The nonlinear and threshold effects of IT investment on the banking sector of Bangladesh

In the modern banking industry, investment in information technology (IT) is crucial to maintain technological advances, operational efficiency, financial innovation, and security. However, the impact of IT investment on the banking sector is still in question, particularly whether it follows a linear or nonlinear relationship, and what should be the optimal level of IT investment. This study investigates the nonlinear and threshold effects of IT investment on bank profitability, stability, and efficiency. We use data from 28 Bangladeshi banks from 2015 to 2020 and use panel models, including static and dynamic models, with quadratic function and dynamic panel threshold regression for analysis. The study reveals that IT investment has a U-shaped nonlinear relationship with bank profitability and stability, indicating that an optimal level of IT investment exists for both factors. In contrast, the relationship between IT investment and bank efficiency is an inverted U-shape, suggesting that, though IT investment can lead to greater efficiency gains, excessive IT investment can become counterproductive. Dynamic threshold regression analysis indicates that the threshold point for IT investment is 15.369, 16.774, and 17.370 for bank profitability, stability, and efficiency, respectively. These findings can serve as useful benchmarks for bank management, policymakers, and regulators to determine the optimal level of IT investment that maximizes the benefits while minimizing costs.