The impact of Internet-Banking on Bank Profitability- the Case of Turkey Assist. Prof. Dr. Ceylan Onay Bogazici University

The results of our estimations using GLS with Common Intercept are available on table 4.1. The adoption of online banking does not seem to have a significant impact on the performance of Turkish banks measured in terms of ROA, ROE or MARGIN in the year of adoption(INTERNET¹). However, in the following year (INTERNET²), we see a significant decrease in the profitability. This could be attributed to the increase in IT expenditures following the adoption of the new technology.

Only in the second year following the adoption of the techonology, we see a positive coefficient of the variable on the ROE estimation. This indicates that the process is gradual. The sign of the coefficient on the ROA for the same period is also positive but this variable is not significant. This finding is in line with those of Hernando and Nieto(2007) who have done the same analysis using a larger pool of Spanish banks. Their study found that the technology has a positive impact on bank profitability also in the third year following its adoption.

5. 
   CONCLUSION
   

Internet has changed the dimensions of competition in the retail banking sector by adding a new distribution channel to retail banking. It has also provided opportunities for emerging countries to build up their financial intermediation infrastructure through the leapfrogging effect as recent literature has argued^c.

In this research we have analyzed the effects of online banking activities on the performance of the banking sector in Turkey, an emerging market and a candidate for membership to the EU. By using panel data from 14 commercial and savings banks in the country that have adopted internet banking some time between 1996 and 2005, we have estimated the effect of online banking activities on the three common determinants of bank performance, namely the return on assets, return on equity and return on the financial intermediation margin.

Our results provide some evidence that investment in e-banking is a gradual process. The internet banking variable has had a positive effect on the performance of the banking system in Turkey in terms of returns to equity only with a lag of two years. Yet, our results suffer from lack of data. We believe the field is going to benefit from further research on the topic to confirm the findings.

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ROA: Before tax income/total assets (year end) Source: BANKSCOPE

ROE: Net interest income to total equity (year averages) Source: BANKSCOPE

MARGIN: Net Interest Revenue/Total Assets (average) Source: BANKSCOPE

DEPOSITS: Total Deposits (end of year) Source: BANKSCOPE

GDPCAP: GDP per capita in 1990 US$ (converted at Geary Khamis PPPs) Source: Conference Board Total Economy Database

PCHGDPCAP: Percentage Change in GDP capita over previous year Source:

R: Average lending rate in the country Source: IMF IFS

BANKCRI: Bankcrisis dummy Source: Caprio, Gerard, Daniela Klingebiel, Luc Laeven and Guillermo Noguera. 2005. Banking Crisis Database in Patrick Honohan and Luc Laeven (eds.), Systemic Financial Crises: Containment and Resolution. Cambridge, UK and New York: Cambridge University Press.

LOANS/TA: Loans to total assets ratio Source: BANKSCOPE

Notes: The trendline represents the locus of the fitted values of a simple regression of INTERNET³ dummy on the returns on equity(ROE).

Notes: The trendline represents the locus of the fitted values of a simple regression of INTERNET² dummy on the returns on equity(ROE).