The Role of Digital Transformation in Improving Financial Performance: An Applied Study on Banking Sector in Egypt

Abstract

Aims: Incumbent organizations are faced with considerable challenges in developing and sustaining new digital competencies essential in competing in a rapidly changing environment, corresponding with accepted historical path dependencies. This study aims to examine the relationship between digital transformation and financial performance, evidence from the banking sector in Egypt. Methodology: The study focused on data collected from the annual reports and financial statements of 5 banks registered in the Egyptian stock exchange, for 11 years period from 2013 to 2023. The study measured the digital transformation (DT) using three dimensions: digital orientation (DO), digital intensity (DI) and digital maturity (DM), and Financial Performance (FP) was measured through two dimensions: Operating Profit Margin (OPM) and Net Profit Margin (NPM). Controlling for the Non-Performing loans (NPL), Net Interest Margin (NIM), Loan-to-Deposit Ratio (LDR), Total Assets (TA), and Capital Adequacy Ratio (CAR). Using panel data methods, the study first applies unit root tests to assess data stationarity, then multiple regression and Pearson correlations was conducted, followed by both Fixed Effects and Random Effects models. The Hausman test is then used to determine the most appropriate model specification. Findings: The findings revealed that there is a significant impact of digital intensity and digital maturity on operating profit margin while digital orientation does not have a significant impact on operating profit margin. The study also revealed that there is no significant impact of digital orientation, digital intensity or digital maturity on the net profit margin of the banking sector in Egypt. This study also combined dependent variables and independent variables in financial performance and digital transformation respectively through principal component analysis (PCA) and found out that there is no significant impact of digital transformation on financial performance. Recommendation: Banks should focus on increasing their digital maturity to ensure that investments in digital pay off in terms of operational and financial benefits. Banks should avoid overextending resources, strategic prioritization and careful consideration of digital efforts are essential to counteract any negative impact on profitability. Conclusion: Banks should not treat digitization as a stand-alone factor, financial organizations should adopt an integrated transformation model that synergistically utilizes strategy, intensity, and maturity in their efforts toward sustained performance outcomes.