Impact of Investment in Information Technology on Financial Performance of Nigerian Banks: Is There a Productivity Paradox?

This research investigates the impact of investment in Information Technology (IT) on the financial performance of banks in Nigeria. The study covers post-Banking (2006-2010) consolidation period of 5 years. The population of the study comprises of all the 24 banks, and a random sampling of 10 banks was made. The study employs secondary data generated from annual reports and accounts of the banks, records maintained by the Nigerian Stock Exchange (NSE) and Central Bank of Nigeria (CBN) reports. The data obtained were analyzed using the panel data regression model where investment in IT (hardware, software and Automated Teller Machine [ATM]), total earnings (TR) and total cost (TC) of the 10 sampled banks were used as the independent variables while financial performance is the dependent variable, proxied by return on assets (ROA), return on equity (ROE), net profit margin (NPM) and earnings per share (EPS). Four hypotheses were developed and tested in line with the proxies to the dependent variables. The result from the panel regression revealed that there is a significant relationship between the independent variables and the dependent variables, but the test revealed that the impact of IT investment on the financial performance of Nigeria banks is significant for ROA, ROE and EPS at 5% significance level but not significant for NPM at 5% and 10% significance level. The effect of TR is positive and that of TC is negative on all the four financial performance measures, but the effect of IT investment on all the four financial performance variables is negative, which is not an expected sign. This means that an increase on IT spending leads to a decrease in the financial performance of Nigerian banks, that is to say heavy IT investment does not increase banks profitability, hence there is existence of IT productivity paradox in the Nigeria banking industry.