THE IMPACT OF FINANCIAL INCLUSION ON THE FINANCIAL

PERFORMANCE OF DEPOSIT MONEY BANKS IN NIGERIA

BY

AKANO OLAITAN AHMED 18/66MB150

BEING A RESEARCH PROJECT SUBMITTED TO THE DEPARTMENT

SUPERVISOR:

MR. JIMOH A. T.

FEBRUARY, 2022
 ATTESTATION

We hereby declare that this project titled: “The impact of Financial Inclusion on the Financial

Performance of Deposit Money Banks in Nigeria” is our own work and has not been submitted

or presented by us or any other person for any course or qualification in this university or any

other citadel of learning. The ideas and views herein expressed are products of research

undertaken by us, and that ideas and views of other researchers and authors expressed in the

work have been fully acknowledged.

AKANO, AHMED OLAITAN …………………………

18/66MB150 Signature & Date

ISAIAH EMMANUEL TEMITOPE .………………………….

17/66MB071 Signature & Date

SANNI KHADIJAT OZOHU

…………………………...

17/66MB130 Signature & Date

i
 CERTIFICATION

This is to certify that this study carried out by AKANO Ahmed Olaitan (18/66MB150), ISAIAH

Emmanuel Temitope (17/66MB071), SANNI Khadijat Ozohu (17/66MB130) has been read,

checked and approved as meeting the requirements of the Department of Finance, Faculty of

Management Sciences, University of Ilorin for the award of Bachelor of Science (B.Sc.) Degree

in Finance.

……………………………………… ……………………………...

Dr. A. T. Jimoh Date

Supervisor

……………………………………… ……………………………...

Dr. Mrs Etudaiye -Muhtar Date

Head of Department

……………………………………… ……………………………...

Prof. U. Gunu Date

Dean, Faculty of Management Sciences

……………………………………… ……………………………...

External Examiner Date

ii
 DEDICATION

This project is dedicated to the Almighty God, the most merciful for the wisdom and provision in

completing this research work.

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 ACKNOWLEDGEMENTS

All utmost gratitude goes to the Almighty God for his faithfulness. We are thankful to Him for

the successful completion of this project.

We profoundly appreciate our supervisor, Mr. Jimoh, A. T. for his guidance, dedication,

contributions and commitment towards the supervision of this project. May God reward his

labour of love.

Our sincere appreciation goes to the Head of Department of Finance, Dr. Oyebola F. Etudaiye-

Muhtar and our level adviser Dr. Kolawole for their moral support and guidance during our

coursework. We equally appreciate the efforts of the lecturers in the Department of Accounting

and the Department of Finance in persons of Prof. M. A. Ijaiya, Dr. M. A. Ajayi, Dr. I. B.

Abdullahi, Dr. Rihanat Abdulkadir, Dr. A. A Abdurraheem, Dr. Bilqees A. Abdulmumin, Mr, W.

O. Ibrahim, Mrs. Rodiat Y. Lawal-Ridwan, and also the non-academic staff in the Departments

of Accounting and Finance for their contributions to our academic progress.

We are forever grateful indebted to our amazing parent, and our lovely siblings who always

encourage, motivate and support us in all our endeavors. Your prayers, selfless love, sacrifice

and finance went a long way in making this undergraduate program a success.

We sincerely appreciate Mr. Toriola Abdullateef (ACA) for his invaluable support and

contributions to our academic progress. Finally, we would like to express our sincere

appreciation to our other colleagues, we are grateful to God for making our path cross. We have

learnt from your individual personalities and we appreciate you all for making this journey

memorable.

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 TABLE OF CONTENTS
Title Page…………………………………………………………………………………………

Attestation………………………………………………………………………………………....i

Certification……………………………………………………………………………................ii

Dedication………………………………………………………………………………………...iii

Acknowledgments………………………………………………………………………………..iv

Table of Contents………………………………………………………………………………....v

List of

Tables……………………………………………………………………………………..vii

Abstract…………………………………………………………………………………………...ix

CHAPTER ONE: INTRODUCTION

1.1 Background to the Study…………………………………………………………………..1

1.2 Statement of problem……………………………..……………………………………….5

1.3 Research Questions………………………………………………………………………..6

1.4 Objectives of the Study……………………………………………………………………7

1.5 Research Hypothesis……….……………………………………………………………...7

1.6 Justification for the Study…………………………………………………………………8

1.7 Scope of the Study………………………………………………………………………...9

CHAPTER TWO: LITERATURE REVIEW

2.1 Conceptual Review…….………………………………………………………………...10

2.1.1 Financial Inclusion...………………………………………………………………..........10

2.1.1.1 Products of Financial Inclusion…………………………………………………….........13

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2.1.2.2 Barriers to Financial Inclusion ...………………………………………………………..19

2.1.2.3 Financial Inclusion Participant/Stakeholders ……………………………………………23

2.1.2. Financial Performance…………………………………………………………………...24

2.1.2.1 Financial Performance Indicators………………………………………………………..25

2.1.3 Deposit Money Banks …………………………………………………………………...32

2.1.4 Digital Financial Service Channels………………………………………………………36

2.1.5 Digital Financial Services and bank performance .………………………………………39

2.1. 6 Automated Teller Machine and Bank Performance………………………………………40

2.1.7 Point of Sales and Bank Performance……………………………………………………42

2.1.8 Bank Embranchment and Bank Performance……………………………………………43

2.1.9 Number of Bank Accounts and Bank Performance………………………………..........44

2.2 Theoretical Review……………………………………………………………………….44

2.2.1 Diffusion of Innovation Theory……………………………………………………….….45

2.2.2 The Innovative Financial Inclusion Theory………………………………………..........48

2.3 Empirical Review…………………………………………………………………..........50

2.3.1 Review of International Studies………………………………………………………….51

2.3.2 Review of Local Studies…………………………………………………………………56

2.4 Research Gap…………………………………………………………………………….62

CHAPTER THREE: METHODOLOGY

3.1 Model Specification ………………………………………………………………..........63

3.2 Research Design …………………………………………………………………………64

3.2 Population Study……………………….………………………………………… ……..64

3.4 Sampling Technique ……………………………………………………………….........65

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3.5 Data and Method of Data Collection…………………………………………………….65

3.6 Method of Data Analysis………………………………………………………………...65

3.7 Variable Measurement…………………………………………………………………...66

CHAPTER FOUR: ANALYSIS OF DATA AND PRESENTATION

4.0 Introduction……………………………………………………………………………...67

4.1 Preliminary Analysis…………………………………………………………………….67

4.2 Regression Result and Hypothesis Testing ………………………………….…………..72

4.3 Discussions of Findings ……………………………….………………………………...74

CHAPTER FIVE: SUMMARY, CONCLUSION, AND RECOMMENDATIONS

5.0 Introduction………………….…………………………………………………………...74

5.1 Summary……………………………………………………………………………........75

5.2 Conclusion……………………………………………………………………………….76

5.3 Recommendations……………………………………………………………………….76

REFERENCES……………………………………………………………………………........78

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 LIST OF TABLES

Table 1 Descriptive Analysis …………..…………………………………………………68

Table 2 Pair-wise Correlation………..………………………………………………….....70

Table 3 Breusch and Pagan Lagrangian Test………………………………………............71

Table 4 Panel Regression Results………...………………………………………………..72

viii
 ABSTRACT

The study examined the impact of financial inclusion on the financial performance of
deposits money banks. This study specifically examine the effect automated teller machine on
the financial performance of deposit money banks in Nigeria; to examine the effect of bank
embranchment on the financial the financial performance of deposit banks in Nigeria; to
examine the effect of number of bank accounts on the financial performance of deposit money
banks in Nigeria; to examine the effect of POS on the financial performance of deposit
money banks in Nigeria. For the purpose of data analysis, ex- post facto design was
employed in collecting data, analyzing and interpreting the data collected. The study
employed secondary data which was extracted from annual reports of all the thirteen (13)
listed deposit money banks in Nigeria and Central Bank statistical bulletin, between the
period from 1985-2020. OLS regression technique was used to analyse the data after
carrying out some preliminary tests. The findings showed that ATMs have a positive
relationship of 1% and positive co-efficient of (0.2441 and P-value of 0.0013), BET have a
positive relationship of 1% and positive co-efficient of (17.6210 and P-value of 0.0002), NBA
have a positive relationship of 5% and positive c0-efficient of (0.0224 and P-value of
0.0698), POS have a negative relationship of 10% and negative co-efficient of (-4.8833 and
P-value of 0.00000.The study concludes that the improvement in the infrastructure of
financial services encourages individuals and corporate bodies to take advantage of the
financial services, hence enhances the profitability of the banks, the study recommends that
management of DMBS should deploy ATMs in accessible locations, improve provision of
other facilities like POS services.

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 CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Financial inclusion is simply an extension of banking and financial services such as savings,

deposits, payments, withdrawals, loans and advances to an individual, group or community.

Financial services can be assessed from formal sources such as banks and development or other

regulated formal institutions as well as from the informal sector as from cooperatives, non-

governmental organization and credit union. It is the concept that all community members can

access and use financial services at an affordable cost at any time (World Bank, 2017). Financial

inclusion is the ability of individual and businesses to be included into the financial environment,

i.e. the access to useful and affordable formal financial product and services by households and

businesses that meets their needs and delivered in a responsible and sustainable way, such as

making transactions, payments, savings, credit and insurance.

The principle of financial inclusion has assumed a greater level of priority in recent times due to

its perceived significance as a booster of economic growth. It has gained a lot of interest both

among academia and practitioners, it has received attention from development partners such as

World Bank, and African Development Bank (AFDB) among others. Giving access to hundreds

of millions of people all over the globe who are presently excluded from financial services would

provide the possibilities for the encouragement of savings deposit, investible funds, investment

opportunities and therefore global wealth generation. In other words, access to financial services,

that are well suited for individuals especially low income earners, small and medium scale

enterprises promote large accumulation of wealth, creation of credit, and investment boom.

Utilization and mobilization of these resources by financial institution like deposits money banks

1
which provide a huge amount of cheap long term investible capital which will in turn boost the

financial performance of DMBS in terms of profitability and efficiency of banks.

In Nigeria, the Central Bank of Nigeria launched the National Financial Inclusion Strategy

(NFIS) in 2012, setting 2020 as the target year. It was to ensure 80% of Nigerian adults to would

have access to financial services by the end of the target year (IMF, 2015). Since 2010, progress

had been made on the reduction of the adult financial exclusion rate. According to Enhancing

Financial Innovation and Access (EFInA) 2020 Survey data, shows that the rate of Nigerian

adults financially excluded declined from 46.3% in 2010 to 16.8% in 2019. Formal financial

inclusion, which comprises the banked population and adults having access to any other formal

channels only, such as microfinance banks or insurance companies increased substantially and

gradually from 36.3% in 2012 to 51% in 2020.

However, the percentage of Nigerian adults who had access to both informal and formal

channels increased from 58.4% in 2016 to 64.1% in 2020. Nigerian adults who were financially

excluded decreased marginally from 39.5% in 2014 to 36% in 2020. It could be actually said that

the numbers of Nigerian adults who were financially excluded increased from 36.6 million to

38.1 million in 2020.

The performance in a deposit money bank shows whether a bank has carry out its responsibility

well or not within a period of time basically the accounting year to achieve its objectives. One of

the document that can be used to measure the performance of a deposit money bank is the

financial statement. According to Rose (2001), a fair evaluation of any bank performance should

start by evaluating whether it has been able to achieve the objectives set by management and

2
stakeholders. It is very common that all banks have their own goals and objectives to be achieved

with some certain period of time.

Financial performance identifies how well a firm generates revenues and manages its assets,

liabilities, and the financial interest of its shareholders. Performance also shows how external

users analyze a firm’s ability to operate on a long run. Governments all over the world attempt to

establish an efficient and effective banking system to promote economic growth and enhance the

financial performance of the banking sector by supervising, regulating, and making reforms

(Aruwa & Naburgi, 2014).

Deposits Money Banks are financial institution licensed by the regulatory authority to mobilize

deposits from the surplus unit and channel the funds through loans to deficit unit and perform

other financial services activities. Apart from the major role of financial intermediation, the

DMBs perform coupled with other functions, provision of financial services and product is one of

them. Beck and Simbanegvavi, (2015) noted that banks plays a major role in the economic and

financial development; they accept deposits and offer various financial services, such as; creation

of credits, electronic banking facilities and etc. Thus, these DMBS have the main goal of making

profit and maximizing shareholders wealth (Pilloff, 1996).

Banks are recognizing the need to expand their services to the financially excluded customers,

they have been exploring more on technology, service design and marketing to provide

affordable financial services through new innovations such as the use of electronic devices or

technology such as E- banking services, installation of automated teller machines (ATMs),

numbers of Point of Sales (POS) outlets in some areas, mobile banking, online banking and

bank penetration to rural areas( having some of their branches in the rural areas), mobile money

3
agents are also another way in which Nigerian banks engage or accommodate the financially

excluded customers. Financial innovations and deregulations are being made by the banks and

the regulatory body to attract the financially excluded customers which will in turn increase their

customer base and the banks financial performance. Several studies have examined how banks

can earn more revenues if loans, branches, ATMs, and electronic tools are improved. Ibekwe and

Obiageli (2021) in their study on how financial innovation affects performance of deposit money

banks showed that financial innovation has positive effect on banks performance. Jegede (2014)

found that ATMs could effectively enhance the growth of Nigerian banks. Shihadeh and Liu

(2019), the study found out that, banking embranchment could positively influence banks

performances. Financial innovation is one of the most important competitive weapon and

generally seen as a firm’s core value capacity. It is considered as an effective way to improve

firm’s productivity due to the resources constraint issues facing a firm. Deposits Money Banks

continues to provide the platform and delivery vehicle for financial inclusion activities which

enables bank customers benefits through reduced costs of transactions, ease of services and

increased levels of efficiency and this would bring more financially excluded people into the

banking system which could influence the financial performance of banks positively through the

increased patronage of services by the people. Hence, there is need to study the effects of

financial inclusion on financial performance of deposit money bank in Nigeria.

1.2 Statement of the Problem

The financial sector mostly the banking sector in the world, has been evolving by inculcating and

improvising their financial products and services through new innovations of technology such as

the use of electronic devices or technology to perform financial activities which would reduce

the work load of banks and the stress of financial services users of coming into the banking hall

4
to transact. This new innovative technologies would enable the financially excluded people to

come into the financial system since their time and energy won’t be hardly spent, which would

increase the customer base of banks, their resources which directly have an impact on their

financial performance. Deposits Money Banks particularly has been developing, innovating

different forms of financial products and services specifically to accommodate financially

excluded customers. These products includes digital services, marketing strategies, attractive and

accessible credit facilities, etc.

These innovations through financial inclusion tends to enhance the performances of banks. These

technological innovations include E –Banking services or instruments such as installation of

ATMS in some geographical areas, numbers of POS outlets in an area, mobile banking and

online banking etc. Banks too has been making provisions and efforts on expansion of their bank

branches to some areas (bank embranchment). Jimoh, Shittu and Attah (2019) studies established

that financial inclusion indicators (ATMs, bank embranchment and point of sales terminals) had

positive and significant impact on banks performances. Humphrey (1994) concluded that ATMs

increase the banks’ profits and revenues.

Furthermore, Ibiekwe, et al., (2021) studies established that ATMs, mobile banking and point of

sales had significant effect on banks return on assets while internet banking had insignificant

effect on banks performances. In Nigeria, some of these financial inclusion indicators has been

used while some is yet to be fully explored on. Based on these foregoing, therefore, this research

work intends to make findings and analyze on some specified channels of financial inclusion in

order to access the combined contributions to the financial performance of deposits money

banks.

5
1.3 Research Questions

i. What is the effect of automated teller machine (ATMs) on the financial performances of

deposit money banks in Nigeria?

ii. What is the effect of bank embranchment on the financial performance of deposit money

banks in Nigeria?

iii. What is the effect of number of bank accounts on the financial performance of deposit

money banks in Nigeria?

iv. What is the effect of Point of Sales (POS) on the financial performance of deposit money

banks in Nigeria?

1.4 Objectives of the Study

The main objective of the study is to identify the impact of financial inclusion on financial

performance of Deposit Money Banks. Specifically, the study is designed to fulfill the

following objectives:

i. To examine the effect of automated teller machine (ATMs) on the financial

performances of deposit money banks in Nigeria.

ii. To examine the effect of bank embranchment on the financial performance of deposit

money banks in Nigeria.

iii. To examine the effect of number of bank accounts on the financial performance of

deposit money banks in Nigeria.

iv. To examine the effect of point of sales (POS) on the financial performance of deposit

money banks in Nigeria.

1.5 Hypothesis of the Study

6
 The following null hypothesis are generated for this study:

Ho1: There is no significant effect between automated teller machine and financial

performances of deposit money banks in Nigeria.

Ho2: There is no significant effect between bank embranchment and financial performance of

deposit money banks in Nigeria.

Ho3: There is no significant effect between number of bank accounts and financial

performance of deposit money banks in Nigeria.

HO4: There is no significant effect between point of sales and financial performance of

deposit money banks in Nigeria.

1.6 Justification for the Study

Previous studies have examined the relationship between financial inclusion and financial

performances of deposit money banks. While some studies revealed negative relationship

between financial inclusion and financial performance of deposit money banks, others

showed positive relationship between financial inclusion and financial performances of

deposit money banks.

The reason for carrying out this study is to explore the impact of financial inclusion on the

performance of deposit money banks. Though the scope of the study was limited to financial

inclusion on deposits money banks, it is hoped that the exploration of this study will provide

a broad view of how financial inclusion affects deposit money banks performances. It will

contribute to the existing literature on the subject matter by investigating empirically the role

which financial inclusion plays on the performance of deposit money banks. This study will

be of great importance to the government, policy makers, banks, students and the society at

7
 large which will in turn boost the growth of the economy likewise the financial performance

of banks generally.

1.7 Scope of the Study

This study centers on the impact of the financial inclusion on the financial performance of

deposit money banks in Nigeria. This study applied the 13 listed deposit money banks in

Nigeria. The data used for this study covers from the period between 1989-2020.

CHAPTER TWO

LITERATURE REVIEW

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This part entails the conceptual clarification, theoretical review, empirical review of different

studies and the research gap.

2.1 Conceptual Clarification

2.1.1.1 Financial Inclusion: Meaning & Importance

The concept of financial inclusion has taken different meaning and measured differently.

Financial inclusion means accessibility and affordability of useful financial products and services

by individuals and businesses to meet their needs in a responsible and sustainable way (World

Bank, 2018). Financial inclusion also called inclusive finance refers to efforts made to ensure

the accessibility and affordability of product services and products to all individuals and

businesses, regardless of their personal net worth or size of their company (Grant, 2020).

Financial inclusion refers to the process that ensures the ease of access, availability and usage of

the formal financial system by all members of an economy. Martinez (2011) identified financial

access as an important policy tool employed by government in fighting and stimulation of

growth given its ability to facilitate efficient allocation of productive resources, thus reducing the

cost of capital . According to a United Nations Report, financial inclusion is the provision

sustainability of affordable financial services that bring the non financially bouyant people into

the formal economy (United Nations, 2016).

Thus, financial inclusion is an extension of banking and financial services to an individual, a

group of people or a community that were formerly excluded. It is the universal access to and

usage of a wide spectrum of banking and financial services at an affordable pricing, particularly

by micro, small and medium enterprises, low income earners and the rural populace (Thingalaya,

2012; Yoshino & Morgan, 2016).

9
Financial inclusion is the provision of wide range of financial products and services such as

savings, credit, insurance, payments and pensions, which are important, appropriate and

affordable for the entire adult population, especially the low income segment (Access, 2019).

Chibba (2009) conceives financial inclusion as a financial intervention strategy that is aimed at

overcoming the market challenges that hinder the poor and less previleged from having access to

financial services.

Central Bank of Nigeria (CBN) through the NFI Strategy defined “financial inclusion as when

adult nigerians have access to a wide range of formal financial services that meet their needs at

an economical cost is achieved.” The services include,but aren’t limited to, payments,savings,

loans, insurance, and pension products.

The definition of financial inclusion used in FIS stemed from the following components: easy

accessibility to financial products this explains the easy reach of all segments of the population

to financial products and it musnt be too tasking. Use of wide range of financial products and

services: There must be wide usage of a broad financial services including, but not limited to

payments, savings, credit, insurance, and other products. Financial products: It must be designed

according to the needs of customers or clients. Affordability: all segment of the population

should be able to afford financial services especially to low income earners or groups. There are

various importances of financial inclusion which are explained below;

The importance of financial inclusion to financial development and economic growth cant be

overemphasised. This importance is further explained by several empirical evidences that link a

high degree of financial inclusion to economic growth and financial development (Onaolapo,

2015). Lack of access to basic financial services can create crippling finanacial problems for

10
people. They may have no way to receive certain payments, have to pay higher amounts for basic

services such as electricity, and are prevented from making purchases due to having no easy

means of submitting payments. Financial inclusions also strengthen the availability of economic

resources and builds the concepts of savings among the poor. Financial inclusion is a major steps

towards inclusive growth. It helps in the overall economic development of the underprivelged

population, for example, in some northern part of Nigeria, effective financial inclusion is needed

for the uplift of the poor and disadvantaged people by providing them with the modified

financial products and services. Having access to financial services is very important to both

individuals and companies as it ptovides a means of storing money, managing payments and

cash flows, accumulating savings, accessing credit and making investments. Such access is also

key to acquring assets and building financial security. Providing greater financial inclusion to

small businesses is important because it can help to create more jobs and improve the standard of

living in a community. According to Shah and Dubhashi (2015), there are some importance to

financial inclusion such as; a condition for sustaining equitable growth, It enables the role of the

financial intermediation to be achieved i.e the channeling of funds from the surplus unit to the

deficit unit for viable investments, the large number of low cost deposits will offer banks an

opportunity to reduce their dependence on bulk deposits andhelp them to better manage both

their liquidity risk and assets liabilities mismatches, to manage payments and cash flows,

accummulating savings, accessing credits, making investment i.e access to acquiring assets and

building financial security, it reduces unemployment by creating more jobs and Improving the

standard of living.

2.1.1.2 Products of Financial Inclusion

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Payments represent one of most basic and common transactions that any individual performs on

a daily basis. Payments are made when making purchases at retail stores, paying utility bills and

taxes or sending money to someone (domestic and international). Similarly, people receive

payments for work performed (wages), for the sale of products and services or for

government/social programs. An important form of payment that is essential for the financial

well-being of developing countries is remittances, or money transfers, which can take place

domestically (within a country) or internationally (cross-border). The migration of individuals in

emerging countries from rural areas to cities in search of better jobs and opportunities has led to

the exponential increase of domestic money transfers to support their families. In most cases, the

cost of remittances is high relative to the amount being sent due to lack of transparency, and take

place through informal means, such as couriers who are entrusted to deliver cash to the family

members in rural villages. These informal methods are prone to theft and high charges (can be as

high as 15% of total transaction size in some countries). Likewise, international remittances refer

to person-to-person transfers, but across borders (i.e., between two countries). Donovan (2012)

notes that international remittances are one of the largest sources of external financing in

developing countries, and often serve as a lifeline to the poor. International remittances provide

significant benefits to the poor by helping families raise their living standards and providing

funds for education, healthcare and food. Indeed, there are more than 200 million migrants from

low- and middle-income countries send money to their families back home, with an estimated

800 million people worldwide supported directly by remittances (Ponsot, Terry, Vazquez & De

Vasconcelos, 2017). The flow of international remittances as of 2016 was $445 billion, which

has more than doubled over the last 10 years, and approximately 25 developing countries receive

10% or more of their GDP from remittances (IFAD & World Bank, 2015). However, one of the

12
biggest issues with remittances is the high prices, which is mainly due to fragmented and

inefficient payment systems and lack of liquidity. The average cost to send remittances from a

money transfer organization (MTO) such as Western Union, or a bank in Sub-Saharan Africa is

approximately 7.3% of the transaction amount. Cash is the most convenient way of making

payments. As Klapper, Dermirguc-kunt, Asli and Singer (2017) point out 59% of adults who

received a wage payment, 91% of adults who received a payment for agricultural products and

48% of adults who received a government transfer payment did so in cash in developing

economies in 2014. While cash is ubiquitous and readily available, there are inherent costs

related to safety storage and time lost. For example, sending cash to family members in other

regions via couriers is susceptible to theft and crime. Moreover, it may require significant travel

time to go to the nearest bank branch or money transfer operator in order to receive a

government transfer payment. Consequently, shifting payments from cash into bank accounts

and digital payments has many potential benefits, including lower costs, higher transparency,

faster transaction times and lower incidence of crime. Aker, Boumnijel, Mcclelland and Tierney

(2013) performed a rigorous study on social welfare programs in Niger, and they found that by

disbursing the government payments electronically, it reduced overall wait time by 75% when

compared to collecting the payments in cash. Advances in mobile phone technology have made

digital transfers to be accessible to the poor, even if they may not have a bank account.

Credit also is a product which most financial institution use to increase the rate of financial

inclusion. Most of the empirical studies on the access to credit have been related to the

effectiveness of MFIs to help lift the poor out of poverty, by providing them with small loans.

Performing systematic reviews of numerous studies of the impact of microcredit on the poor,

Cull, Ehrbeck and Holle (2014); Klapper et al. (2017) both highlight that the results from most of

13
these empirical studies have been mixed. Initial research on microfinance performed in the 1990s

and early 2000s showed significant social and economic benefits, but were mostly based on

anecdotal evidence and descriptive statistics (Banerjee, Karlan, & Zinman, 2015). More recent

empirical studies and evaluations have shown more modest conclusions. Bauchet, Marshall,

Starita, Thomas, & Yalouris (2011) elaborate this point and mention that while increasing access

to credit does not produce dramatic effects of completely lifting people out of poverty, it allows

for the creation of new businesses and moving away from the consumption of temptation goods

such as tobacco and alcohol. Also, micro loans help some households to smooth consumption, it

is an important aspect for the poor which suffer from unpredictable and irregular income

streams. Banerjee et al. (2015) analyzed six extensive RCT studies across four continents and six

countries on the impact of microcredit under different models, and they concluded that the

effects were “modestly positive, but not transformative”. Stewart (2012) conducted a broad

review of 17 microfinance interventions globally, and they find mixed results on the effect of

microcredit on higher income and more economic opportunities. Although the evidence at the

individual level is not very strong, there is evidence that microcredit provides positive benefits to

micro entrepreneurs by allowing them to borrow so that they can grow their businesses (Cull et

al., 2014).

Savings is an important financial tool that allows individuals to set aside funds for future

expenses such as large purchases, education, old age and potential emergencies. Savings can also

help households manage cash flow spikes and smooth consumption. In developing countries,

savings mainly takes place through informal means – one of the most common methods is

through rotating savings clubs, also known as ROSCAs. These clubs operate by having members

make weekly deposits, pooling the deposits together and then disbursing the entire amount to a

14
different member each week. Other forms of informal savings include cash under the mattress,

jewelry, real estate or livestock. However, there are a few issues with these informal savings

mechanisms. First, they tend to be risky due to potential theft and asset depreciation (in the case

of jewelry and other physical assets). Second, informal savings options may not be very liquid,

due to high transaction costs and how long it takes to sell the different items to get cash. Finally,

the informal savings clubs tend to be community driven, and thus an individual’s savings cannot

be transferred to another community, if the individual is seeking better opportunities elsewhere.

Saving at a formal financial institution can provide many potential advantages, including lower

risk of theft and curbing impulse spending. Micro-savings, which is the ability to save small

amounts at a high frequency in formal financial institutions, seem to provide a significant benefit

for the poor. Similar to microcredit, Cull et al., (2014) and Klapper et al. (2017) have reviewed

empirical studies of micro savings interventions to evaluate their impact on the poor. One study

the authors highlight is a field experiment in Kenya which showed that women market vendors

were able to save significantly more when they were provided with a savings account, and as a

result increased their expenditures by 38% when compared to a control group (Dupas &

Robinson, 2013). The study speculates that by keeping the money in an account that was not

immediately accessible, people are able to better resist the temptation to spend the money. Dupas

and Robinson (2013) performed another empirical study where they show that using a

commitments savings account, which require the saver to deposit a certain amount of money in a

bank account for a specified period of time, can help the poor better cope with health

emergencies. In particular, individuals increased their investments in preventive health by 138%

when they were provided these savings accounts, as compared to a control group. Overall, most

empirical studies on micro-savings seem to have a more positive impact on improving the

15
livelihoods of the poor than the studies on the impact of microcredit. For the savings products to

be effective, they need to be customized and tailored to overcome the behavioral constraints of

the poor and marginalized.

Insurance is an important financial product to help manage risks due to unexpected expenses

from health emergencies, natural disasters or income loss from the death of wage earner, yet it is

rarely used by the balance of payments. One reason for the lack of use is that in most cases these

insurance products are difficult to understand and are very expensive relative to the limited

income of the poor. Micro insurance, which refers to providing insurance for small amounts of

coverage by paying very small premiums, has become the main way to provide insurance to the

poor and marginalized. Several randomized control trials offering weather-related micro

insurance products to farmers in India and Ghana encouraged them to take higher risks by

investing in higher return, high risk crops and resulting in higher income for the farmers (Cole,

Sampson, & Zia, 2011; Karlan, Osei, Osei-Akoto, & Udry, 2014). The insured farmers had

higher total revenues more assets post-harvest, and they were 8% less likely to report missed

meals when compared to other farmers that did not get weather-related insurance. Empirical

studies on the impact of micro insurance on the poor are fairly limited and little is known on the

welfare benefits; therefore, more studies need to be conducted.

In summary, financial inclusion provides significant benefits to help the poor, and it is supported

by a wide range of empirical studies. However, the effectiveness and impact in the reduction of

poverty and economic growth varies by financial product. So far, savings accounts offer the

biggest impact, provided that the accounts are customized, inexpensive and serve a specific

purpose. Equally, digital payments offer significant impact on improving the livelihoods of the

poor. Although research on microcredit has been the most extensive, its impact is only modest.

16
Finally, initial studies on insurance show promising results, but they are still fairly limited and

more work needs to be done in this area. As I will demonstrate in the next section, the use of

technology in all of these financial products has the potential to significantly increase access to

formal financial services to the unbanked and under banked..

2.1.1.3 Barriers to Financial Inclusion

According to Babajide (2020), it was revealed that irregular income or job loss, high

maintenance fees, lack of trust, and low customer services are of high threat to financial

inclusion. (Banqin, 2020) cited some barriers which included some out of the ones stated above;

geographical distance gender inequality e.t.c.

According to Kama (2013), one of the challenges in the financial inclusion process is the issue of

financial illiteracy, Nigerians lack knowledge about accessing financial services and staff of the

services providers are also found lacking in that part too and are unable to educate the public

efficiently. It was also stated that the issue of double digit inflation in the economy is also a

challenge faced by financial inclusion as it will prevent the ability of the populace to save.

Increase in poverty is also a barrier, the inabilty of people to acquire jobs i.e unemployment rate

continues to increase due to this the populace wont have the chance to save up the excess of their

income because ther isnt one to start with, which would not enable the goals of financial

inclusion be achieved etc. In her work stated that cultural, social and religious factors means

some people don’t access financial services due to their religion, cultural belief, gender, age etc.

Underdeveloped delivery channels meaning lack of infrastructures making them not to access

financial services and products, even making it more costlier and difficult. Lack of capital and

limited financial capabilities i.e this explains that vulnerable groups of population such as youth

17
or women in rural areas who have no income, neither some other form of capital for collateral.

Rigorous procedures for opening of accounts; in some cases, banks tends to reqire a lot of

documentation for partaking in financial products and services.

Some theories suggest that barriers that prevent broad financial access can be a critical

mechanism for generating income inequality and poverty traps (Banerjee & Newman, 1993).

Knowledge of these barriers to financial inclusion allows policy makers and stakeholders to

design rules and regulations to potentially reduce them. A large number of barriers and

challenges have been cited in different academic papers and journal articles, which includes; lack

of personal documentation, lack and inadequacy of financial infrastructure, limited amounts of

funds or resources, high maintainance cost of bank accounts, financial illiteracy and restrictive

regulations. The key barriers or challenges faced by financial inclusion can be classified into

supply side barriers and demand side barriers. The supply side barriers, which are related to the

financial institutions that supply formal accounts and services, and demand side barriers, which

are barriers related to the individuals (Beck & De La Torre, 2007).

The main demand side barriers to financial inclusion are the absence of formal identifiaction and

financial illiteracy (Soriano, 2017), the World bank, there is an estimation of 1.5 billion people

globally who don’t have a government issued and recognised documents as proof of identity. In

addressing this issue, some countries have implemented biometric systems to identify individuals

examples are the T-KYC (Three-tiered Know Your Customer) frameworks and the NIMC

(National Identity Management Commission) in Nigeria, where the government has set up a

centralised data base that issues a unique number to all individuals and also records their

fingerprints as a proof of identification. Financial illiteracy has also been identified as one of the

barriers why the poor don’t have bank account. Educating of individuals on the various financial

18
products and services and the benefits to having a bank account, is expected to results in higher

usage of financial products and services.

The key supply side barriers to financial inclusion are the high costs of financial prodfucts and

services and the lack of banking infrastructure in rural areas (Beck, 2015). Cost of running and

usage of financial services is extremely high relative to some peoples income, which makes the

provision of financial services at a formal financial institution more difficult. The maintenance

cost also are extremely high such as charging flat fees for withdrawal and bank accounts

minimum requirements balances. The poor and marginalised usually have limited resources, and

thus make fewer transactions, which will results in lower profitability in banks. Beck ,

Demirguc-Kunt, and Peria (2018), performed a survey of the largest banks in 62 developing

countries and document the variations in the cost of different financial products, the authors

found out that there was high cost of opening and maintaining of bank accounts and for

MSMEs, high interest rates and collaterals for loans in some african countries. Some major

constraints is the limited number of bank embranchments and ATMs in rural areas. Banks do

not view it as economically viable to have branches in rural areas where the population is

significantly lower than urban centres. To address this issues , microfinance has emerged and

agent banking has also emerged.

In conclusion, barriers to financial inclusion include financial illiteracy, age, gender inequality,

poor income, proximity to financial services, interest rate, stringent and restrictive

documentation of paperwork, inadequate financial infrastructure in rural areas, poor ICT

knowledge, Inadequacy and inappropriateness of awareness campaign.

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2.1.1.4 Financial Inclusion Participant/ Stakeholders

According to national inclusion financial strategy (2012). The national financial inclusion

strategy stakeholders include the public sector institutions, regulatory institutions, financial

services providers, distribution actors, development partners and users. The public sector

institutions, include the federal ministries, NIMC, Nigerian postal services and government

agencies, they as a participant are expected to provide an enabling environment for digitalizing

government financial responsibilities and supporting other initiative to increaseaccess to finance

by excluded populations. Regulatory institutions includes; CBN, NCC, NAICOM, PENCOM,

NDIC, SEC, they are saddled with the responsibilities to achieve effective and efficient systems

that will enhance sustainable real sector growth and development. They will ensure the

development and implementation of appropriate policies, guidelines and frameworks for

financial service providers, other financial institutions

Financial service providers are the formal financial institutions such as deposit money banks,

microfinance banks, development finance institutions, insurance companies, pension funds

administrators and asset managers. They provide a favourable environment that supports

business development, encourages innovation, product offerings and enhances their profitability.

They also make provisions to provide financial services that are easily accessible, affordable,

meet their customer needs and are in consonance with established consumer protection

principles.

Distributor actors such as mobile network providers, inter-bank settlement providers, super

agents, they provide efficient, timely, and reliable services in support of financial inclusion

objectives. The development providers too are stakeholders of financial inclusion strategy, they

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include; non-governmental organisations (NGOs) and multilateral agencies. They provide the

opportunity of channeling their resources to achieve the sustainable developmental goals such as

equality, empowerment, poverty alleviation, welfare improvement amognst other goals which

also fufills the objectives of the financial inclusion strategy. Users are the the ones who engage

in economic activities, have access and manage their finances by using financial services

responsibly and advocating for public policy implementations, monitoring and evaluations.

2.1.2 Financial Performance

The term performance means carrying out or execution or achievement or accomplishing of

specific activities or the undertaking of a duty. Bank performance may be defined as the manner

of way in which the resources of a bank are used in a pattern which enables it to achieve its

objectives.

Didin Fatihudin, (2018), financial performance is the achievement of the company’s financial

performance for a certain period covering the collection and allocation of finance measured by

capital adequacy, liquidity, solvency, efficiency, leverage and profitability. Financial

performance is the ability of a company to manage and utilize its resources. Financial

performance is the firm’s financial conditions over a specific period that includes the collection

and use of funds measured by several indicators. Financial performance is the ability of a firm to

manage and control its resources (IAI, 2017). Financial performance, is an indicator of how a

business organization has transformed its assets to generate revenue in its daily business

activities or operations (Bessler & Bittelmeyer,). Performance also mirrors how external parties

assess a firm’s ability to operate on the long run.

21
Financial performance simply means whether a firm i.e. banks has performed well within a

trading period to realize its objectives. The only documents that explains this term is the

published financial statements. According to Rose (2001), a fair evaluation of any banks

performance should start by evaluating whether the expectation and objectives set by the

shareholders, stockholders and management has been achieved. There are certain ways financial

performance of banks are measured and evaluated through some indicators. Ordinarily, stock

prices and its behavior are deemed to reflect the performance of a firm. This is a market indicator

and it is not enough and reliable to use in the measurement of banks performance.

2.1.2.1 Financial Performance Indicators

They are referred to a set of measurements that are quantifiable which used to gauge a

company’s overall long term performance. They are used specifically to help in determining a

firms strategic, financial, and operational achievements, especially compared to those of other

businesses within the same sector (Twin & James, 2021).

According to Havryliuk (2017), in his research gave the following financial performance of

banks indicators particularly in Ukraine to be; Profitability of bank assets (ROA); which is called

return on assets, it’s an indicator that characterizes the ratio of the bank’s net income to the

bank’s assets and shows how much net profit the unit of the bank’s assets give. Profitability of

the bank’s Share capital (ROE) known as return on equity, it’s an indicator that measures the

profitability of the bank’s share capital. It’s of utmost importance to the shareholders or investors

of the bank particularly, since it is approximately equal to the size of the net profit.

Net Interest Margin (NIM): it explains the ability of the banks to generate revenue, differential

interest income, as a percentage of net assets.

22
Adequacy of Regulatory Capital: It shows the ability of the bank to meet its liquidity needs or

obligations timely and as at when due. Another major yardstick for measuring performance in

the banking industry is the CAMEL approach. This approach is equally used by the monitoring

authority to assess the level of banks performance, before making any pronouncement on their

soundness, solvency and liquidity position (Osadume & Ibenta, 2018). The CAMEL acronym

denotes;

C= Capital Adequacy

A= Assets Quality

M= Management Capability

E= Earnings

L= Liquidity

S= Sensitivity

Capital Adequacy

According to Capital adequacy assesses an institution’s measurement of financial strength. It

also shows the level of banks compliance with regulations of the minimum capital reserve

amounts (Al- Najjar & Assous, 2021). Regulators establish the rating by assessing the financial

institution’s capital position currently and over several years. Freahat (2009), was of the view

that capital adequacy is the overall usage of financial leverage in the bank. Nimalathasan (2008),

capital adequacy shows the capital position of the banks, which enables and simultaneously

protect depositors funds from the potential losses incurred by banks. To get a high capital

adequacy rating, institutions must also comply with dividends and interest practices. Growth

23
plans, ability to control risk, economic environments, and loan and investment concentrations are

other factors that used in rating and assessment of an institution’s capital adequacy (Kuhil, &

Lelissa, 2018).

Asset Quality

This category assesses the quality of an assets it is important in banks, as the value of assets can

decrease rapidly if they are high risk (Kuhil, & Lelissa, 2018). For example, loans are type of

asset that can become impaired if money is lent to a high risk customers.

This covers an institutional loan’s quality, which reflects the earnings of the institution.

Assessing asset quality involves rating investment risk factors, the bank may face and balance

those factors against the bank’s capital earnings. This shows the stability of the bank when faced

with particular risks. A rating of 1 reflect a high asset quality and minimal portfolio risks.

Likewise a rating of 2 implies high quality assets although the level and severity of classified

assets are greater in a 2 rated institution, firms rated 1 and 2 will generally exhibit trends that are

stable or positive, a rating of 3 indicates a significant degree of concern, based on either current

or anticipated asset quality problems, however firms under this category maybe experiencing

negative trends, inadequate loan underwriting, poor documentation, higher risk investments,

inadequate lending and investment controls and monitoring, a rating of asset quality of 4 and 5

denotes increasingly severe asset quality problems; rating of 4 poses a threat to the institution’s

viability if left uncorrected. Rating of 5 indicates that the institution viability has deteriorated due

to the corrosive effect of its asset problems on its earnings and levels of capital (Maude &

Dogarawa, 2008)).

Management Capability

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Management capability measures the ability of a management of an institution’s to recognize and

then react to financial stress. (Kuhil, & Lelissa, 2018), the category depends on the quality of a

bank’s business strategy, financial performance, and internal controls. For the strategy and

financial performance, it includes the capital accumulation rate, growth rate, and identification of

the major risks. For the internal controls areas include information systems, audit programs, and

record keeping. Information systems ensures the integrity of computer systems to protect

customer’s personal information. Audit programs check if the company’s policies are followed.

While record keeping is all about the accounting principle and ease of documentation to be

followed. This component rating is reflected by the management’s capability to point out,

measure look after and control risks of the institution’s daily activities. A rating of 1 indicates

that management and directors are fully effective, for a rating of 2, minor deficiencies are

noticed, but management produces a satisfactory record of performances, furthermore a rating of

3 and 4 indicates that either operating performance is lacking in some measures, or some other

conditions exist such as the inadequate planning strategy of the management and a serious

deficiencies noted to be the inability of the management to meet its responsibilities respectively,

rating of 5 denotes problems resulting from management’s weakness are of such severity that

some type of administrative action has to be taken to restore safe and sound operations (Maude

& Dogarawa (2008).

Earnings

It explains the ability of financial institutions to earn an appropriate return on its assets which

enables it to fund expansion, remain competitive, and replenish and or increase capital (Al-Najjar

& Assous, 2021). It is determined by assessing the banks’ earnings, earnings growth, stability,

valuation allowances, net margins, net worth level, and the quality of the banks existing assets.

25
Earnings help firms in the evaluation of its long term viability. A banks needs an appropriate

return to be able to grow its operations and maintain its competitiveness. Maude and Dogarawa

(2008), earnings are rated 1 if the firms are currently and are projected to be sufficient to fully

provide for loss absorption and capital formation with due consideration to asset quality, growth,

and trends in earnings, an institution with a 2 rating is denotes to have its earnings positive and

relatively positive provided its level of earnings is adequate in view of asset and operating risks,

rating of 3 denotes when a firms current and projected earnings are not fully sufficient to provide

for the absorption of losses and the formation of capital to meet and maintain compliance with

regulatory requirements, rating of 4 and 5 shows firms may be experiencing erratic fluctuations

in net income, the development of a severe downward trend in income, or a substantial drop in

earnings from the previous period and a drop in projected earnings anticipated and experiencing

of consistent losses respectively.

Liquidity

For banks, liquidity is especially important, as lack of liquid capital can lead to a bank run. This

examines the interest rate risk and liquidity risk. Interest rates affect the earnings from a bank’s

capital markets business segment. Liquidity refers to the ability of a financial institution such as

bank to meet up with their obligations as at when due, i.e., depositors withdrawal, maturing

liabilities and loan requests without delay (Teck, 2000) If an institution exposes itself to a large

interest risk, then its investment and loan portfolio value will be volatile. Liquidity risk is defined

as the risk of not being able to meet present or future cash flow needs without affecting day to

day operations. Factors to be considered in evaluating the liquidity management of a firm are;

balance sheet structure, contingency planning to meet unanticipated events, contingency

planning to handle periods of excess liquidity, cash flows budgets and projections and integration

26
of liquidity management with planning and decision making. Maude and Dogarawa (2008),

under the Uniform Financial Institutions Rating System, A rating of 1 indicates a firm exhibits

only modest exposure to balance sheet risk that is management has demonstrated it has the

necessary controls, procedures, and resources to effectively manage risks, rating of 2 denotes that

a firm exposure to risk is reasonable, management’s ability, to identify, measure, control and

report risk is sufficient and it appears to be able to meet its reasonably anticipated needs, rating

of 3 includes that the risk exposure of the bank is substantial, and management’s ability to

manage and control risk requires improvement, while 4 and 5 rating indicate that the firms

exhibit an unacceptably high exposure to risk.

Sensitivity

It covers how a particular risk exposures can affect institutions. Sensitivity assesses an

institution’s sensitivity to market risk by monitoring the management of credit concentrations. In

this way, firms are able to see how lending to specific industries affects an institution (Kagan,

2021). Examples of those specific groups lend to are; agricultural sectors, energy sector, health

sector etc. Exposure to market based price changes, including; foreign exchange, commodities,

equities, derivatives etc.

In summary, there are various ways in measuring financial performances which are; return on

equity (ROE); return on assets (ROA); and net interest margin (NIM). While some firms uses the

CAMELS approach.

2.1.3 Deposit Money Banks

Deposit money banks are financial institution licensed by the regulatory authority to perform the

role of financial intermediation that is (mobilize deposits from the surplus unit and channel the

27
funds through loans to the deficit unit) and perform other financial services (Central Bank of

Nigeria).

Deposits money banks are defined as resident depository corporations and quasi corporations

which have any liabilities in the form of deposits payable on demand, transferable by cheque or

otherwise usable for making payments (OECD Statistics 2001).

Deposits money banks which are also known as commercial banks are financial institutions that

provide financial services such as acceptance of deposits, granting business loans and auto loans,

mortgage lending and basic investment products such as savings accounts and certificates of

activities deposit (Uzonwanme, 2015).

They provide the foundation for the development of financial system. Their credit component

constitute a major link between the monetary sector and the real sector of the Nigerian economy.

In performing these roles, deposits money banks must realize that they have the potential, scopes

and prospects of mobilizing financial resources and allocating them to productive investments

and in return, promote sustainable performance and ensures that businesses are flourishing and

alive.

The deposit money banks perform different functions like: acceptance of deposits and maintain

current and savings account from natural and legal persons, provision of retail banking services

Provision of credit and finance activities, deal in foreign exchange and provide foreign exchange

services, act as a settlement bank subject to CBN approval, provide treasury management

services,

28
Provide custodial services, provide financial advisory services, invest in non-convertible debt

instruments and subject to CBN approval, undertake fixed income trading, Provision of non-

interest banking services subject to CBN approval and any other activities allowed by the CBN

from time to time. According to (Seth) some of the essential functions of commercial banks

stated are: accepting deposits by attracting the idle savings of people in form of deposits; these

deposits may be of any of the following types: demand deposits also known as currents accounts;

fixed deposits or time deposits; savings deposits, giving loans and it can be done in the following

ways; through overdraft; creation of deposits; discounting of bills, remittance of funds, safety

custody of valuable documents, ornaments, agency functions, references about the financial

position of their customer in confidentiality when their customers want to establish business

connections with some new firms within or outside the country, letters of credit.

2.1.4 Digital Financial Services

Innovation in banking and the proliferation of mobile money have given rise to opportunities for

growing digital financial services through alternative channels. Commercial banks represent the

trusted, traditional avenue of integration of the financially excluded into the formal financial

system in most emerging economies. Adoption of technology and innovation to deliver modern

banking services efficiently through innovative models and alternative channels are being

practiced by banks due to changes in banking, driven by changing consumer preferences and

technology. Digital financial services encompasses a magnitude of financial services which are

accessed and delivered through digital mediums or channels (Ebong & George). Such financial

services include payments, credit, savings, remittances, and insurance. Formal financial

institutions may use technological based solutions to provide several financial services to the

poor and eventually lead to financial inclusion. Application of technology (internet based mobile

29
finance) by financial institution assist them to deliver uniform processes in banking and reduces

the operation cost (Xv & Meng, 2015).

Digital financial services refers to financial services provided through the use of mobile phones,

mobile wallets, individual computers, the internet , or debit cards, credit cards which are linked

to a reliable digital payment system (Durai & Stella 2019; Shofawati, 2019). It comprise of all

products, services, technology and infrastructure that facilitate individuals and companies to

have access to payments, savings, and credit facilities via the internet without the need to visit a

bank branch or without dealing with financial services provider. It also refers to the availability

of far reaching technologies (e-money, mobile money, card payments, and electronic funds

transfers) in order to perform financial services from a broader range of providers to a large

category of recipients (Asian Developments Bank, 2016).

Digital financial services refers to the operations using digital technology, including electronic

money, mobile financial services, online financial services, i-teller and branchless banking

whether through bank or non- bank institutions. (OECD, 2018).

Technological innovations in banking is a continuous and never ending process. Speed,

accuracy, and efficiency have become pertinent in business. IT enabled banking services are

being preferred as electronic banking services channels enhances bank competitiveness.

Rendering of these banking services, banks not only face some challenges in implementation but

customers too also may face challenges in the usage of IT enabled services. Some provision have

been made to mitigate these challenges through digital literacy and adequate protection of

consumers who might not be digitally sound.

30
The goal of financial services made available digitally is to contribute to poverty reduction and

financial inclusion objectives of developing countries (United Nations, 2016). There are three

key components of any digital financial services which includes; a digital transactional platform,

retail agents, and the use of a device, most commonly mobile phones by customers and agents to

transact via the digital platform (CGAP, 2015). The usage of digital financial services is done

through having the DFS user having an existing bank account which they own and should have

available funds in their accounts to make cash payments or to receive revenue or funds via digital

platforms including mobile devices, PCs or the internet.

2.1.4 Digital Financial Services Channels

Electronic banking: Electronic banking or internet banking or e-banking has been defined in

many ways. Daniel defines electronic banking as the delivery of banks information and services

by banks to customers via different delivery platforms that can be used with different terminal

devices such as a personal computer and a mobile devices with browser or desktop software,

telephone or digital telephone or digital television. Lilesh Gautum, (2014), electronic banking is

a service that allows customers to access and perform financial transactions on their bank

accounts from their web enabled computers with internet connection to banks web sites any time

they wish. E-Banking also known as electronic funds transfer (EFT), is simply the use of

electronic means to transfer funds directly from one account to another, rather than the use of

cash or by cheques.

Automated Teller Machine (ATM) : It is an unattached electronic machine in a public place,

connected to a data system and related equipment and activated by a bank customer with the use

of credit cards or debits cards to obtain cash withdrawals and other banking activities. The

31
physical carriage of cash as well as frequent visit to the banks is being reduced. The principal

advantages of ATM is that it dispenses cash at any time of the day even as it needs not to be

located within the banking premises but in stores, shopping malls, fuel stations etc., unlike the

traditional method where customers have to queue for a very long period of time to withdraw

cash or transfer funds. The ATM is the most popular e-transaction solution in Nigeria. ATM is

popular because of its convenience.

Telephone banking: This is a service provided by a bank or other financial institution that

enables customers to perform over the telephone a range of financial transactions which do not

involve cash or financial instruments, without the need of visiting a bank branch.

Mobile banking: Mobile banking is the process or act of making financial transactions on a

mobile device (cell phones, tablet, etc.). Mobile banking is very convenient in today’s digital age

with many banks offering impressive apps. It also involve the use of mobile phone for settlement

of financial transaction. This is more or less fund transfer process between customers with

immediate availability of funds for the beneficiary. Even though the product is existing many

customer are yet to fully buy into it in Nigeria, hence both the apex bank and other banks still

have a lot to do in terms of increasing awareness of the product to the saving populace in the

country.

Point of sales banking: It’s a critical piece of a point of purchase, refers to the place where a

customer executes the payment for goods or services and where sales taxes may become payable.

It can be in a physical store, where POS terminals and systems are used to process card payments

or a virtual sales point.

32
SMS banking: it is a form of mobile banking. It’s a facility used by some financial institutions

to send messages to customers mobile phones or a services provided by them enabling customers

to perform some financial transactions through the use of SMS medium.

Online banking: It is also called internet banking, web banking or home banking. It is a banking

system and method in which a personal computer is connected by a network service provider

directly to a host computer system of a bank such that customer service requests can be

processed automatically without need for intervention by customer service representatives.

Commonly online banking transaction in Nigeria are settlement of bills and purchase of air

tickets through the websites of the merchants. The online banking system will typically connect

to or be part of the core banking system operated by a banks’ operated by a banks’ operating cost

by reducing reliance’s on a branch and the convenience of being able to perform banking

transactions even when branches are closed. Internet banking provides personal and corporate

banking services offering features such as viewing account balances, obtaining statements,

checking recent transactions, transferring money between accounts and making payments. There

are benefits or advantages of using electronic banking mediums such as; Payment of bills online,

Easy transfer of funds, Deposit of cheques online, Low cost of banking fees.

Some shortcomings of electronic banking includes; technology disruptions due to server issues;

it lacks personal relationship with one’s bank; privacy and security concerns; limited services. So

to redress this issues, financial institution should try their possible best to reduce the effects of

this issues on their customers and on the financial institutions itself.

2.1.5 Digital financial services and bank performance

33
The revolution of information technology has changed every aspect of human being’s life

including banking. IT works as a catalyst for growth in the banking sector, particularly it

supports banking services, productivity growth and risk managements of banks. Financial

institutions invested heavily in building and innovation of their digital financial services. Banks

investment in IT is under the presumption that such investments would enhance operating

efficiency and thus improve financial performance. Banks and firms improves their financial

performances through enhanced operational efficiency, increase market share, innovative

products, extend their client reach, improve customer retention, new employment opportunities

and software applications etc. to progress and remain competitive in the market. Financial

institutions such as banks are leveraging digital channels to offer basic financial services at

greater convenience, and lower cost than the former way banking was done. Nghwengeh et al

(2017), observed that digital financial services were a booster of commercial bank’s profit level

in his study “the influence of digital financial services on the financial performances of

commercial banks in Cameroon. Digital banking services on the performance of commercial

banks in Zimbabwe revealed that ROA of the commercial banks in Zimbabwe increased in trend

as a result of an increase in online bank transactions. Takon et al (2019) examined the impact of

digital payment system on the Nigerian banking sector efficiency, the results showed that

payments made through some channels had negative and significant effects on bank efficiency.

2.1.6 Automated Teller Machine and Banks performance

The ATM payment system also known as an automated banking machine (ABM) or Cash

Machine which, according to Oboh (2005), was first introduced into the Nigerian financial

service sector in the late 1980s by Societe Generel Bank, First bank etc. One of the modern

methods of electronic banking is using ATMs. Automated teller machine (ATM), also known as

34
an automated teller machine, is a computerized telecommunications device that provides clients

of a financial institution with access to financial transactions in a public place without the need

for a cashier, human clerk or bank teller (Peter & Kalu, 2016).

According to Adeniran (2014), among the development in the banking services delivery is the

introduction of Automated Teller Machine (ATM) that intends to decongest the banking halls as

customers now can go to any nearest ATM outfit to consummate their banking transactions such

as: cash withdrawal, cash deposit, bill payments, and transfer of fund between accounts. The

research made use of across sectional survey design that questioned respondents on ATM

services.

Idris (2014), is of the view that Automated teller machine (ATM) among others was one of the

services introduced by banks with the objective of providing customers quick access to their

finances, as well to reduce cost of such access. The research investigated the perceived customer

satisfaction towards introduction of automated teller machine (ATM) in Nigerian banks. The

researcher used questionnaires and descriptive statistics to analyze the study. This covered

perceived ease of use, perceived accessibility and perceived security in order to measure

customer satisfaction in relation to ATM service quality. The result indicated that the customers

with agreed responses on perceived ease of use and perceived accessibility has higher mean and

standard deviation, while the perceived security responses has higher mean and standard

deviation of disagreed responses.

Also, Komal (2009) examined the Impact of ATM on Customer Satisfaction, establishes that

ATM services enhance operations and customer satisfaction in terms of flexibility of time, add

35
value in terms of speedy handling of voluminous transactions which traditional services were

unable to handle efficiently and expediently.

The major types of ATM cards in Nigeria include debit cards and credit cards, debit cards are

linked to a bank customer accounts and offer immediate confirmation of payments while credit

cards can be used for accessing local and international networks and were widely accepted in

most countries.

According to Uzor (2009), all the development in the e-payment sector is in line with Nigeria’s

quest to keep its payment at par with international best practices and standards by leveraging on

technology. Uzor also claimed that Nigeria’s e-payment rose to 360 billion in 2008. As of

January 2009, Nigeria has about 7300 Automated Teller Machines installed in various bank

branches across the country. Interswitch, a provider to about 25 banks in Nigeria had about 60

million transactions recorded.

In recent years, technologies like ATM are more prevalent as a method of sustaining loyal

customers and increasing market shares. Banks utilize technologies to face competitive

challenges imposed by competitors and online banks and also as a method of decreasing service

costs which used to be performed manually by the bank workers (Faqih & Jarada, 2015). There

are some benefits of the usage of ATMs to both banks and customers which include; continual

access and increase in banking services productivity, preventing time and human resource loss

for performing daily bank affairs which would be done easily and more precisely, which will

enable the banks to have more time to engage in more productive projects, it also increases the

rate of commerce in the institution its installed in (Carbo & Rodriguez, 2008).

2.1.7 Point of sales and bank performances

36
Point Of Sale (POS) are among the most common payment devices for credit cards, debit cards,

checks, smart cards, electronic bank transfer (EBT) and other electronic transactions in a retail and

wholesale environment. These terminals are used in face-to-face deals (Shahi, 2010). POS is a

device which provides automatic transfer of purchasing price from seller’s account via telephone or

network connection to bank systems. Apart from payment, POS includes different performances

including account balance, account billing, postponing a purchase and daily reports which has

benefits of a small bank branch for its owners (Begona, Dolores & Zaida, 2014).

Point of sale or POS are mostly used in the exit parts of stores, restaurants and hotels for receiving

customers’ cash. In a more common sense, POS refers to the point allocated to this activity and in a

more special sense, it could be the device performing this activity.

Amazing development of ICT and its development into monetary markets and banking systems has

changed current banking methods and facilitated affairs for bank customers. New technologies and

electronization of banks enables banks to increase the speed, quality, precision and diversity of their

services and to decrease the costs for presenting these services. Efficient payment systems are among

main components of efficient economies and monetary markets and facilitates the transaction of

products and services and assets. The growth of electronic payments could significantly decrease

social costs of a country’s payment system

(Humphrey, Willesson, Bergendahl & Lindblom, 2006).

2.1.8 Bank Embranchment and Bank performances

The size of a bank is relevant in relation to the profitability of banks. Almazari (2014), Duncan,

Iraya, Lishenga and Teimets (2019) reveal that the capacity to sustain profits over time remain

the first bank’s line of defense as it absorbs unexpected losses, strengthens banks’ capital base

37
and in addition, used to improve future performance through re-investment of the retained

earnings. Teimet et al (2019) state bank size plays a significant role in the prediction of financial

performance when economies of scale are considered. A bank may leverage on average cost

reduction per unit while enhancing efficiency, capital base and market share.

According to Babalola and Abiola (2013), larger bank is more influential in the strategic decision

and have more influence upon its stakeholders, competitors, efficiency and in addition, more

profitable relative to a small bank.

The largeness of a bank can be decomposed into; vertical on activities and products; or

horizontal on the supply of a product or service across several entities. Thus, a puzzled endless

debate on the optimal bank size, management complexity and exposures associated with

activities ranges. Larger banks engage more in market activities outside their traditional lending,

which of late, has escalated and grown significantly (Teimet & Lishenga, 2019).

2.1.9 Number of Bank Accounts and Bank Performance

The banking sector in all countries has an important effect on economy movements due to the

important role played by financial institutions especially banks for improving of the overall

economic activities, including financial intermediation that is necessary for economic growth of

any country (Monnin & Jokipii, 2010). Banks as a financial institution which invests the deposits

of its customers and works as a financial broker between the investors who has surplus funds

(depositors) and the borrowers of this funds that need it to cover the needs of their investment

(Albertazzi & Gambacorta, 2010). The bank size uniqueness in terms of deposits made into the

bank accounts held by them, influences the quality of decisions on the activities undergone by

banks, which in effect, affect the strength and improvement of financial performances of banks

38
(Olowokure, Tanko & Nyor, 2015). Thus, increase in the bank accounts held by banks, facilitate

for more deposits into those accounts, which enhance the profitability of banks, also

diversification of bank accounts (fixed, current and savings) by banks, ensures that the deposits

made into these accounts are used for productive investments, the return gotten from the

investments are used by banks to ensure smooth running of their operations. Banks get profit

offer by charging fees and commissions, offering respective services on customer’s bank

accounts; these services includes credit services, cashing cheques, safekeeping of documents

and securities, foreign exchange services, acting as agents, advisory and consultancy services,

insurance services, ATM withdrawal charges, card fees etc.(Bendi & D’ Angolo, 2008;

Ishuza,2015).

2.2 Theoretical Review

This study is built upon diffusion of innovative theory and innovative financial inclusion model.

2.2.1. Diffusion of Innovation Theory

The diffusion of innovation theory was developed by Everett Rogers in 1962. Diffusion of

innovation theory centres on the conditions which increase or decrease the likelihood that anew

idea, product, or practice will be adopted by members of a given culture (Jimoh et al, 2019).

According to Monyoncho (2015), the theory explains how innovative ideas are passed from one

generation to the other through various channels among individuals of the same social beliefs

and tenets. In today’s world, information technologies such as internet and cell phones which

combine aspects of mass media and interpersonal channels, represent formidable tools of

diffusion (Morris & Ogan, 1996).

39
Rogers (1962) explained that, there are critical factors that determine the adoption of an

innovation at the general level are the following: relative advantage, compatibility, complexity,

trialability and observability.

Relative advantage refers to the degree to which an innovation (introduction of ATMs) is

perceived as providing more benefits than its predecessors. Relative advantage results in

increased efficiency, economic benefits and enhanced status (Monyoncho, 2015). Research

suggests that when a user perceives relative advantage or usefulness of a new technology over an

old one, they tend to adopt it (Roberts & Amit, 2003).

Complexity by Cheung (2000) defined complexity as the extent for which an innovation can be

considered relatively difficult to understand and use. Users will be inhibited to use technology if

they find, it requires more mental effort, is time consuming or frustrating. The complexity of

technology use requires considerable learning it is less likely that users will persevere with it

(Monyoncho, 2015). Past research found that complexity negatively influence the adoption of

technology usage (Au & Kaffyman; Mallat, 2007).

Trialability is defined as the degree that the innovation can be tested and experimented before it

inclusion. It also refers to the capacity to experiment with new technology before adoption.

Potential adopters who are allowed to experiment will feel more comfortable with it and are

more likely to adopt it (Argawal & Prasal 1998; Rogers, 2003).

Compatibility refers to the degree to which a service is perceived as consistent with users

existing values, beliefs, habits and present and previous experiences (Rogers, 2003).

Compatibility is an important feature of innovation as conformance with user’s lifestyle can

propel a rapid rate of adoption (Rogers, 2003). Research as shown that compatibility is a

40
significant antecedent in determining consumer’s attitude towards technology adoption

(Ndubuisi & Santi, 2006).

Observability of an innovation describes the extent to which an innovation is visible to the

members of a social system (banks embranchment) and the benefits (banks profitability) can be

easily observed and communicated (Rogers, 2003). Moore and Izak (1991), simplified the

original construct by redefining observability into two constructs; visibility and results

demonstrability.

In the context of this study, this theory suggests that the degree of bankers adopting new

technology or innovations such as automated teller machines (ATMs), point of sales (POS) and

bank embranchment depends on the willingness of the individuals and the more the technology

or innovation covers the needs of the bankers, the faster the adoption which in turn amounts to

profit. Diffusion of innovation theory explains the approach in which innovations can be adopted

and how it can be successful. The following related studies (Jimoh et al, 2019; Babarinde,

Gidigbi, Ndaghu & Abdulmajeed, 2020; Usman et al, 2020) were built on this theory.

2.2.2. The Innovative Financial Inclusion Theory

The innovative financial inclusion model was propounded by G20 leaders in 2009, it was

resolved that extensive usage and access of banking and financial services deliveries to the

downtrodden, low income earners and small businesses through various products that encourage

easy patronage and inclusion should be recommended. This model emphasizes that financial

inclusion could be deepened through a wide range of different banking and financial products

and services to attract more customers which will enable deposits money banks to increase their

capital and customer base which they would use to invest in other profitable and viable projects

41
that will increase their profit. G20 leaders 2010 explained that innovative financial inclusion is

delivery of financial services beyond conventional service points of banks but also through the

use of ICT, non-banking retail agent, POS, mobile banking and other device network to reach a

wide spectrum of wide customer. There are some principles which are introduced by the model,

they were set in place to spur innovation for financial inclusion while safeguarding financial

stability and protecting financial consumers and they are: leadership, diversity, innovation,

protection, empowerment, cooperation, knowledge, proportionality and framework.

Leadership, it explains how governments can successfully improve financial inclusion through

formulation and addressing of policies and regulatory issues related to innovation, consumer

protection and payments. Adoption of collaborative approach to financial inclusion that engages

all stakeholders, collection of data’s to support proportionate and evidence based policy.

Diversity, it implements approaches that promote competition and provide market based

incentives for delivery of sustainable financial access and usage of a broad range of affordable

services as well as diversity of service providers.

Innovation, to promote technological and institutional innovation as a means to expand financial

system access and usage (mobiles phones, agent banking), including addressing infrastructure

weaknesses (difficulty for new providers to enter the interbank payment system).

Protection, encouragement of a comprehensive approach to consumer protection that recognizes

the role of government, providers and consumers to promote trust in new and innovative services

i.e. the need of consumer protection infrastructure to mitigate the risk of fraud and abuse due to

the use of these innovative financial services ( KYC- know your customer initiative).

Empowerment, development of financial literacy and financial capability so as to make

customers to make use of most of new financial services.

42
Cooperation, creation of institutional environment with clear lines of accountability and

coordination between government, business, and other stakeholders.

Knowledge, utilization of improved data to make evidence based policy, measure progress, and

consider an incremental test and learn approach by both regulators and service providers. It

enables countries to examine new services and untried business models under carefully

controlled conditions. As a result they are able to strike an appropriate balanced policy

regulations with safety and soundness on one hand and growth and development on the other

hand.

Proportionality, any innovation involves risk, so provisions are to be made by creating a

regulatory framework that is strong enough to protect the financial system and institutions

against those risks.

Framework, it encompasses all other principles and summarizes the key constituents of an

effective regulatory framework. The international financial standards provides the basic

framework.

In the context of this study, this theory suggests that the theory finds innovations of financial

services as being transmitted through some channels and easy access and usage of banking and

financial services to engender the continuous usage of financial services through these mediums;

Financial literacy, capability, diverse financial services, protections of the consumers,

cooperation of various stakeholders and regulatory frameworks are to be set in place and

followed by each stakeholders. Abubakar et al (2018); Lawal et al (2020) study was built on this

theory.

2.3 Empirical Review

43
There are various studies and researches that has been made on the impact of financial inclusion

on financial performances of deposit money banks. Some reviews on international studies and

local studies has been selected to expatiate more and give insights on this particular research

study.

2.3.1 Review of International Studies

Nader (2011) analysed the profitability efficiency of the Saudi Arabia Commercial banks during

the period of 10 years (1998-2007). The results of his study indicated that availability of

telephone banking, number of ATMs and number of embranchments had a positive effect on the

profit efficiency of Saudi banks. However, the study found out that the number of point of sale

terminals (POS), availability of Personal Computer banking and availability of mobile banking

did not improve profit efficiency.

Kondo (2017) examined whether branch network expansions/ number of bank branches by

Japanese regional banks influence their management performances positively at a time when

management environments surrounding regional financial institutions have become increasingly

severe due to population decreasing and shrinkage of regional economies. Thus it was deduced

that establishment of more branches is effective in increasing the total sum of loans and bills

discounted by each bank because regional banks with many branches can make contact with

more customers which in turn increase their profitability through the use of panel study analysis.

Nzyuko and Jagongo (2017) focused on use of technology such as ATMs, mobile banking,

internet banking and agency banking and its impact on financial performances of commercial

banks in Kenya and how these channels of inclusions innovations have moved them closer to

44
branchless banking. 42 Commercial banks licensed in Kenya by 2010 were sampled on. The

study used time series data from secondary sources s\through data from central bank of Kenya

and Kenya bankers association’s annual supervisory reports (2010-2016). Through multiple

regressions and correlation analysis, the study found out that there is a strong positive

relationship between financial inclusion strategies and financial performances.

Usman, Monoarfa and Marsofiyati investigated on effects of e- banking and mobile banking on

customer satisfaction. Respondents for the research were 834 in numbers and the data was

analysed using SEM-PLS. The results of the analysis showed that improved expectancy

performances acceptance of e-banking technology customers of banks, the government

enhancement, effort expectancy (easy understanding of electronic banking, the ability to use

electronic banking), social influence, condition and security( upgrading privacy, authentication,

integrity and non-repudiation) facilitating will cause enhancement behavior intention and use

behavior directly or indirectly.

Njogu (2019) determined the effects of electronic banking on profitability of commercial banks

in Kenya. These data were collected from the central bank of Kenya and commercial banks.

Regression analysis was done for the period to determine the effects of electronic banking on

profitability of commercial banks in Kenya. The study covered a period of 5 years from 2009-

2013. The study findings showed that major changes in the financial performances of

commercial banks in Kenya could be accounted to changes in internet banking, point of sales,

automatic teller machine, mobile banking and size of the banks at 95% confidence interval. The

study found that there was a strong positive relationship between financial performance of

commercial banks and electronic banking. Bank size was also found to be positively influence

the financial performance of commercial banks in Kenya.

45
Jude (2019) analyze the empirical test of whether banks offering internet banking are profitable,

and to help fill essential space in knowledge concerning profitability, cost efficiency, and other

characteristics based on banks perspectives for adopting internet banking system. A panel data

from 22 retail banks operating in Turkish Republic of Northern Cyprus. Data set was drawn from

the year ended aggregate income statements and balance sheets compiled by the central bank of

Northern Cyprus. The findings showed that banks offering internet banking services to their

customers or has internet as their alternative distributive channel experienced an increase on the

banks return on assets and those banks that are not using internet as their medium of service

delivery experienced low return on assets. This also shows that there is significant effects of

internet adoptions on banks profitability.

Shihadeh (2021) in his research work financial inclusion and banks performance. The study was

aimed to examine the relationship between financial inclusion indicators and bank performance

in Palestine. The study sample included all the 15 banks operating in Palestine and cover the

period 2006-2016 with panel data from 162 observations. The variables used for the independent

variable 9financial inclusion) in the study includes the use of volume of loans to SMEs, banking

penetration, number of ATMs and branches and online banking. Furthermore, the study uses

operational profits, total revenues and ROE as bank performance indicators and dependent

variables. The results gotten from the study indicated that banking penetration tools, branching

and ATMs, could enhance bank performance. In general, financial inclusion helps banks

improve their performance and increase their revenues. The study recommended that government

organizations can use the obtained results to formulate their strategies and agendas for improving

financial inclusion in Palestine and other developing countries.

46
Boadi, Dana, Mertena and Mensa (2017) examined the impact of SMEs financing on bank

profitability in Ghana, using regression model anchored on fixed effect model. The study found

that SME financing has a significant positive impact on banks financial performance in Ghana.

The study offered a fresh perspective on the SME financing and bank profitability.

Chauvet and Jacolin (2015) studied the impact of financial inclusion on financial performance of

firms in countries with low financial development, using firm-level data panel for a sample of 26

countries. The study found that there is a significant positive impact of financial inclusion on

firm’s performance. The study highlighted access to funds by SMEs as a very important financial

inclusion variable.

Shahchera and Taheri (2011) investigated the impact of loans to SMEs and banks profitability in

Iran, using panel data regression model based on Generalized Method of Moments (GMM). The

study found that SMEs financing has a negative significant impact on profitability of banks in

Iran as banks considered SME financing a highly risky business venture.

Vekya (2017), study was on the impact of e-banking on the profitability of commercial banks in

Kenya. Descriptive research design was adopted, the population of the research consisted of the

43 commercial banks in Kenya. A census survy was undertaken. The study used secondary data

obtained from various central bank of Kenya publications. Results from the multiple regression

showed that there is positive significant relationship between ATM transactions and bank

profitability.

Furthermore, Kemboi (2018), carried out research on the relationship between financial

technology and the financial performance of 43 commercial banks in Kenya. The target

population used in this study was the 43 banks. The independent variables were, agency banking,

47
internet and mobile banking. Multiple regression technique was also used to study the

relationship between the variables. Results gotten indicated that adoption of mobile banking,

internet banking and agency banking impacted the financial performance measured using return

on assets for banks positively.

Ngwengeh et al (2021), study was to determine the influence of digital financial services on the

financial performance of commercial banks in Cameroon. Survey research design was used and

the Taylor linearize variance estimation technique was used to determine the reliability of digital

financial services on commercial bank profitability. Results from the study showed that digital

saving services, digital withdrawal services and digital transfer services have a positive and

significant influence on commercial banks profitability. In his conclusion, he recommended that

commercial bank managers and shareholders to ensure that they make provision for robust

digital payment services that are cost effective and efficient so as to generate profit.

Andrea, et al., (2020), the study aimed to examine the role of financial literacy on financial

performance of SMEs. The study applied census survey for 162 textile and clothing Italian

SMEs. Regression analysis and correlation analysis was applied to test the hypotheses.

Descriptive statistics was applied. The results revealed that there is a significant positive

relationship between variables. The study recommended that quality regulatory framework

should be put in place by all the actors of the economic system, initiative that supports the

development of knowledge and banking and financial culture and research in financial issues

should be encouraged. SMEs should be appropriately literate to access and use alternative

financial channels of the banking system.

2.3.2 Review of Local Studies

48
Ebiringa (2010) study was principally based on primary data collected from users of the ATMs

and a total of 1,141 users of ATM were sampled. The study used weighted scores of the

responses to success factors identified in the literature that were analyzed using the factor

analysis simulation model. The study concluded that the provision of adequate infrastructure

such as power is critical for effective integration of the Nigerian banking system to the global

network of electronic payment via ATMs.

Obiekwe and Anyanwaokoro (2017), in their study named the effect of Automated Teller

Machine (ATMs), Point of Sales (POS) and Mobile Payment (MPAY) on the profitability of

commercial banks in Nigeria. A total sample of 5 banks was considered for the period of 5 years

(2009-2015) and the study adopted the panel least square (PLS) estimation technique as the

analytical tool. Data collected from the Central Bank of Nigeria (CBN) Statistical Bulletin and

Annual Reports and Statements of Accounts of the five banks used in the study, findings

revealed that Automated Teller Machine (ATMs) and Mobile Payments have significant impact

on the profitability of commercial banks in Nigeria. However, Point of Sales has no significant

impact on commercial banks profitability in Nigeria.

Adelowotan (2016) investigated in his study Implications of the contribution of the branches to

banks performances. The study made use of the whole banks in Nigeria during the period 1981

and 20113 using a pooled data analysis on ordinary least square (OLS). The variables used

included the total number of banks branches in rural and urban areas and those domiciled abroad

regarded as foreign branches, while the growth in total assets is represented as the dependent

variable. The study findings showed that there is a positive but no systemic relationship between

number of banks and assets growth perhaps because banking organizations optimize the size of

49
their branch network operations as part of an overall strategy involving both branch based and

non- branch based activities.

Okon and Amaegberi (2018) using Panel Unit Root and SURE Model Estimation technique to

conduct a quantitative analysis of the impact of mobile banking transactions on bank profitability

among four selected old and new generation banks in Nigeria. The study findings were analyzed

using economic a priori criteria, statistical criteria and econometric criteria. The positive and

statistically significant relationship between automated teller machine, point of sales are a major

factors that contributes to old and new banks performances in Nigeria. Ibekwe (2021) assessed

the effects of financial innovation on the performances of deposit money banks in Nigeria. The

study adopted an ex-post facto research design. Data was sourced by using secondary data gotten

from THE Central Bank of Nigeria (CBN) Statistical Bulletin, CBN Annual Report and

Statements of Accounts. The result of the study indicated that automated teller machine, mobile

banking has significant and positive effect on the profitability of commercial banks in Nigeria

while internet banking has negative and insignificant effect on the profitability of commercial

banks in Nigeria. The study thus concludes that financial innovation have positive and significant

effect on the profitability of commercial banks in Nigeria which has enhance the return on assets

of the commercial banks in Nigeria.

Abubakar (2020) examined the effects of automated teller machine on user satisfaction in

Nigeria; a case study of united bank of Africa (UBA) in Sokoto metropolis was used. The

research was carried out through the use of coss sectional survey design which questioned

respondents on ATM services. The population of the study consisted mainly of the UBA within

Sokoto metropolis. Samples of 100 respondents who are users of ATM services. The data

collected based its analyses with the use of multiple logistic regression analysis. The findings

50
revealed that, the impact of ATM services in terms of their perceived ease of use, transactions

cost and service security is positive and significant. However, the results also indicated that the

impact of ATM services in terms of availability of money is positive but insignificant.

Taiwo and Agwu (2019), assessed the role of e- banking on the operational efficiency of

commercial banks in Nigeria. Primary data were used and obtained by administering of

questionnaires to staff of four selected banks (Ecobank, UBA, GTB and Firstbank). Pearson

correlation was used to analyze the results obtained using the Statistical Package for Social

Sciences (SPSS) and it was observed that banks’ operational efficiency in Nigeria since the

adoption of electronic banking has improved compared to the era of traditional banking. This

improvements was noticed in the strength of banks, revenue and capital bases, as well as in

customers loyalty. It was concluded that the introduction of new channels into their e- banking

operations drastically increased bank performances, since the more active customers are with

their electronic transactions the more profitable it is for the banks.

Abubakar et al (2018), they examined the impact of financial inclusion on financial performance

of deposit money banks in Nigeria. The study measured financial inclusion with micro, small and

medium scale enterprises (MSMEs) financing, rural financing, number of branches of DMBs,

pricing and usage of banking services, while financial performances was measured with return

on assets. The study utilizes ex post facto research design and data were collected from

secondary sources obtained from the Central Bank of Nigeria (CBN) Statistical Bulletins and

financial reports of the Nigeria Deposits Insurance Corporation (NDIC) for the period of 1982-

2016. Ordinary least square regression model, with the aid of Autoregressive Distributed Lag

Error Correction Method, was used to analyze the data. The stationary property of the time series

variables were tested using the Augmented Dickey Fuller test statistics for unit root and data

51
were found to be stationary at levels and first difference. The study findings was that, MSMEs

financing has a significant and positive impact on financial performances on deposits money

banks in Nigeria, while rural financing, pricing of banking services, number of bank branches

and usage of banking services had insignificant impact on the financial performances on deposits

money banks in Nigeria. The study recommended that DMBs should increase the amount of loan

and advances given to MSMEs as this will strengthen financial performances of deposits money

banks in Nigeria. Also CBN and NDIC should encourage DMBs through their regulatory and

supervisory responsibilities to give priority to SMEs financing in Nigeria.

Jimoh, Shittu and Attah (2019) examined the impact of financial inclusion on performance of

banks in Nigeria. The study was based on how banks can be innovative in rendering of their

various banking services. Data were of secondary data collected from World Bank database,

Central bank of Nigeria Statistical Bulletin, and annual reports of Deposits Money Banks

(DMBs). The data were analyzed with Fixed Effect Regression Model. The Regression analysis

was conducted after carrying out the Breusch-Pagan Lagragian Multiplier (BP-LM) test to

determine the suitability of either the fixed effect or random effect model. The study findings

revealed that there is positive and significant impact of Automated Teller Machine, Banks

Embranchment, and Point of Sale terminals on bank performances at level of significance of

both 1% and 5%. However, the result on the number of bank account is insignificant. The study

concludes that improvement in the quality of financial services will attract more customers to the

bank and boost their performances. The study recommended that more ATMs, POS and

Branches be put in place for better inclusive finance.

Onaolapo (2015), examined the effects of financial inclusion on the economic growth of Nigeria.

Secondary data was used and obtained from Statistical Bulletins of the Central Bank of Nigeria

52
(CBN), Federal Office of Statistics (F.O.S) and World Bank, variable employed consist of

branch network, loan to rural areas, demand deposits, liquidity ratio, capital adequacy, and gross

domestic product. The ordinary least square (OLS) method was used. The overall results of the

regression analysis showed that inclusive bank financial activities greatly influenced poverty

reduction but marginally determined national economic growth and financial intermediation

through enhanced bank branch networks, loan to rural areas, and loan to small scale enterprises.

The study recommendation centers on the need to create deposit and borrowing windows at

affordable cost to the poor and to the income group that are unbankable.

2.4. Research Gap

Evidence from the review of above empirical studies revealed that there is no relationship

between financial inclusion through some channels on financial performances of deposits money

banks while some revealed that there is a positive relationship between financial inclusion on

financial performance of deposits money banks, as such: further research is needed to uncover

the relationship. This study therefore, contribute to existing knowledge by determining the

impact of financial inclusion on financial performances of deposits money banks covering 2012

– 2020, making it the latest contribution to this field of study. (Attah, Jimoh & Shittu, 2019 ;

Abubakar, Abdullahi, Hassan & Abdulkarim, 2018).

53
CHAPTER THREE

METHODOLOGY

3.1 Model Specification

In order to investigate the impact of financial inclusion on financial performance of deposit

money bank in Nigeria, this study adopts the multiple regression model with the adaptation and

modifications from the work of Jimoh et al (2019), they analyzed the impact of financial

inclusion on financial performance of deposit money banks in Nigeria. The model is stated

below;

ROA t – 1 = β0 + β1ATM+ β2BET + β3NBA + β4 POS + e t - 1

We have however, made some adaptation to suit our study. Which is specified thus;

ROA it = β0 + β1ATMit + β2BETit + β3NBAit + β4POSit + µt.

Where;

ROA = Return on Assets

β0 = Intercept / Regression constant

β1 – β4 = Co-efficient of independent variable

ATM= Number of automated teller machine

POS = Number of Point of Sales

BETS = Numbers of Bank embranchment

54
NBA = Number of Bank Accounts.

µt = Error term.

3.2 Research Design

Ex post facto research design has been adopted for the purpose of this study. Ex post facto

research design is the type of research design that is a quasi- experimental study that examines

the effect of an independent variable on dependent variables within an experiment. It examines

past occurrence in order to understand a current state. It helps to answer the research questions

concerning financial inclusion and the financial performance of deposit money banks which are

of critical concern of this study.

3.3 Population of the Study

The population of this study constitutes of all 13 listed deposit money banks in Nigeria within

the research period of 2012 – 2020 because the study has to do with the impact of financial

inclusion on financial performance on deposit money banks.

3.4 Sample and Sampling Technique

The sampling technique adopted in this study is the census sampling technique, which is the

method that takes all members of the population into consideration which also means all the

population members are studied. Here, the contributions of all the 13 listed deposits money

55
banks in aggregate are taken into consideration. The technique employed for the study is based

on parametric tools. Ordinary regression analysis has been used because it is a collection of

multi-dimensional data set observed over multiple time periods which assist in ascertaining the

causal relationship between financial inclusion on financial performance on deposits money

banks. In which, ROA (return on assets) has been used as the variable for financial performance

significantly by other independent variables of financial inclusion. All in all, the technique is

appropriate for achieving the overall objective of the study.

3.5 Data and Method of Data Collection

The data collected from this study have been extensively collected from secondary sources. The

data were obtained from the Central Bank of Nigeria (CBN), Nigeria Bureau of Statistics, and

annual financial reports of deposits money banks of various years.

3.6 Method of Data Analysis

Ordinary least square data regression analysis is used to determine whether financial inclusion

indices (automated teller machine, point of sales, bank embranchment, number of bank

accounts) have impacted on financial performance on deposit money banks in Nigeria, (ROA,

i.e. return on assets).

3.7 Variable Measurement

Financial Inclusion: it’s the independent variable and it’s measured by Automated Teller

Machine, Point of Sales, Bank Accounts and Bank Embranchment

56
Financial Performance: it’s the dependent variable and it’s measured using ROA (Return on

Assets).

CHAPTER FOUR

DATA PRESSENTATION, ANALYSIS AND INTERPRETATION OF RESULTS

4.0 Introduction

The results of both the preliminary analysis and OLS regression analysis were presented and

interpreted in this Chapter.

4.1 Preliminary Analysis

57
This section presents the results preliminary analysis before the ordinary least square (OLS)

regression analysis.

Descriptive statistics of the variables are presented in Table 1. It is observed that descriptive

statistics of some variables showed significant variation because of the different structure of

variables taken in to account as a sample.

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Table 1: Descriptive Analysis

ROA ATMs BET LnNBA LnPOS

Mean 1.453533 76.26933 15.556735 61.701840 14.815702

Median 1.786600 16.46650 5.547805 6.776385 4.835420

Maximum 2.610000 18.00000 5.903800 6.859138 5.159751

Minimum 1.020000 13.30400 5.362900 6.361728 4.418152

Std. Dev. 0.562980 1.604950 0.188370 0.184882 0.269548

Skewness 0.086524 -1.059280 0.044210 -1.160666 -0.223754

Kurtosis 1.980644 3.150057 3.105231 2.933024 1.916701

Jarque-Bera 0.267258 1.127704 1.093143 1.348267 0.343450

Probability 0.874915 0.569013 0.578931 0.509598 0.842211

Source: Authors computation (2022)

Table 1 shows that the average ROA, ATMs, BET, NBA and POS over the selected periods are

about 1.793533, 16.26933 , 5.556735, 6.701840 and 4.815702in their respective units. It also

shows that all the variables did not vary significantly over the period as indicated by the low

margins between the Minimum and maximum values except the ATMs. The skewness

coefficient of ROA, ATMs, BET, NBA and POS are zero (0) and are in agreement with the

assumption of normal distribution. However, the skewness coefficient of ATMs and NBA are

negative and significant, indicating evidence of deviation from normal distribution and that their

means are also to the left of the peak.

Checking the closeness of the data to normal distribution, the study used Jarque-Bera’s test

where the decision rule is to accept the null hypothesis (data followed a normal distribution) if

the probability of a test (JB) is more than 5%. In Table 1, the result of the normal distribution test

59
showed that the probability (J-B) for all variables is more than 5%. Therefore, this means that all

the variables followed a normal distribution.

Another parameter of relative importance in Table 1 is the maximum and minimum values of the

variables. The values depict the largest value of each variable for the companies under study and

the periods. For instance, the largest ROA for the six-year period across the DBMs is 18. This

mean every 18 ATMs is serving 100,000 adults which is not a good one and might likely

contribute less to ROA of DMBs. The more ATMs deployed, the more the commission on

turnover and the more profitability to the banks.

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Table 2: Pair-wise correlation

VARIABLES
ATMs BET LnNBA LnPOS

ATMs
1.000000 -0.741496 0.661322 0.434916

BET
-0.741496 1.000000 -0.844865 -0.585084

LnNBA
0.661322 -0.844865 1.000000 0.026877

LnPOS
0.434916 -0.585084 0.026877 1.000000

Source: Author’s computation, (2022).

Table 2 shows the pair-wise correlation values for the explanatory variables. The values explain

the possibility of having perfect linear relationship between any pair of two or more independent

variables. This is because ordinary least square regression technique assumes the absence of

multicolinearity among the independent variables (ATMs, BET, NBA, POS) if a higher level of

accuracy is to be expected from the estimation. Applying a multicolinearity plagued regression

for forecasting will be too hazardous. It is clear from Table 2 that there is no perfect relationship

between the different pairs of independent variables. That is, there is no multicolinearity as no

single values in the table is in the region identified by researchers and econometricians as

multicolinearity headache. Gujarati (2009) asserts that multicolinearity becomes a serious issue

whenever the correlation coefficient between two regressors is above 0.8.

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Table 3: Breusch and Pagan Lagrangian Multiplier Test

Varsd = sqrt(Var)

ROA 25.8634 13.35998

E 41.1111 32.19302

U 0 0

Chibar2(Prob) 49.14(0.0672S)

Source: Author’s computation, (2022).

Breusch and Pagan Lagrangian multiplier (lm) test was conducted to choose between pool OLS

and random/fixed effect for the study model. The result suggests acceptance of null hypothesis

indicating that the variance of the random effect is zero as the p-value is greater than 0.05. From

the test, the regression analysis and hypotheses testing were made using the pool OLS.

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Table 4: Financial Inclusion and Performance

(ROA) Co-eff. (P-value)

Constant 7.1493 (0.4220)

ATMs 0.2441 (0.0013)*

BET 17.6210 (0.0002)*

LnNBA 0.0224 (0.0693)***

LnPOS -4.8833 (0.0000)*

R2 0.9247

Adjusted R2 0.8728

F-statistic 32.27

P-value (0.0000) *

Source: Author’s computation, (2022).

Table 4 depicts the result of the regression tests, based on the model illustrated in chapter three.

The models represent the relationship between explanatory variables (ATMs, BET, LnNBA and

LnPOS) and dependent variables under consideration (ROA). The model has significant

explanatory power. All together the independent variables are able to explain almost 83% of the

total variance of the dependent variable. It shows the coefficient of determination (R-Square)

with a value of 0.9247 which means that in Nigeria, about 92% of the total systematic variations

in capital structure variables can be explained by the variables namely ATMs, BET, LnNBA and

LnPOS. The adjusted R-square shows that even after adjusting for the degree of freedom the

63
model could still explain about 83% of the total systematic variations in capital structure (ROA).

Only about 8% of the systematic variation of segment disclosure was left unaccounted for by the

model which has been captured by the stochastic disturbance term in the model.

Moreover, of the overall statistical significance of the model as indicated by the F-statistics, it

was observed that the overall model was statistically significant since the calculated F-value of

32.27 was greater than the critical F-value of 5.0 at 5% level of significance. This shows that

there exists a significant linear relationship between the independent variable and the dependent

variables in the study and all variables are complementary to each other and banks would benefit

more from their branchless banking investment if they used a multichannel strategy as opposed

to adoption of a single channel strategy.

On the basis of the individual statistical significance, Table 4 further describes the influence of

explanatory variables (ATMs, BET, LnNBA and LnPOS) on dependent variable (ROA). The

findings suggest a positive relationship between ROA and explanatory variable (ATMs, BET and

LnNBA) with 0.24, 17.62 and -4.88 as coefficient and prob. value of 0.0013, 0.002 and 0.0000

which are significant at 1% and 5%. Explanatory variable (LnPOS) with coefficient 0.02 and p-

value 0.0693 was not significant at 1% and 5% but at 10% significant level.

4.3 Discussion of Findings

The analysis of data using OLS show that number of ATMs, and bank embranchment have

positive and significant effect financial performance of banks in Nigeria. The finding on ATMs

effect on bank performance is consistent with previous studies of Muselim and Hakeem (2016);

Azubike (2017); Hassan (2019) who suggested that ATMs has a direct impact on ROA. The

study also found that BET has significant influence on ROA and the finding is also in tandem

64
with Hissel (2017); Kambala (2017); Nasir (2011) which stated that BET relates strongly to

ROA.

However, the result of the analysis indicates that NBA has a positive but insignificant influence

on ROA at 5% level of significance, which is not consistent with findings of Salam (2012) on the

same variables. Also, on the POS, result of this study is in consonance with the study of Giwa

and Salami (2017) but contrary to the studies of Okpara (2014); Aina and Salisu (2015) which

found a positive though insignificant relationship between POS and ROA.

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 CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Summary

This study was carried out to examine the effect of financial inclusion on financial performance

of deposit money banks in Nigeria. Specifically, the effects of automated teller machine

operations, bank embranchment, and point of sale terminal transactions on return on asset of the

banks were assessed. The objectives were set to enable the researcher draw some conclusion on

which of the financial inclusion variables that have significant effect on the financial

performance of deposit money banks, as it will would enable the researcher to make report on

the hypotheses formulated in the study.

Relevant literature was reviewed on conceptual issues like concept of financial inclusion

determinants of financial inclusions, measures of financial inclusion, bank and bank

performance, and measurement of bank performance among others. The study also reviewed

different theories which formed the theoretical underpinnings of the study.

For the purpose of data analysis, ex-post facto design was employed in collecting data,

analysing and interpreting the data collected. Data used for the study were collected on all

financial inclusion variables as well as on bank performance from CBN statistical bulletin of

2020, for period from 1985 to 2020. OLS regression technique was used to analyse the data after

carrying out some preliminary tests. The analysis was conducted with the aid of E-View

statistical package.

66
Results of the analysis revealed that financial inclusion variables significantly influence return on

asset which was used to proxy financial performance of the banks. This implies that the study

found that financial inclusion has significant effect on financial performance of deposit money

banks in Nigeria.

5.2 Conclusion

Both the theories and empirical evidences have shown that financial inclusion has some

relationship financial performance of banks. It became imperative from the review of literature

empirically investigate this relationship to allow for effective policy recommendations. The

findings of the study revealed the significance of the effects of financial inclusion variables like

ATMs operations, Bank embranchment, and POS transactions on return on asset of deposit

money banks in Nigeria.

Based on the findings, the study concluded that the improvement in the infrastructure of financial

services encourages individuals and corporate bodies to take advantage of the financial services,

hence enhance profitability of the banks.

5.3 Recommendations

The follow recommendations were made in the light of the above findings and conclusion drawn

therefrom:

i. Management of deposit money banks should deploy more ATMs in accessible locations

so that quick and convenient services are provided to customers;

67
 ii. Management should also improve on the provision of other facilities like POS services

which need to be sufficiently provided to promote financial inclusion and boost financial

performance of the banks; and

iii. Management of deposit money banks in Nigeria should pursue opening of more bank

with adequate awareness programmes to include capture many of unbanked or under-

banked people to the financial net.

68
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