THE IMPACT OF ELECTRONIC BANKING ON THE PERFORMANCE OF FINANCIAL INSTITUTIONS IN UGANDA: CASE STUDY OF STANBIC

BANK, MUKONO BRANCH

ABSTRACT

The study was carried at Stanbic bank with the purpose of establishing the impact of electronic banking on the performance of financial institutions in Uganda. The specific objectives of the study were; to identify internet services provided, to establish the determinants of performance and to establish the relationship between electronic banking and performance of Stanbic bank.

The literature was reviewed from 2000-2016 basing on research questions. The organization data covered a range (2014-2016) from different scholars which was extracted from journals, books and many others based on the impact of electronic banking on the performance of financial institutions.

The research design was descriptive in nature where both qualitative and quantitative approaches of data collection were adopted. The researcher used questionnaire method to collect data from 40 respondents using purposive sampling and simple random on a population of 44 employees.

The study found out that majority of the respondents (100%) strongly agreed that there is electronic banking at Stanbic bank, customers withdraw cash through the ATM very often, customers deposit cash through the ATM very often and customers with draw cash using their mobile phones. The major determinants of bank performance included (90%) of the respondents agreed with management of the bank, (82.5%) agreed with market share, (75%) of them agreed with ownership structure, 65% of the respondents agreed with location and size of the bank and  (62.5%) of the respondents agreed with number of branches. The study also found out that there is a strong positive relationship between electronic banking and performance of financial institutions at Pearson correlation coefficient r= 0.794.

In conclusion, the most prevalent electronic banking services were seeking product rate information and the use of online credit cards. Since its introduction in mid-2005, the adoption of electronic banking has been slow due to impaired unavailability of infrastructure and lack of supportive legislation for electronic banking. However the adoption of electronic banking has enhanced performance of the financial institutions due to increased efficiency, effectiveness and productivity. The researcher recommends that the bank should take advantage of reduced internet costs to lower its transaction costs which in return will attract potential customers hence create customer loyalty.

CHAPTER ONE: INTRODUCTION

1.0 Introduction

This chapter presents the background to the study, statement of the problem, purpose and specific objectives of the study, research questions, scope and significance of the study.

1.1  Background to the study

Advances in information and communication technologies in particular, the growing use of the internet for business transaction, have had a profound effect on the banking industry. While this is a global phenomenon, creating a truly global marketplace, penetration of internet banking into less developed countries has effect on the financial performance of banks. Information and communications technologies (ICTs) have changed the approaches to conducting business transactions and meeting the growing demands of customers for most organizations (Warren 2003). The background to the study explained the concept of electronic banking, financial performance and their relationship.

1.1.1 Electronic banking

The concept of electronic banking as we know it today dates back to the early 1980s, when it was first envisioned and experimented with. However, it was only in 1995 (on October 6, to be exact) that Presidential Savings Bank first announced the facility for regular client use. The idea was quickly snapped up by other banks like Wells Fargo, Chase Manhattan and Security First Network Bank. Today, quite a few banks operate solely via the Internet and have no ‘four-wall’ entity at all (Ross Bainbridge, 2006).

The banking system of the 21^st century operates in a complex and competitive environment characterized by these changing conditions and highly unpredictable economic climate. Information and communication technology (ICT) is at the centre of this global change curve of electronic banking system in Africa today (Stevens 2002). Internet has changed the dimensions of competition in the retail banking sector. Following the introduction of personal computer banking, automated teller machines and phone banking, which are the initial cornerstones of electronic finance, the increased adoption and penetration of Internet has added a new distribution channel to retail banking: Internet/Internet-banking (Allen et al, 2002).

The application of information and communication technology concepts, techniques, policies and implementation strategies to banking services has become a subject of fundamental importance and concerns to all banks and indeed a perquisite for local and global competitiveness Banking. Electronic banking has also been termed as electronic fund transfer (EFT) as a system that uses electronic technology in place of cheques and hard cash. Similarly, this study also portrays electronic banking as a system that uses electronic means to transfer funds from one bank account to another. This involves automated teller machines and deposit machines which now allow consumers carry out banking transactions beyond banking hours and anywhere of their convenience (Stevens 2002).

1.1.2 Performance of Financial Institutions

Bank performance is directly dependent on efficiency and effectiveness of electronic banking and on the other hand tight controls in standards to prevent losses associated with electronic banking. In order not to impair on their prosperity, Stanbic bank needs to strike a balance between tight controls and standards in efficiency of electronic banking. This is only possible if the effects of electronic banking on financial institutions and its customers are well analyzed and understood (Tiwari, 2007). Financial performance measures are intended to evaluate the effectiveness and efficiency by which organisations use financial and physical capital to create value for shareholders. Some authors have suggested the balanced scorecard which provides a framework, which encourages the use of financial and non- financial measures of performance via balancing four perspectives – financial, customers, internal business processes, and learning and growth (Kaplan and Norton, 1992).

The key recommended measures for financial analysis include: profitability, liquidity and solvency (Zenios et al. 1999). Profitability measures the extent to which a business generates a profit from the factors of production: labour, management and capital. A subjective measure of how well a firm can use assets from its primary mode of business and generate revenues. This term is also used as a general measure of a firm’s overall financial health over a given period of time, and can be used to compare similar firms across the same industry or to compare industries or sectors in aggregation (Copisarow, 2000). Profitability analysis focuses on the relationship between revenues and expenses and on the level of profits relative to the size of investment in the business.

Four useful profitability ratios and measures are the return on assets (ROA), return on equity (ROE), operating profit margin and net income. The ROA measures the return to all assets and is often used as an overall index of profitability and the higher the value, the more profitable the business. The ROE measures the rate of return on the owner’s equity employed in the business. It is useful to consider the ROE in relation to ROA to determine if the firm is making a profitable return on their borrowed money. The operating profit margin measures the returns to capital per unit of gross revenue.Net income comes directly off of the income statement and is calculated by matching revenues with the expenses incurred to create those revenues, plus the gain or loss on the sale of capital assets (Zenios et al. 1999).

1.1.3 Relationship between E-banking and Performance of MFIs

Electronic financial institutions significantly perform better than the non-Internet groups. Additionally, the risk variables associated with the Internet group continue to be lower relative to the non-Internet group. The asset-liability variables on average reveal that the banks in this Internet group are larger and have significantly higher trading and investment activities and less dependent on retail deposits (both demand and saving deposits) relative to the non-Internet group. There is a significant and positive link between offering of Electronic banking activities and banks’ profitability and a negative but marginally significant association between the adoption of Electronic banking and bank risk levels particularly due to increased diversification (Hasan et al., 2002).

There is a higher profitability for multichannel banks through increased commission income, increased brokerage fees and (eventual) reductions in staffing levels and concluded that the Internet channel was a complement to physical banking channels. In contrast to earlier studies, the multichannel banks in Spain relied more on typical banking business (lending, deposit taking and securities trading). The adoption of the Internet as a delivery channel had a positive impact on banks’ profitability after one and a half years of adoption (Hernando and Nieto, 2005).

There is relatively lower profits at the Internet-only institutions than the branching banks, caused in part by high labour costs, low fee based revenues and difficulty in generating deposit funding (DeYoung, 2005). However, consistent with the standard Electronic banking model, the results indicated that Internet-only banks tended to grow faster than traditional branching banks. Internet-only banks have access to deeper scale economies than branching banks and because of this, they are likely to become more financially competitive over time as they grow larger.

1.1.4 Stanbic Bank Uganda

Stanbic bank Uganda Limited is one of the major banks in Uganda with headquarters in Kampala, Uganda. The company provides its products and services with a network of several branches and its electronic banking platforms. Technology has greatly advanced playing a major role in improving the standards of service delivery in Stanbic bank. Days are long gone when customers would queue in the banking halls waiting to pay their utility bills, school fees or any other financial transactions. They can now do this at their convenience by using their automated teller machines (ATM) cards or over the internet from the comfort of their homes. Additionally due to the tremendous growth of the mobile phone industry in Uganda, Stanbic bank has ventured into the untapped opportunity and has partnered with mobile phone network providers to offer banking services to their clients (Monitor, 2009).

Electronic banking through Stanbic bank enables customers to perform all routine transactions, such as account transfers, balance inquiries, bill payments, and stop-payment requests, and some even offer internet loan applications. Customers can access account information at any time, day or night, and this can be done from anywhere. Electronic banking has improved banking efficiency in rendering services to customers (Mwesigwa, 2010). Stanbic bank cannot ignore information systems since they play an important role in their operations because customers are conscious of technological advancements and demand higher quality services for example they take a large share of bank resources, plastic card fraud particularly on lost and stolen cards and counterfeit card fraud. Thus there is a need to manage costs and risks associated with electronic banking. Therefore the researcher sought to establish the impact of electronic banking on the financial performance of Stanbic bank.

1.2 Statement of the Problem

Electronic banking is used as a marketing tool to attract and retain customers, expand market reach, and improve service quality, the extent and the intensity of banking products and services offered online is likely to have a significant impact on the bank’s overall performance. Some of the e-banking services introduced by financial institutions include the electronic transfer of funds between accounts, payments of utility bills, airtime top ups, balance enquiries, loan applications, and cheque book requests (Garau, 2002).

However, electronic banking still remains a fictitious idea to most people with frequent cases of frauds reported in the basic electronic banking system like ATM cards and most people would prefer taking money in cash than adopt technology (Acharya, 2008). Despite Stanbic bank investing large sums of money in electronic banking, the banks still faces low performance in terms of small market share and customer dissatisfaction. The researcher therefore intended to determine the impact of electronic banking on performance of financial institutions and come up with relevant recommendations that may be used to create a better platform towards marketing electronic banking.

1.3 Purpose of the Study

The main of this study was to establish the impact of electronic banking on the financial performance of institutions in Uganda. A case study of Stanbic bank.

1.4 Objectives of the Study

1. To identify internet services provided by Stanbic bank.
2. To establish the determinants of performance in Stanbic bank.
3. To establish the relationship between electronic banking and performance of Stanbic bank.

1.5 Research Questions

1. What are some of the internet services provided by Stanbic bank?
2. What are the determinants of performance in Stanbic bank?
3. What is the relationship between electronic banking and performance of Stanbic bank?

1.6 Scope of the Study

This study was established the impact of electronic banking on the performance of financial institutions in Uganda. The study was carried at Stanbic bank. The selection of the case study is based on the fact that Stanbic bank carries out electronic banking. The study was carried out for a period from May – September, 2017.

1.7 Significance of the Study

• It is equally significant for bank executives and indeed the policy makers of the banks and financial institutions to be aware of electronic banking as a product of internet commerce with a view to making strategic decisions.
• This study would provide useful information to other government departments in order for them to develop useful strategies for effective and efficient banking platforms in order to increase performance, come up with policies and procedures with regard to technology.
• Players in the financial institution sector will find the study useful as they can use the findings to strategize on how they can mutually benefit from this development.
• Finally, this study adds to the existing literature, and is a valuable tool for students, academicians, institutions, corporate managers and individuals who want to learn more about electronic banking.

CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction

This chapter analyzes the previous literatures that have already been covered on electronic banking system and performance of financial institutions. The chapter will also expand and explain the gaps that still lie unattended.

2.1 Theoretical Basis of E-Banking

2.1.1 Technology Acceptance Model

One of the most common models used by researchers in the study of individual’s adoption of technology is Technology Acceptance Model (TAM) (Davis, 1989). TAM proposed that both the perceived usefulness and perceived ease of use can be used to predict the attitude towards using new technology, which in turn affects the behavioral intention to use the actual system directly (Davis, 1989) and hence performance.

Perceived usefulness is defined by Davis as “the degree to which a person believes that using a particular system would enhance his or her job performance” (Davis, 1989). Thus for users of online banking, they will adopt the system if they believe the system will bring benefits such as reducing time spent on going to bank and improving efficiency (Rao et al., 2003). According to TAM, perceived ease of use is “the degree to which the prospective adopter expects the new technology adopted to be a free effort regarding its transfer and utilization” (Davis, 1989). Therefore if users feel that online banking is easy to use and free of hustle, then the chances of them to use the system will be greater.

Jeyaraj et al. (2006) conducted a comprehensive review of predictors of technology adoptions by organizations and individuals that were published between 1992 and 2003 and found that TAM is one of the most widely used technology adoption model. Although TAM was first introduced in 1989, it is still being widely used as shown in Jeyaraj et al. (2006). However, many research state that TAM itself is insufficient to explain users’ decisions to adopt technologies, therefore they use TAM as a base model and extended the model by adding additional variables to the model depending on the types of technologies they studied. For example, Kamarulzaman (2007) on his study of internet shopping adoption drew upon TAM and included personal and cognitive influence. Amin (2007) also modified the original TAM by including perceived credibility and the amount of information on mobile credit card were added to his study of mobile credit card usage intentions. Various extensions to the TAM were also conducted in the study of online banking such as those conducted by Pikkarainen et al. (2004) also used TAM as a base and included various factors such as security and privacy, enjoyment and amount of information.

2.1.2 Diffusion of Innovation theory

Rogers (1962) pioneering work in the adoption of innovations led to the development of the Diffusion of Innovations theory (DoI). According to this theory, the decision to adopt an innovation depends on, among other things, the perceptions of the members of a social system regarding five specific attributes of the innovation in question, namely: relative advantage, i.e. the degree to which the innovation is perceived to be better than what it supersedes; compatibility, i.e. the degree to which the innovation is perceived to be consistent with existing values, past experiences and needs; complexity, i.e. the degree to which the innovation is perceived to be difficult to understand and use; trialability, i.e. the degree to which the innovation can be experimented with on a limited basis; and observability, the degree to which one can see and understand the results of adopting the innovation before the full adoption.

According to Rogers (1962), perceptions regarding those five attributes represent reliable predictors of innovation adoption and diffusion. Indeed, various studies since the DoI framework was originally introduced have shown that the framework is superior to other predictors of the adoption decision, such as the demographic profile of the consumers (Holak, 1988).  From findings, customers have a positive perception towards e-banking and this has improved the customer base of the bank. Stanbic bank has observed the benefits of mobile and internet banking and therefore, they adopted these innovations given other factors such as the availability of the required tools. Adoption of such innovations has been faster due to internet access and information technology departments than in organizations without.

2.2 Internet services provided by financial institutions

Customers do not need to worry about reaching the branch, branch timings, standing and waiting for their chance. If they are out of town, country they don’t need to panic can still make transactions online or can withdraw money from any nearest ATM. All traditional banks services are offered online by Electronic banking no physical (brick & mortar model) existence of the bank is required. These banks are known as virtual‟ banks or Internet only‟ banks and may not have any physical presence in a country despite offering different banking services. In India such type of virtual banks are not there till now (Karen et al, 2010).

Customer Relationship Management; traditional banks are functioning in the same way as they earlier used to, with some specific branch timings. The incredible growth of internet has enhanced the way the banks are offering varied services online for 24*7, better customer Relationship Management (CRM), ease and convenience of accessing the bank. Information technology has emerged as a strategic resource for achieving higher efficiency, control of operations, productivity and profitability in banking operations. Therefore, banks in Uganda are increasingly embracing information technology to meet the increasing customer expectations and face the galloping competition (Gurau, 2002).

Account Summary: Accounts which are ‘Electronic banking Enabled’ may be displayed along with the Current Balance, Total Balance, Unclear Balance and Available Balance etc. (Savings /Current / Overdraft /Term Deposit / Loan Accounts). Overdraft Details: Limit and Drawing Power for OD Accounts, Repayment Schedule for Loan Accounts may be viewed (Cheruiyot, 2010).

Transactions Details: User may view, download and print of the last 14 transactions or for specified period of selected account. Online Requests: User may request for Stop Payment for a particular Cheque or Range of Cheques in select accounts, Revoke of Stop Payment of Cheques already stopped. User may also change his contact no. (phone no., mobile no., email etc.) (Buzzle, 2012)

Funds Transfer between own Accounts: User may transfer funds from one account (with requested transaction facility) to his/her another account to the extent of fund transfer limit fixed by the bank from time to time, subject to the available balance, by selecting ‘from’ & ‘to’ accounts. Adding of Account in Beneficiary List: If amounts are frequently transferred to a particular account, then the facility of adding that account in beneficiary list was available by providing a nick name to that account. Viewing of Beneficiary Accounts: User may view all the beneficiaries that have been added and may also modify the details of a beneficiary by selecting that beneficiary (Acharya, 2008).

Fund transfer: fund E-banking transfer fund from his/her account (with requested transaction facility) to any other third party account, maintained with any of our CBS Branch, to the extent of fund transfer limit fixed by the bank from time to time, subject to the available balance, by selecting his/her account and giving either third party’s account number or selecting a beneficiary. Standing Order: User may give standing order for transfer of funds from one account to another to be executed on a predefined frequency (daily /monthly / month end). User may also amend or cancel the standing order so given (Anyanzwa, 2011).

E-Payment: banks provide E-Payment facility for payment of Direct (CBDT) and Indirect (CBEC) taxes by debiting the account online and print cyber receipt. He further argued that online banking is portrayed by online Enquiry: which may cheque Enquiry: User may enquire status of a Cheque or Range of Cheques issued in an account. Also cheque Books: User may enquire for Cheque books issued in an account. Outward Cheques Enquiry: User may enquire status of specific Cheque or all Cheques deposited in an account. TDS Detail: User may view the Tax Deducted at Source details (Gurau, 2002).

2.3 Determinants of Performance for financial institutions

Measures of financial performance according to Copisarow, (2000) are subjective measures of how well a firm can use assets from its primary mode of business and generate revenues. This term is also used as a general measure of a firm’s overall financial health over a given period of time and can be used to compare similar firms across the same industry or to compare industries or sectors in aggregation.

Financial performance is the single most important factor in assessing growth potential, earnings capacity and overall financial strength (Richardson, 2002). In theory, product diversification should lead to reduce volatility of earnings. However, earnings arising from non-interest activities of banks are much more volatile than net interest income (European Central Bank, 2010).

Size of a bank: it is generally assumed that bigger firms lead the innovation and diffusion processes due to the existence of economies of scale and scope in R&D activities and in the application of their results (Buzzacchi et al., 2005). Some analysts argue that large banks will retain their lead over small banks due to large fixed costs of developing information management systems and creating brand recognition among consumers (Keeton, 2001). Almost all the studies on adoption of Internet banking, except Bughin (2004), have reported positive relations of bank size with adoption decision. Overall, the analysis leads to the expectation that, controlling for other factors, the larger the bank, the more likely it is that it will offer Internet banking, i.e. the coefficient of this variable is expected to be positive. Thus, have improved performance.

Return on assets (ROA): has been included as a measure of bank profitability to test whether it has an independent effect on the decision to offer Internet banking. The direction of its effect is ambiguous. It is possible that more profitable banks will choose to incur the costs of offering Internet banking; both because they are financially more able to do so and because they believe doing so will help them maintain their competitive position (Gourlay and Pentecost, 2005). It is also possible that less profitable banks may be more willing to invest in Internet banking to improve their performance. However, Literature has shown profitability to be an ineffective factor in decision-making process.

Bank’s market share: measures the size of the bank relative to its own market. It is expected that as market share increases, the probability that a bank adopts Internet banking would increase (Courchane et al.., 2002a, b). It may also be possible that the banks with lower market share may adopt Internet banking to increase their customer base. Thus, the expected sign for bank market share is ambiguous.

Branch intensity (Branches): is another characteristic which may influence the probability to adopt Internet banking. More intensively branched banks can see great potentials for costs savings and the possibility of increasing the efficiency of their existing operations. Hence, banks with higher branch network have higher probability to adopt Internet banking with a possible reduction of future network in mind. On the other hand, some analysts have argued that banks without a large branch network will seize on Internet banking as an inexpensive mean to expand their customer base (Andriy, 2001). To account for the nature of bank category, a dummy variable is also introduced for the present study. Private takes the value of 1 if the bank happens to be a private bank (whether domestic or foreign) and takes a value of zero, otherwise. The expected sign for private is positive as the banks with private ownership are supposed to be more likely to adopt Internet banking.

Bank deposits (deposits): are another characteristic which may influence the probability to adopt Internet banking. Banks that are less reliant on traditional sources of funding may pursue a more aggressive overall business strategy, including the adoption of Internet banking (Furst et al., 2002a). However, Andriy (2001) found a positive relation between the deposits base and the decision to adopt electronic banking. Sullivan (2000) argued that a bank can generate Internet transactions if it has a sizeable customer base. Banks oriented on client base (i.e. deposits of the bank) respond more actively to adoption of electronic banking and adopt new products quicker than the banks with a small number of deposits ceteris paribus. Thus the expected sign for this variable is ambiguous.

Non-financial statement variables involve factors that have no direct relation to the financial statements. The examples of non-financial variables within this category are management, ownership structure, number of branches, and status of the branch, location and size of the bank. Large size is expected to promote economies of scale and reduce the cost of gathering and processing information. Ownership structure (private, public, foreign) affects the financial performance, privately owned banks are considered to be more innovative than public ones.

In general, large-sized banks have the advantage of providing a larger menu of financial services to their customers, and hence mobilize more funds (Haron, Sudin 2004). High net interest margin and profitability tend to be associated with banks that hold a relatively high amount of capital, and with large overheads. Stronger management’s beliefs and strategic planning results in better financial performance.

External factors are those factors that are considered to be beyond the control of the management of a bank. Among the widely discussed external variables are competition, regulation, market share, bank ownership and structure, monetary policy, and macroeconomic indicators including inflation, money supply, exchange rate and gross domestic product. Annual Growth Rate for Gross domestic product is considered important factor affecting bank financial performance because the high of GDP growth means the increased of investment. Inflation is another important environmental condition which may effect on ROE and ROA as this factor represents the changes in the general price level or inflationary conditions in the economy and affects the investor’s return. Inflation affects the real value of costs and revenues although it may have a positive or negative effect on profitability depending on whether it is anticipated or unanticipated. Exchange rate stability has a direct impact on financial performance given a favorable movement and stability in the market (Haron, Sudin 2004).

The main conclusion emerging from these studies is that internal factors such as electronic banking explain a large proportion of banks profitability; nevertheless external factors have also had an impact on their performance.

2.4 Relationship between electronic banking and performance of Stanbic bank

Online banking differs with electronic banking according to Olivia (2011). She argues that online banking narrows to only use of internet while Electronic banking allows an individual to access the account using electronic teller machines. Daniel, (1999) found that online banking is a new phase in retail banking services. With the help of online banking several types of services through which customers can request information and carry out their banking transaction such as balance inquiry, inter account transfers, utility bills payment, request check book etc., via a telecommunication network or internet without physically visit the branches.

The application of internet technologies to businesses for improvements in their performances is not something new. As stated by Saffu, Walker and Hinson. (2008), there is an increase in applications of e-banking in businesses in the past ten years. The benefits of e-banking include reduction in cost, increasing business opportunities, reducing lead time and providing a more personalized service to the consumers.

Gija (2012), one e-banking tool that is being adopted by the banking industry is online banking or e-banking. Online banking is the performance of banking activities via the Internet. Online banking is also known as “Internet banking” or “Web banking.” A good online bank will offer customers just about every service traditionally available through a local branch, including accepting deposits (which is done online or through the mail), paying interest on savings and providing an online bill payment system.

Online banking differs with electronic banking according to Olivia (2011). She argues that online banking narrows to only use of internet while Electronic banking allows an individual to access the account using electronic teller machines. With the help of online banking several types of services through which customers can request information and carry out their banking transaction such as balance inquiry, inter account transfers, utility bills payment, request check book etc., via a telecommunication network or internet without physically visit the branches.

Karen et al (2010), among the reasons for Internet banking audience are the notion that electronic banking and payments will grow rapidly, more or less in tandem with proliferating internet commerce; industry projections that Internet banking will cut banks’ costs, increase banks’ revenue growth, and make banking more convenient for customers; and some vexing public policy issues. Despite this attention, there is a dearth of systematic information on the nature and scope of Internet banking. Bankers and public policymakers alike have to plan using largely anecdotal evidence and conjecture.

For customers, online banking and e-banking have brought a lot of convenience in their wake but for banks, they are much more than that. Banks switching to online banking have experienced reduction in operational costs. Earlier customers had to come physically even to know their account balances and certainly every time to withdraw money from their accounts. Even when they had to make payments to other accounts from their saving or current account, they had to come to the bank to deposit Cheques. All this was done by personnel at the bank which unnecessarily resulted in wastage of time and manpower. But the use of online banking and e-banking has obliterated the need of personally visiting the bank for such purposes (Olivia, 2011).

IT tools such as online banking have provided an improvement in services among the banking industry (Dawes & Rowley, 1998). There are currently more than thousands of e-banking web sites all over the world (Gurau, 2002). Although online banking has been implemented in many developed countries such as the United States and those in Europe (Pikkarainen et al., 2004).

2.5 Empirical studies

Egland et al. (1998) was the first important study, which estimated the number of US banks offering Electronic banking and analyzed the structure and performance characteristics of these banks. It found no evidence of major differences in the performance of the group of banks offering Electronic banking activities compared to those that do not offer such services in terms of profitability, efficiency or credit quality. However, transactional Internet banks differed from other banks primarily by size.

Furst et al. (2000) found that banks in all size categories offering Electronic banking were generally more profitable and tended to rely less heavily on traditional banking activities in comparison to non-Internet banks. An exception to the superior performance of Internet banks was the de novo (new start-ups) Internet banks, which were less profitable and less efficient than non-Internet de novos. The authors concluded that Electronic banking was too small a factor to have affected banks’ profitability.

Sullivan (2000) found that click and mortar banks in the 10th Federal Reserve District incurred somewhat higher operating expenses but offset these expenses with somewhat higher fee income. On average, this study found no systematic evidence that banks were either helped or harmed by offering the Internet delivery channel.

Hasan et al. (2002) found that the Electronic financial institutions were performing significantly better than the non-Internet groups. Additionally, the risk variables associated with the Internet group continued to be lower relative to the non-Internet group. The asset-liability variables revealed that on average the banks in this Internet group were larger and had significantly higher trading and investment activities and less dependent on retail deposits (both demand and saving deposits) relative to the non-Internet group. The only category where the Internet group showed a lower performance was the noninterest expense category. It found a significant and positive link between offering of Electronic banking activities and banks’ profitability and a negative but marginally significant association between the adoption of Electronic banking and bank risk levels particularly due to increased diversification.

Hernando and Nieto (2005) examined the performance of multichannel banks in Spain between 1994 and 2002. The study found higher profitability for multichannel banks through increased commission income, increased brokerage fees and (eventual) reductions in staffing levels and concluded that the Internet channel was a complement to physical banking channels. In contrast to earlier studies, the multichannel banks in Spain relied more on typical banking business (lending, deposit taking and securities trading). The adoption of the Internet as a delivery channel had a positive impact on banks’ profitability after one and a half years of adoption. It was explained by the lower overhead expenses and in particular, staff and IT costs after the same period.

Sathye (2005) investigated the impact of the introduction of transactional Electronic banking on performance and risk profile of major credit unions in Australia. Similar to the results of Sullivan (2000), the Electronic banking variable didn’t show a significant association with the performance as well as with operating risk variable. Thus, Electronic banking didn’t prove to be a performance enhancing tool in the context of major credit unions in Australia. It neither reduced nor enhanced risk profile.

DeYoung (2005) analyzed systematically the financial performance of pure-play Internet banks in U.S. The study found relatively lower profits at the Internet-only institutions than the branching banks, caused in part by high labour costs, low fee based revenues and difficulty in generating deposit funding. However, consistent with the standard Electronic banking model, the results indicated that Internet-only banks tended to grow faster than traditional branching banks. Internet-only banks have access to deeper scale economies than branching banks and because of this, they are likely to become more financially competitive over time as they grow larger.

Cheruiyot (2010) did a study on impact of electronic banking on financial performance of commercial banks in Kenya. He measured the internet variable using banking intensity as derived from a web feature data collected from bank websites. He measured performance using ROA and ROE variables. He observed from the multiple regression results that the profitability and offering of Electronic banking does have a small significant association. This study seeks to measure performance using four variables, return on average equity, return on average assets, cost to income ratio and the overheads/profit before tax ratio. In addition, it seeks to investigate the impact of amounts invested in electronic banking including number of internet products offered by commercial banks on financial performance. Therefore, to the extent of the knowledge of the researcher no study has been conducted in assessing these aspects of electronic banking on financial performance.

2.6 Conclusion

There is no evidence of major differences in the performance of the group of banks offering Electronic banking activities compared to those that do not offer such services in terms of profitability, efficiency or credit quality. Electronic banking is small a factor to have affected banks’ profitability. Banks were either helped or harmed by offering the Internet delivery channel. Based on these consistent results, this study seeks to establish the impact of electronic banking on performance of financial institutions in Uganda.

CHAPTER THREE

METHODOLOGY

3.1 Introduction

This  chapter  presents  methods  and procedures  that the researcher  used when  assessing  the findings  of the  study. It presents research design, sample population and size, data collection instruments, data type, data processing and presentation and the problems encountered during the process of data collection and limitation of the study.

3.2 Research Design

Descriptive research design was used in this study, because it describes the state of affairs as it exists, when reporting the findings. Mugenda and Mugenda (2003) points out that descriptive studies result in the formulation of important principles of knowledge and solution to significant problems. Descriptive design will enable the researcher to measure, analyze, compare and interpret data in order to understand the study under investigation. The research was designed in such a manner, which enabled the researcher to meet the objectives of the study; the researcher therefore used both qualitative and quantitative research designs. A qualitative research design aimed at describing phenomenon; therefore a descriptive research was used to measure the relationship between the variables, Quantitative research designs was used to present numerical data. According to Mbendi and foster (2007), the best design depends on the research questions as well as the orientation of the researcher. The reason for this choice of design was to increase the reliability of the report.

3.3 Study population

The population of the study comprised of staff and clients of Stanbic bank,

3.4 Sampling Size and selection

The sample size of 40 respondents was determined by formulae of Krejcie Morgan (1970). The researcher used purposive sampling to select the samples from the population. Here, the researcher chose the sample based on who she thought was appropriate for the study. Simple random sampling was used to limit on the biasness of purposive sampling.

Table 3.1: Sample Size

3.5 Source of data

Data was both primary and secondary. Primary data was collected by the use of questionnaires and secondary data was got from reports, journals, and internet.

3.6 Data Collection Methods and Instruments

Questionnaire

Questionnaire is a carefully designed instrument for collecting data in accordance with the specifications of research questions. This contained a form of set questions to be answered by the respondents and the researcher asked simple logic questions every respondent could comprehend fully. Self-administered semi structured questionnaire was designed to collect quantitative data. It involved both open-ended and closed ended questionnaires. This research tool was considered to be central for this study simply because it was a convenient tool whereby the respondents could chose when to answer the outlined questions without panic. Quantitative data was collected by the use of questionnaire method. A Self-administered questionnaire was designed and they were distributed to staff members who filled them within 3 days of research period.

3.7 Reliability and Validity

Validity refers to the degree to which a test measures what it is supposed to measure and consequently permits appropriate interpretation of scores. As suggested by (Kathari, 2003; Enon, 1998), content and construct validity was determined by expert judgment. The researcher thus used help of the supervisor who examined and confirmed content validity by checking the items’ and  content coverage, relevance, clarity of questionnaire, persistency and ambiguity.

The reliability of research instruments was ensured by the researcher throughout the study, discussing them with the supervisor when seeking expert opinion, taking great care in the choice of section, order and proper structure of questions. The researcher developed instruments that were easy to understand for instance questionnaires were conducted in the language that suits respondents.

3.8 Data analysis

3.8.1 Qualitative Data

Data processing involved editing raw data to detect errors and omissions, classifying data according to common features, and tabulation to summarize and organize it. Data analysis involved the qualitative approach of identifying the major themes arising respondents’ answers; assigning of codes to the themes: classification of the themes under the main theme; and integrating the responses into the report in a more descriptive and analytical manner.

3.8.2 Quantitative Data

Manual editing of questionnaires was done to eliminate errors. After coding, tabulation was done to clearly present various responses and the interpretation. Frequencies and percentages were used to portray statistics used to analyze and interpret the findings of the study. Data analysis was done using; correlation analysis to establish the relationships that exist between the variables. For ease of analysis, procedures within Statistical Package for Social Sciences (SPSS) were used.

3.9 Data Presentation

Presentation of data involved use of tables and pie-charts that were generated from the questions relevant to the study variables. Interpretation and discussion of the results was done as the researcher explained the strength of the study variables basing on the frequencies and percentages and charts.

3.10 Limitations and anticipated solution

Some respondents were not willing to give confidential information, which was sufficient to the researcher. However, the researcher convinced them that research was intended to help them improve on their problems and mainly for academic purposes.

There was too much pressure as a result of limited time for the researcher. However, the researcher devote most of the time on the research.

Financial constraint since research required money for printing and transport. However, the researcher minimized the costs as lowest as possible and solicited funds from family members.

CHAPTER FOUR

PRESENTATION, ANALYSIS AND INTERPRETATION OF FINDINGS

4.0 Introduction

This chapter consists of the presentation, discussion and analysis of the findings from the study. It provides results which were analyzed from raw data collected in the field. It is in two categories; the first one represents the demographic characteristics of the respondents while the other category represents the responses of the questions that were asked concerning research objectives. The analysis was done and data is represented in form of tables, graphs and pie-charts.

4.1 Overview of the Study

The study was carried out at Stanbic bank. Questionnaires and interview guides were designed to obtain data from a sample size of 40 was selected, and these were top management, operational staff and customers. The findings of the study were presented in accordance to the study objectives.

4.1.1 Response Rate

A sample of 20 respondents was selected using purposive sampling methods. Questionnaires, and interview guides were administered to them for data collection. Among the 40 respondents, all of them returned the questionnaires, giving a response rate of 100%.

4.2 Demographic Characteristics of the Respondents

The background characteristics compiled show the gender, age, the education level and period of work. This data was analyzed and is presented below;

Figure 4.1: Showing gender of the respondents

Source: Primary Data

From figure 4.1 above, it’s indicated, majority of respondents (53%) were males and the females were only 47% of the total respondents. This implies that men were found to be active in the study under investigation. However, both ideas were relevant for the study. This indicates that the institution employees more males than females in procurement and stores department.

Table 4.1: Age of Respondents                                                                               

Source: Primary Data

Table 4.1 shows that, the majority (40%) of the respondents were predominantly between the ages of 31 and 40 years. A significant percentage (25%) of the respondents was in the age bracket of 41 and 50years. The remaining 20% of the respondents were in the age bracket of 18 and 30years and another 15% of them were in the age group of 50 and above. 31-40years had the highest number because these are the most active age group hence they are actively involved in management in the organizations, therefore they had rich experiences and could also appreciate the importance of the study.

The table above shows that most of the interviewed respondents (55%) were of degree holders, 30% were of Certificate/Diploma and only 15% of the study respondents were of A’ level while none of the respondents had a postgraduate nor of O’ level therefore, provided information based on the academic knowledge, skills and experience they have gain in management. This shows that company employees are qualified and competent to execute their duties and also appreciated the study under investigation.

Findings in table above, it was revealed that majority (45%) of respondents have worked at organization between 4years and above, followed by 1-3 years  with 30% and less than 1year with (25%). This implies that the majority of the employees are experienced in the activities of the firm and they act as the role models for the newly recruited staff members with regard to study.

4.3 Online services provided by Stanbic bank.

The study sought to establish the online services provided by the bank. The results were obtained and are presented below;

Table 4.2: Online services provided by Stanbic bank

Source: Primary Data

According to the study findings majority of the respondents (100%) strongly agreed that there is electronic banking at Stanbic bank, Customers withdraw cash through the ATM very often, Customers deposit cash through the ATM very often and Customers with draw cash using their mobile phones this implies that these services are highly offered by the bank.

Also study findings that 85% of the study findings strongly agreed that online bill payment exist while 15% of the agreed. This implies online bill payment exist.

80% of the study findings strongly agreed and 20% agreed that customers check balance online and salary processing. This implies that these services exist at the bank.

4.4 Determinants of performance in Stanbic bank

The researcher sought to establish the determinants of performance. The results were obtained and are presented below;

Table 4.3: Determinants of performance in Stanbic bank

Source: Primary Data

According to the table above, most of the respondents (62.5%) of the respondents agreed with number of branches, 22.5% of them disagreed and only 15% of them were not sure. This implies that the number of branches and their status determines bank performance.

Table above also indicate that 65% of the respondents agreed with location and size of the bank, 15% of the respondents disagreed, 20% of the respondents were not sure. This implies that size of the bank also matters when determining the performance of the bank. Large-sized banks have the advantage of providing a larger menu of financial services to their customers and therefore mobilise more funds than small-sized banks.

The table indicates that, most of the respondents (75%) of them agreed with ownership structure, 15% of them disagree, 10% of the study respondents were not sure. This implies that majority of the respondents agreed that ownership structure is a major determinant of bank performance. Privately owned banks are considered to be more innovative than public ones.

Respondents (90%) agreed with management of the bank, none of them disagreed and only 10% of them were not sure. This implies that the management of the bank is a determinant of bank performance.

The table above shows that most of the respondents (82.5%) agreed with market share, 7.5% of them disagree while only 10% of them were not sure. This implies that majority of the respondents agreed. This is because a bank that has a wider market share can generate more funds through selling out their products to a large number of customers.

4.5 The relationship between electronic banking and performance of financial institutions of Stanbic bank

The study sought to establish the relationship between electronic banking and performance of financial institutions of Stanbic bank. Results were obtained and are presented below;

Table 4.4: Relationship between electronic banking and performance of financial institutions of Stanbic bank

Source: Primary Data

Table above show that majority of study respondents (87.5%) agreed with customer turnout level has been high, 7.5% of them disagreed while 5% of them were not sure. This implies that electronic banking in the bank has made customer turnout level to be high.

Findings also indicate that majority of the respondents (90%) agreed with increased revenues from deposit service has improved banks’ profitability, 5% of the study respondents disagreed, also 5% of the respondents were not sure. This implies that increased revenues from deposit service due to electronic banking have improved banks’ profitability.

Table above also shows that majority of the study respondents (62.5%) agreed with reductions in staffing levels, while 25% of them disagreed, a significant percentage (12.5%) were not sure implying that as a result of electronic banking, the organization has reduced staffs. This has enabled to minimize the general operational costs.

The study findings as indicated in the table above show that majority of the respondents (67.5%) agreed with lower overhead expenses, while 12.5% of them disagreed, 20% of the respondents were not sure. However, most of the responses were positive implying that as a result of the application of electronic banking in the operation, minimal overhead expenses have been registered in Stanbic bank.

Finally, study findings in the table above indicate that majority of the respondents (55%) agreed with more financially competitive, 27.5% of the respondents disagreed, 17.5% of the respondents were not sure. However, from the results most of the respondents were on a positive side implying that internet has made Stanbic bank to be more financially competitive.

The study went ahead to identify the strength of the relationship electronic banking and performance of financial institutions using Pearson correlation.

Table 4.5: Relationship between electronic banking and performance of financial institutions

From the able above, findings indicated that there is a strong positive relationship between electronic banking and performance of financial institutions at Pearson correlation coefficient r= 0.794. This implies that electronic banking affect the performance of financial institutions of Stanbic bank by 79.4% and others factors by 20.6%.

CHAPTER FIVE

DISCUSSION, CONCLUSION AND RECOMMENDATIONS

5.0 Introduction

This chapter presents the discussion of the findings based on the study objective; conclusion drawn and recommendations.

5.1 Discussion of findings

5.1.1 Internet services provided by Stanbic bank.

According to the study findings majority of the respondents (100%) strongly agreed that there is electronic banking at Stanbic bank, Customers withdraw cash through the ATM very often, Customers deposit cash through the ATM very often and Customers with draw cash using their mobile phones this implies that these services are highly offered by the bank. This finding is in line with Gurau (2002), traditional banks are functioning in the same way as they earlier used to, with some specific branch timings. The incredible growth of internet has enhanced the way the banks are offering varied services online for 24*7, better customer Relationship Management (CRM), ease and convenience of accessing the bank. Information technology has emerged as a strategic resource for achieving higher efficiency, control of operations, productivity and profitability in banking operations. Therefore, banks in Uganda are increasingly embracing information technology to meet the increasing customer expectations and face the galloping competition.

5.1.2 Determinants of performance in Stanbic bank

Findings indicated that most of the respondents (62.5%) of the respondents agreed with number of branches. This implied that a bank with a bigger number of branches can cover a wider customer base. There is an agreement with Kenneth and Brian (2006) who argued that electronic banking helps to meet unexpected demands or demands for customization of products as with agile production and smooth seasonal or cyclical demand.

Study findings revealed that 65% of the respondents agreed with location and size of the bank. This implied that Large-sized banks have the advantage of providing a larger menu of financial services to their customers and therefore mobilise more funds than small-sized banks. This finding agrees with (Haron, Sudin 2004) who argued that in general, large-sized banks have the advantage of providing a larger menu of financial services to their customers, and hence mobilize more funds. High net interest margin and profitability tend to be associated with banks that hold a relatively high amount of capital, and with large overheads. Stronger management’s beliefs and strategic planning results in better financial performance.

Results indicated that, most of the respondents (75%) of them agreed with ownership structure. This implied that the type of ownership of a bank also determines its performance. This study concurs with Richardson (2002) who stated that ownership structure (private, public, foreign) affects the financial performance, privately owned banks are considered to be more innovative than public ones.

Study findings revealed that (90%) of the respondents agreed with management of the bank. This implied the type of management applied in a bank also determines its performance. This is in line with (Richardson, 2002) who also argued that non-financial statement variables involve factors that have no direct relation to the financial statements and management is inclusive.

Results showed that most of the respondents (82.5%) agreed with market share. This implied that market share is also a major determinant of bank performance in Stanbic bank. This is in agreement with (Seoh, 2012) who noted that External factors are those factors that are considered to be beyond the control of the management of a bank. Among the widely discussed external variables are competition, regulation, market share and others.

All these determinants concur with Copisarow, (2000) who stated that measures of performance of financial institutions are subjective measures of how well a firm can use assets from its primary mode of business and generate revenues. This term is also used as a general measure of a firm’s overall financial health over a given period of time and can be used to compare similar firms across the same industry or to compare industries or sectors in aggregation.

5.1.3 Relationship between electronic banking and performance of Stanbic bank

The study found out that there is a strong positive relationship between electronic banking and performance of financial institutions at Pearson correlation coefficient r= 0.794. This implies that electronic banking affect the performance of financial institutions of Stanbic bank by 79.4% and others factors by 20.6%. This finding concurs with DeYoung (2005) who analyzed systematically the performance of financial institutions of pure-play Internet banks in U.S. The study found relatively lower profits at the Internet-only institutions than the branching banks, caused in part by high labour costs, low fee based revenues and difficulty in generating deposit funding. However, consistent with the standard Electronic banking model, the results indicated that Internet-only banks tended to grow faster than traditional branching banks. Internet-only banks have access to deeper scale economies than branching banks and because of this, they are likely to become more financially competitive over time as they grow larger.

5.2 Conclusion

In this paper, the highlight was on exploring the banking services and security offered by financial institutions. The study revealed that the most prevalent electronic banking services were seeking product rate information and the use of online credit cards. Since its introduction in mid-2005, the adoption of electronic banking has been slow due to impaired unavailability of infrastructure and lack of supportive legislation for electronic banking. However the adoption of electronic banking has enhanced performance of the banking industry due to increased efficiency, effectiveness and productivity.

5.3 Recommendations

The researcher makes the following recommendations;

The researcher recommends that the bank should take advantage of reduced internet costs to lower its transaction costs which in return will attract potential customers hence create customer loyalty. If ICT is effectively used, the bank can create distinctive competence which will enhance its market share.

The bank should entrench mechanisms to ensure uninterrupted 24hr banking to its clients. This will improve its financial performance.

The bank should target those customers who are ICT competent in order to ensure success of electronic banking. Besides, bank should take advantage of reduced costs and wide availability of mobile phones to attract potential customers. The application software used for accessing banks services online should be simple and user friendly so as to be hassle free to the customers.

5.4 Suggestion for further Research

The following areas are suggested for further study;

1. The study should be undertaken under cross-sectional descriptive design which would ensure elimination of any bias experienced in this study.
2. A replica of the study should also be carried out within the context of another field other than banking industry for comparative purpose.

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APPENDICES

APPENDIX I: QUESTIONNAIRES FOR STAFF

Dear respondent,

My name is NANTABA LYDIA and I am carrying out a study on “the effect of electronic banking on the performance of financial institutions in Uganda. A case study of Stanbic bank”. The study is for academic purposes and is carried out as partial requirement of the award of Bachelor degree of microfinance. You have been selected to provide vital information that will facilitate the study. Your response was treated with utmost confidentiality. Thank you very much for your valuable time.

Section A: Background information about the respondent

1. Gender of the respondent

Male                            Female

2. Age bracket of respondent in years

18 –30                         31-40                           41-50                           Over 50

3. Highest level of education attained by respondent

“O” Level                    “A” Level                    Certificate/Diploma                Degree Postgraduate

5. For how long have you been working in this organization?

Less than 1 Year                     1-3 Years                                4 Years and above

Section B: Online services provided by financial institutions.

In this section, the researcher seeks to identify online services provided by the bank.  Please tick (√) the appropriate alternative. Key; Where SA-strongly agree, A- agree, NS- Not Sure, SD-strongly disagree D-disagree

Section C: Determinants of performance of MFIs

In this section, the researcher seeks to establish the determinants of performance.  Please tick(√) the appropriate alternative. Key; Where SA-strongly agree, A- agree, NS- Not Sure, SD-strongly disagree D-disagree

Section D: The relationship between electronic banking and financial performance

In this section, the researcher seeks to assess the relationship between electronic banking and financial performance.  Please tick (√) the appropriate alternative. Key; Where SA-strongly agree, A- agree, NS- Not Sure, SD-strongly disagree D-disagree

Thank You