CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Digital banking, also known as online banking or e-banking, refers to the delivery of financial services through digital channels such as the internet, mobile devices and automated teller machines (ATMs). Digital banking has become increasingly popular in recent years, but its origins can be traced back several decades.

The first forms of digital banking can be traced back to the 1960s, when banks began using mainframe computers to automate various banking functions such as check processing and customer account management. In the 1980s, banks started offering dial-up services that allowed customers to access their accounts through their home computers. Further-more in the 1960s, Bank of America introduced the first ATM, which allowed customers to withdraw cash from their accounts without needing a bank teller. Also, In the 1980s, Citibank introduced the first online banking system, which allowed customers to access account information and perform basic transactions through a dial-up connection. Since the late 1990s E-banking has developed from virtual insignificance to tens of millions of users worldwide (OECD 2001, Organisation for Economic Co-operation and Development). However, E-banking is the product of different generations of electronic transactions. The current web-based internet or E-banking is the latest of several generations of systems: Automated Teller machine (ATMs), Phone Banking, PC or House Banking. Automated teller machines (ATMs) were the first well-known machines to provide electronic access to customers where as in phone banking, users call their bank’s computer system on their ordinary phone and use the phone keypad to perform banking transactions. The global banking industry has developed from traditional “click and mortar” to Internet banking. Internet banking refers to the deployment over the Internet of retail and wholesale banking services. It involves individual and corporate clients, and includes bank transfers, payments and settlements, documentary collections and credits, corporate and household lending, card business and some others (UNCTAD 2002, United Nations Conference on Trade and Development).

The driving forces behind the rapid transformation of banks are influential changes in the economic environment include among others innovations in information technology, innovations in financial products, liberalization and consolidation of financial markets, deregulation of financial inter-mediation. Internet has changed the dimensions of competition in the retail banking sector. Following the introduction of PC banking, ATMs 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/Online E-banking. Allen et al (2002) define E-finance as “the provision of financial services and markets using electronic communication and computation” and today retail banks are switching to multi-channel distribution of financial services in hybrid platforms where the traditional services of banks are provided through both “bricks and mortar” branches and Internet.

The services provided by banks on the Internet has evolved from simple consultation of account to a full range of banking services and it goes to affect bank and microfinance performances either profitability or liquidity. Compared to the traditional form of banking, the Internet has the advantage of eliminating most of the network and software costs attached to other electronic banking innovations through the use of browsers. A study by Jones et al (2004) revealed that banks saved 107 times of total cost when internet banking services were employed. Internet banking increases operational, legal, reputation risks, and increase competition thus promoting better services amongst competing banks. Internet banking also allows customers to interact more intensively than before with the front office of the bank and, at the same time allow banks to centralize back-office operations and increase their efficiency. It’s day and night availability making it so convenient for the bank’s clients. According to Egland et al., (2008), the main attraction to electronic banking is the elimination of the tiresome bureaucratic red tape in registering personal details as well as other services have translated into a literal boom in the banking industry over the last five years. Large national banks, regional and even smaller banks and credit unions offer e-banking known as PC banking, home banking, online banking or internet banking.

When it comes to profitability, electronic banking has both the potential to Improve profitability as well as reduce the profitability of financial institutions, may it be in terms of cost reduction, customer base, cross selling opportunities, enhancement of customer retention security or again fraud. All these points are very determinant when thinking of the profitability aspect because the all either increase or decrease profitability of financial institutions. This equally forces financial institutions to keep up with the constant innovation of the world and the banking sector at large and customer’s demand and ease.

According to Digital Literacy Fact Sheet (2015), computer illiteracy among majority of the population is still significantly high especially in Africa due to poor and/or lack of technological infrastructure and reliable power supply, lack of proper legislation governing e-transactions, Preference to paper money, as opposed to “virtual” cash in transactions. Cameroon’s financial system, being one of the largest in the CEMAC region isn’t an exception to the enlisted above. According to the number of institutions, Cameroon is the main financial centre in the sub-region with more than 600 financial institutions out of 993, or 61%(Making finance work for Africa, 2021).With regard to microfinance, as at 31 December 2017, 3.03 million accounts had been opened in Cameroon’s microfinance institutions all thanks to e-developments which kept on advancing rapidly in all areas of financial intermediation such as e-finance, e-money, electronic banking (E-banking), e-insurance, e-exchanges, and even e- supervision. In recent years, the adoption of E-banking in these sectors in Cameroon began to occur quite extensively as a channel of distribution for financial services due to rapid advances in IT and intensive competitive banking markets.

1.2 Problem Statement

In the recent past, there has been a radical increase in the use of electronic banking being practiced in the World, Cameroons’ banks not withstanding its Microfinance institutions. However, this new venture is costly to launch and manage. There was need therefore to investigate whether electronic banking has had any impact on the financial performance of Microfinance institutions by evaluating whether the increase in costs and the possibility of eventually having less personnel has had any positive impact on the performance of these Microfinance institutions. Micro-finances are challenged by technological up scale that led to innovative products which stiffed up competition for market share. There is a shift from paper-based to electronic payments (cash), costly branch offices transportation or physical movement to branches and other depositor related services.  Several studies have been conducted in Cameroon and all over the world to highlight these problems faced by the Microfinance institutions and the relationship between electronic banking and financial performance but have not been able to show clearly how costs have contributed to the performance of these banks (Mwangi, 2009). This study therefore sought to show an overview on how electronic banking has impacted on the financial performance of Microfinance institutions (MUPECI) by highlighting the key factors to indicate whether the MUPECI is making profits or losses and if its customers are being satisfied by the services being rendered. It also aimed at finding the relation between electronic banking and the financial performance of MUPECI where past studies have failed.

1.3 Research question

1.3.1 Main research question

 What effects has E-Banking on the profitability of MUPECI littoral?

1.3.2 Specific question

1. 1. To what extent do ATMs services affect the profitability of MUPECI littoral?
2. 2. How far do mobile money services impact the profitability of MUPECI littoral?

1.4 Objectives of the Study

 1.4.1 Main Objective

This researches’ aim is to analyze the effect of E-banking on the profitability of MUPECI littoral.

1.4.1 Specific Objectives

1. To evaluate to what extent ATMs services affect the profitability of MUPECI littoral.
2. To access the Impact of Mobile banking services on the profitability of MUPECI littoral.