Examining the efficiency of IT applications and bank performance
| Published date | 21 October 2019 |
| Date | 21 October 2019 |
| Pages | 2072-2090 |
| DOI | https://doi.org/10.1108/IMDS-03-2019-0129 |
| Author | Kwame Owusu Kwateng,Joseph Agyei,Kofi Amanor |
| Subject Matter | Information & knowledge management |
Examining the efficiency
of IT applications and
bank performance
Kwame Owusu Kwateng
Department of Supply Chain and Information Systems, School of Business,
Kwame Nkrumah University of Science and Technology, Kumasi, Ghana
Joseph Agyei
Institute of Distance Learning,
Kwame Nkrumah University of Science and Technology, Kumasi, Ghana, and
Kofi Amanor
Department of Economics,
Kwame Nkrumah University of Science and Technology, Kumasi, Ghana
Abstract
Purpose –Banking institutions have vigorously pursued the integration of information and
communication techno logy in modern banking services. Unfortun ately, empirical sup port demonstrating
the usefulness of this un dertaking has largel y been scanty. The purp ose of this paper is to inve stigate
causal links between t he efficiency of informati on technology (IT) applica tions and bank performance us ing
data envelopment anal ysis.
Design/methodology/approach –The study adopts the DEA approach to evaluate the bank level cost and
IT efficiency. The Vector Error Correction Model Granger causality tests with the forecast error variance
decomposition and impulse response functions were subsequently used to examine the causal relationship
between the variables.
Findings –From the findings, the bank achieved an average level of 99.1 per cent cost efficiency for the
sampled period. Also the periods where the bank obtained optimal cost efficiency were in 2005, 2006 and 2014.
This culminated into inefficiency scores ranging from 0 to 2.9 per cent, with 2016 financial year as the period
of worst cost performance. In addition, the study found that there are both short-run and long-run
relationships between IT efficiency and cost performance.
Practical implications –Management should note that any improvement to IT applications may
contribute significantly to overall IT performance but for the short period, specifically the first period, by the
medium to long-run period, most improvement to overall IT performance emanates from cost performance of
the bank.
Originality/value –Some studies have examined the effect of IT on banks in USA and Europe. However,
such studies are rare in the African context. This study will contribute to extant literature by add a new
dimension of IT and bank efficiency.
Keywords Performance, Efficiency, Data envelopment analysis, Information technology, Bank
Paper type Research paper
Introduction
It is common knowledge that the bankingindustry makes a significant contribution towards
economic growth and development (Ibrahim and Muhammad, 2013). However, due to
competitive pressures made possible by rapid technological development, globalisation and
unpredictable consumer demands, many banks around the globe run the risk of failure and
complete fold-up, particularly bank groups in developing countries like Ghana. The rising
demand for banksto consistently augment thelevel of bank’s service qualityhas become ever
more imminent; as this has been explained to have a telling effect on the bank’s capacity to
retain customers and entrench its market position and competitiveness.
Due to this, modern banking systems have evolved; affecting the way and manner in
which banking services are provided to customers. Not only has the mechanisms by which
Industrial Management & Data
Systems
Vol. 119 No. 9, 2019
pp. 2072-2090
© Emerald PublishingLimited
0263-5577
DOI 10.1108/IMDS-03-2019-0129
Received 11 March 2019
Revised 23 June 2019
Accepted 12 September 2019
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/0263-5577.htm
2072
IMDS
119,9
banking services are offered changed, but the strategies and activities of banking
institutions around the globe have also transformed. Adewale and Afolabi (2013) asserted
that there has been an increase in the various channels through which people can access
financial services. Needless to say, the engine on which banking services have operated on
in modern times has been largely information technology (IT), generally concerning
computers and peripheral equipment. The introduction of technological applications to
electronic payments, information exchanges, internet banking, security investments,
(Berger, 2003), etc. has initiated the possibility of banking institutions to offer diverse and
innovative banking services to customers on a wider scale than would have been made
plausible in the historical past.
As a result, many scholars have ascribed the application of information technologies as
very vital to bank success and competitiveness in modern markets ( Jegede, 2014; Ibrahim
and Muhammad, 2013). The widespread acknowledgement of information and
communication technology (ICT) in banking operations inspired the wide application
among banking institutions around the globe and in Ghana. Ghanaian banks including GCB
bank have embarked on the unparalleled utilisation of IT-related banking products and
services including telephone banking, electronic banking, automated teller machine (ATM)
and M-banking solutions among others in recent times. GCB bank limited has invested
massively in its IT technologies to streamline its operations, improve competitiveness
whiles enhancing the quality of banking services to customers. The utilisation of ICT has
been a vital component for bank services and competitiveness. ICT is required for effective
planning, systematising and delivering innovative services at the highest quality standards.
The critical question that pops up to the critical mind is how efficient these applications
are being exploited to achieve the needed financial output that is required. The effect size of
IT application in banking operations would require more than just the adoption of these
technologies. Once these applications are considered resources, there is the need to
investigate how efficient these items are to achieving corporate goals. Jegede (2014) and
Ibrahim and Muhammad (2013) stress that the contribution of IT resources on bank
performance is not straightforward. Generally, the relevance of IT technologies is widely
acknowledged in literature; nonetheless, there are pieces of evidence to suggest that the
improved scalability of IT technologies may not always be proportional to increases in
banks’performance (Thakor and Olazabal, 2002). Thus, raising concerns about the
efficiency of IT applications adopted by banks.
Extensive studies have been conducted attempting to establish the correlation between
IT applications and organisational performance (Ibrahim and Muhammad, 2013; Jegede,
2014). The findings of these studies have largely not converged regarding the link between
IT utilisation and bank performance. A number of research findings catalogue a positive
correlation between ICT and organisational performance (Greenan et al., 2002). Other
researchers, on the other hand, provide a contrasting view to this assertion and
subsequently highlight that ICT is not a major determinant of bank performance (see
Oluwatolani et al., 2011). This conflicting result seems interesting; especially considering the
growing investment, contemporary banking institutions are making to produce an IT
integrated bank service to customers. It is the conjecture of this paper that mixed results in
previous studies may stem from how effect of IT application was measured. We argue that
since each bank may have a different cost structure and managerial efficiency in combining
resources, measuring the effect of ICT applications on bank performance concentrating on
investment shares and outlays may not reveal the actual performance effect of ICT;
particularly when managerial efficiency is not controlled in the analysis. Thus, the mere
adoption of ICT has no automatic bearing on bank performance, if the applications are not
efficiently combined to deliver the optimal outcomes. This argument, therefore, requires
researchers to focus on the efficiency of IT applications, rather than IT investments.
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