Impact of cashless policy on bank’s profitability: Evidence from a developing economy

Abstract

This paper investigates the relationship between e-banking and commercial bank performance in Bangladesh. A five-year aggregate quarterly commercial bank data as provided by Payment System Department of Central Bank of Bangladesh was used in this study. A multiple regression procedure was used to determine the significance of the relationship between the independent variables (electronic banking indicators) and the profitability measures of return on assets (ROA) and return on equity (ROE) as the dependent variables. The findings were that only IB was statistically significant at 0.01% level under both ROA and ROE models with p-values of 0.0000 and 0.0000, respectively. However, the predictive power of ROE was found to be higher than ROA using adjusted r-square and d-statistic. Some of the other variables (POS, CHQ) were also statistically significant ([Formula: see text]) and the rest of variables had mixed result. The results show that at an aggregate level, commercial banks in Bangladesh widely use the traditional banking methods such as use of cheques. The results are expected to inform bank managers on the need to discover the optimal supply of electronic banking services such as MOB, EFT and ATM payment systems in order to improve bank profitability. This study will further inform policy makers on the need to improve on Information and Communication Technology (ICT) in order to cater for optimal use of electronic banking service in Bangladesh.