards and ATM influence economic comparatively weak but positive effects banks profitability,
performance of companies. This is in accordance with a going along with an indirect contact which is tremendously
studies conducted by IIyas et al., 2015 on the electronic significant for financial institutions in Africa.
banking effects on performance of banks using a panel Therefore, most African countries should develop most of
dynamic data. The negative effects of POS and internet the electronic banking services like ATM/branch since it
banking on financial institutions (banks) based on the analysis affects bank performance importantly on the basis of
can be attributed due to the distinct structural features of the profitability. Even when the results evaluated, it impacts banks
investigated economies. financial performance. The impacts of electronic banking
Furthermore, the findings indicates that ATM affects services on performance on the description of the innovation
banks profitability at all-out. Banking institutions are arrangement clarify innovations on the bank's performance
increasing the number of ATMs and this leads to the increase important
of banks profitability and eventually decreasing operational
costs of banks. This is based on the number of branches ACKNOWLEDGMENT
opened, so the findings are not astounding. The authors would like to acknowledge Isaac Adu
Notably, Automated Teller Machine (ATM), are highly Amankwaa, Belinda Obeng Faamaaa from the School of
used by customers of banks than other technological or Management Jiangsu University, China for their immense
electronic based banking tools because of the longtime uses. contribution to this study and two anonymous reviewers.
With this, both behaviors of customers and the lack of
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