ABSTRACT

This study is to investigate THE IMAPACT OF DIGITALIZATION ON THE PROFITABILITY OF MICROFINANCE INSTITUTION IN BUEA which case study was BUEA POST AND TELECOMMUCATION COOPERATIVE CREDITIVE CREDIT UNION ( BPTCUUL)  Chapter one includes the introduction background to the study definition of terms, statement of the problem, objectives of the study, hypothesis scope and limitations and significance of the study. Chapter two is made up of the literature review and other related literature regarding the topic under study  and   Chapter three is based on research methodology and consists of the study area, sample size, research design, research instruments, like the instrument that will be used to analyze the data is, the statistical package for socials.  In collecting my data, I will use questionnaires To analyse the data, the study made use of Qualitative and Quantitative analysis. Qualitative analysis involves Descriptive statistics which was presented using bar charts, frequency tables and pie charts. The Quantitative analyses involves testing the hypothesis in the study and procedure of data collection and ethnical consideration while Chapter four focuses on data presentation analysis and findings, here reliability test was tested using IBM SPSS Statistics of 30, descriptive Statistics was also used to test result and inferential statistics was also use to determine performance using IBM SPP Statistics and lastly chapter five is focused on the summary of the work , recommendation conclusion and reference.

CHAPTER ONE

INTRODUCTION

1.1 Background to study

Digitalization is discussed by various authors whose definitions focus on different aspects of the term. Digitalization is the integration of digital technologies into everyday life by the digitization of everything that can be digitized. The literal meaning of digitalization gives an apparent idea of development and technology dependent world. In this chapter, digitalization means computerization of systems and jobs for better ease and accessibility (Mahaldar, O & Bhadra, K., 2015, p. 503). Other authors focus more on the process of change, triggered through digital technologies, such as Hess (2013), who presents the following definition, Digitalization as the process of changes, which is caused through the introduction of digital technologies and application systems (Hess & Heinzl, 2012, p. 23)

Over the course of the past years, advanced information technology and technological disruptions in the digital field have changed our behavioral norms (Casio and Montealegre, 2016). Google, Netflix, Amazon and other companies have fundamentally changed the society and the way people interact in its entireness. Especially younger generations opt for personalized solutions that are tailored to their needs. Businesses and whole industries feel pressured to meet those changing customer needs and face competition (Nicoletti, 2017).

Innovation and digitalization are pivotal notions for organizations (Burns & Stalker, 1961; Brown & Duguid, 1991). Organizations need to effectively re-think traditional assumptions and possibly re-invent their business models to remain competitively viable and generate different sets of strategic choices in a timely manner (Utterback & Abernathy, 1975; von Kutzschenbach & Brønn, 2017). Digitalization has turned into a transformative power that reshapes numeric aspects of the economic landscape and business operations, including competition, intermediation, product designs, automation, accessibility, speed and analytics (OECD, 2018). Therefore, the modern view on digitalization has shifted away from progress in information technology made by computers, telecommunications and online connection, towards the understanding of digital technologies that transform how businesses interact and operate. Recent examples have been technological hardware innovation such as virtual assistant speakers as well as technological software innovation as per example the innovation of mobile applications, Bitcoin and cloud computing that help improve communication with consumers and increase their engagement.

The technological interface type is a self-service technology, the definition of the technological interface allows the customers to create and consume services on their own, without any assistance from employees (Meuter et al., 2000; Curran & Meuter, 2005). Self-service technologies are becoming more adopted in society (Kauffman & Lally, 1994). There are some challenges in providing the introduction of this service because of the features of the technology, it can attract customers/consumers if it’s clear and easy to use, or else customer/consumers won’t be interested in the self-service technology that is too complex to understand. There is also a challenge to attract new customers to the microfinance as well as getting the current customer to change into self-service technology to get more interacted with the microfinance. Encouragement and justification by the microfinance may be required to adopt the self-service technology for current customers (Curran & Meuter, 2007; Meuter et al., 2005). However, there are described situations where customers/consumers are using the self-service technologies to avoid direct contact with employees (Meuter et al. 2000; Curran & Meuter, 2005) due to stress to face the issues and having to deal with a possibly judgmental person. On the other side there are the opposite customers/consumers who will avoid self-service technology because of the customers’ preference to interact with a person (Dabholkar, 1996). Self-service technologies (SSTs) and artificial intelligence (AI) have been developed quickly which has provided many opportunities for governments worldwide to improve public services and increased the interactions with citizens as well (Chen, et al., 2020). SSTs are referred to as interfaces in technology that enable consumers to benefit from services, the main priority is to make consumers independent of direct service employee participation (Meuter et al., 2000; Curran & Meuter, 2007; Dabholkar, 1996; Cheng et al., 2006). The SSTs are used in the service industries, and the AI technologies have been integrated into the SSTs, it is considered as an emerging tendency (Chen, et al., 2020; Carbo-Valverde et al., 2020). The digitalization innovation has resulted in breakthrough technologies where artificial intelligence (AI) is one of them, and following incremental technologies for example, diffusion accessibility of digital channels which has increased in the past years (Carbo-Valverde et al., 2020).

 For each year the acceptance of technology has emerged with innovation theories at the same time as the customers are adopting new technologies (Venkatesh& Bala, 2008). If the digital services are costly (Gerrard et al., 2006) and complex (Mallat, 2007) there is a risk that the customer may decide to avoid them, as well as when multichannel services are provided through internet banking, the customer may show dissatisfaction (Eriksson and Nilsson, 2007). The perception from the customer is safety that is significant to adopt the digitalization of customer experience claims (Casalo et al., 2007). The IT investments in the banking industry are increasing, and it has increased the digital capabilities regarding the IT in digitalization of the Valhalla bank customer, these investments have a chance to affect the microfinance’s results (Beccalli, 2007; Chowdhury, 2003). However, if the microfinance is focusing on technologies to improve their customer experience claims, it may also have an effect and impact on the end-users in the microfinance (Carbo-Valverde et al., 2020).

The rapid development of digital transformation technology has brought the global community into the digital era. Advanced digital technologies (e.g., the Internet of Things, big data analytics, machine learning, artificial intelligence, and cloud computing) have changed social and industrial activities. Currently, digital transformation is becoming an inevitable reality. This phenomenon was accelerated by the COVID-19 pandemic, which has increased people’s online activities due to physical contact restrictions. The impact of the global pandemic has become an important trigger for industry, academics, regulators, and societies in many countries to consider digital transformation as the game changer in boosting sustainable economic growth. Digital transformation is happening massively and has become the power source for corporate management and development, even for micro–small–medium enterprises in various sectors such as manufacturing, transportation, health, education, and agriculture, as well as the economic and financial sectors. The rapid development of digital economy activities requires banks and microfinance to undergo digitalization to stay competitive and relevant in their industry, as digital technologies can improve the microfinance’s business values and propositions from the customer perspective. Digital transformation has become an important issue in the banking sector as it can enlarge customer outreach by servicing without physical branches, marketing differentiation from competitors, and for operational cost efficiency (Kitsios. F et al., 2021). The banking sector should adjust its digital capabilities to compete with FinTech, because this new player influences the competitiveness and profitability of the banking sector; thus, technology management will directly impact microfinance profitability (Dwivedi. R., 2022). The digital transformation, which is supported by technology-enabled innovation, also becomes a solution for leveraging financial inclusion for economic development in emerging countries (Dwivedi. P et al., 2021).

Digital transformation is associated with technology investment to support productivity, but not all scholars, microfinance and banks believe in its impact on business values. Existing researchers state that no definitive conclusions can be drawn from digital transformation’s effects on microfinance profitability (Beccalli. E., 2009).The findings argue that technology is not a driver of microfinance performance and mentions that there is a profitability paradox between technology investment and profitability, because the research did not empirically find a positive relationship between technology investment and microfinance profitability. This opinion is based on the argument that the use of technology by market participants is caused by competitive pressures in which technology is required to increase efficiency, but it has no impact on profitability (Brynjolfsson. E. And Hitt. L.M., (2009); Carr. N.G. (2003)). The development of digital technology encourages microfinance to carry out a digital transformation in their service processes, as it makes customers consider that the microfinance is still relevant with the current conditions; thus, microfinance can then gain profits in their business. The use of digital technologies in organizations has been proven to support organizational profitability, including return of assets, return of equity and return on investment (Dupont. 2007 And Solomon.1963). The motive for profit in banking’s digital transformation was also analyzed in a study which found microfinance that focused on digitalization and sustainability (Stefanovic. N et al., 2021) even during the coronavirus disease 2019 (COVID-19) pandemic, were profitable, as these principles can enable operations and stimulate product, service, and business model innovation (Hanelt. A, 2021).

Digitalization has had a significant impact on the profitability of microfinance by transforming their business operations and customer interactions. According to a report by McKinsey & Company, digitalization has the potential to increase the profitability of microfinance by up to 40% through cost reductions and revenue growth (McKinseyandCompany,2015).

One way digitalization has impacted microfinance profitability is through cost reduction. By automating processes, streamlining operations, and implementing digital platforms for customer interactions, microfinance’s have been able to lower their operating expenses. This was highlighted in a study by Deloitte, which found that digitalization can lead to significant cost savings for microfinances, particularly in areas such as back-office operations and customer service (Deloitte,2019).

Furthermore, digitalization has enabled microfinance institutionsto expand their revenue streams and reach new customers through online and mobile banking services. This was evidenced in a study by PricewaterhouseCoopers (PwC), which emphasized the potential for digital channels to drive revenue growth for microfinance institutions by offering personalized services and innovative products to customers (PwC, “Banking reimagined: Disruption, innovation, and opportunity,” 2017).

Additionally, digitalization has improved customer relationships and satisfaction, leading to increased customer retention and loyalty. A study by Accenture highlighted the importance of digital customer experiences in driving profitability for banksand microfinance, as satisfied customers are more likely to use additional services and recommend the microfinance to others (Accenture, 2017).

In summary, digitalization has had a profound impact on the profitability of microfinance by reducing costs, expanding revenue opportunities, and enhancing customer relationships. These changes have fundamentally transformed the way microfinance operate and interact with their customers, ultimately leading to improved financial profitability.

1.2 State of the problem

Microfinance are financial institutions set up by investors or group of individuals who put their capital together in order to help alluvial poverty which is also to help the poor which are under various umbrellas or networks like CAMCCUL, RAINBOW, MUFID, BINUM TONTINE, RECCUCAM, MUCADE etc. . As a business entity, the aim of these investors is to make profit in compensation to the financial investments made to set up the microfinance. Despite the potential benefits of digitalization, many microfinance institutions struggle with implementation of digitalization due to the following challenges which include initial cost, lack of technical skills, regulatory hurdles(obstacles). Understanding how digitalization affects the profitability is essential for MFls to navigate these challenges and leverage technology effectively.

Many microfinances have failed in the past due to liquidity issues occasioned by poor profits and lack of investor’s willingness to commit additional funds to shore up their capital adequacy ratios as required by the central bank of Cameroon. This is because no investor wants to put funds into a business that they will not reap good returns. Also, microfinance with poor profits or loss-making microfinance also faces threats of mergers and acquisitions by sound microfinance that are also making profits. In other to make and sustain profits, banks seek various avenues to make income irrespective of how little the incomes are. Besides, several studies have used Return on Assets (ROA), Return on Equity (ROE), Profitability (Njeru & Omagua 2018, Sujud & Hasmen 2017, Abaenewe, Ogbulu & Ndugbu 2013, Kharwish, 2011,) etc as proxy for bank performance with scanty work preferring bank deposit (Ugwueze & Nwezeaku, 2016).

 1.3 Research Questions

1.3.1   Main research question

 The main research question for this study is to determine the impact of digitalization on the profitability of microfinance institutions in Buea.

1.3.2 Specific research questions

The specific research question for this study seeks to find answers to the following questions below;

1. What is the effect of electronic funds transfer on the profitability of microfinance institutions in Buea?
2. To what extend do ATM influence the profitability of microfinance institution in Buea?
3. What is the influence of mobile money banking services on the profitability of microfinance institutions in Buea?

1.4 Research Objective

1.4.1 Main objective

To assess the Impact of Digitalization on microfiche institutions ‘Profitability

1.4.2 Specific Objectives

1. To ascertain the effect of electronic funds transfer on the profitability of microfinance institutions in Buea
2. To analyze the role of ATM card services on the profitability of microfinance institutions in Buea.
3. To ascertain how mobile banking services affect the profitability of microfinance institutions in Buea

1.5 Research Hypothesis

Null Hypothesis (H0): There is no significant impact of digitalization on microfinances’ institutions profitability.

H01: Electronic funds transfer does not significantly affect the profitability of microfinance institutions in Buea.

H02: ATM card does not significantly affect the profitability of microfinance institutions in Buea.

H03: Mobile money banking services does not significantly the profitability of microfinance institutions in Buea

Alternative Hypothesis (H1): Digitalization has positive has a significant impact on the profitability microfinance institutions Buea.