Examining the efficiency of IT applications and bank performance

Abstract

Purpose Banking institutions have vigorously pursued the integration of information and communication technology in modern banking services. Unfortunately, empirical support demonstrating the usefulness of this undertaking has largely been scanty. The purpose of this paper is to investigate causal links between the efficiency of information technology (IT) applications and bank performance using data envelopment analysis. 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.