LEADSTAR COLLEGE OF MANAGEMENT AND

LEADERSHIPFACULTY OF BUSINESS & LEADERSHIP

GRADUATE DEPARTMENT OF BUSINESS
ADMINISTRATION

ASSESSMENT OF FACTORS INFLUENCING ADOPTION OF AGENCY

BANKING IN ETHIOPIA: WITH EMPHASIS TO SELECTED COMMERCIAL
BANKS

A RESEARCH PROPOSAL SUBMITTED TO LEADSTAR COLLEGE OF

MANAGEMENT AND LEADERSHIP IN PARTIAL FULFILLMENT FOR

THE REQUIREMENT OF DEGREE OF MASTER IN BUSINESS
ADMINISTRATION (MBA)

PREPARED BY: - Adanech Tafese Jaleta

ID NO:6295/09/04
ADVISOR: - Dr.Demeke

July, 2019
ABSTRACT

Adoption of agency banking service is a recent phenomenon in Ethiopia, following the decree
of NBE issued to regulate Mobile and Agent Banking Services in late 2012.
However, only 3 commercial banks have acted accordingly. Large number of commercial Banks
in the country didn’t start agent banking service which shows existence of gap in its
implementation. To the best knowledge of the researcher, sufficient research was not conducted
in Ethiopia to identify the pitfalls faced by commercial banks to comply with the NBE
decree from both sides, banks’ and agents’ perspective except one which has been conducted
by Afework Gugsa in 2015, which focused on banks’ that considered the application and
launched Agency Banking services. The aim of this study is to identify driving and restraining
forces influencing the adoption of Agency-Banking in Ethiopian Banking industry, Agents
participating in its implementation and accordingly to suggest solutions i.e. pro-active measures
to mitigate the challenges identified. The researcher will use descriptive research design and a
mixed method of sampling technique, which is a combination of probability and non-probability
sampling. Accordingly, the researcher will selects three commercial banks that started agent-
banking service in Adama city purposively as they are deemed to be knowledgeable in due
course of implementing Agency Banking services and provide important view point on the
adoption while six other commercial Banks will be selected randomly using lottery method
considering those which did not started agent-banking services. The researcher will use both
primary & secondary data sources to conduct the research. Primary data will be collected by
use of semi-structured questionnaires & interview. Secondary data will be collected by
referring to published reports, articles and researches done by other scholars on the area to be
studied. The collected data will be analyzed by using descriptive statistics. The researcher will
use Statistical Package for Social Sciences (SPSS) software in analyzing, interpreting and
presentation of the data to be collected.

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TABLE OF CONTENTS
Contents Page
ABSTRACT .................................................................................................................... i
TABLE OF CONTENTS ............................................................................................... ii
LIST OF TABLES ......................................................................................................... ii
LIST OF FIGURES....................................................................................................... v
LIST OF ABBREVIATIONS ...................................................................................... vi
CHAPTER ONE: Introduction........................................................................................ 1
1.1 Background of the Study........................................................................................... 1
1.2 Statement of the Problem .......................................................................................... 3
1.3 Research Questions ................................................................................................... 5
1.4 Purpose of the study .................................................................................................. 5
1.5 Objectives of the Study ............................................................................................. 6
1.6 Significance of the Study .......................................................................................... 7
1.7 Scope /Delimitation of the Study .............................................................................. 7
1.8 Operational Definitions ............................................................................................. 8
CHAPTER TWO: Review of Related Literature ............................................................ 9
2.1 Theoretical Review ................................................................................................... 9
2.2 Empirical Review .................................................................................................... 12
2.3 Conceptual Framework ........................................................................................... 17
CHAPTER THREE: Research Methodology ……………………………………………18
3.1 Research Design.......................................................................................................... 18
3.2 Target population ……………………………………………………………………18
3.3 Sampling Methods and Techniques…………………………………………………19
3.4 Sources& Type of Data…………………………………………………………….20
3.5 Method of Data Collection………………………………………………………….20
3.6 Instrument Validity and Reliability ............................................................................ 21
3.7 Data Analysis………………………………………………………………………..22
3.8 Ethical Consideration………………………………………………………………..22

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Chapter Four: Time Schedule & Budget Plan…………………………………………...23
4.1 Time Schedule......................................................................................................... 23
4.2 Budget Plan ............................................................................................................. 24
References ..................................................................................................................... 25
Appendices………………………………………………………………………………30
A) List of Commercial Banks in Ethiopia..................................................................... 30

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iiii
 LIST OF TABLES

Table 3.1 Sampling Frame-----------------------------------------------------------------------19

B)Sample size determination (confidence level = 0.95) ............................................... 3

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v
LIST OF FIGURES

Figure 2.1 Conceptual framework------------------------------------------------------------ 17

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 LIST OF ABBREVIATIONS
AML ----------------------Anti-Money Laundering

CFT ------------------------Counter-Terrorism Financing

ATM-------- ----------------Automatic/Automated Teller Machine

E-banking-------------------Electronic banking

AIB-------------------------Awash International Bank

CBE------------------------Commercial Bank of Ethiopia

CBO------------------------Cooperative Bank of Oromia

LIB-------------------------Lion International Bank

UB-------------------------United Bank

DB--------------------------Dashen Bank

OIB-------------------------Oromia International bank

BOA------------------------Bank of Abysinia

WB-------------------------Wogagen Bank

ICT--------------------------Information Communication Technology

NBE-------------------------National Bank of Ethiopia

POS ------------------------ Point-of-Sale

S.Co------------------------Share Company

SPSS -----------------------Statistical Package for Social Sciences

KYC------------------------Know Your Customer

CGAP---------------------- Consultative Group to Assist the Poor

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CHAPTER ONE

1. INTRODUCTION

This chapter presents introductory part comprising background of the study, statement of the
problem, basic research questions, purpose of the study, objectives of the study, significance of
the study, scope (delimitation of the study) and operational definitions.

1.1 Background of the Study

The business environment has globally changed and it has been characterized by stiff
competition and this is not an exception to banks. Competition has pushed commercial banks
towards becoming more innovative. These innovations include debit cards, ATMs, internet
banking, mobile banking, youth oriented accounts, women oriented banking, interest free
banking and agency banking, which are most recently introduced in the banking sector (Bold,
2011).

The revolution of information technology has influenced almost every facet of life, among
them is the banking sector. The introduction of electronic banking has revolutionized and
redefined the way banks were operating. As stated in different e- banking literatures, the
deployment of e-banking helps financial service providers to achieve cost reduction, revenue
enhancement, product diversification, increased competitiveness and better brand image.
Technological advancement has not only affected the way of living but also has an effect on
the way people do their banking. Banks and other financial institutions, which have
traditionally relied on physically established branches to provide banking services, are now
gearing towards the adoption of mobile banking services as a form of branchless banking which
has the consequence of lowering cost of banking. Technology has therefore created greater
opportunities to service providers to offer services to customers with great flexibility which has
a better customer satisfaction and minimization of cost to both ends. To this end, banks are
developing and deploying branchless banking services such as ATM, internet and mobile
banking among others (Laukkanen&Pasanen, 2007).

1
Till recently, bank customers used to stand in line to get financial services, but now because of
the multi-channel service outlets they can perform from anywhere at any time it is becoming
less and less crowded. Funds are transferred electronically between financial institutions and
individual accounts, and between individual accounts using e-banking system (Shyamapada
et al,2011).

Like all other social entities, financial institutions in Ethiopia are being constantly expanding
with technological innovations. E-banking services commenced in Ethiopia in late 2001, while
Commercial Bank of Ethiopia (CBE) introduced about eight ATMs to deliver service to the local
users. Later on in the year 2005, Dashen bank introduced ATMs and in 2009, it commenced
delivering mobile banking service in Ethiopia to acquire E-commerce and mobile merchant
transactions that allows transfer of funds from one’s account to others. Zemen Bank has also
launched internet-banking service in the year 2010, which was new to Ethiopian banking
industry (Ayana 2012).

Agency banking is branchless banking based on ICT that allows financial institutions to offer
financial services outside the traditional bank premises (Mas, 2008; Mas and Siedek, 2008).
Agent banking allows customers to conduct a limited type of financial transactions at third party
outlets that include post offices, supermarkets, grocery stores, pharmacies, and gas stations etc.
located in remote areas (Warii, 2011). It is the retail outlet, that conducts the transaction and lets
clients deposit or withdraw cash, transfer funds, effect bill payments, inquire for account
balance, receive government benefits or a direct deposit from their employer rather than a
branch teller (Siedek, 2008).Globally, these retailers are being increasingly utilized as important
distribution channels for financial inclusion. Agent banking is used to reduce the cost of
delivering financial services, relieve crowds in bank branches and establish presence in new
areas (Kumar et al .2006). Agent banking became one of the most promising strategies for
offering financial services in emerging markets (Chai et. al. 2011). Though commercial banks
continue to invest in opening brick and mortar branches complimented by various delivery
channels and access to formal financial services remains a big impediment to financial
performances. Customers from remote areas are forced to travel long distances and spend huge
amounts of money and time on transport in order to access a branch.

2
To curb these challenges, a number of central banks around the world have issued
legislation that allows commercial banks to contract third party retail networks as agents
(Ivatury and Lyman, 2006).

Agency banking service has enabled banking institutions to compete more effectively in
different countries by extending their products and services beyond restriction of space and time
through established third party with the application of technology. The main factors that
contributed to agency banking adoption by commercial banks in different countries are the
prospects of cost reduction, availability of the services beyond the banking service time and
related customer service enhancements. However, lack of suitable legal frameworks, low level
of ICT infrastructure, lack of customers trust and awareness towards the technology and
customers’ fear to use the technologies are among the factors that holds banking industry to
adopt the system (Afework, 2015).

1.2 Statement of the Problem

Access to finance is critical for sustainable economic growth and social development. Financial
inclusion empowers low-income people and marginalized sectors of society to actively
participate in the economy, which leads to increasing employment and decreasing poverty
levels (Bold, 2011). Apart from increasing access to those excluded from financial services
and reducing reliance on informal financial sources, agent banking has reduced the need for
more staff and branches to reach customers (Arora and Ferrand, 2007). Agent banking has
reduced cost and enhanced efficiency in the financial sector with a possibility and availing
financial services at much lower cost to consumers (Bean, 2009). It has also increased the ease
of banks expansion hence outreach to far- flung market pockets of bankable populations (Bold,
2011).

Agency banking is a strategy to increase revenue from additional investments, to increase

customer base and market share, to improve indirect branch productivity by reducing congestion
in the branches and to offer low cost solutions in areas with potentially less volume and
number of transactions. It is further intended to enhance easy financial accessibility for
both the unbanked and the banked population (Ivatury and Mars, 2008).

3
Low-income earners often feel more comfortable in banking at their neighbors than walking into
bank branches. In 2015/16, 494 new bank branches were opened raising the total branch
network to reach 3,187 from 2,693 the year before. As a result, the current bank branch to
population ratio of Ethiopia declined from 1:33,448 people to 1:28,932 people (NBE, 2015/16
annual report).

Agency banking service which operates by integrating transactions with ATMs, Mobile
banking, Point-of-Sale (POS) devices and others through third party operators is new to
Ethiopian banking sectors. Agency banking system mainly uses modern technology and it allow
customers to access banking services electronically through mobile devices and bank agents to
deposit and withdraw cash, transfer funds, make bill payments. Moreover, the cost that involved
in servicing low-value accounts, availing physical infrastructure to remote rural areas and cost
(in money and time) incurred by customers in remote areas to reach bank branches are among
the major concerns (Ndungu, 2014).

Most of the studies reviewed were done abroad i.e. various research studies have been conducted
on agency banking services in different parts of the world including our neighbor country
Kenya. It is not right to import the wholesome results of a research without taking into account
the contextual differences and hence the need to carry out local research in order to understand
better the problem raised in the mind of the researcher.

Adoption of agency banking service is a recent phenomenon in Ethiopia, following the decree
of NBE issued to regulate Mobile and Agent Banking Services in under Directives
No. FIS/01/2012” late 2012. However, only three commercial banks have acted accordingly.
Large number of commercial Banks in the country didn’t start agent banking service which
shows existence of gap in its implementation. To the best knowledge of the researcher,
sufficient research was not conducted in Ethiopia to identify the pitfalls faced by commercial
banks to comply with the NBE decree from both sides, banks’ and agents’ perspective except
one which has been conducted by Afework Gugsa in 2015, which focused on banks’ that
considered the application and launched Agency Banking services.

4
Thus, the researcher aims to assess factors influencing adoption of agency banking in Ethiopian
Banking Industry where the number of bank branches are ever increasing to outreach customers
with significant amount of investment and this study will contribute to fill the gap by
identifying factors influencing the adoption of Agency banking in Ethiopia both from banks and
agents perspective.

1.3 Research Questions

In order to gain a comprehensive understanding of the phenomenon under investigation, the
following questions need to be addressed by the research work.

i. What are driving forces contributing to adoption of agency banking by

Commercial banks?

ii. What are driving forces contributing to adoption of agency banking by agents of the banks?

iii. What are the challenges (restraining forces) hindering adoption of agency banking by
Commercial banks?

iv. What are the challenges facing agents of commercial banks in providing Agency Banking
Services?

1.4 Purpose of the study

Access to finance is critical for sustainable economic growth and social development. Agent
banking plays a great role in enhancing financial inclusion by increasing the ease of banks
expansion to outreach far flung market pockets of bankable populations, increasing access to
those excluded from financial services and enhancing efficiency in the financial sector with a
possibility of availing financial services at much lower cost to customers. It has also reduced
the need for more staff and branches to reach customers are among the benefits of agent
banking perceived by different banks adopted agency banking in different parts of the world
including our neighbor country Kenya.

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 Even if agent banking is at its infant stage in Ethiopia, it is the right time to conduct study in
order to identify challenges and suggest pro-active measures to mitigate the challenges before
they became serious and to capitalize on the opportunities available as well as to protect the
banks from reputational risks that may encounter while implementing agency banking service.
Moreover, the cost that involved in servicing low-value accounts, availing physical
infrastructure to remote rural areas and cost (both in money and time) incurred by customers in
remote areas to reach bank branches are among the major concerns. The aim of this study is
therefore, to identify driving and restraining forces influencing the adoption of Agency-Banking
in Ethiopia ands accordingly to suggest possible solutions i.e. pro-active measures to mitigate
the challenges hindering adoption of agency banking & capitalize on available opportunities.

1.5 Objectives of the Study

1.5.1 General objective

The general objective of this study is to identify factors influencing adoption of agency banking
by commercial banks in Ethiopia and agents participated in it supplementation: with emphasis
to selected Commercial Banks.

1.5.2 Specific Objectives

i. To identify driving forces contributing to adoption of agency banking by

Commercial banks in Ethiopia.

ii. To identify driving forces contributing to adoption of agency banking by agents of the banks.

iii. To identify restraining forces that hinders adoption of agency banking by

Commercial banks in Ethiopia.

iv. To identify challenges that faces agents of the banks in implementing agency banking.

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 1.6 Significance of the Study

The findings of this study can be useful for different stakeholders.

 The study findings can help the governor or regulatory Bank (NBE) to know the
extent to which Commercial Banks in Ethiopia have embraced agency banking
which enable them to look at critically & reframe regulation of agent banking in
Ethiopia.
 It will also benefit Commercial Banks in Ethiopia to have a clear understanding
of factors that would be important in embracing and adopting agency banking.
 The findings of this study on other hand come in handy for scholars those wishing
to carry out further studies on this topic by using the study findings as the basis
for further research.
 It will also help those who have not embraced this concept and enable them to
make decisions concerning the adoption of agency banking service.
 Moreover, the study will helps the researcher to attain MBA degree, as
conducting thesis is a prerequisite for the partial fulfillment of the program.

1.7 Scope /Delimitation of the Study

The study intended to identify factors influencing adoption of Agency Banking by Commercial
Banks in Ethiopia and Agents participated in implementation of Agent Banking w i t h
emphasis to selected Commercial Banks. Currently, there are 17 Commercial Banks involved in
retail banking operation in Ethiopia with exception of Developmental Bank of Ethiopia, which
does not, involves in retail banking operation. The study focuses on nine (9) commercial banks.
Of the nine Commercial Banks, three (3) have started agent-banking operation while the
remaining six(6) banks are those have not. In order to make the study more manageable, the
study is limited to the sampled banks’ product development department head at their head
quarter for strategic related issues and to branch managers of the three banks started agent-
banking operation in Adama city for implementation related issues along with their respective
agents.

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1.8 Operational Definitions

1.8.1 Agent

Agent means a person engaged in a Commercial or Business activity and has been contracted by
a financial institution to provide their services on their behalf (NBE Directive, FIS-01-2012).
1.8.2 Agent Banking

Agent banking means the conduct of banking business on behalf of a financial institution
through an agent using various service delivery channels as permitted under NBE directives
issued to regulate mobile ands agent banking (NBE Directive, FIS-01-2012).

1.8.3 Mobile Banking

Means performing banking activities, which primarily consists of opening and

maintaining mobile/regular accounts and accepting deposits; furthermore, it includes performing
fund transfer or cash-in and cash-out services using mobile devices (NBE Directive, FIS-01-
2012).
1.8.4 Agency Banking

Agency Banking is a service outlet contracted by financial institution or mobile network

operator to process client’s transactions rather than a bank teller. It is the owner or an employee
of the retail outlet who conducts the transaction and lets its client deposit, withdraw and transfer
funds, pay their bills, inquire about an account balance, or a direct deposit from their employer,
or receive government benefits. Banking agents can be pharmacies, super markets,
conveniences stores, lottery outlets, post offices etc. (Ivatury& Layman, 2006)

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CHAPTER TWO

2. REVIEW OF RELATED LITERATURE

This chapter presents literature review comprising of the theoretical review of literature,
empirical literature and conceptual framework.

2.1 Theoretical Review

Agency Banking is a branchless banking, which represents a new distribution channel that
allows financial institutions and other commercial actors to offer financial services outside
traditional bank premises. A wide spectrum of branchless banking models is evolving (State
Bank of Pakistan, 2011). Theories of branchless banking can be classified into three broad
categories: Bank-focused theory, Bank-led and Nonbank-led theory.

2.1.1 Bank-led Theory

In the most basic version of the bank-led theory of branchless banking, a licensed
financial institution (typically a bank) delivers financial services through a retail agent. That is,
the bank develops financial products and services, but distributes them through retail agents who
handle all or most customer interaction (Lyman, Ivatury and Staschen 2006). The bank is the
ultimate provider of financial services and is the institution in which customers maintain
accounts. Retail agents have face-to-face interaction with customers and perform cash-in/cash-
out functions, much as a branch-based teller would take deposits and process withdrawals
(Owens, 2006). Virtually any outlet that handles cash and is located near customers could
potentially serve as a retail agent. Whatever the establishment, each retail agent is out fitted to
communicate electronically with the bank for which it is working. The equipment may be a
mobile phone or an electronic point-of- sale (POS) terminal that reads cards. Bank-led model
offers a distinct alternative to conventional branch-based banking in that customer conducts
financial transactions at a whole range of retail agents instead of at bank branches or through
bank employees (Lyman, Ivatury and Staschen, 2006). This model promises the potential to
substantially

9
increase the financial services outreach by using a different delivery channel (retailers/ mobile
phones), a different trade partner (Chain Store) having experience and target market distinct
from traditional banks, and may be significantly cheaper than the bank based alternatives. In this
model, customer account relationship rests with the bank (Tomaskova, 2010).

Agents related risks arise from substantial outsourcing of customer contact to retail agents.
From a typical banking regulator’s perspective, entrusting retail customer contact to the types
of retail agents used in both the bank-led and nonbank-led models would seem riskier than
these same functions in the hands of bank tellers in a conventional bank branch. These retail
agents may operate in hard-to reach or dangerous areas and they lack physical security systems
and specially trained personnel. The lack of expert training may seem a particular problem if
retail agents’ functions range beyond the cash-in/cash-out transactions of typical bank tellers to
include a role in credit decisions (State Bank of Pakistan, 2011). Banking regulation typically
recognizes multiple categories of risk that bank regulators and supervisors seek to mitigate. Five
of these risk categories-credit risk, operational risk, legal risk, liquidity risk, and reputation risk-
take on special importance when customers use retail agents rather than bank branches to access
banking services. The use of retail agents also potentially raises special concerns regarding
consumer protection and compliance with rules for combating money laundering and financing
of terrorism (Kumar, et al. 2006). The bank lead theory is related to the study as it focus on how
financial institution like bank deliver their financial services through a retail agent, where the
bank develops financial products and services, but distributes them through retail agents who
handle all or most customer interaction . For example; Family bank of Kenya distributes it
financial product through it Pesa pap agent, where the agent have face-to-face interaction
with customers and perform cash-in/cash-out functions, much as a branch-based teller would
take deposits and process withdrawals

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2.1.2 Nonbank-led Theory

In this theory, customers do not deal with a bank, nor do they maintain a bank account.
Instead, customers deal with a nonbank firm either a mobile network operator or prepaid card
issuer and retail agents serve as the point of customer contact. Customers exchange their cash
for e-money stored in a virtual e-money account on the non-bank’s server, which is not
linked to a bank account in the individual’s name (Kumar, et al. 2006). This model is riskier as
the regulatory environment in which these nonbanks operate might not give much importance
to issues related to customer identification, which may lead to significant Anti-Money
Laundering and Counter-Terrorism Financing (AML/CFT) risks. Bringing in a culture of
Know Your Customer (KYC) to this segment is a major challenge. Further, the
nonbanks are not much regulated in areas of transparent documentation and record
keeping which is a prerequisite for a safe financial system. Regulators also lack experience in
the realm. For these reasons, allowing nonbank-led model to operate is an unnecessarily big
leap and an unjustifiably risky proposition. However, this model becomes viable after
regulators have gained sufficient experience in mitigating agent related risks using bank led
model and need to think about mitigating only e-money related risks (Kapoor, 2010). To
mitigate the e-money risks (which are peculiar to Nonbank-led model), necessary changes
in the existing regulations are required. It starts by bringing non-banks under financial
regulatory net by giving these entities special status of some sort of quasi-bank/remittance
agent etc. (Hogan, B. 1991). Grant of this status depends upon meeting pre-specified
standards of transparency, financial strength and liquidity. There should be clear, well-defined
limits on nature, type and volume of transactions that such entities can undertake. To avoid
insolvency, these entities may be required to deposit their net e-banking surplus funds with
scheduled banks meeting certain minimum rating criteria (State Bank of Pakistan, 2011).
Nonbanks are not much regulated in areas of transparent documentation and record keeping
which is a prerequisite for a safe financial system.

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2.1.3 Bank-focused Theory

The bank-focused theory emerges when a traditional bank uses non-traditional low-cost delivery
channels to provide banking services to its existing customers. Examples range from use of
automatic teller machines (ATMs) to internet banking or mobile phone banking to provide
certain limited banking services to banks’ customers.

This model is additive in nature and may be seen as a modest extension of conventional branch-
based banking. Although the bank-focused model offers advantages such as more control and
branding visibility to the financial institutions concerned, it is not without its challenges.
Customers’ primary concerns are to do with the quality of experience, security of identity
and transactions reliability and accessibility of service and extent of personalization allowed.

Banks address these issues by providing a branchless banking service with an easy to use
interface, made secure with the help of multi-factor authentication and other technology, capable
of running uninterrupted 365 days a year (Kapoor, 2010). The bank-focused theory emerges
when a traditional bank uses non-traditional low-cost delivery channels to provide banking
services to its existing customers.

2.2 Empirical Review

2.2.1 Regulatory Framework

Policymakers around the world seek to encourage the provision of financial services to the
unbanked and under-banked poor, they implement regulatory frameworks that enable the spread
of low-cost branchless banking while at the same time protect consumers against fraud. This is a
difficult balance to strike, particularly when it comes to regulating agents, which typically play a
crucial role in receiving and dispensing cash on behalf of the financial service provider (CGAP,
2010). Branchless banking is only allowed to be undertaken by licensed deposit-taking financial
institutions (bank and non-bank) or their agents. Furthermore, all customers of financial
institutions (FIs) undertaking branchless banking activities must be uniquely identified. In each
case, customer account relationship must reside with some FI and each transaction must hit the
actual customer account. All FIs and their agents must comply with the Anti-Money Laundering
Act (2008) as well as the international standards set by the Financial Action Task Force

12
It is a regulatory requirement that adequate customer due diligence, on the spirit of (KYC) be
undertaken on all new accounts and on one-off cash transactions over designated
thresholds. This requires identifying the customer and verifying the customer’s identity:
Financial service providers to keep detailed transaction records for at least five years.
Financial institutions to report suspicious transactions promptly to the AML/CFT authority
(World Bank, 2010)

A study Conducted in Brazil found that some countries restrict the location of agents, though
such restrictions are sometimes eased when regulators recognize that the regulations create
obstacles to financial inclusion. For example, due to concerns that agents could threaten
bank branches, Brazilian regulation originally allowed agents only in municipalities that did not
have bank branches (Bold, 2011). Indian regulators also found that initially required agents to be
located within 15 kilometers of a “base branch” of the appointing bank in rural areas, and within
5 kilometers in urban areas. This policy, intended to ensure adequate bank supervision of its
agents, limited the use of agents by banks with only a few branches (Bold, 2011). Experience
has shown that overly restrictive location requirements can complicate the business case for
viable agent-based banking and ultimately work against financial inclusion goals. In addition,
the real-time nature of most agent services has enabled remote supervision, thereby obviating
one of the central arguments for location restrictions (Tarazi and Breloff, 2011). Regulations
often impose some form of “fit and proper” requirements, mandating a form of agent due
diligence that requires financial institutions to verify that would-be agents have good
reputations, no criminal records, and no history of financial trouble or insolvency. While fit-
and-proper criteria listed in regulation often are not problematic, providers and agents have
occasionally argued that compliance with particular details can impose significant cost,
particularly with respect to gathering documentation (Tarazi and Breloff, 2011). Central banks
regulations on agency banking hamper the growth of agency banking, these regulations
slows down the penetration of the agency banking which negatively affect the performance of
commercial banks. Central Bank has stringent regulations on agency banking, which slow down
the growth of agency banking in Kenya thus affecting the performance of commercial banks in
Kenya (Wawira, 2013).

13
In late 2012, National Bank of Ethiopia has issued a legal framework on Agency Banking in
Ethiopia a directive cited as “Regulation of Mobile and Agent Banking Services under
Directives No. FIS/01/2012 with effective date of January 1, 2013. This directive has clarified
and framed the business modality of the agent and mobile banking services in Ethiopia. Only
financial institutions that are licensed by the National Bank of Ethiopia are allowed to engage
in the mobile &agent-banking services as we follow a bank led model in the financial services.
Mobile and agency banking service shall be carried out only within Ethiopian geographic
boundary and only with Ethiopian Birr. Banks can deliver agent banking through their agents as
specified in the directives.

2.2.2 Cost

It was observed that agent banking increased customer convenience, productivity, efficiency,
expands customer base and reduces upfront cost by leveraging on existing infrastructures. The
cost of establishing and operating one branch is equal to forty banking agents (CGPA,
2007). Brazil has the highest banking agent network in the world with more than 113,000
agents in the year 2009 out of which close to 40,000 offers a broad range of banking services
such as cash-in, cash-out, bill payments, account opening and loan application (CGAP, 2009).
The growing interest in agency banking was mainly as a result of reduced costs. The major
reason for the adoption of agency banking in many countries relates with the effort to reach
the unbanked at minimal cost. The unbanked are diverse group of individuals who remain
outside the banking mainstream for different reasons (Anderson, 2007)

The main factors that contributed to agency banking adoption by commercial banks are the
prospects of cost reduction, availability of the services beyond the banking service time and
related customer service enhancements. However, lack of suitable legal frameworks, low level
of ICT infrastructure, lack of customers trust and awareness towards the technology and
customers’ fear to use the technologies are among the factors that holds banking industry to
adopt the system (Afework, 2015). One of the primary impediments to providing financial
services to the poor through branches and other bank based delivery channels is the high cost
inherent in these traditional banking methods.

14
The amount of money expended by financial service providers to serve a poor customer with a
small balance and conducting small transactions is simply too great to make such accounts
viable. In addition, when financial service providers do not have branches that are close to
the customer, the customer is less likely to use and transact with their services. However,
we see the emergence of new delivery models as a way to drastically change the economics of
banking the poor. By using retail points as agent banking, banks can offer saving services in a
commercially viable way by reducing fixed costs and encouraging customers to use the service
more often, thereby providing access to additional revenue sources. Agent banking systems
are up to three times cheaper to operate than commercial bank branches for two reasons.
First, agent banking minimizes fixed costs by leveraging existing retail outlets and reducing the
need for banks to invest in their own infrastructure. Second, acquisition costs are lower for
agents. By using mobile phones linked to bank accounts they are able to acquire customers at
less than 70 percent of the cost of a branch. Costs are incurred only if transactions are realized.
Agent banking systems receive a commission only if transactions are realized. On the other
hand in a commercial bank branch, fixed costs are distributed over number of transactions
resulting in significantly higher costs per transactions especially if the branch is under-utilized.
As a result of lower transaction costs and a transaction driven revenue model, agent banking
systems are more cost effective for transactional accounts with low balances and frequent
transactions. Challenges to the profitability of agent banking by commercial banks include the
following: it is believed that banks cannot rely on agents to cross sell financial products. (Clara
Veniard, Bill & Melinda Gates Foundation, November 2010).

Agent banking represents a significant opportunity to reduce transaction costs such as travel for
clients by bringing financial services too hard to reach and geographically dispersed areas.
Banks often do not have sufficient incentive or capacity to establish formal branches in these
areas. The set up for agent bank is less costly and more flexible than for traditional commercial
bank branches. It reduces the need to invest in staff and physical infrastructure.

The commercial banks had ventured into agent banking operations to achieve the following
objectives: to increase territorial coverage, to decongest or ease traffic in their existing bank
branches, to reach the poor marginalized unbanked, and to increase sales on loans and other
borrowings.

15
Major factor contributed to the successful operations of agent banking in most of the
banks is technological advancement followed by other factors such as policies and
procedures and control issues. The control policies and procedures, technological
advancement, and regulations put in place both by the agents and commercial banks have made
agent banking operations viable. The challenges faced by commercial banks in operating agent
banking operations are reputational risk, anti- money laundering, consumer protection and legal
risk. The agents on the other hand encounter challenges such as liquidity risk, operational risk,
and credit risk. The commercial banks should put in place mechanisms when planning and
implementing agent banking operations as a competitive strategy that can mitigate this risks
which are brought by agent banking operations (International Journal of Business and
Social Science Vol. 4 No. 13; October 2013).Agent banking has reduced cost and enhanced
efficiency in the financial sector with a possibility and availing financial services at much lower
cost to consumers (Bean, 2009).

2.2.3 Technological Advancement

Technology adoption especially in banking systems has shown a great momentum and spread at
an unbelievable pace across the world. Considering the importance of banking systems high
presence and affordability, there is great potential of using this in agent banking for provision of
banking services to unbanked community (Arora and Ferrand, 2007).

However, technology systems have associated data and network security risks which make them
susceptible for conducting financial transactions. Technology risks regarding information and
data security based on applicable models of agent banking have been reported thus creating
uncertainty to the clients. Financial institutions are required to plan and act for long term
development and prosperity of their agents to reach the targeted customers from a set of
population (Owens, 2006).

This requires close coordination (collaboration) with agents, providing them opportunities
to learn more, to become more efficient and; a fair pricing mechanism for the services
provided by the agents (Arora and Ferrand, 2007). As the technology changes rapidly,
banks have been greatly affected in its operation, whereby application of the technology ensures
quick and effective services to the clients.

16
However, banking agents do not change their system as frequent often leading to system failure
and the consequent delays in transaction execution (Lyman, et al, (2008). This leads to customer
inconvenience and trust over the security/safety of transaction lodged with agent banks.
Moreover, these constant systems failure makes transactions with banking agents vulnerable to
fraud.

2.3 Conceptual Framework

Conceptual framework is a presentation of how the independent and dependent variables are
related. In this study, the independent variables are technological advancement, accessibility,
Cost effectiveness, and regulatory framework while the dependent variable is adoption of
Agency Banking by Commercial Banks & Agents in Ethiopia.

Independent Variables Dependent Variable

Technological advancement

 Internet banking
De
 Mobile banking
 POS pendent Variable
 ICT infrastructure

Accessibility Adoption of
agency
 Market share
banking by
 Customer base expansion Commercial
 Awareness of Agency Banking Banks in
Ethiopia

Cost effectiveness

 Monetary costs
 Time

Regulatory framework

Figure 2.1: Conceptual Framework

Source, Researcher own work, 2017

17
 CHAPTER THREE RESEARCH

METHODOLOGY

This chapter presents research design, target population, sampling methods & techniques,
sources & type of data, method of data collection, instrument validity & reliability, method data
analysis & ethical consideration.

3.1 Research Design

This study employs descriptive survey design aimed to describe factors influencing adoption
of agency banking innovation by Commercial Banks in Ethiopia. Descriptive research tries to
“paint a picture” of a given situation by addressing who, what, when, where, and how questions
(Zikmund, 2010). The design provides a quantitative or numeric description of trends, attitudes,
or opinions of a population by studying a sample. Thus, the design is considered as appropriate
for this study because survey was concerned with describing, recording, analyzing, and
reporting conditions that exists or existed (Kothari, 2003).

3.2 Target population

Population is any complete group that shares some common set of characteristics (Zikmund,
2010). Target population is the population to which a researcher will generalize the results of a
study (Kothari, 2004). Currently, there are Seventeen Commercial Banks involved in retail
banking operations in Ethiopia. All these Commercial banks involved in retail banking operation
&the agents involved in agent banking operation are the target population of this study.

3.3 Sampling Methods and Techniques

The researcher will use a mixed method of sampling technique, which is a combination of
both probability and non-probability sampling procedure. Mixed method sampling strategies are
combinations of intermediate points between the probability and purposive sampling positions
(Charles and Fen 2007). Accordingly; the researcher will select three Commercial Banks that
have started agent-banking operation in Adama city. Namely, Cooperative Bank of Oromia
S.Co, Lion International Bank S.Co & United Bank S.Co purposively since they are supposed to
be knowledgeable in due course of implementing the Agency Banking system and could provide
important perspectives on its adoption. While six Commercial Banks will be selected randomly,
using lottery method from those do not started agent-banking operation.
Table 3.1 Sampling frame

Banks Business Number of Number of Number of

development Branches in branch Agents of Banks
head Adama city Managers in Adama city
CBO 1 5 5 155
LIB 1 3 3 11
UB 1 3 3 7
AIB 1 Not Applicable Not Applicable Nill
CBE 1 Not Applicable Not Applicable Nill
DB 1 Not Applicable Not Applicable Nill
OIB 1 Not Applicable Not Applicable Nill
WB 1 Not Applicable Not Applicable Nill
BOA 1 Not Applicable Not Applicable Nill
Total 9 11 11 173

Source: Sampled Commercial Banks

Business development head of each sampled bank at their head quarter will be considered
for strategic related issues & all of them will be considered as their number is small.
Branch managers of the three banks started agent-banking operation in Adama city along
with their respective agents will be considered for implementation related issues.
Accordingly, all branch managers of the three sampled banks that started agency banking
service in Adama city are considered as they are small in number. One hundred twenty
(120) agents of the three sampled banks will be the samples of the study among 173
agents based on sample size determination table developed by Israel, Glenn D, 1992 and
reviewed by (Masuku, 2014).

3.4 Sources& Type of Data

The study uses both primary & secondary data. The primary data will be collected
through survey method by asking respondents for information using verbal or written
questioning. Secondary data will be collected from published and unpublished reports of
the sampled banks. The researcher will uses both quantitative& qualitative data.

3.5 Method of Data Collection

The researcher will collects primary data through conducting survey by asking respondents
(representative sample of people) for information using verbal or written questioning. The
main advantage of survey is its ability to accommodate large sample size at relatively
low cost, ease of administration and ability to tap into factors that are not directly
observable (Hair et al., 2006). The researcher will use semi structured questionnaires
(which contains a set of both close-ended and open-ended questions)&self-
administered interview to collect primary data. Since the number of agents is large, it
is difficult to conduct interview with them. Therefore, questionnaires will be floated to
120 agents of the three sampled banks started agency-banking operation in Adama city. As
banking operation is tight in its nature, it creates difficulty to conduct interview with
branch managers at the expense of Customers’ time. So, questionnaire will be floated to 11
branch managers of the 3 sampled banks.
Self-administered interview will be made with all (9) Business development head of the
sampled banks at their head quarter for strategic related issues, since the researcher can
handle interview in person with them easily.

3.6 Instrument Validity and Reliability

Reliability is an indicator of a measure’s internal consistency. A measure is reliable when

different attempts at measuring something converge on the same result and Validity is the
accuracy of a measure or the extent to which a score truthfully represents a concept.
(Zikmund, 2010).To establish the instrument’s validity and reliability, the researcher will
conducts pilot study prior to the main research. Questionnaire will be floated to three
branch Managers of Commercial Banks started agent banking operation in Modjo city
and as well as to ten bank agents of the three banks from the same city. Modjo city is
selected because of its proximity to Adama city, which facilitates speedy access to the
respondents.

Validity
The researcher will check for face validity to measure the logical appearance of scale’s
content to reflect what was intended to be measured by asking different experts. If the
subjective agreement among professionals indicates that a scale logically reflects the
concept being measured the scale is assumed to be valid. When an inspection of the test
items convinces experts that the items match the definition, the scale is said to have face
validity (Zikmund, 2010).

Reliability
The researcher will check for reliability of the instrument by using Coefficient alpha (α)
method of measuring reliability for the internal consistency of the measure. The
measurement will assist the researcher in checking & correcting any ambiguities in the
data collection instrument. The researcher will make modification and adjustment to the
instruments after the piloting in preparation for the main research if the Coefficient alpha
(α) values is less than 0.60 and if the value of Coefficient alpha (α is greater than 0.60 the
instrument is assumed to have internal consistency (reliable).
3.7 Data Analysis

Analysis means categorizing, ordering, manipulating and summarizing of data to obtain

answers to research questions (Orodho, 2005). The data to be collected will be
categorized based on their similarity, edited and coded. The researcher will use
descriptive analysis to analyze the data to be collected to make inferences about
characteristics of the entire population of interest by using measures of central tendency
like mean, measure of dispersion like variance, standard deviation & correlation analysis.
Correlation is an interdependence technique concerned with how variables relate to one
another. The researcher will uses Statistical Package for Social Sciences (SPSS) to
analyze quantitative data as well as content analysis for qualitative data and the findings
will be presented using frequency tables & graphs.

3.8 Ethical Consideration

The most important ethical principles in educational research are minimizing harm, (harm
include among others financial and reputational consequences for the people being
studied), Protecting privacy (this means to keep data confidential) and respecting
autonomy that is showing respect for people in the sense of allowing them to make
decisions for themselves, notably about whether or not to participate (Hammersley, M. &
Traianou, A, 2012).
Therefore, the researcher will treats all information to be gathered with utmost
confidentiality to safeguard the public reputation of the organizations and peoples
considered in study as well as the researcher will obtains informed consent by informing
respondents the purpose of the study and benefits of participation to provide sufficient
information so that a participant can make an informed decision about whether or not to
continue participation.
Chapter Four

Time Schedule & Budget Plan

This chapter presents time schedule & budget requirement for conducting the study.
4.1 Time Schedule
S .No Activity Time break down
JULY AUGEST SEPTEMBER OCTOBER
1 Problem Identification SEPTEMBERRER January May
2 Reviewing literatures
3 Preparing &
submitting proposal
4 Defending proposal
5 Designing &
developing
questionnaire
6 Conducting pilot
survey
7 Data collection,
editing, coding and
classification
8 Analyzing and
interpreting the result
9 Writing first draft of
the research report
10 Writing final research
paper
11 Submitting final
research paper
23
 4.2 Budget Plan

Item Description Measurement Estimated Budget (ETB)

Printing Page 300.00

Photocopying Page 150.00

Binding Pcs 200.00

Transportation Travel frequency 1,000.00

Telephone Air Time 500.00

Internet Air time 800.00

Coffee and tea Person 2,000.00

Advisor fee Credit hour 3,300.00

Other Miscellaneous Expense No 500.00

Total 8,750.00

NB: All costs will be covered by the researcher

24
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Appendices

A) List of Commercial Banks in Ethiopia

S.N Name of Banks
1 Abay bank
2 Abyssinia bank
3 Addis international bank
4 Awash international bank
5 Birhan international bank
6 Bunna international bank
7 Commercial bank of Ethiopia
8 Cooperative bank of Oromia
9 Dashen bank
10 Debub global bank
11 Enatbank
12 Lion international bank
13 Nib international bank
14 Oromia international bank
15 United bank
16 Wogagen bank
17 Zemen bank

Source: - Available http://www.nbe.et.com

30
B) Sample size determination (confidence level = 0.95)
31