The Determinants of Digital Banking Adoption Among Banks Offering Islamic Banking Service
The Determinants of Digital Banking Adoption Among Banks Offering Islamic Banking Service
The Determinants of Digital Banking Adoption Among Banks Offering Islamic Banking Service
559 - 588
p-ISSN: 2460-6146, e-ISSN: 2460-6618
1
IIUM Institute of Islamic Banking and Finance, Malaysia, [email protected]
2
International Islamic University Malaysia, Malaysia, [email protected]
ABSTRACT
Technology advances in the financial sector have been a topic of much discussion
within the banking industry. It is believed that the adoption of digital banking by
banks depends greatly on their characteristics and the market they operate. This study
examines the relationship between bank and market characteristics and the adoption of
digital banking among banks that offer Islamic banking services in Indonesia. Data are
gathered from banks’ annual reports, their first mobile banking app, financial reports,
and banking statistics from 2010 to 2022. A panel logistic regression is utilized in the
analysis. The results indicate that bank and market characteristics have a meaningful
impact on a bank’s decision to adopt digital banking. Additionally, it is found that
banks are more inclined to adopt digital banking during the COVID-19 pandemic.
Article history:
Received : February 21, 2023
Revised : September 24, 2023
Accepted : November 30, 2023
Available online : December 1, 2023
https://doi.org/10.21098/jimf.v9i4.1688
560 The Determinants of Digital Banking Adoption Among Banks Offering Islamic Banking Services
I. INTRODUCTION
Financial technology is the most significant development within the banking
industry. Over the years, banks have expanded their technology adoption from
Automated Teller Machines in the 1970s to Internet banking in the 1990s and
mobile banking afterwards (Mullan et al., 2017; Thakor, 2020). Electronic or digital
platforms have become a primary alternative channel for banks to deliver their
financial services (Liebana-Cabanillas et al., 2013). It is expected that technological
innovation in the banking sector will be more intense as banks seek to lower
costs as well as to cater to increasing demands for digital transactions, driven by
requests from the new generation (Schindler, 2017) and the present COVID-19
pandemic (IFSB,2020). A bank that adopts and adapts to this emerging trend
would potentially retain its market share (Stulz, 2019; Thakor, 2020).
Despite the critical importance of technology adoption, digital transformation
in Indonesia’s banking sector is slow (Bank Indonesia, 2019; Paminto et al., 2022). A
survey conducted by the Central Bank of Indonesia/Bank Indonesia (BI) reveals that
the adoption rate of digital banking is still relatively slow (Bank Indonesia, 2019).
This may also have occurred in Islamic banking as a lack of information technology
has been identified as an obstacle to development, leading to the inability to create
competitive products and services and differentiation (Indonesian Ministry of
National Development Planning, 2019; OJK, 2021a). Considering the importance
of digital transformation, Indonesia Financial Services Authority/Otoritas Jasa
Keuangan (OJK) has promoted accelerating digital transformation as a strategic
direction of national banking 2020-2025 to respond to the challenges in national
banking, including the Islamic banking digitalization (OJK, 2021c). In particular,
digitalization has been identified as the key factor supporting Islamic banking
development in the Indonesia Islamic Banking Development Roadmap 2020-2025
(OJK, 2021a). Thus, there is an urgent need to assess digital transformation and
technological adoption in Indonesia.
In the literature, previous studies have identified mixed results concerning the
effect of bank-specific factors on the decision to adopt digital banking; for instance,
some studies suggest profitability as a significant factor in the decision to adopt
Internet banking (Furst et al., 2002; Hernández-Murillo et al., 2010) whilst others
find no evidence for its significance (Malhotra & Singh, 2007). Moreover, cost
reduction is theoretically the motive for the emergence of financial innovation (Van
Horne, 1985); however, Malhotra & Singh (2007) confirm no evidence concerning
the effect of labour cost on the decision to adopt digital banking. These results may
lead to an uncertain conclusion on factors influencing the decision to adopt digital
banking. Moreover, it is essential to conduct further research taking the bank’s
perspective as most of the studies regarding the adoption of financial services
innovations such as Internet banking and mobile banking are investigated from
the view of consumers (Nejad, 2016; Mullan et al., 2017).
Along the lines of these studies, the present examines bank-specific and
market-specific factors driving digital banking adoption by banks offering Islamic
banking services in Indonesia. It differs from previous studies in that this study
concentrates on the dual banking system with a focus on banks offering Islamic
banking services. The paper contributes to the literature in twofold. Firstly,
it extends the literature on the adoption of digital banking by examining the
Journal of Islamic Monetary Economics and Finance, Vol. 9, Number 4, 2023 561
(2023a) argue that the emergence of Fintech start-ups is associated with negative
bank performance, and higher Fintech start-ups categorized as P2P lending would
positively impact Islamic bank performance. Using digital payment to indicate
digitalization, Kasri et al. (2022) find digital payment affects banking stability in the
long run while digital payment has a positive relationship with banking stability
in the short run. The relationship between digital payment and banking stability is
not evident in Islamic banking. Literature has shown that most studies on digital
banking in Indonesia emphasize the impact of digital banking. To the best of our
knowledge, none has been done to reveal factors explaining the adoption of digital
banking in a dual banking system.
Table 1.
Mixed Results on Digital Banking Adoption Studies
References L P D T
Furst et al. (2002) + x +
Malhotra and Singh (2007) x x + +
Hernández-Murillo et al. (2010) - +
He (2015) 1) +,x x
Sullivan & Wang (2020) x + x
Note: L=Labour expense; P=Profitability; D=Deposits; T=Type of bank; x = insignificant relationship; + = positively
significant; - = negatively significant; 1) He (2015) employed two indicators to analyze the effect of labour costs
Size
Labour cost
Bank Specifics Deposit
Profitability Digital banking
Bank type adoption
Age of bank
Ownership
Market concentration
Market Specifics Competitor adoption
Customer adoption
Figure 1.
Conceptual Framework of The Study
Therefore, the expected sign for profitability in digital banking adoption needs to
be clarified.
H4. Profitability has a significant impact on digital banking adoption.
in the COVID-19 pandemic. They have been forced to adopt digital banking to
retain or attract new customers. The COVID-19 pandemic has accelerated the
adoption of digital banking by banks (Mariani et al., 2021). In Indonesia, several
studies have confirmed the effect of Covid-19 on bank performance. Yudaruddin
(2023b) confirms Covid-19 causing a decrease in bank performance, regardless of
whether they are Islamic or conventional banks. In contrast, Sapulette et al. (2021)
find a significantly positive impact of the fintech on the banks’ stock returns for big
banks during the COVID-19 pandemic and the opposite impact for smaller banks.
H10. The COVID-19 pandemic positively influenced the adoption of digital banking by
the bank.
IV. METHODOLOGY
4.1. Data and Sample
The Indonesian banking industry has adopted a dual banking system to provide
banking services. In this dual banking system, Islamic banking products and
services are offered to the customers by both Conventional banks through its Sharia
Business Unit (Islamic windows) and Islamic banks (full-fledged Islamic banks or
Sharia Commercial Bank). As a part of a Conventional bank, the Sharia Business
Unit benefits from the bank in business strategy, information and technology
infrastructure, publication of financial reports, capital requirements and others.
Accordingly, this study opts for Conventional banks that offer Islamic banking
products and services and Islamic banks as the study sample.
The data on digital banking adoption is hand-collected from banks’ annual
reports and verified with the first mobile banking application launched on the
PlayStore or AppStore. Previous studies on financial innovation utilize banks’
annual reports (Arnaboldi & Rossignoli, 2015; He et al., 2020) and the first mobile
banking launched on the AppStore (He, 2015) to identify the adoption of financial
innovation, online banking and mobile banking adoption. Firstly, we collect the
banks’ annual reports by downloading the reports from the banks’ official websites.
Banks with incomplete annual reports are excluded from the sample. Secondly,
Journal of Islamic Monetary Economics and Finance, Vol. 9, Number 4, 2023 569
Table 2.
Distribution of Sample
Digital Banking Adoption
Bank Type Non-adopter Adopter Total Observations
Conventional Bank 197 248 445
Sharia Commercial Bank 114 161 275
Total 311 409 720
570 The Determinants of Digital Banking Adoption Among Banks Offering Islamic Banking Services
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Figure 2.
Digital Banking Adoption
4.2. Variables
The choice of variables in this study is aligned with the theoretical/conceptual
framework and hypotheses elaborated in the previous section. Data availability is
also considered. Digital banking adoption (DBA) is the dependent variable which
indicates whether a bank has adopted or has not adopted digital banking services.
Digital banking generally refers to internet banking and mobile banking. A bank is
assumed to have digital banking services if the bank at least has adopted one type
of digital banking, namely, internet banking or mobile banking. Digital banking
adoption is a dummy variable which takes a value of 1 if bank i has adopted digital
banking in period t; otherwise, 0.
Bank characteristics can be grouped into financial characteristics, namely, bank
size (ASSET), labour cost (LABOUR), bank deposits (DEPOSIT) and profitability
(ROA), and non-financial characteristics, namely, bank type (BTYPE), age of the
bank (AGE) and ownership type (OWNER). Market concentration is measured by
the Concentration Ratio (CR5) and competitors’ adoption by the share of digital
banking adoption. Both represent the market characteristics. In addition, the
presence of COVID-19 (COVID) and customer adoption of digital banking (CUST)
are included in the model as variables of interest. Table 3 describes the variables
used in this study and their data sources.
Journal of Islamic Monetary Economics and Finance, Vol. 9, Number 4, 2023 571
Table 3.
Variable Description and Sources
No Variable Description Source
The dummy variable takes a value of 1 for Banks’ annual reports,
Digital Banking
1 the bank that has adopted at least one type www.appbrain.com, www.
Adoption (DBA)
of digital banking. apptopia.com
2 Bank Size (ASSET) The natural log of total assets Banks’ financial report
Labour Cost The ratio of labour expense over total
3 Banks’ financial report
(LABOUR) assets
Bank’s Deposit
4 The ratio of total deposits over total assets Banks’ financial report
(DEPOSIT)
The ratio of earnings before tax to average
5 Profitability (ROA) Banks’ financial report
total assets 1)
Type of Bank The dummy variable takes a value of
6 (BTYPE) 1 for the Islamic bank and 0 for the Banks’ annual reports
conventional bank.
The natural log of the number of years
7 Age of Bank (AGE) from the date of establishment to the Banks’ annual reports
period of analysis 2)
Ownership Type The dummy variable takes a value of 1 for
8 Banks’ annual reports
(OWNER) the private bank and 0 for the public bank.
The sum of assets for the five largest
Market
banks in the Islamic banking industry Islamic banking statistics,
9 Concentration
divided by the total assets of the Islamic Banks’ financial reports.
(CR5)
banking industry
The number of banks that have adopted Banks’ annual reports,
Competitors’
10 digital banking over the total number of www.appbrain.com, www.
adoption (DBS)
banks apptopia.com
The dummy variable takes a value of 1 for Government Regulation No.
11 COVID-19 (COVID)
the time of COVID-19 and otherwise is 0 3) 21/2020
Customers Natural log of the aggregate of digital
12 Proprietary channel statistics
Adoption (CUST) banking transactions
Note:
1. The value of ROA is available in the bank’s financial reports.
2. The date of establishment refers to when the bank received the license or operated, regardless if the bank had
converted from a Conventional Bank to a Sharia Commercial Bank.
3. Government Regulation No. 21/2020 on Large Scale Social Restriction in the effort to handle COVID-19 was
established on March 31, 2020, and the date is set as the starting point for the COVID-19 pandemic.
(1)
Where DBA, ASSET, LABOUR, DEPOSIT and ROA are as defined above
and X is a variable from the list of the remaining variables (bank non-financial
characteristics, market characteristics, COVID-19, and customer adoption).
Table 4.
Descriptive Statistics
Variable Obs Mean Std.Dev. Dba(0) Dba(1)
Obs. Mean Obs. Mean
Asset 720 48,307 70,637 311 16,433 409 72,543
Labour 720 766 949 311 300 409 1,120
Deposit 720 37,352 53,939 311 12,753 409 56,057
ROA 720 0.019 0.024 311 0.024 409 0.015
Age 720 47 17 311 45.06 409 47.77
DBS 720 0.568 0.279 311 0.388 409 0.705
CR5 720 0.651 0.061 311 0.679 409 0.629
Notes: Asset, labour expense, deposit in IDR Billion; Dba(0) = bank non-adopting digital banking, Dba(1) = bank
adopting digital banking.
Journal of Islamic Monetary Economics and Finance, Vol. 9, Number 4, 2023 573
banking. This finding is consistent with Hannan & McDowell (1984). They note
that specialisation is one of the bank characteristics accounting for innovation
adoption.
Age of bank (AGE) is found to positively influence digital banking adoption.
The older bank is more likely to adopt digital banking than a younger bank. This
finding is consistent with the sample statistics which suggest banks adopting
digital banking, on average, have longer ages than non-adopting digital banking.
However, the finding contradicts Furst et al. (2002), Malhotra & Singh (2007),
Hernández-Murillo et al. (2010) and Sullivan & Wang (2020). They find new banks
to be more likely to adopt Internet banking. Older banks, which have been around
for longer years in banking, have accumulated experience and reduced perceived
risk in digital banking investment (Mahotra & Singh, 2007). Accelerating digital
transformation has been stipulated as a strategic direction of Indonesian banking
development 2020-2025 by OJK, and to this end, OJK has supported banks to
improve synergy and technology collaborations between banks and the digital
ecosystem to increase banks’ competitiveness (OJK, 2021c).
Ownership type carries a positive and significant coefficient, indicating that
private banks are more likely to offer digital banking than public banks. This finding
supports Malhotra & Singh (2007). Customers view banking services, information
and technology infrastructure used by private banks as more competitive than
public banks (Harun, 2023). Private banks have been identified to use information
systems more extensively than public banks (Kangis & Kareklis, 2001).
Table 5.
The Correlation Coefficient Matrix
ASSET LABOUR DEPOSIT ROA BTYPE AGE OWNER CR5 DBS COVID
ASSET 1
LABOUR -0.3512 1
DEPOSIT 0.3396 -0.0166 1
ROA 0.0425 0.1052 0.0237 1
BTYPE -0.4627 0.1290 -0.1677 -0.4133 1
AGE 0.4226 -0.1577 0.1077 0.2900 -0.5809 1
OWNER -0.0992 -0.1209 -0.3191 -0.2837 0.3416 -0.1551 1
CR5 -0.1968 0.1221 0.1055 0.175 -0.0417 -0.1362 -0.0028 1
DBS 0.2457 -0.1792 -0.1050 -0.2063 0.0412 0.1896 0.0090 -0.7414 1
COVID 0.1397 -0.1128 -0.0499 -0.1119 0.0008 0.1257 0.0159 0.0083 0.5868 1
Note: The correlation coefficient for customer adoption is not displayed in Table 4 since the period of the sample differs from Table 4. However, the estimation for customer adoption is
still maintained to avoid the correlation issue among independent variables.
Journal of Islamic Monetary Economics and Finance, Vol. 9, Number 4, 2023
575
Table 6.
576
1 2 3 4 5
ASSET 23.20338*** (3.5409) 20.19121*** (1.4338) 15.29351*** (1.130459) 23.12837*** (2.575836) 25.0466*** (3.288616)
LABOUR 16.74307 (56.60565) 21.44618 (52.0402) 47.80108 (50.94396) 18.07003 (56.03316) 131.3842* (67.81675)
DEPOSIT -26.89035*** (7.12188) -23.22211*** (5.298187) -16.23301*** (4.715065) -26.67086*** (6.423183) -21.41084*** (6.238547)
ROA -146.2332*** (43.93985) -128.1275*** (38.94281) -111.3137*** (33.68386) -138.4776*** (41.00019) -134.3378*** (38.71092)
BTYPE 23.35401*** (4.362918)
AGE 9.415302*** (1.625488)
OWNER 22.07041** (10.58587)
CR5 -35.17711*** (8.139164)
DBS
COVID
CUST.
Cons. -194.9503*** (28.92202) -182.8454*** (14.63936) -165.5603*** (9.344929) -202.0588*** (22.63879) -195.1439*** (26.34316)
Table 6.
Logit Estimation Results (Continued)
6 7 81)
ASSET 10.95515*** (1.749678) 19.7278*** (2.968864) 25.02299*** (5.438969)
LABOUR 210.8219 (139.952) -20.03164 (57.84728) 31.74109 (80.87118)
DEPOSIT -2.384714 (9.66555) -22.61576*** (6.3033) -33.63312*** (11.56606)
ROA -99.60893 (63.17159) -132.4559*** (35.99496) -162.1646*** (45.39095)
BTYPE
AGE
OWNER
CR5
DBS 50.43323*** (8.540812)
COVID 13.50421** (5.834077)
CUST. 6.264183*** (1.587105)
Cons. -127.997*** (20.62579) -166.3926*** (25.20348) -300.4683*** (59.46795)
members of the banking system, particularly between the banks that have adopted
it and the banks that have not, to encourage the latter to adopt the technology.
Observation and communication may increase understanding of the benefits and
risks of digital banking adoption, lowering the risks for late adopters.
The COVID-19 pandemic positively influences banks to offer digital banking
services. The COVID-19 pandemic situation has made banks more likely to adopt
digital banking. It is necessary for banking to reach customers remotely during the
COVID-19 pandemic due to social/physical distancing. The COVID-19 pandemic
has changed preference of customers towards cashless transactions (IFSB, 2020)
remote access to banking services. Banks need to anticipate the situation by
accelerating digital banking transformation (OJK, 2021c; Mariani et al., 2021) as
digital banking enables customers to access banking services conveniently anytime
and anywhere.
Finally, we also note that customer adoption (CUST) as proxied by digital
banking transactions influences the adoption of digital banking significantly and
positively. The Diffusion of Innovation theory reveals that relative advantage is
one of the attributes that would lead to the adoption of innovation. Customers
prefer to use digital banking services since they are able to access banking services
anytime and anywhere (Tiwari et al., 2006; Shah & Clarke, 2009), which would
increase the customer experience as well as the efficiency of accessing banking
services (Laukkanen, 2007). Customer preferences to use digital banking for
transactions have stimulated banks to adopt digital banking as applying digital
banking would increase customer satisfaction and widen customer base.
PlayStore and AppStore are combined to derive the adoption of digital banking
data by the banks in the sample. Using semi-annual data drawn from banks’
financial reports and banking statistics as of June and December for each year from
2010-2022, we employ a panel logistic regression for the analysis.
The logit result confirms that bank size, deposit and profitability, significantly
affect the likelihood of digital banking adoption. A bank with a larger size,
lower deposit and lower profitability is more likely to adopt digital banking.
Sharia commercial banks, older banks, and private banks have more probability
of adopting digital banking. Adoption by competitors and customer adoption
significantly influence the decision of a bank to adopt digital banking. Enhancing
customer experience instead of cost orientation has motivated banks to adopt
digital banking. In addition, the COVID-19 pandemic has stimulated banks to
adopt digital banking to fulfil customer financial needs. Robustness tests using
alternative measures and sub-samples corroborate the findings of the study. These
findings should prove important in crafting initiatives to promote the adoption of
digital banking in Indonesia.
Finally, we should note that this present study is limited to banks offering
Islamic banking services in Indonesia. The similar analysis might be extended
to other dual banking countries to gain more insights on the issue. Moreover, it
is suggested that further research be conducted to include more factors such as
demographic factors into the analysis.
ACKNOWLEDGEMENTS
We would like to thank Prof. Dr. Mansor H. Ibrahim, Dr. Nur Harena Redzuan,
and Dr. Rifki Ismal for providing constructive comments on the earlier drafts of
this paper.
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APPENDIX
584
Tabel A1.
Logit Estimation Result for Robustness Test 1 (Alternative Variables)
1 2 3 4 5
ASSET 23.63523*** (3.813782) 22.18483*** (3.415973) 14.19192*** (0.885776) 23.37555*** (3.072013) 24.41797*** (2.926083)
OCOI 4.579126 (3.623002) 3.899696 (3.190459) 1.331609 (3.331141) 4.204989 (3.066675) 4.688133 (3.438522)
DEPOSIT -25.70848*** (7.190407) -24.10411*** (6.802498) -14.09569*** (4.330342) -25.24529*** (6.613205) -20.87926*** (5.947436)
ROE -13.95055** (6.694537) -14.43592** (5.993574) -14.1321** (5.559824) -14.17713** (5.674951) -10.09896* (5.900849)
BTYPE 22.83237*** (6.529436)
AGE 6.622243*** (1.431448)
OWNER 23.48265*** (4.282691)
CR5 -27.57855*** (7.086373)
DBS
COVID
CUST.
Cons. -203.8507*** (31.93973) -202.8177*** (32.95033) -146.8921*** (7.196435) -209.0794*** (26.53743) -196.7712*** (24.71561)
Tabel A1.
Logit Estimation Result for Robustness Test 1 (Alternative Variables) (Continued)
6 7 81)
ASSET 8.855776*** (1.334937) 18.50795*** (1.785599) 18.19778*** (1.156492)
OCOI -0.656406 (5.769804) -4.595125 (4.87186) -0.023043 (5.869054)
DEPOSIT -1.156181 (8.29773) -18.16296*** (5.272956) -21.2193*** (6.390543)
ROE -11.0394 (9.888331) -22.48715*** (7.015814) -20.63129** (8.204902)
BTYPE
AGE
OWNER
CR5
DBS 42.60169*** (5.74732)
COVID 16.23882** (6.452769)
CUST. 5.932353*** (1.342164)
Cons. -101.3782*** (15.13042) -153.7367*** (17.45312) -239.7345*** (23.25979)
Tabel A2.
Logit Estimation Result for Robustness Test 2 (Sub Sample) (Continued)
6 8 71)
ASSET 8.046645** (3.902063) 19.91733*** (3.839284) 25.6541*** (4.118398)
LABOUR 248.996 (197.5819) -23.75816 (59.86782) 28.20891 (82.18701)
DEPOSIT 11.06814 (14.04251) -21.9505*** (6.915878) -34.4629*** (10.86595)
ROA -117.3393* (69.1399) -138.5687*** (39.84338) -162.7406*** (46.18667)
BTYPE
AGE
OWNER
CR5
DBS 77.33966*** (20.65775)
COVID 28.38631*** (10.42945)
CUST. 6.388801*** (1.588466)
Cons. -132.1112*** (43.50299) -173.71*** (34.24082) -309.8116*** (48.05114)