Impact of digital transformation on financial performance of licensed commercial banks in Sri Lanka pre and post COVID-19 pandemic

Abstract

Enhancing the quality of goods and services through innovation and the integration of electronic applications is a fundamental aspect of digital transformation. This topic has increasingly captivated the attention of management and organizational scholars. This focus is especially relevant in improving organizational performance by digitalizing core operations. The global and Sri Lankan economies have faced severe disruptions due to the COVID-19 pandemic, which has compelled commercial banks to adopt innovative digital strategies as a means of mitigating the resultant risks and maintaining stability. This study explores the impact of digital transformation on the financial performance of 10 Licensed Commercial Banks in Sri Lanka, comparing outcomes before and after the pandemic’s onset. By employing a robust methodological framework that includes descriptive statistics, correlation analysis, and T-test analysis, the research investigates key variables to discern trends and patterns across different timeframes. The assessment of digital transformation is conducted through a multi-dimensional approach, focusing on metrics such as the volume of digital transactions, income from fees and commissions, and the proliferation of Automated Teller Machines (ATMs) and Cash Deposit Machines (CDMs). Financial performance, on the other hand, is gauged using critical indicators like Return on Assets (ROA) and Return on Equity (ROE). The analysis reveals nuanced insights: while the increase in ATMs and CDMs correlates positively with financial performance, this relationship lacks statistical significance. In contrast, a substantial and positive effect on financial performance is observed from the volume of digital transactions and the income generated from fees and commissions. Significantly, the findings indicate that digital transformation initiatives have enabled commercial banks to not only weather the pandemic but also enhance their financial performance during this period of unprecedented challenge. These results emphasize the imperative for financial institutions to strategically integrate advanced technologies, such as artificial intelligence, into their digital transformation agendas. By doing so, they can secure and potentially elevate financial performance, even amidst unforeseen global crises like a pandemic.