The Effect of Digitalization on the Efficiency of Commercial Banks in Malawi

Abstract

The rapid advancement of digital technologies has transformed the banking industry, enhancing operational efficiency and expanding the range of services offered to customers. In Malawi, commercial banks have increasingly adopted digital banking services, like mobile banking, internet banking, POS and ATM transactions, to improve service delivery and remain competitive. However, the extent to which these digitalization efforts impact the efficiency of commercial banks has not been fully explored. This study was motivated by the need to examine the role of digitalization in improving the efficiency of Malawi’s commercial banks and to provide insights for enhancing banking performance in the digital age. The primary objective of this research was to assess the effect of digitalization, specifically mobile banking, internet banking, ATM transactions, bank size, and bank liquidity, on the efficiency of commercial banks in Malawi. The study was grounded in Financial Intermediation Theory and supported by Innovation Diffusion Theory and the Technology Acceptance Model provided a theoretical foundation for understanding the adoption of digital banking technologies. To achieve the research objectives, the research utilized a descriptive panel research design, analyzing secondary data from 8 commercial banks in Malawi over a 5-year period (2019–2023). The study employed Data Envelopment Analysis to measure bank efficiency and used a fixed-effects panel regression model to assess the effect of the independent variables on efficiency. The findings revealed that digitalization positively and significantly impacted the efficiency of commercial banks. The R-squared values indicated that 58.2% (within) and 56.5% (overall) of the variation in bank efficiency was explained by the independent variables. The regression analysis showed that mobile banking (β = 0.096492, p = 0.000), internet banking (β = 0.015053, p = 0.000), ATM transactions (β = 0.092434, p = 0.000), bank size (β = 0.024605, p = 0.000), and bank liquidity (β = 0.087975, p = 0.000) all had statistically significant positive effects on bank efficiency. These results suggest that digitalization, along with bank-specific factors like size and liquidity, plays a crucial role in enhancing commercial banks effeciency in Malawi. The study concluded that digital banking services, particularly mobile banking, internet banking, and ATM transactions, significantly improve bank efficiency. Larger banks and those with higher liquidity ratios are also more efficient. On the basis of the conclusion, it is recommended that policymakers promote the expansion of digital banking infrastructure and that commercial banks invest in enhancing their digital platforms and liquidity management strategies. Additionally, banks should focus on customer education to increase the adoption of digital banking services. Future research could expand this study by incorporating a larger sample size, examining the role of emerging digital technologies such as artificial intelligence, and exploring external factors like macroeconomic conditions and regulatory policies that may influence the relationship between digitalization and bank efficiency.