The impact of strategic cost management and digital transformation on cost efficiency and bank performance in Iraqi banks

Abstract

Analyzing a dataset of 22 Iraqi financial institutions across the 2008–2024 timeframe (yielding 286 bank-year points in an unbalanced panel), this paper investigates the relationship between financial results, cost efficiency, digital upgrades, and disclosure-based strategic cost management. The Strategic Cost Management Index (SCMI) evaluates practices like activity-based and time-driven costing, capacity management, target costing, cost-driver and value-chain analysis, life-cycle and quality costing, benchmarking, and channel or customer profitability. Meanwhile, the Digital Transformation Index (DTI) captures multiple dimensions including technological readiness, investment, infrastructure, service adoption, usage depth, and connectivity with national payment networks. The cost-to-income ratio (CIR) measures operational efficiency, whereas return on equity (ROE) and return on assets (ROA) track overall performance. Controlling for bank and year fixed effects, the econometric models demonstrate that elevated SCMI and DTI levels align with a reduced CIR alongside stronger ROE and ROA, with mean-centered interaction terms displaying the anticipated signs for profitability and efficiency. Additionally, a mediation analysis reveals significant indirect pathways operating via the CIR, and tests involving ownership variables point to more pronounced effects within privately owned institutions. Given the observational nature of the research and the reliance on public disclosures for the indices, the conclusions reflect conditional relationships rather than direct causality. Ultimately, the work offers a management-accounting perspective on how capacity choices, channel profitability metrics, cost-driver insights, and technology spending function collectively as a unified performance framework.