Profitability Paradox: Evidence from Commercial Banks in Pakistan

Abstract

It is generally believed that information technology (IT) impacts the organizational profitability positively however empirical evidence has remained inconclusive. This was first highlighted by Solow (1987), labelled as Solow’s paradox, and later labelled as profitability paradox by Beccalli (2007). The persistence of inconclusive empirical literature provides the impetus of this research to investigate the impact of different components of IT on banks profitability in Pakistan from 2009-2016 for a sample of 25 Pakistani commercial banks. Return on assets (ROA) and return on equity (ROE) have been used as indicators of bank profitability whereas two different components of IT, number of ATMs and investment in banks software have been employed as proxies of IT. Empirical results reveal that investment in bank software appears to have a positive influence on bank profitability, while the acquisition of ATMs seems to reduce the profitability of banks. It can be concluded that IT paradox is not necessarily a paradox of IT in totality and may be termed as IT component paradox.