The Adoption of E-banking in Developing Countries: A Theoretical ...

International Review of Business Research Papers
Vol. 5 No. 6 November 2009, Pp.212-230

The Adoption of E-banking in Developing Countries: A
Theoretical Model for SMEs


Al Nahian Riyadh, Md. Shahriar Akter, Nayeema Islam


Electronic banking offers numerous benefits to SMEs. SMEs can check account balances,
transfer money, pay bills, collect receivables and ultimately reduce transaction costs and
establish greater control over bank accounts. Despite the benefits of e-banking to SMEs,
there has been little research done on the factors affecting its adoption. This research
aims to investigate the factors that affect SMEs’ adoption of e-banking in Bangladesh. It
is well documented in the literature that despite their availability and potential benefits,
SMEs in Bangladesh are slow in adopting e-banking services. For the purpose of
identifying factors affecting the adoption of e-banking by SMEs, TOE framework,
Technology Acceptance Model (TAM), Institutional Theory and Institutional Intervention
Theory are used. Drawing upon these as background theories, an integrated conceptual
framework for SMEs’ e-banking adoption is developed, which incorporates both the
rationalistic goal oriented behaviour of firms and the external forces of technology
adoption. Seven variables affecting e-banking adoption by SMEs are identified. They are:
organizational capabilities, perceived benefits, perceived credibility, perceived regulatory
support, ICT industries readiness, lack of financial institutions readiness and institutional
influence. This model can be tested empirically for SMEs in Bangladesh as well as in
other developing countries.

Field of Research: Electronic Banking, Electronic Commerce, Electronic Finance,
Information Systems (IS), Information and Communication Technologies (ICTs), Small
and Medium Scale Enterprises (SMEs).


1. Introduction


Electronic banking (e-banking) reduces the transaction costs of banking for both SMEs
and banks. SMEs need not visit banks for banking transactions, providing round the
clock services (Cheng et al., 2006). SMEs can apply for loans and do other banking
services online (Smith and Rupp, 2003). Despite these benefits, little research has been
conducted on factors affecting e-banking adoption by SMEs in developing countries. E-
banking has been discussed from a retail point of view (B2C) (Wan and Chow, 2005;
Celik, 2008), however financial services to SMEs have so far received limited attention.
(Gehling et al., 2007). Nonetheless, online financial services represent a critical issue
for the survival of SMEs (Wright and Ralston, 2002). E-banking grows faster than other
e-commerce sectors, as financial services are data intensive and require no physical
delivery (Zekos, 2004). The Literature on SMEs in developed countries has mostly
focused on e-commerce issues (Bunker and MacGregor, 2000), as unlike in developing
countries, financing seems not to be a critical issue (Guglani, 2001). Khalifa and
Davison (2006) mentioned that existing literature on the adoption of information
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technologies can be grouped into two approaches. One focuses on the rationalistic goal
oriented behaviour of firms and the other focuses on external forces of institutions.
These theories, however, are not mutually exclusive as both firms’ related and
institutional forces together determine adoption. Hence, there is a clear demand for an
e-banking adoption model for SMEs in developing countries that incorporate both the
goal oriented behaviour of firms as well as institutional pressure on technology adoption.
E-banking services have been available in Bangladesh since 2001. As of 2007, 29 out
of 48 banks have offered online financial services (Rahman, 2007). However, the
adoption of online banking channels by Bangladeshi SMEs has been rather slow when
compared with the large companies in Bangladesh or SMEs in other developed
countries. Dewan and Nazmin (2008) have reported that SMEs in Bangladesh lag
behind in the use of ICTs. In Bangladesh, research has been done on electronic
commerce issues (Azam, 2007), computer usage (Azam, 2005), Internet usage (Awal,
2004), telephone (Khan, 2001) and electronic banking (Bakta et al., 2007). But, no
research has been done on e-banking issues in SMEs, although SMEs in Bangladesh
contribute 25 percent of GDP, 80 percent of employment creation (Rikta, 2007). Also
more than 40 percent of SMEs are deprived from any kinds of external sources of
finance (IFC Investment Climate Survey, 2003). Banks in Bangladesh have invested
huge amounts of money in offering financial services online. However, SMEs are slow
in adopting e-banking services. In order for the Banks to effectively integrate SME
segments with e-banking systems, it is important to identify the factors responsible for
this.
The aim of this paper is to extend the existing adoption models and to propose an
integrated and eclectic conceptual framework of factors which influence e-banking
adoption behavior by SMEs in Bangladesh. To accomplish this, we start with a critical
understanding of SMEs’ e-banking adoption behaviour and factors that could drive or
inhibit wider adoption and use of e-banking. We then examine the roles of institutions in
the e-banking adoption process of SMEs and how effectively they can play a role in
expediting the adoption of e-banking. Finally, we develop a theoretical model by
integrating theories of rationalistic goal oriented behaviours of firms and institutional
theories in order to better explain technology adoption in developing countries like
Bangladesh.

2. Literature Review


2.1 Benefits
of
Electronic Banking to SMEs


Using e-banking, SMEs can apply online for lines of credit, credit cards, loans and
mortgages, hence, less visit is required to banks for doing banking transactions (Purcell
and Toland, 2003). Rikta (2007) mentioned that in Bangladesh, SMEs owners had to
visit on an average of 15 times to their lender for a single loan. Han (2008) also found
the favorable impact of the application of informational technology on SME finance.
Wendel and Williams (2001) mentioned that online SME businesses are more profitable
and produce higher revenues, than SMEs that use only traditional channel. Through
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Internet, SMEs can do research on banking products, interest rates, terms, and then
choose lenders that best fulfil their expectations and needs. Customers prefers e-
banking for conveniences, speed, round the clock services and access to the account
from any parts of the world (Cheng et al., 2006). E-banking offers benefits to banks as
well. Banks can benefit from lower transaction costs as e-banking requires less paper
work, less staffs and physical branches (Cheng et al., 2006). E-banking leads higher
level of customers’ satisfaction and retention (Poatoglu and Ekin, 2001).E-banking
reduces loan processing time as borrowers loan application can be viewed by loan
processing and loan approval authority simultaneously (Smith & Rupp, 2003). Typically,
loan applications received at branch level and send to head office for approval. This
documents transfer to and from branch to head office consume much time and delay
loan sanction period.

2.2
Factors
Affecting
E-banking
Adoption by SMEs: Organizational
Perspectives


Literature on organizational adoption of ICTs can be categorized under two groups. The
first one focuses on rationalistic goal oriented behaviour of firms, such as Technology
Adoption Model (Davis, 1985). Other approaches focus on institutional pressure on
firms such as Institutional theory. Rationalistic goal oriented behaviour are mostly grown
from the Theory of Planned Behaviour (TPB) (Ajzen, 1991), derived from the Theory of
Reasoned Action (TRA) (Fishbein and Ajzen, 1975) and Technology Acceptance Model
(TAM) (Davis, 1989). TRA can be described as one of the most influential theory to
explain human behaviour’s attitude towards adoption of innovation (Venkatesh et al.,
2003). TBP best suited with the situations where people do not have complete control
over their behaviour. Taylor and Todd (1995) proposed a model, which is popularly
known as Decomposed Theory of Planned Behavior (DTPB), based on Innovation
Diffusion Theory and TPB. In DTPB, attitudinal beliefs are broken into three parts:
perceived usefulness, perceived ease of use and compatibility. A good number of
studies have investigated the adoption of various IS using either TAM or extended
version of TAM (Venkatesh and Davis, 2000; Wang et al., 2003). Most important
extension of TAM was made by Venkatessh and Davis (2000) by adding subjective
norm construct and this modified model is known as TAM2. TAM model is based on two
main constructs: perceived usefulness and perceived ease of use. This model explains
how individual customers or organizations take decisions regarding adoption of
technology.
On the other hand, the perspective of Innovation Diffusion Theory (Rogers, 1983;
Tornatzky and Klein, 1982) has been embraced by a group of researchers in which
behavioural intention or behaviour and determinants of innovation diffusion are relative
advantages, compatibility, complexity, observability, and Trialability (Rogers,
1983).Rogers Innovation Theory has been extended by Moore and Benbaset (1991) by
adding two more construct: image and voluntariness of use. It is widely believed that the
explanatory power of any model increases if researchers extend the existing models
rather than looking at only one goal oriented model (Cheng et al., 2006). Hernandez
and Mazzon (2007) studied Internet banking adoption in Brazil by combining constructs
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from various models like innovation characteristics, subjective norm, perceived
behavioural control, and individual characteristics and found that integrated model offers
superior ability to explain adoption. Wang et al. (2003) studied adoption of Internet
banking in Taiwan using TAM model and introduced new construct ‘perceived credibility’
that reflects the user’s security and privacy concerns in the acceptance of Internet
banking. They found the significant influence of perceived ease of use, perceived
usefulness and perceived credibility on the intention to use Internet banking. Celik
(2008) extended TAM for studying factors that determine customers’ acceptance of
Internet banking.
Tornatzky and Fleischer (1990) in their Technology-Organization-Environment (T-O-E)
framework describe that three factors are important for any technology or innovation
adoption diffusion process: technology context, organizational context and
environmental context. Technology context includes both internal and external
technologies applicable for firm. Organizational context includes resources (capital and
human), organizational scope and size. Environment context includes both the direct
and indirect roles of competitors, industry associations, and the governments.
All the adoption model described above (like TAM, TPB, TRA) are developed for
studying technology adoption in developed countries, however, technology adoption in
developed countries might be different from those of developing countries as the
challenges are different in various contexts (Molla and Licker, 2005). In most developing
countries e-commerce adoption has been inhibited by the quality, availability and cost of
accessing infrastructure (Humphrey et al., 2003). Furthermore, as SMEs in developing
countries have lack of skilled human resources, businesses and technological
resources and hence, those are vital in adopting electronic business. Therefore, there is
a demand for an adoption model for developing countries.

2.3
Factors Affecting E-banking Adoption by SMEs: External
Institutional Perspective


In technology diffusion, the role of institutional involvement has been described and
acknowledged in various literatures (Tornatzky and Fleischer, 1990; King et al., 1994;
Andersen et al., 2003). King et al (1994) mentioned that six types of institutional
intervention can stimulate IT adoption by firms. These are knowledge building,
knowledge deployment, subsidy, mobilization, standard setting and innovation directives.
Institutions can influence in several ways in IT adoption, like through enacting rules and
regulations or through creating demand for innovative product and processes
(Montealegre, 1999). Damsgaard and Lyytinen (2001) mentioned that institutional
involvement is imperative in the technology adoption and such institution contains
governmental agencies, national and global standardization organizations, local
government, and non profit organization like industry association. Andersen et al (2003)
also acknowledged the role of information infrastructure (telecommunication, wireless
and Internet infrastructure, technology acceptance) and roles of government and private
sectors in technology adoption. Shi et al. (2008) studied adoption of Internet banking
from consumers perspectives and found that normative and coercive pressure
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significantly influence the attitude and intention to adopt of Internet banking. Wang and
Cheung (2004) found that coercive pressure have influence on travel agencies’
adoption of e-business. Online banking allows both SMEs and financial institutions to
lower transaction cost and save time to SMEs and creates more business and ensure
better customer relationship management to financial institutions (Han, 2008). Therefore,
pressure may come from banks to SMEs to adopt online financial services.
Government in both developed and developing countries together with donor agencies
are playing crucial role to foster the adoption of e-commerce (OECD, 1999), as
government intervention is critical in sustainable technological development in SMEs
(Rothwell, 1994). SouthAsian Development Facility (SEDF), a concern of World Bank, is
also working for technology and e-commerce adoption in SMEs in some Asian countries.
Role of institutions have been studied by many researchers like role of government
(Scupola, 2003), role of consultant (Dessant and Rush, 1993), role of professional
association (Damsgaard and Lyytinen, 2001). Kapurubandara and Lawson (2008)
emphasized the need for training programs, workshops and seminars in local languages
for awareness and skill development for SMEs. Infrastructural issues are also concern
for SMEs in developing countries. Issues faces in developing countries in e-commerce
adoption are different from developed countries (Corbitt et al., 2001). Lack of
telecommunications infrastructures, lack of skilled staff, low Internet penetration, low
bank account, lack of timely and delivery of physical goods hinder the growth of e-
commerce/e-banking diffusion in developing countries. Therefore, developed countries
technology adoption model cannot fully explain the technology adoption behaviours of
developing countries.

3. Background Theory


Literature on technologies adoption and diffusion suggest us to be open to more than
one approaches of technology adoption to identify relevant factors of any technology
adoption (Khalifa & Davison, 2006). Abrahamson (1991) also advocates for using
multiple perspective in innovation research. He argues that under the condition of
uncertainty, ‘fad’ or ‘fashion’ model, based on institutional theory of innovation, better
suits with innovation research than ‘rationalistic goal oriented’ model. The underlying
notion of rationalistic goal oriented or efficient theory is individual make choice regarding
adoption of an innovation based on goals and technical consideration. Inclusion of more
than one theoretical perspective enriches the depth and breadth of innovation research
(Wolfe, 1994). In this paper we present four dominants technology adoption model. Out
of four, Technology Adoption Model (TAM) (Davis, 1985) and TOE framework
(Tornatzky & Fleischer, 1990) are known as rationalistic goal oriented model.
Institutional Intervention Theory of King et al., (1994) and Institutional Theory of
DiMaggio and Powell (1983) are two dominant institutional theories in technology
adoption.

3.1 The
Technology-Organization-Environment (TOE) Framework

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To study adoption of general technology innovations, technology-organization-
environment (TOE) framework was developed by Tornatzky & Fleischer (1990). TOE
framework shown below identified three aspects, technological context, organizational
context, and environmental context, which influences technology adoption by firms’
(Tornatzky & Fleischer, 1990). As a generic theory of technology diffusion, the TOE
framework can be used for studying any kind of information systems (IS) innovation
research (Zhu,K. et al., 2003) including e-banking Liao et al.1999).The TOE framework
has been used extensively in various IS adoption empirical works.


3.2 The Technology Acceptance Model (TAM)


Technology Adoption Model (Davis, 1985, 1989) has been the foundation of many
technology adoption and diffusion research and it is rooted in the Theory of Reasoned
Action (TRA). As per TAM, the two important independent variables of actual use of
technology are:
Perceived ease of use, defined as ‘the degree to which a person believes that using
a particular system would be free of effort’
Perceived usefulness, defined as ‘the degree to which a person believes that using a
particular system would enhance his or her performance’
The presentation of TAM (Davis, 1985) is shown below:

Perceived
Usefulness
Attitudes
External
Towards
Behavioural
Actual
Variables
Using
Intension
Use
Perceived
Ease of Use


TAM was developed to explain and predict particular IT usages. However, this particular
model has been using by many researchers in studying adoption and diffusion of
various IS technologies.



3.3
Institutional
Intervention Theory


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In the adoption and diffusion of an innovation, influence and regulatory actions are
important (King et al., 1994). King et al. (1994) provide a list of institutions in their
seminal paper and claim that potential institutional action may take two dimensions and
draw a model in line with that. Institutions can exert pressure through influence and
regulatory power and ‘Supply push’ and ‘Demand pull’ forces lay down the context for
those actions to take place (King et al.1994). Both ‘Supply push and ‘Demand pull’ are
required for innovation adoption. Supply push innovation comes from the supplier of
innovation and demand pull generates from the users to enjoy the innovation. This
theory has been used in many technology adoption studies like e-commerce adoption
(Scupola, 2003); EDI adoption (Dansgaard and Lyytinnen, 2001).

3.4 Institutional Theory


Institutional theory asserts that in societies where organizations work are guided by both
rational rules and activities as originations are treated as system (Waber, 1946).
DiMaggio and Powell (1983) and Scott (2001) claim that three types of institutional
pressures-coercive, normative and mimetic, determine the technology adoption by
individuals and firms.
Coercive pressure are exerted by organizations or other bodies on social actors
to adopt the prescribed attitudes, behaviours, and practice as the later have
resource dependency to the former (DiMaggio and Powell, 1983). At organization
level, coercive pressure may come from resource dominant organizations and
regulatory bodies (Teo et al., 2003). Shi et al. (2008) mentioned that coercive
pressure significantly influence the attitude and intention to adopt Internet
banking.
Normative pressure occurs when an organization voluntarily, but unconsciously
imitate the attitude, behaviours and practices of other organizations. Although
this imitation is not pushed by large actors, however, social actors those who
have not adopted innovation may feel discomfort when peers whose they admirer
have adopted the same (DiMaggio and Powell, 1983). Shi et al. (2008) have
found the significant influence of normative pressure on Internet banking
adoption.
Mimetic pressures are directly associated with the both voluntary and conscious
imitation or copying of the practices and behaviours of competitors or successful
and high status actors (DiMaggio and Powell, 1983).

4. Theoretical Model For E-Banking Adoption By SMEs


Since the TOE framework, TAM, Institutional Theory and Institutional Intervention
Theory has strong theoretical bases, proven empirical supports, and applicability to
wide range of IS innovation, therefore we have adopted all these theories as
underpinning theory for the research. However, all the theories described above are
mostly applied and used for technology adoption studies in developed countries. The
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social, cultural, economic condition of both developed countries and developing
countries are different (Molla and Licker, 2005), therefore, developed countries
technology adoption model cannot be applicable for developing countries without
modifications.
Yet, as a significant differentiation from prior research: Firstly, we divide all the factors
affecting e-banking into two groups: internet and external, for better appreciation of
these factors in determining technological adoption. Secondly, we acknowledge the role
of different institutions in the adoption and diffusion process as their roles are important
(Abrahamson, 1991; Khalifa and Davision, 2006). Finally, we integrate two different
approaches of research and develop an integrated framework that can better explain
the e-banking adoption by SMEs in developing countries.

4.1 Internal Organizational Factors: Based on existing literatures this research
identified that among many, three internal factors have more influence on e-banking
adoption by SMEs.
• Organizational Capabilities: Organizational capabilities may take several forms
including human capital, IT literacy, and slack resources. Yap et al., (1992)
mention that SMEs are regarded as ‘poor’ in human, financial and material
resources and that hinders them to adopt ICTs. Hence, SMEs with more IT
experience and IT in use are more likely to adopt IS innovation. Technological
readiness of SMEs is important for e-commerce adoption (Zhu et al., 2006) and it
includes not only physical assets, but also human resources as human resources
are complementary to physical asset (Mata et al.1995). Iacovou et al., (1995)
measured organizational readiness through financial resources and technological
resources. Zhu and Kraemer (2005) mentioned that, organizational readiness
includes infrastructure, relevant systems, and technical skills. Although, the
definition of organizational readiness differs in literature but all agreed that
organizational readiness have strong influence on SMEs’ technologies adoption
(Zhu et al., 2003). Due to importance of human, IT and capital in determining
technology adoption and use in any organization, we have included
organizational capabilities as one of the factors in e-banking adoption by SMEs.
• Perceived Benefits: Numerous literature states that perceived benefit is a key
reason for technology adoption. Benefits e-commerce to SMEs includes lower
administrative cost (Quayle, 2002), increased internal efficiency (MacGregor et al.
1998), improved relationship with business partners (Poon and Swatman, 1997),
improve competitiveness (Fraser et al., 2000); improve quality of information
(Kaplan and Sawhney, 2000). Mehrtens. et al (2001) ranked perceived benefits
as main factors for small firms’ Internet adoption. E-banking provides benefits to
SMEs like 24/7 access to bank account, fund transfer and bill payment. E-
banking also widens scope of financing from both local and global players.
Therefore, we can conclude that perceived benefits is one of the main factors for
e-banking adoption by small firms.
• Perceived Risk, Online Security, Trust and Perceived Credibility: ‘Perceived risk
is the consumer’s subjective expectation of suffering a loss in pursuit of a desired
outcome’ (Wang et al., 2003). Perceived risk is multi-dimensional in nature and
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captures performance, physical, financial, psychological, social loss and time
(Greatorex and Mitchell, 1994) and therefore, difficult to capture objectively
(Pavlou, 2001). Akinci et al. (2004) found that lack of confidence, security,
reliability and privacy issues are main concerns of online banking customers.
The components of online security are trust, confidence, reliability, risk on online
transactions and reputation of online financial service providers. Security issues
arise due to disruption of the operating system, or interrupted supply of the
internet (Min and Galle, 1999). In case of web based transactions trust on service
providers as well as on the system are important (Lee and Turban, 2001). Wang
et al., (2003) found the perceived credibility is most determining factors in
Internet banking adoption. Perceived credibility is impersonal in nature, and
captures reputation, information and economic reasoning (Ba and Pavlou, 2002).
It reflects consumers’ perception regarding the online transaction’s security and
trust issues (Wang et al., 2003). Therefore, this research adopts perceived
credibility as a construct in the adoption of e-banking.

4.2 External Environmental Factors: Literature confirms that external factors
together with internal determine the level of IS innovation adoption. Relevant external
factors that we include in conceptual model are discussed below:
• ICT Industries Readiness: ICT infrastructure includes telecommunication
network, Internet connectivity, availability of computer, other hardware and
software. Technological environment, both electronic and telecommunication,
where a particular firm operates have influence on ICT adoption (Dholakia and
Kshetri, 2004). Shortage of information technology infrastructures act as barriers
for sustaining growth of online commerce (Chircu and Kauffman, 2000). Hence,
we conclude that e-banking adoption by SMEs depends on ICTs industries
readiness.
• Perceived Regulatory Support: Rotchanakitumnuai and Speece (2003) found that
legal support for online banking for safeguarding customers is most important.
Customers hesitate to use the e-banking services if there are inadequate laws on
it (Larpsiri et al., 2002). Thomas et al., (1998) mentioned that who will bear the
liability if financial loss occurs is another concern as sometimes it is hard to
recognize the location of online service providers. Banks often transfer the risk to
users of their services by signing agreement and that may hinders customers to
use this services (Attaran, 2000). In developing countries regulatory environment
is more critical than developed countries in adoption of innovation (Zhu et al.,
2006). Due to the importance of regulatory support in e-banking adoption, we
include this construct in the conceptual model.
• Financial Institutions Readiness: E-banking offers benefit for banks as well their
customers. E-banking is described as ‘wallet sharing’ for both financial
institutions and SMEs (Sato and Hawkins, 2001). If any banks have online
channel for providing banking services, and as building these online channel
requires huge amount of investment, therefore, bank certainly would ask their
customers to use online channel. Zhu et al. (2003) mentioned that lack of trading
partner readiness is significant adoption inhibitor. Trading partner readiness
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encourages small firms to adopt ICT and electronic commerce (McCole &
Ramsey, 2005) and same expected to apply in e-banking adoption by SMEs.
• Pressure from Institutions: Institution is a social structure that has attended a
high degree of reliance (Scott, 2001). King et al., (1994) provides a list of
institutions including government, governmental institutes, development agencies,
educational institutes, business association. Pressure may emerge due to
competition and as well as from regulation. Institutions can exert pressure to
SMEs to adopt e-banking through many ways including enacting laws, providing
training, subsidy, and knowledge deployment. Institutional pressure can be
coercive, normative and mimetic (DiMaggio and Powell, 1983). Financial
institutions can also influence SMEs regarding use of their online channel for
banking as it is benefited for both of them. Hence, this research includes
pressure from institutions as a construct in the adoption framework.

4.3 Institutional Role in Technology Diffusion: Among the institutions
government and financial services providers’ role are vital for diffusion of e-banking as
both institutions are working closely with SMEs (Chong and Parvan, 2007). Government
through setting up infrastructure and enacting rules and regulations can create
environment for SMEs for technological uptake. Donor institutions also help
governments in developing countries in setting up infrastructures as well as through
funding to SMEs and IT projects. IT service providers are also important and provide
support to SMEs and financial institutions. The roles of Resource centres (includes
training institutes, consultants, business association) are limited in creating awareness
and providing consultancy services as well as training. They mostly depend on external
sources of funding either from donor or from government. Association of IT service
providers and association of banks are also part of resources centres.
Although, all institutions have certain roles to play, however, among all groups,
government role are most important (Scupola, 2003) and it was acknowledged in
various literatures (Iacovue et al., 1995; Kuan and Chau, 2001).Pressure from financial
institutions are also important for SMEs to adopt e-banking adoption as online channel
decreases transaction cost and banks can reach to larger segments of customers
(Claessens et al., 2002; Zekos, 2004). That is why both government and financial
institutions are grouped as influencing institutions. SMEs lack technical expertise
(Mirchandani & Motwani, 2001) hence they rely on vendors and external expertise for
website development, technological upgradation, security of their online systems
(Gehling et al., 2007). Industry association, educational institute, training centres also
have impact on technology adoption and hence they are also included as influencing
institutions.



Exhibit 1 Summary of the Institutional Support to SMEs in
Bangladesh
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