E-banking and Financial Performance of

Commercial Banks in Sri Lanka

1
 Table of Contents

Table of Contents.......................................................................................................................ii
Task 1.........................................................................................................................................1
1. Introduction.......................................................................................................................1
1.1 Background of the problem........................................................................................2
1.2 Establishment of the problem and objectives.............................................................2
1.3 Methodology..............................................................................................................2
1.4 Significance of the study............................................................................................2
1.5 Literature Review.......................................................................................................2
Task 2.........................................................................................................................................4
2. Study design.......................................................................................................................4
2.2 Conceptual Framework..............................................................................................4
2.3 Performance indicators...............................................................................................5
Task 3.........................................................................................................................................6
3. Data Presentation and Analysis..........................................................................................6
3.1 Composition of e-banking service..............................................................................6
3.2 ATMs and performance of the banks.........................................................................6
3.3 Total fee and commission income..............................................................................7
3.4 Profit before tax (PBT)...............................................................................................8
3.5 Number of branches...................................................................................................9
3.6 Total assets and performance of the banks.................................................................9
Task 4.......................................................................................................................................12
4. Findings and Conclusion...................................................................................................12
4.1 Key findings.............................................................................................................12
4.2 Conclusion...............................................................................................................12
References

ii
 Task 1

1. Introduction
Information and Communication Technology (ICT) has enabled the delivery of a
wide range of financial products and services. Thus financial markets have become
complex along with the advancement of ICT. Also banks have introduced computers
in to their operating systems to enhance the growth in business.
Electronic banking (E-banking) is offer variety of banking activities through
electronic and telecommunication networks for the purpose of deliver value added
products and services to bank customers. E-banking services generally include
Automated Teller Machines (ATMs), mobile banking, electronic fund transfer, online
payments, credit and debit cards, extended opening hours etc.. E-banking has
increased the competition among banks by offering more modern way of banking
activities.
Banking sector of Sri Lanka comprise with private banks, state banks and
foreign banks. The majority of the banks are increasingly using e-banking to deliver
their services. This includes expanding island wide ATMs network, introducing
mobile banking and online banking. Furthermore the technological enhancements of
the commercial banks of Sri Lanka enabled customers to access their remittances 24
hours through their mobile and ATM network as they combined mobile banking with
their e-remittance system to provide greater convenience.
E-banking creates a high cost for the bank, because software research and
development cost, promotional expenses and employee training cost are essential for
provide such services (Sullivan, 2000).While e-banking directly creates high cost to
the banks, it indirectly create cost to the customers because banks charge a certain
amount or flat charges fees on e-banking products and services (Sumra et al., 2017).
Banks with weak physical and system security substantially increase their exposure to
risks, many of which could lead to collapse (Chibueze, Maxwell, & Osondu, 2013).
Therefore, e-banking should be consistent with the banks overall strategic and
business plans and adequate expertise should be employed to operate and maintain
such systems. This creates high cost for the banks.

1
1.1 Background of the problem
Sri Lankan banks have adopted e-banking to deliver their services for few decades.
However, only a limited number of studies have been conducted in Sri Lankan
context to identify the impact of e-banking for profitability of banks in Sri Lanka.
Therefore policy makers have seemingly failed to develop appropriate strategies and
policies to boost the performance in the Sri Lankan banking system through an
effective adoption of e-banking.

1.2 Establishment of the problem and objectives

Section 1.1 and 1.2 highlighted that e-banking, in general, has a sizable effect on the
performance of individual banks as well as on the banking system as a whole. Further
the discussions reveal that sufficient empirical investigations have not been
conduction in Sri Lankan context to investigate this phenomenon. Therefore, this
study attempts to address, does E-banking affect the performance of Sri Lankan
commercial banks.To this end, the study aims to

1. Asses the degree of ICT adoption in Sri Lankan banks

2. Assess the effect of e-banking on performance

1.3 Methodology
The data were gathered on six systematically important banks in Sri Lanka over the
period from 2014 to 2018 based on the published annual reports of the banks and the
reports of the Central Bank of Sri Lanka. Data analysis is done using linear regression
and exploratory data analysis techniques.

1.4 Significance of the study

This research provides evidence regarding the degree of adoption to ICT of banks.
This study identifies dimensions of e-banking which are important to develop
strategies to improve the quality of their services and profitability. Hence, banks can
take in to account such factors for further implementation of e-banking.

1.5 Literature Review

The evidence suggests that e-banking has contributed positively to the profitability of
banks (Surma et al, 2017). According to Vohra (2014) E-banking allow banks to
expand their geographical reach and new market by providing much easier service to
the customers to compare one bank’s product and services with another bank. Surma

2
et al (2017) stated the introduction of e-banking has significantly affected to
revolutionize the ways banks were operating.
The other benefits of e-banking can be named as expand of business, lower
operational costs, less human errors, workers efficiency improvement and availability
of services anytime and everywhere (Karimzadeh and Sasouli, 2013). Further he
mentioned that the main goal of every company is to maximize profits and e-banking
services offer a perfect opportunity for maximizing profits. Onay et al (2014) also
stated that internet banking has positively affected to improve performance of banks
in Turkey. Gakure and Ngumi (2013) investigated and found that ATMs, Online
banking and Point of Sales terminals positively contribute for the profitability of
commercial banks in Kenya. In addition to that their study discovered that debit and
credit card have less influence for the profitability of commercial banks in Kenya.

According to Sumra et al (2017), De Young et al (2007), concluded that e-banking

improved the profitability of banks hence increasing their revenues. Also, E-banking
is largely driven by the factors of minimizing the operating costs and maximizing
operating profit, suggests Simpson (2002). Banks are also earning from E-banking in
a way of commission and annual deductions. The banks charge a certain amount or
flat charges or a certain percentage on products and services like ATMs, funds
transfer etc (Surma et al 2017). De Young et al (2007) stated that internet banking
improve the profitability of banks because of revenue from service charges. They
comparatively investigated banks with internet banking and banks without internet
banking using ROE.

3
 Task 2
2. Study design

2.2 Conceptual Framework

E-banking
Performance
 Number of ATMs
 Profit before Tax
 Fee and Commission
Income

Size

 Total Assets
 Number of branches

Based on the conceptual framework, this study assesses the impact of e-banking on bank
performance to find the relationship specified in equation 1.

PER = α + β1EB+β2Size+ Ɛ --------------------- (1)

H0: β = β1= β2= 0

H1: β ≠ β1≠ β ≠ 0

Where,
PER denotes financial performance of the banks. This study used profit before
tax to measure the financial performance. α denotes constant and β denotes degree of
sensitivity of independent variable.EB denotes the e-banking. Numbers of ATMs and fee
and commission are used to indicate EB. Further, this study uses total assets and
number of branches to measure the size of the banks, which is used as a control
variable. Ɛ denotes for the randomerrors.
Ordinary Squares Linear Regression OLS method is used to determine the
relationship between the e-banking and the bank performance. This is applied to
access the quantitative data from the annual reports of selected banks to access
relationship between e-banking and bank performance. Purposive sampling method is
used to select the sample of six SIBs in Sri Lanka. The study uses secondary data
published in annual reports of the selected banks over the period of 2014 to 2018.

4
 As illustrated in figure 3.1, two variables are taken in to account while e-
banking is taken as the main variable of this study. Size of the bank is considered as
the other variable of this study. Further, number of ATMs and total fee and
commission income are used to measure e-banking. Further, size of the bank is
indicated by total assets and number branches.

2.3 Performance indicators

There are number of ways to measure the financial performance of the banks. Bank
profit can be measured by using ROA and ROE. Furthermore, when the profit level is
changed, profit after tax (PAT) also significantly changes. Hence, if PAT is used to
compare performance among several organizations, it generates misleading
information. Therefore, to remove the impact of tax from the profit, this study also
uses PBT to measure the financial performance of the banks.

5
 Task 3
3. Data Presentation and Analysis

3.1 Composition of e-banking service

With the purpose of identifying the composition of e-banking services of selected
banks ATMs, credit cards and debit cards, internet banking, mobile banking, SMS
banking and phone banking are taken as determinants of e-banking.

Table 3.1: Composition of e-banking service

Internet Mobile SMS Phone ATM Credit
Bankin Bankin Bankin Bankin s &
Name of the Bank
g g g g Debit
Cards
Bank of Ceylon      
People's Bank      
Commercial Bank      
Hatton National
Bank      
Sampath Bank      
Seylan Bank      
Source: Web sites of each bank

According to this table 3.1 all the selected banks provide same e-banking
services and in a same composition of e-banking services.

3.2 ATMs and performance of the banks

This study considered the distribution of ATM network and assessed how it
contributed to improve the financial performance linked with e-banking. The table 3.2
displays the annual data of numbers of ATMs of each bank.

Table 3.2: Number of ATMs

6
 Year BOC PB CB HNB SB SeB
2014 251 232 346 260 163 109
2015 329 300 368 310 186 118
2016 352 330 414 350 222 125
2017 404 382 500 400 255 133
2018 451 420 555 410 264 154
Source: Annual Report of each bank

According to table 3.2 the largest ATM network belongs to CB. ATM network
of SeB has not widely spread than other banks. However, all the banks have
established new ATMs annually and the numbers of ATMs of all banks have rapidly
increased fromyear 2014 to year 2018. This growth has affected to increase the fee
and commission income of each bank.

3.3 Total fee and commission income

Total fee and commission income applied as another determinant of e-banking in this
study.Table 3.3 shows the fluctuations of fee and commission income of each bank
during 2014 to 2018.

Table 3.3: Total fee and commission income

Year BOC PB CB HNB SB SeB Average

2014 4084 3591 2715 2364 1355 1802 2652
2015 4219 3108 2530 2309 1206 1274 2441
2016 6014 3171 3220 2809 1361 1427 3000
2017 6676 2930 3765 2780 2648 1512 3385
2018 7320 3542 4147 3741 2804 1760 3885
Source: Annual Report of each bank
Note: Amounts are reported in Rs. Million

According to table 3.3 total fee and commission income of all the banks have
grew during the time period of 2014 to 2018. Especially, the fee and commission
income of BOC has significantly increased through the time period and BOC
achieved lager portion of fee and commission income among state and private banks.
Among private sector banks, CB has recorded higher level of fee and commission
income.

7
3.4 Profit before tax (PBT)

Table 3.4: Profit before tax (PBT)

Year BOC PB CB HNB SB SeB Average

2014 5231 5664 7416 4785 2564 155 4303
2015 4208 6076 7126 5918 3976 893 4700
2016 10053 8771 9290 6731 4502 1997 6891
2017 15546 15600 11069 8388 4994 1170 9461
2018 19794 15249 14295 10466 7265 3184 11709
Source: Annual Report of each bank
Note: Amounts are reported in Rs. Million

According to table 3.4 BOC has recorded the maximum amount of PBT in the
year of 2018 and SeB has recorded the minimum amount of PBT among the all banks
in 2014. BOC have achieved large portion of the PBT among state and private banks
and CB have achieved larger portion of PBT among private banks. However, SeB
recorded the minimum level of PBT among all the banks. Further, BOC has largest
ATM network among state banks and CB has largest ATM network among private
banks. Additionally, SeB has minimum level of ATMs among all the banks as
illustrated in table 3.2. Further, these changes of e-banking related services have
affected to change the fee and commission income of each bank. BOC achieved lager
portion of fee and commission income among state and private banks. Among private
sector banks, CB has recorded higher level of fee and commission income. SeB
recorded the minimum level of fee and commission income in banking sector. Hence,
these changes display the positive relationship among those three variables.
Therefore, numbers of ATMs and fee and commission income has positively
influenced to increase the PBT of banks.

3.5 Number of branches

Table 3.5: Number of bank branches

8
 Year BOC PB CB HNB SB SeB
2014 309 642 165 177 112 94
2015 310 670 172 186 131 93
2016 309 679 187 205 171 95
2017 318 714 213 240 206 99
2018 324 728 227 247 209 107
Source: Annual Report of each bank

According to table 3.5 the largest branch network belongs to PB. As shown in
the table, branch network growing rapidly over 5 years. Starting from 642 in 2014 has
ended up in 2018 recording the ever highest branch network among the SIBs. SB and
SeB recorded the minimum level of branch network in banking sector over the year of
2014 to 2018.

3.6 Total assets and performance of the banks

.
Table 3.6: Total assets (TA)

Year BOC PB CB HNB SB SeB Average

2014 484380 397550 281210 255270 138540 154046 1011666
2015 538240 476250 322320 313910 156160 156160 327173
2016 714950 547620 370060 280290 185080 191310 381552
2017 835540 662080 387130 353800 244750 165940 441540
2018 1048220 873110 399800 418300 376890 183660 549997
Source: Annual Report of each bank
Note: Amounts are reported in Rs. Million

According to table 3.6 total assets of all the banks have grew during the time
period. Especially, the total assets of BOC have significantly increased through the
time period. As shown in the table, total assets growing rapidly over 5 years.
According to table 3.6 Peoples Bank recorded intensely growth LKR 0.236Mn to
LKR 0.476Mn in 2015 and LKR 0.662Mn to LKR 0.873Mnin 2018 by owns
secondly highest total assets among the SIBs. SB and SeB recorded the minimum
level of total assets in banking sector over the year of 2014 to 2018.
Table 3.7: Descriptive statistics

Variables Mean Std.Deviation Minimum Maximum

PBT 7412. 4,884.2 155.0 19,794.0

9
 53 6 0 0
1,527.1 1,206.0 7,320.0
Fee & commi: income 3072.56 2 0 0

ATMs 303.10 118.55 109 555

Branches 277.97 198.59 93 728

542,385. 233,805.5 138,540.0 1,048,220.0
Total Assets 53 3 0 0
Note: Amounts are reported in Rs. Million; N=30

According to table 3.7, PBT ranges from a minimum value of LKR 155 Mn to
maximum value of LKR 19,794 Mn. This represented the PBT of SeB in 2014 and the
PBT of BOC in 2018 respectively. Further, PBT has a Std. Deviation of 4884.26. This
is because of the highly distributed variables of PBT.
The minimum value of fee and commission income was 1206 of SB in 2015.
Maximum value of fee and commission income was 7320 of BOC in 2018. Further,
Std. Deviation of fee and commission income was 1527.12 and this shows low
variance between minimum and maximum values.
The minimum number of ATMs was 109 and it represented of SeB in 2014.
Further, the number of ATMs of SeB has increased to 154 by 2018. The maximum
number of ATMs was 555 and it represented the ATMs of CB in 2018. The average
level of ATMs was 303 (SD = 118).
The minimum number of branches was 93 and it represented the branches of
SeB in 2015. However, the maximum number of branches was 728 of PB in 2018.
This shows high variance between minimum and maximum values.
The minimum value of total assets was 138,540 and it represented the total
assets of SB in 2014. The maximum value of total assets was 1,048,220 and it
represented the total assets of BOC in 2018.

Table 3.8: Regression results        

Variable Coefficient
  β Std. Error t Sig.

10
(Constant) 4413.944 -3.810 0.001
Number of ATMs 0.275** 4.835 2.347 0.028
Fee and Commission income 0.093* 0.558 0.419 0.679
Number of Branches 0.279** 3.639 1.882 0.072
Total Assets 0.930*** 0.003 5.882 0.000

Note: Dependent variable is profit before tax (PBT)

The symbols (***), (**) and (*) indicate statistical significance at 1% and 5%
and 10% level, respectively.

According to the results of the regression; Numbers of ATMs, Fee and

Commission Income, Number of Branches and Total Assets explained 93.5% of the
variance in profit before tax. (R2 = .935, F = 69.11, p <0.001). It was found that total
assets significantly predicted aggressive tendencies (β = .93, p < 0.001), as did
number of branches(β = .28, p = 0 .072), numbers of ATMs (β = .27, p =0.028) and
fee and commission income (β = .09, p = 0 .679). A main effect of number of ATMs,
fee and commission income, number of branches and total assets was found for PBT,
F = 69.11, p = .001.In addition, there is a positive effect between numbers of ATMs
and PBT (t = 2.35, p = 0 .028), fee and commission income and PBT (t = 0.41, p = 0 .
679), number of branches and PBT (t = 1.88, p= 0 .072)and total assets and PBT (t =
5.88), p < 0 .000) Further, Statistical amount of the Durbin-Watson of this study is
1.845.
Further, the standardize distribution of the variables; fee and commission
income, Number of branches, Total Assets, numbers of ATMs and profit before tax
was taken in to account in this study. Further, the normal P-P Plot of regression
standardized residuals also considered to check the normality of the data which were
used in this study. The normality of data indicated through standardized distribution
and normal P-P Plot of regression standardized residuals.

Task 4
4. Findings and Conclusion

4.1 Key findings

One objective of this study was to assess the degree of ICT adoption of banks.
According to investigation, all the selected banks have adopted for e-banking to

11
deliver services such as ATMs, mobile banking, online banking, phone banking and
SMS banking etc. Hence, all the commercial banks in Sri Lanka demonstrate higher
degree of adoption to e-banking.
The other objective of this study was to assess the effect of e-banking on bank
performance. According to this study, the effect of number of ATMs and fee and
commission income has indicated significant impact on bank performance.
Furthermore, number of ATMs and fee and commission income has obviously
correlated with profit before tax (PBT) of the bank. Hence, the results of this study
indicate that e-banking related services have created significant positive impact on
performance of commercial bank in Sri Lanka.
A number of factors have affected to the variability of bank profitability. The
findings of this study suggest that effect of number of branches and total assets have
indicated significant impact on bank performance. Further, these variables have
obviously correlated with PBT of the bank. Hence, the results of this study indicate
that size of the bank has created significant positive impact on performance of
commercial bank in Sri Lanka.

4.2 Conclusion
The findings of this study suggest that e-bankingimproves performancein Sri Lankan
banking industry. The adoption of e-banking has affected commercial banks of Sri
Lanka by making it productive and effective.
This study discovered that BOC is the highest performing bank in Sri
Lanka.PB has recorded second highest performance. Further, the size of these both
banks was high level compared to other banks. The findings suggest that banks with
extended branch network have higher PBT and total assets. Hence, the size of bank
has affected Sri Lankan banking sector by building it more profitability. Therefore,
these symptoms reflected that size of bank has positively affected for the bank
performance. According to these findings this study discovered a significant positive
impact of bank size on bank performance of commercial banks in Sri Lanka.

References

12
Delgado, J., & Nieto, M. J. (2004). Internet banking in Spain some stylized facts.Monetary
Integration, Market and Regulation. Research in Banking and Finance, 187-209.

Gakure, R., & Ngumi, P. (2013). Do bank innovations influence profitability of commercial
banks in Kenya? Prime Journal of Social Science, 237-248.

Karimzadeh, M., & Sasouli, M. R. (2013). Contribution of Internet Banking toward

Profitability of Banking in India. AUDOE,Vol 9, no 6,, 57-69.

Shittu, O. (2016). The impact of electronic banking in Nigeria banking system. 8-55.

Sullivan, R. J. (2000). How Has the Adoption of Internet Banking. Kansas City: Federal
Reserve Bank.

Sumra, S. H. (2017). The Impact of E-Banking on the Profitability of Banks:. Journal of Public
Administration and Governance.

Vorha, P. (2014, April 10). Banking and Information Technology. Retrieved December 16,
2013, from http://www.ceet.niu.edu/faculty/vhr/tech497/present/ebanking.doc

13