RIFT VALLEY UNIVERSITY NEKEMTE CAMPUS DEPARTMENT OF

BUSINESS MANAGEMENT
MBA PROGRAM
ASSESSMENT OF THE IMPACT OF DIGITALIZATION ON
COMMERCIAL BANK OF ETHIOPIA PROFITABILITY: THE CASE
OF SELECTED COMMERCIAL BANKS IN ETHIOPIA

ADVISOR: OLIYAD EJETA (PHD CAND)

A Proposal Submitted To Department Of Business Management Presented
In Partial Fulfillment Of The Requirements For The Degree Of Master Of
Business Management In Finance.

JULY, 2024
NEKEMTE, ETHIOPIA
Statement of Declaration

I, the undersigned, declare that this is my original work and has not been
submitted to any other college, institution or university for academic credit.

Signature: Date:

Keno Diyesa
ID NO 0094/2015

Statement of Certification

This is to certify that Keno Diyesa Dinsa completed the thesis "The Impact of
Digitalization on Bank Profitability: The Case of Selected Commercial Banks in
Ethiopia." The work is unique and appropriate for submission to the Master of
Business management in Finance.

Advisor:

Name: Oliyad Ejeta (PhdCand)

Signature

Date
Rift Valley University School of Graduate Studies

I hereby certify that the thesis entitled: “Assessment of The Impact of Digitalization on
Bank Profitability: The case of selected commercial banks in Ethiopia” and submitted
in partial fulfillment of the requirements for the Degree of Master of Business management
in Finance complies with the regulations of the University and meets the accepted standards
with respect to originality and quality.

Approved by

Internal examiner: ________________ S i g n a t u r e Date

External examiner: Signature Date

Advisor: Oliyad Ejeta (PhD cand) S i g n a t u r e Date

Acknowledgment

I thank the God for watching and supporting me through all the challenges that I
have passed while doing the entire research.

I'd like to thank Oliyad Ejeta (PhD candidate), the advisor of my research paper,
for his helpful advice and criticisms from the beginning of the proposal to the end
of the study.

I'd also like to thank all of the personnel in the commercial banks' digital banking
departments and branches, who have always been friendly and helpful.

My heartfelt gratitude also goes to my Wife, Rome Solomon, as well as my

friends and relatives, for their unwavering support and encouragement throughout
the years, as well as for all of the ideas they have shared with me.
References ANNEX

List of Tables

Table 3.1. Sample Frame 42

Table 3.2. Operationalized and Measurement of Variables 50

Table 4.1. Respondents Profile 52

Table 4.2. Descriptive Statistical Analysis result on Operational Excellence 54

Table 4.3. Descriptive Statistical Analysis result on Service Quality 56

Table 4.4. Reliability Statistics on Operational Excellence 58

Table 4.5. Reliability Statistics on Service Quality 58

Table 4.6. Correlation Matrix between Dependent and Independent 59

Variables

Table 4.7. Test for Normality Assumption 62

Table 4.8. Multicollinearity Assumption Test 65

Table 4.9. Independency of Residuals Test 66

Table 4.10. Model Summary for Dependent variable and Predictors 67

Table 4.11. ANOVA Test using Alpha =0.05 68

Table 4.12. Regression Coefficient 70

Table 4.13. Summary of Variables, Hypothesis Test and Decisions 75

 List of Figures
Figure 2.1. Conceptual Framework 38

Figure 4.1. Linearity Assumption Test 61

Figure 4.2. Normality Assumption Test 63

Figure 4.3. Test for Homoscedasticity 65

Acronyms
ICT Information and Communication Technology
CBE Commercial Bank of Ethiopia
BOA Bank of Abyssinia
ATM Automated Teller Machine
POS Point of Sale
ITM Iterative Teller Machine
MW Mobile Wallet
ROA Return on Asset
ROE Return on Equity
NBE National Bank of Ethiopia
WWW World Wide Web
PC Personal Computer
PSS Premium Switch Solutions
SPSS Statistical Package for Social Science
PLS Partial Least Square
BCG Boston Consulting Group
NIBU Number of Internet Banking User
VATMT Value Transacted on Automated Teller Machine
VIBT Value of Internet Banking Transaction
NMBT Number of Mobile Banking Transaction
VMBT Number of Mobile Transaction
GDP Gross Domestic Product
 CHAPTER ONE

INTRODUCTION
1.1 Background of the Study

Information and communication technology (IT) has brought super change on the financial
institutions particularly it supports banking service, risk management and increase
productivity. Information and communication technology investment has enabled the financial
institutions to compute and be successful in digital banking transformation (Abase and
Weygand, 2017).

Rapid advancements in information technology and computer networks, such as the Internet
and telecommunication systems, enabled the global expansion of electronic commerce. The
Internet's practically universal access has made it a useful business tool, spawning a new sort
of economy known as the digital economy. The development of global connectivity which the
Internet offers has made it a valuable business tool and the digital economy is a new sort of
economy that was established (Shah and Clarke, 2009). Due to qualities such as speed,
efficiency, cost reduction, and taking advantage of unique chances, digital banking has entered
a new phase in the competition. This demonstrates that if a bank's investment increases
profitability, the use of digital banking in the banking industry will be beneficial (Faiedh et al.,
2004).

Digitalization has become predominant as industries and institutions including commercial

banks strain to adopt better and effective method of service provision to their customers. It
brought about a huge change in the financial sector specifically the support of banking service.
As a result, financial institutions deploy a huge amount of investment on digitalization
(Agboola M.G. et al, 2019). Digitalization facilitates the delivery of brick-and- mortar banking
services to the customers through innovative technologies such as internet banking, mobile
banking, mobile money, electronic commerce and other digital payment platforms. Internet and
mobile digital banking deliver fast, efficient and effective service not only to the traditional
banking service but also for the new innovated products as well.
The availability of 3G and 4G internet technology and the expanded uses of
smartphone encourage financial institution to offer advanced digital technology to their
existing client as well as to reach out the unbanked population (Abase and Weygand, 2017).

To serve its clients, the financial sector has traditionally relied significantly on high-cost
infrastructure channels (branches, ATMs, POS machines). This paradigm has shifted with the
advent of agent and mobile banking channels, as well as the emergence of more economical
platforms like M-POS, allowing financial institutions to expand their infrastructure with lower-
cost delivery methods. The emergence of new delivery models is transforming the economics
of banking to reach those with low income, adding to the financial inclusion agenda for
financial institutions. The number of traditional (ATM, POS) and nontraditional (agents)
access points to financial services is rapidly expanding in Ethiopia. By using bank agent
networks and micro financial institutions, Ethiopia has expanded its reach of access points
outside of large urban regions; yet, there is still room for development. Despite the expansion,
urban regions still have a significant concentration of branches, ATMs, and POS machines.
Furthermore, consumers frequently report problems with ATMs and POS equipment, lowering
overall demand for digital channels. Increased access to Cash-In, Cash-Out (CICO)
infrastructure in urban and rural areas will be critical to growing digital payment usage. In
metropolitan regions, ATM expansion will play a major part in the CICO infrastructure, with
an increase in agent networks supporting it; in rural areas, the agent network will be the
dominant CICO infrastructure. This takes into account and is based on the socioeconomic
standards of the clients as well as the required business case for each infrastructure model.
(National bank of Ethiopia, 2021).
Debit cards and automated teller machines (ATM) are widely used in Ethiopia banks, while
credit cards have yet to be issued. The majority of Ethiopians lack credit cards, and internet
access is slow, expensive, and unreliable. Ethiopia's connection to Secom's underground/sea
fiber optic cable via Djibouti, however, has recently improved internet performance.
International banking networks are connected to ATMs. International ATM cardholders can
withdraw money from any ATM machine operated by Ethiopia commercial banks. ET Switch
S.C., a commercial bank-owned corporation, was founded to promote bank-to-bank
connectivity. The program is used by approximately 10 million ATM card holders across the
country, according to ET Switch S.C. sources. (Ethiopia-Country Commercial Guide, 2021).
Ethiopian banks have begun to use mobile, internet, and card banking services to conduct
primary internet transactions. These innovations came with the introduction of centralized,
online real-time electronic banking solutions, which resulted in a rise in clients. The
mechanism for delivering digital financial services still has a long way to go. Foreign
companies are currently providing technical services for the country's numerous financial
inclusion efforts. Ethiopia has now developed and tabled a proclamation to allow, regulate, and
monitor e-commerce operations in the country (Ethiopia-Country Commercial Guide, 2021).
As the platform for most financial transactions and the potential to enhance financial inclusion,
digital finance is becoming a strategic tool that offers to connect disparate industries. In
Ethiopia, new trends are affecting Digital Financial Services (DFS), such as the launch of a
national switch service that is jointly owned by all banks and is aiming to create
interoperability through various channels such as ATMs, POS, Mobile Wallets, and bank
accounts (ictet.org, 2021).

New technology advancement requires high investment on the area of digital banking and
which has required the firm to deploy huge amount of capital that resulted in low profitability
in short run. On the other hand, digitalization will harm the performance of Banks and the
public money they protect. Banks will be facing a big challenge of cyber- attack unless they
fortify their infrastructure. This way, the introduction of digitalization and the resulting
openness of bank infrastructure networks can introduce this new type of risk to the banks; so
that they will harm the financial capability, the type of spending they make, the morale of
their management, employees, and customers, and brand damage to the banks (Betty, F. C. &
Bogonko, J. B., 2017).

ICT concepts, methodologies, policies, and implementation strategies applied to financial

services have become a major topic of debate and concern for all banks, as well as a
requirement for local and global competitiveness Dana (2016). The banking industry's service
delivery standards have been significantly impacted by technological advancements.

Customers can now make financial transactions outside of typical business hours using
automated teller machines (ATMs) and mobile banking, in their most basic form individuals
can check their account balances and make payments without having to visit a bank using
online banking. This is gradually transforming society into a cashless society, in which
consumers are no longer need to pay for all of their purchases in cash, hence boosting customer
relationship management (Mapesa, 2018).

Given the recent global economic downturn, it is critical for banks to develop a tough and
steadfast customer base in order to weather tougher economics and more competition. The
concept of providing outstanding service while also selling consumer goods is an effective way
to meet customers' requirements while also engaging them. Given that many banks offer similar
goods in a competitive market, banks are paying close attention to service delivery in order to
gain a competitive advantage. "Banks that provide high-quality services gain a competitive
advantage in terms of increased revenue, customer loyalty, and retention." (Kumar et al., 2010).

Every institution in the world is being knocked on the door by fast developing information and
communication technologies, and Ethiopian banks will never be exceptional. Cash is still the
most common form of payment in Ethiopia, and electronic payment systems are still in their
infancy. In the face of rapid spread of electronic payment systems in both the developed and
developing worlds, Ethiopia's financial sector cannot afford to be an outlier in terms of
adopting the technology. Digital cash and digital wallets have mostly supplanted the use of
cash. After barter, currency, paper money (checks), and now digital cash, this can be said to
constitute the fourth stage of evolution (Gardachew, W. 2010).

Ethiopia's banking industry is preparing to develop capacity and modernize the financial system
by utilizing cutting-edge technologies that can be found anywhere in the world. E- banking first
appeared in Ethiopia in late 2001, when the country's largest state-owned commercial bank
(CBE) deployed ATMs to provide services to local customers. In recent years, Commercial
Bank of Ethiopia and other private commercial banks are also implementing different kinds of
e-banking services such as Internet banking, mobile banking, ATM (Automated Teller
Machine) and POS (Point of Sale Terminal) channels (Gardachew, W. 2010).
Therefore, the current study is to determine the Assessment of the impact of digitalization on
commercial bank of Ethiopia Profitability: The case of selected commercial banks in Ethiopia
1.2 Statement of the Problem

Digital strategy is a critical component of the overall organizational strategy and should be
guided by the business‟ vision, mission, and overall strategy, as well as market conditions.
There are three fundamental engagement models for banks: become a digital bank, introduce
standalone digital channels or products, or establish subsidiaries to operate digital banking
activities. Offering digital financial services does not have to be an all or nothing approach. All
three routes to digitization allow institutions to move forward on a digital journey, with large or
small investments, taking large or smaller risks (IFC, 2018).

Commercial banks in Ethiopia are investing a large amount of capital in digital banking in order
to remain in a competitive and dynamic environment (National bank of Ethiopia. (2021).This
considerable investment must be used to develop a fully integrated e-banking business. As a
result, it is vital that e-banking innovations are founded on a thorough analysis of the costs
associated in order to avoid detrimental consequences on bank performance. On the one hand,
bank performance is closely tied to the efficiency and effectiveness of electronic banking, yet to
avoid losses associated with electronic banking, strict controls and regulations are required
(Josiah, A. and Nancy, k. 2012).

Solomon, W. (2016) investigated the role of e-banking on commercial banks' financial

performance in Ethiopia. The study selected ten commercial banks operating in Ethiopia
between 2013 and 2015 using secondary data and a purposive sampling technique. To
determine their link and influence on commercial banks' ROA, the value or price of POS
transactions, debit card transactions, the number of automated teller machine terminals, the
number of point of sale terminals, and market share were utilized as explanatory variables. The
study's findings revealed that all of these factors had a positive and considerable impact on the
financial performance of the commercial bank as evaluated by ROA, which enhanced
profitability.

Elias, G. (2019) looked at the role of e-banking on commercial bank financial performance in
Ethiopia, using return on equity as a proxy for profitability. The study selected ten commercial
banks operating in Ethiopia between 2015 and 2018 using secondary data and a selective
sampling technique. Number of ATM terminals, number of debit cards, Number of mobile
banking users, Value of ATM transactions, Value of mobile banking transactions, bank size,
and inflation rate were identified as explanatory variables to reveal their link and influence on
commercial bank financial performance. The study found that the number of mobile banking
users and the value of ATM transactions had positive and significant effects on bank
profitability as measured by return on equity, indicating that increasing the number of mobile
banking users and the value or price of ATM transactions had a positive impact on commercial
bank financial performance by making basic financial services more accessible by reducing the
time and distance to the nearest bank branch. According to the study, emphasizing and
improving on awareness generation, as well as the major internal drivers, could improve e-
banking practice and commercial bank performance in Ethiopia.

According to studies made on digital banking, such as Solomon, W. (2016) and Elias, G.
(2019), have been undertaken on the role of e-banking on the financial performance of
commercial banks in Ethiopia. Other Ethiopian research on the other hand, focused on the
acceptance of e-banking, as well as its challenges and prospects in the Ethiopia banking system.
Ayana, G. (2010) Barriers and Drivers of e-banking adoption in Ethiopia; Gardachew, W.
(2010) on the challenges and opportunities of electronic banking practices in Ethiopia, and
Million, (2013) on impact of electronic banking on customer satisfaction. This shows that more
research has to be done on the impact of digital banking on commercial banks profitability in
Ethiopia.

This study, therefore; tries to determine the influence of digital banking on profitability of
commercial banks in Ethiopia by including variables such as internet banking users and value of
transactions made through internet banking, which have not yet been discussed in previous
studies performed on the Ethiopian context, and is proxy to digital banking and commercial
banks profitability. The researcher also tried to show the effect of digitalization on operational
excellence and service quality of selected commercial banks operating in Ethiopia And, the
result will help the stakeholders to make decision on how wisely to invest more funds on digital
banking products and services.

1.3 Research Questions

 Does digitalization affect the profitability of the commercial banks?

 Does digitalization have impact on operational excellence of the commercial banks?
  Does digitalization affect service quality of the commercial banks?
1.4 Objective of the Study
The general objective of the study is to find out the impact of digitalization on the profitability
of commercial banks in Ethiopia.
The relation of the study specifically established:

• The impact of ATM on profitability of commercial banks;

• The impact of Mobile banking on profitability of commercial banks;

• The impact of Internet banking on profitability of commercial banks;

The effect of digitalization efforts of the commercial banks to bring

operational excellence;
• The effect of digitalization efforts to bring service quality to the commercial banks;

1.5 Research Hypothesis

1: Value of ATM transaction has positive and significant impact on ROE Commercial banks in
Ethiopia
2: Number of internet banking users has positive and significant impact on ROE of commercial
banks in Ethiopia
3: Value of transaction executed by internet banking has positive and significant impact on ROE
of commercial banks in Ethiopia
4: Number of Mobile banking transaction has positive and significant impact on ROE of
commercial banks in Ethiopia.
5: Value of transaction executed by Mobile banking has positive and significant impact on ROE
of commercial banks in Ethiopia.

6: Digitalization has impact on the operational excellence of commercial banks in Ethiopia

7: Digitalization has impact on service quality of commercial banks in Ethiopia.
1.6 Significance of the Study

Digitalization is a ubiquitous influence nowadays, impacting many industries, including the

banking sector. Banks are facing tremendous competitive pressure and the need for the
development of digital opportunities is urgent to ensure future success. As a result, the question
is not if or whether digitization affects the Bank's profitability, but rather how. The way
business is done is being challenged, and it must be modified to the changing market conditions.
The topic of digitalization has been discussed for more than 20 years, but not until recently
banks discovered this topic as present and of strategic relevance. Digitalization in banking along
with other factors, such as changing customer experience on digitalization, operational
excellence, accessibility option and increasing regulatory frameworks, is a relevant influencing
factor for banks.

The finding of the study will be of great importance at identifying the impact of
digitalization as a strategic theme on the commercial banks‟ profitability to enable the decision
makers of the banks how to wisely invest on digitalization. It also gives a light for policy
makers and regulatory bodies in assessing the legal frameworks and policy and procedures on
digital regulation and implementation of the services.

The study will allow researchers and scholars to use the study for reference. It can provide
additional knowledge of electronic banking and form the basis upon which further research will
be done.

1.7 Delimitation/Scope of the Study

The objective of this study is to examine how implementation of digitalization affects

profitability, operational excellence and service quality of commercial banks in Ethiopia branch.
The study is limited to commercial bank. The questioners are developed only for employees of
the institutions while external stake holders don’t include such as customer feedback.

Selection of dependent variable, Return on Equity (ROE) which fit the study was also, part of
limitation. Because there are many variables which determinants of performance but not
relevant for this study the researcher needs to choose the more appropriate variables so that it is
suitable with the independent variables, Value of ATM transaction, Number of Internet banking
user, Value of internet banking transaction, Number of mobile banking transaction and Value of
mobile banking transaction. The data was verifiable since it came from each selected banks
head office and commercial banks published annual audited financial statements. However, the
study has limitation to the degree of precision of the data obtained from the secondary source.

Banks profitability determinants except ROA and ROE which used as proxy variable to
measure profitability are mostly categorized into two broad factors which are internal and
external factors (Sarawak, Mustafa, Abide & Ahmad, 2018). While, under these investigations
the study considered only the internal factor to measure profitability of the Bank.

Therefore, the study measured the impact of digitalization on profitability without inclusions of
external determinants such as GDP, inflation and others. The application of digitalization is a
recent issue in commercial banks of the country. To enable us to determine the impact of
digitalization on the profitability of the commercial banks in Ethiopia

Organization of the Study

The study is organized in the following form: The first chapter is introductory which consists of
general background, statement of the research problem, basic research questions, research
h y p o t h e s i s , objectives of t h e s t u d y , s i g n i f i c a n c e o f the s t u d y ,
and delimitation/scope of the study. The second chapter summarized related literature review
of theoretical and empirical studies in the study of digital banking and its impact on profitability.
Chapter three is the Methodology part; which contained design of the study, population and
sampling techniques of the study, data type and instrument, sources of data collection, and
methods of data analysis. Analysis and data interpretations are presented in chapter four. The
final chapter presents conclusion, recommendation and area for further study.
 CHAPTER TWO

LITERATURE REVIEW

This chapter reviews the existing literature on the effect of digital banking on banks
profitability. In particular, theoretical review where various theories on digital banking are
reviewed, empirical reviews done by previous researchers on effects of digital banking on banks
profitability are reviewed. This chapter provides the concept of digital banking versus
operational excellence and service quality, important terms of digitalization and determinants of
bank profitability. It also identifies the knowledge gap and shows the conceptual framework of
the study.

2.1 Theoretical Review

The study reviewed different theories to establish the impact of digital banking on bank
profitability.

2.2 Impacts of Digitalization on Bank Profitability and Performance

The world is undergoing a rapid digital transformation, dubbed the fourth industrial revolution
by some. Several economies and private businesses have begun the process of digital
transformation. Ethiopia is expected to follow Ethiopia's lead. The Ministry of Innovation and
Technology has released the National Digital Transformation Strategy, which outlines
significant changes aimed at transforming Ethiopia into a digital nation by 2025. Payments are a
critical enabler for this change, and since technology allows for faster and more frictionless data
(and money) transfers in the modern day, a stable and ethical digital payments ecosystem is
required.

A service for digital banking activity has become a hot topic in the financial business in the new
millennium (Wade Sango, N., & Magaya, B., 2020). Digitalization has been known to affect the
performance of commercial Banks, both positively and adversely. In the past decade various
scholars from different corners of the world have studied the various effects of digitalization on
profitability, operations and service quality of commercial banks. There are also researches
made in the African continent, especially in countries like Rwanda, Nigeria, and Kenya where
there are relatively better digital banking experiences.

These countries have clear digital vision and policy frameworks. Although very few, local
researches have been made in order to determine the effects of digitalization on the performance
of Ethiopian commercial Banks.

2.3 Digital Banking

The act of conducting banking and financial transactions without the use of cash, coin, or bills is
known as digital or cashless banking (Kamboh and Leghari, 2016). The early stages of the
digital banking journey have largely focused on enhancing existing offerings with new,
technology-enabled services in order to improve customer accessibility and value. Electronic
banking is also known as digital banking, cashless banking, electronic banking, internet
banking, online banking, virtual banking, web-based banking, remote electronic banking, phone
banking, and so on Pery-Quatey (2018). Digital banking provides the characteristics that will
propel banks into a competitive future by assisting them in identifying new niche markets that
will drive innovation and create jobs.

E-banking is the delivery of a broad range of value-added products and services to bank clients
through electronic and telecommunication networks (Steven, 2002). For years, banks have used
e-banking platforms to connect with foreign and domestic consumers and do business. Banks
began to use electronic channels to receive instructions and provide their products and services
to their clients as the WWW (World Wide Web) and the Internet grew in popularity in the latter
half of the 1990s. Despite the fact that the content and capabilities of the products and services
offered by banks via the internet vary, they are all referred to as Internet banking or E-banking.
A customer can use the internet (electronic banking) to access his or her bank account.
2.4 Definition of Important Terms and Concepts

For the scope of this research the following definitions of important terms and explanation of
ideas will apply:

Digitalization

Digitalization is defined as the creation of a new customer experience on the outside and an
efficient, effective operating model on the inside, both of which are enabled by digitalization

and the underlying technology, processes, and structures. Digitalization largely focused on
enhancing the present offering by introducing new, technology-enabled services that would
improve client accessibility and value. Mobile apps, e-wallet solutions, online banking, APIs,
and personal finance management (PFM) tools are the most well-known examples (Shukla, R.,
2016).

Different firms are being pushed to reassess their existing business models and operating
methods as a result of new prospects brought on by digitalization, or to focus on finding fresh
market opportunities Bowman et al. (2019). The way banks and other financial institutions learn
about, communicate with, and please clients is changing dramatically as a result of
digitalization. Understanding digital client behavior, preferences, choices, likes, dislikes, and
stated as well as implicit needs is the first step toward digitalization. (Kamran, 2019).

2.4.1 Key Enablers for Digitalization

Digitalization in banking industry can be facilitated through digital enablers which mainly
includes: Digitalize customer experience; Digitalize products and services; Digitalize
organization and Digitalize operations (Shukla, R., 2016)

Digitalize customer experience: Taking full control of customer experience and managing the
stated or unstated needs of existing and new customers and develop business model
accordingly. Customers can promptly adapt to the digital world expecting seamless
multichannel experience and consistent service.

They label their experience on three basic issues: How well companies understand their needs;
simplicity of doing business; and how delightful it is.
Digitalize products and services: Traditional banking practice has focused on increasing sales
targets rather than understanding the needs of customers. Recently, banks are more interested to
become customer centric. Digitalization can provide billions of customers with minimum cost
and affordable price. To maintain competitive edge in the industry, banks need to develop
innovative products and services that meet customer needs.

Digitalize organization: Most banks have not structured their internal organization and
governance policy according to the multichannel organization. Most efforts have been made to
digitalize the front end while ignoring the back-end impact on the operation. To support the
digital banking journey a complete restructure on the existing system required.

Digitalize operations: The digital world becomes possible as customers, competitors and even
regulatory agencies fully engaged in the transparency and convenience of anywhere
banking system. Banking does not guarantee customer loyalty instead it can identify
opportunities by looking at the overall customer life cycle, enabled better customer service
through the practice of digital marketing and customer service strategies and focus on
improving customer experiences.

2.4.2 The Application of Digitalization in Business

The use of digital technologies to streamline corporate operations, boost efficiency, and
improve customer experience is known as digitalization (Prause, 2020). Customers' need for
satisfaction is one of the primary roles of digitization, which is changing as a result of the
construction of a more comfortable and prompter contact between the client and the
organization. The following are the goals of corporate digitalization:

Product or service improvement: innovative technologies such as the creation of mobile

banking applications on smart phones, online banking, e-wallet and other digital products have
made banks to optimize their processes efficiency, its quality, attractiveness, ease of use and
delivery to their customers.
Automation of production and other internal processes of the company: While significantly
reducing costs with the help of new payment modalities and cashless transactions and
optimizing production processes to preserve the environment, save human, money and time
resources, and also improve the standard of living in general.
Increased number of clients: the growth of financial technologies in financial institution
particularly in banking sector increase the number of customers in the use of mobile application
and online banking losing interest on traditional banking. Digitalization of the financial
institutions contributes a great deal on how banks carry out their performance to avoid customer
loss.

2.5 Banking practice in Ethiopia

Modern banking in Ethiopia began in 1905 with the founding of Abyssinian Bank, which was
founded on a fifty-year deal with the Anglo-Egyptian National Bank. In 1908, three foreign
banks, the So cite National d'Ethiope pour le Development de agriculture et du, Banque de
l'Indochine, and Compagnie de l'Afrique Orientale, were created (Pankhurst, R.,1963). As Geda
(2006) points out these institutions have been chastised for being wholly owned by foreigners.
The Ethiopian government purchased Africa's first national bank in 1931, renaming it Bank of
Abyssinia after the Abyssinian Bank, which had only been in operation for a few years before
being closed owing to the Italian invasion. Several Italian bank branches had been established
by the time of the Italian invasion.

During the five years of Italian occupation, banking activity increased (1936-41). Italy's banks
were quite active. Barclays Bank was established following Ethiopia's independence from Italy's
brief occupation, and it remained in operation in Ethiopia between 1941 and 1943, thanks to
Britain's strategic planning throughout World War II (Gedey 1990; in Geda, 2006). In 1943, the
Ethiopian government established the Ethiopian State Bank. Before being reformed into the
National Bank of Ethiopia (the Central Bank, re-established in 1976) and the Commercial Bank
of Ethiopia, the Bank of Ethiopia served as both a commercial and a central bank until 1963.
Following this time, a flood of new banks arose, many of which had been in operation prior to
the Great Depression.

Following the fall of the imperial government in 1974, the Commercial Bank of Ethiopia (CBE)
took over all private commercial banks. Ethiopian financial sector reforms did not allow private
sector participation in existing government banks or the entry of foreign banks until 1994 Geda
(2006). After 1994, a new chapter in the history of banking was written, allowing local private
banks to operate in the country. As a result, Awash international bank s.c, Ethiopia's first
indigenous private commercial bank, was founded by 486 initial shareholders with a paid-up
capital of Birr 24.2 million. It received its banking license on November 10, 1994, and began
operations on February 13, 1995.

With a recently joined four private commercial banks, the Current banking industry comprises
one state-owned development bank and 21 commercial including the state owned dominant
Commercial Bank of Ethiopia (NBE annual report, 2021).

According to Kea tinge (2014) the financial sector in Ethiopia is dominated by the state owned
Commercial bank and also the sector is on its infancy stage. CBE dominate the sector and it
accounts with a total of 70 percent of the industry’s asset holdings. This monopoly has a
negative influence on the country's economic growth and financial intermediation. In
comparison, banking businesses in regional and international peer countries have a substantially
higher level of private sector and foreign participation. Literatures revel, compared to most
countries, for so many purposes and intent, Ethiopia has refrained from opening up its banking
industry. This generally resulted in less development than its regional peers (Kea tinge, 2014).

The banking sector dominates Ethiopia's financial sector. The strength of any economy is
determined by the efficiency and competitiveness of its financial system. Ethiopian banks, like
those in other developing countries, play a critical part in the country's economic growth and
development. Banks are a necessary component of every financial system. They serve a crucial
role in moving surplus sector savings to deficit sectors.
Since the financial liberalization in Ethiopia, the numbers of financial institutions come to
operation increase rapidly. However, Cash remains the most widely used medium of exchange
(Garedachew, W. 2010).

2.5.1 Digital Banking practice in Ethiopia

Ethiopia's main state-owned bank, Commercial Bank of Ethiopia, began e-banking in

2001,while,CBE began e-banking in 2007. With ATMs in commercial banks, CBE was a
pioneer in establishing ATM service for local users. Furthermore, CBE had been a Visa member
since November 14, 2005. However, due to lack of adequate infrastructure, the membership was
not successful.
The arrangement is Ethiopia's first significant cooperation between competing banks, setting a
precedent for other banks to follow in their footsteps, as no single bank in Ethiopia can afford to
provide vast regional coverage (Windom, M. 2013).

Electronic banking facilities provided by most Ethiopian Banks are very basic. Next to other
private commercial banks, Bank of Abyssinia (BOA) introduced its electronic banking service
in 2014 with the support of core banking system which was implemented two years ahead. The
Bank has started out card banking (ATM and POS) with 50ATM machines installed in various
location and Mobile Banking. On the same year, The Bank has been also in the process of
introducing other types of electronic banking channels such as mobile and internet banking and
Agent banking which enable to increase its effort and proximity to the existing and prospective
customers. As a result of the enhancement work which has been made on mobile and internet
banking, more secured, reliable and faster online banking products including newly virtual and
e-commerce service has roll out to retail and corporate customers (BOA Annual report, 2020).

Ethiopia's banking sector appears to be underdeveloped, demanding rapid capacity building and
financial system modernization using cutting-edge technologies available elsewhere in the
world. Ethiopia's current banking system falls short of offering effective and dependable
services, given the expanding number of import-export enterprises, greater international trade,
and increased international ties. As a result, all commercial banks in Ethiopia should understand
the necessity to implement an electronic banking system in order to meet the needs and
requirements of their consumers. (Garedachew,W. 2010).

Although the adoption of digital mechanisms for financial transactions is still low in Ethiopia, it
has a substantial room to expand. The number of debit card holder’s increase from time to time.
However, only 12% of Ethiopians made or received digital payments during the last year,
compared to the 4% of population that hold a debit card. Credit cards are not issued in Ethiopia
and are used only by foreigners and diaspora (0.3% of population). However, while peer
countries such as Kenya and Rwanda evidenced an increasing usage of mobile money as a
solution for financial inclusion (73% and 31% of population), in Ethiopia it is less than 1% due
to regulation restrictions (Digital Ethiopia 2025).
2.5.2 Digital Banking Forms
Automated Teller Machines (ATM)

ATM has been around for quite some time now. ATMs are convenient since they are open 24
hours a day, seven days a week, so clients do not have to wait until bank hours to get their
money. An automated teller machine (ATM) is an electronic computerized telecommunications
device that allows customers of a financial institution to access their bank accounts, order or
make cash withdrawals (or cash advances using a credit card), and check account balances
without the need for a human bank teller. First, as compared to other e-channels, ATMs are the
most well-known and accepted. Bishnoi, S. (2013) ATMs play a major role in enhancing the
firms competitive position; since they were first introduced in an attempt to lower bank costs
and increase efficiency (Abdel. Aziz, El Bradawl and Ismail

Hussein, 2014). Banks have been positioning ATMs to increase their accessibility. As clients
value their time, they would appreciate a reliable ATM that would help them save their time in
conducting routine banking activities at their convenience to withdraw and deposit money.
ATMs added other benefits regarding their location, because many shopping places, Malls,
Hotels, Supermarkets and market places include a point nearby or inside their location to give
customers the opportunity to have access to their money for shopping. Unlike cash it has also a
secured feature in case of misplaced or stolen. If the person who gets the ATM card doesn’t
knows the pin security code, your money cannot be accessed.
Point of Sale (POS)

A real or virtual location where commercial transactions take place. A customer can buy things
and pay for them using POS. The transactions could take place at a cash register in a retail store
or through virtual shopping on Booking.com or Ebay.com. Commercial banks set up point-of-
sale systems to allow merchants to take payments using local and international VISA,
MasterCard, Union Pay, and American Express cards from all over the world. POS terminals
have steadily gained a reputation for being at the heart of business operations, particularly for
merchants. Unlike the early POS terminals, which were only used to accept card payments, more
modern POS terminals have been upgraded to include additional payment methods of contactless
payments like mobile wallets. This technological advancement led to e-POS, which a limited
number of digital payments without the presence of card swiping (Namibians, B., 2021)
Internet Banking (IB)

Financial institutions provide service through internet banking which can be accessed via web
browsers and mobile apps, Customers can use mobile apps to access banking services from
anywhere with an internet connection. The service can be served to both individual customers
and corporate businesses based on the customers need and capacity of the company. Customers
may be more satisfied with Internet Banking than with a manual banking system, which
requires more time and costs (Hassan, 2015). It provides several advantages to banks, including
cost reduction, market differentiation, streamlining of work processes, improve consumer
banking service, increased sales, increased reach, increased

loyalty and opportunity to attract new customers. It is a self-service model which can be offered
anytime and anywhere accessing to a broad range of banking products and services.

Mobile Banking (MB)

Mobile banking refers to the use of electronic mobile devices such as cell phones and PDAs to
access banking services and facilities. The use of a mobile phone or another mobile device to
conduct financial transactions tied to a customer account is known as mobile banking (m-
banking) Salem & Rashid, (2011). In his study on the association between mobile banking and
commercial bank financial performance in Kenya, Kingoo, N. (2011) noted that m-banking
refers to the provision and use of banking and financial services via a mobile communications
device.

Mobile Banking enables financial transactions to be carried out on mobile devices such as
smartphones and tablets. This service is provided by financial institutions, particularly banks.
Unlike the internet banking, it makes use of software, commonly referred to as an app that is
offered by the financial institution. Mobile banking has revolutionized the way people in
underdeveloped countries transfer money, and it is now set to offer more complex banking
services that might have a substantial impact on people's lives
(Mahwah, F. 2016).
Mobile banking allows users to monitor account balances, make electronic bill payments,
receive short notifications on their phones telling them of instant transactions in their bank
accounts, and make cash transfers between one customer's and another's accounts, depending on
the institution.

Mobile Wallet (MW)

Mobile wallets allow users to use the funds in the wallet to make payments for transactions with
multiple merchants, as long as there is an existing contract between the merchant and the mobile
wallet company. It allows users to withdraw the funds into a bank account and in cash.

2.6 Virtual Banking (ITM)

The hybrid experience of utilizing an Automated Teller Machine (ATM) and engaging with a
live teller is created via virtual banking conducted through the use of an Interactive Teller
Machine (ITM). ITMs, sometimes known as virtual teller machines, are automated machines
that handle currency, receive checks, scan identity, and produce receipts. They also give the
transaction a human touch by using digital communication capabilities to communicate with a
distant, live person within the bank. ITMs provide voice communication (through a speaker or a
private handset), video conferencing, and chat, similar to how Skype works on a PC
(Portal.BankofAbyssinia.com).

Credit/Debit Cards

With a certain amount of digit card numbers, expiration dates, and magnetic strips, credit and
debit cards look remarkably identical. Both can make purchasing in stores or online simple and
convenient. Debit cards are used to make purchases by withdrawing monies from a customer's
bank account. Credit cards allow customers to borrow money from the card issuer for purchases
or cash withdrawals up to a certain limit. Credit cards are issued by financial entities, most
commonly banks, and allow cardholders to borrow funds that must be repaid with interest.
When it comes to fraud protection, credit cards outperform debit cards (Cassin, P.M. 2021).
2.7 Determinants of Financial Performance

Banks' Financial performance is a measure of a company's ability to earn revenue from its
primary way of operation. This term can also be used to describe a broad indicator of a
company's overall financial health over time, and it can be used to compare similar companies
in the same industry or to compare industries or sectors in aggregate (Sime et al., 2020).

The ultimate goal of a given firm performance is measured through profit. Banks' profitability
determinants are normally consisting of factors that are within the control of commercial banks.
These factors which affect the revenue and the cost of the banks are classified into two
categories namely the financial statement variables and non-financial variables. Bank’s balance
sheet and income statement have a direct relationship with the financial statement variables.
Whereas, the non-financial statement variables include factors like management quality,
efficiency, and productivity, the number of branches of a particular bank location, size of the
bank, and technology.

Banks have developed different ratios to measure profit of which Return on the asset, return of
equity, and net interest margin are the major ones (Devinaga Rasiah, 2010).

According to Abu rime (2008), there are two common ways of classifying bank performance
determinant which are classified as internal (bank specific) and external (macro-economic)
factors. Internal factors are specific to individual banks which can affect the performance of the
bank. Internal (bank specific) and external (macro-economic) factors are the two most popular
approaches of identifying bank performance determinants. Internal factors are unique to each
bank and might have an impact on the bank's success. Operating environment and technology,
human capital, management efficiency, business risk, loan performance, earning quality,
liquidity, net-worth, asset quality, asset size, and capital adequacy are some of the most
common internal determinants of a bank's performance. Bank concentration and regulation,
inflation rate, actual economic activities (GDP), and tax rate are examples of external
influences.
2.8 Digital Banking and Financial Performance

Prior to the emergence of information technology, the cash-based transaction was the only
channel of conducting banking transactions which were characterized with risk, inefficiency and
inconvenience to both the banks and the customers (Boateng, 2020).

With the advancement of technology over the past two decades, the banking sector has
embraced and offered a variety of electronic banking channels with the goal of increasing
efficiency, convenience, and financial inclusion.

In previous decades, a bank's large branch network might have been leveraged to gain a
competitive advantage over rival banks. In today's banking world, however, this is not the best
method for banks to service their customers and urge them to stay with them. Instead, by using
the e-banking platform to consistently generate novel products and services at a cheaper cost,
future consumers will be attracted to the bank and existing customers' loyalty will be increased,
causing them to stay with the bank (OBENG-OSEI, 2019).

Banks that want to gain a competitive advantage use the internet and other communication
technologies like mobile banking to maintain a smooth flow of information with their
consumers (Shah, 2009).

Increases in new customer acquisition, customer retention, resource mobilization, and cross-
selling opportunities have all been identified as possible drivers of the revenue rise brought
about by e-banking channels. There is still a debate about whether the increase in revenue is
sufficient to provide banks with a satisfactory return on investment (Shah, 2009).

One of the main economic arguments for e-banking has been the lowering of overhead costs, as
iteliminates the need for more bank branches and their accompanying operational costs.
According to Young (2007), the implementation of e-banking entails a significant financial
expenditure. System integration, internet security, and labor costs all have a tendency to
undermine profits.

Despite the high investment of ICT, digital banking has a huge impact on Nigerian’s deposit
banks profitability. Electronic banking plays a major role in the financial performance of
commercial banks in Kenya.
A study by Simiyu (2018) noted that electronic banking has been found to increase profitability,
improve bank management quality, raise bank assets, and stimulate growth and expansion. Due
to its time savings, convenient access to cash, and ease of use of the goods, ATMs have been
considered to be a more appealing digital banking channel than internet banking. In addition,
customers believe that ATM is safer and much secure than internet banking (Mawutor, J.K.M.,
2014).

Due to its 24/7 convenience service to clients, the introduction of mobile banking into the
digital banking channel has resulted in a significant growth in banking users. Commercial
banks' profitability has improved as a result of a growth in the number of users and transactions
on mobile banking. The greater the number of mobile banking transactions, the higher the
capital adequacy ratio, the larger the market share, and the greater the number of mobile
banking users, the better financial performance (Mahwah’s, 2016).

Banks' profitability improved as a result of their use of e-banking, resulting in increased

income. The driving reason behind digital banking is operating cost minimization and operating
profit maximization (Simpson, 2002).

2.8.1 Banks performance measurement

Bank performance measure can be classified into internal and external factors. Variables that
can be controlled by the bank from the internal factors and they differ from one bank to the
other. Variables beyond the control of the bank from the external factors such as; gross
domestic product, inflation, interest rate and political instability among others. Ngango et al
(2015) claimed that profitability is one of the most important indicators of financial
performance in their study. The level of profitability is reflected in the return on assets (ROA).
Return on equity (ROE), which compares the amount of profit made to the amount invested by
shareholders, are two other ratios that are utilized. Indicators of profitability were used to assess
a bank's financial performance to see if electronic banking leads to enhanced efficiency,
effectiveness in terms of cost reduction, and time savings, according to (Mwangi, 2014).
Profitability ratios, such as return on assets, were employed to demonstrate management
efficiency. This ratio illustrates how successfully a company utilizes its net income in relation to
its total assets.
The major indicators of profitability are returns on assets, return on equity, net interest margin
and earning spread ratio.

The researcher used ROE as a measure of profitability for commercial banks in this study. As
far as net interest margin is concerned, there are two primary drawbacks. Because most banks
receive fees and other non-interest income through service and net interest margin, it was unable
to determine the bank's entire profitability. Furthermore, banks cannot be compared because
they are poles dissimilar in terms of the nature of their activities and client base makeup.
(https://www.readyratios.com)

Although ROA is important measure to in profitability but it has also shortcomings that we
should consider while using for performance measurement. Its limitation is that, it does not
consider for outstanding liabilities and may indicate a higher profit level than the actual. ROA is
a measure of firm’s success in using assets to generate profit without looking at how the assets
were financed.

Empirical Review

Banks are considered to be highly technology-intensive firms that invest large sums in digital
technologies. Therefore, one would expect to find ample literature on the impact of the digital
transformation on bank performance. However, empirical analyses of the link between digital
transformation and bank performance are quite sparse (Kriebel et al., 2019).

In the following paragraphs the most related studies are analyzed and identified knowledge gaps
are documented.

2.9 Related Empirical Studies

Guidance, M. D., Campanile a, F & Daze, L (2016) made a study to determine the impact of e-
banking products on banks‟ profitability. 3692 banks located in 28 European countries used as a
sample and classification analysis method adopted to determine the impact of independent
variables over the dependent variable of ROE. The researchers concluded that high return on
equity (ROE) for banks is achieved by offering retail and corporate internet services and home
banking services to customers.
A study made by Kamahi, N. (2015) on mobile banking and operational efficiency of Kenyan
commercial banks. The researcher conducted a census survey of the 43 Kenyan commercial
banks. For the period 2011 to 2014, the study analyzed secondary data on the number of
registered mobile banking clients, the quantity of money moved through mobile banking, bank
earnings, and operational costs. Data has been analyzed using Pearson correlation analysis
deployed between dependent and independent variables. The result of the study shows that
Mobile banking positively and significantly impacts the operational efficiency of commercial
banks in Kenya and the research recommended policy makers to constantly look at adopting
mobile banking technologies.

Mbama, C (2018) surveyed on UK bank customer’s perceptions of digital banking. The study
applied independent variables of Customer experience, loyalty, satisfaction and dependent
variable of financial performance. Structural Equation Modeling, ANOVA and Multivariate
Factor Analysis used to determine customer experience in digital banking are service quality,
perceived value, employee-client engagement, perceived risk and usability. The study revealed
a significant connection among customer loyalty, experience and satisfaction which enhances
financial performance.

Vekya, J. M. (2017) studied on the impact of ATM transactions, Point of sale (POS)
transactions on profitability of commercial banks (ROE), the study adopted a descriptive design.
A census survey was undertaken on population which consists of 43 Kenyan commercial banks
in operations as at 2014. SPSS was used to analyze secondary data obtained from various
Kenya‟ central bank publications. The study revealed that a rise in ATM and POS transactions
leads to a rise in bank profitability (ROE).

Mournful, O. (2016) studied e-payment adoption and profitability of banks in Nigeria. Internet
Banking Transactions has been used as independent variable and ROA as a dependent variable.
The study used secondary data for the period 2005 to 2012 and applied Panel Regression. From
the study the researcher concluded that Internet banking transaction was found to have a
negative effect on banks‟ profitability. Another study made by Mulwa, F. N. (2017) on
variables ROA, Online bank transactions, online transaction fees, online customer deposits.
Descriptive design was used. Data were collected through questionnaires on 40 commercial
banks in Kenya. Pearson correlation coefficient and inferential test multiple regression analysis
was used for analysis. The study concluded that online banking transaction significantly and
positively predicts ROA and which resulted in an increase in ROA.

Agboola et al. (2019) use the purposive technique and simple random sample to study how
digitalization improves the performance of commercial banks in Nigeria. They chose 370 non-
managerial staff from a commercial bank. The main data collection instrument was a self-
structured questionnaire, which was processed using SPSS version 25. According to the
findings, there was a minor significant and positive association between digitization and
commercial bank performance (r = 0.114*; p.05). In addition, there is a significant positive link
between product innovation and commercial bank performance in Nigeria (r = 0.186; p 0.001).
According to the findings, if digitization processes are properly implemented, they will have a
considerable positive impact on commercial bank performance in Nigeria.

According to Boating and Navajo (2020), Ghana's banking system has adopted and introduced
numerous channels of electronic banking during the last two decades with the primary goal of
improving efficiency, convenience, and financial inclusion. Boating and Nagarju studied on
the impact of digital banking on the profitability Ghanaian deposit. Secondary source date from
annual report of the central bank of Ghana has employed. Data is analyzed using the Partial
Least Square (PLS) regression model. Result from the PLS revealed that out of the six
independent variables only two variables are significantly impact on the profitability of the
bank. Positive relation with the profitability of the bank has been seen with regard to the
independent variables of cheque code line clearing; Ghana automated clearing house, Ghana
interbank settlement and GH-Link. And unexpected result has been exhibited on mobile money
and E-zwich negatively related with the dependent variable of profitability of the banks. This is
due to double charge policy on mobile money which resulted in customer dissatisfaction
and shortage of E- zwich machines.

In Kenya, Ogare (2013) researched the impact of e-banking on commercial banks' financial
performance. The study sought to see if there is a link between the dependent variable, such as
profit after tax, and the independent variables, such as the number of ATMs, debit and credit
cards issued to customers, point of sale terminals, and mobile banking usage levels. The
analysis relied on secondary data gathered from commercial banks' annual reports and the
Kenyan Central Bank. Descriptive and inferential statistical analysis used to analyze the data.
According to the study's findings, e-banking has a considerable and positive impact on the
profitability of commercial banks in Kenya's banking industry. As a result, e-banking and bank
performance have a positive association. The impact of bank innovations on bank profitability
was statistically significant, indicating that the aggregate effect of bank innovations in this study
was statistically significant in explaining the commercial banks profit in Kenya.

Mawutor, J.K.M. (2014) conducted research on the influence of electronic banking on a bank's
profitability in Ghana. It also investigates how ATM and internet banking has impacted on
Agricultural Development banking services and profitability. Structured questionnaires were
used to collect data from selected branches of the bank’s customers. SPSS has been deployed to
analyze the data and it was discovered that the net profit margin of the bank in the year 2011
and 2013 has increased. Therefore, the study concludes that E- banking has a positive impact on
the profitability of the Agricultural Development bank.

A study by Taiwo, J.N., Agwu, E. (2017) on the role of e-banking on organizational

performance tried to determine the impact of operational efficiency of banks: bank revenue and
base, customer loyalty. The study used Primary data obtained by administering questionnaires
to the staff of four purposively selected commercial banks in Nigeria. The data was analyzed
using Statistical Package for Social Sciences (SPSS).

According to the research, banks' operational efficiency improves as a result of e-banking

adoption, as seen by increased revenue and capital bases and increased client loyalty.

Referring on the above researches which were made in the context of the African commercial
banking industries where a cashless policy has been declared and practiced since 2012. In
addition, most of the banks have introduced various channels of electronic banking since the
past two decades ago. On the other hand, the current researcher is proposing to make a similar
study on the Ethiopian society where the National Digital Payment Strategy is only a new
release, in 2021, and the practice and adoption of digital financial services by the public is at its
infant stages. The current Ethiopian commercial banks are not yet fully digitalized; so that
digital banking is more or less a choice to the customer.
2.9.1 Related Empirical Studies in Ethiopia

Girma (2016) used secondary data to conduct a research ICT impact on the performance of the
Ethiopian banking industry from 2010 to 2014. The data is analyzed in a panel environment.
The researchers used a purposive selection strategy to choose samples from Ethiopia’s
commercial banks. The study used ROA as dependent variable and six independent variables
(ICT investment, ATM, POS, INFLATION, BRANCH and GDP) and deployed co-integration
regression analysis to affirm the result and impact of ROA analyzed using ordinary least square
technique. According to the regression results, ICT, ATMs, and POS have no statistically
significant impact on commercial banks‟ return on assets. Based on the study's findings and
conclusions, the researcher advised Ethiopian commercial banks to enhance their return on
assets by improving their ICT.

Dewitt (2017) made a study to identify the relationship between IT investment and profitability
of commercial banks in Ethiopia. In order to achieve this, Dewitt used a multivariate regression
model using ROA as a dependent variable for measuring financial performance whereas he used
six independent explanatory variables, three of which are IT related (Hardware, Software and IT
Service). The researcher has concluded that there is a negative significant relation between IT
investment and financial performance.

Kasha (2017) found that E-banking services have a favorable impact on the profitability of CBE
by minimizing transaction processing mistakes, saving time, lowering the risk of losing cashes,
and enhancing the bank's operational reliability. While the study finds that attracting new clients
to the bank, reducing the firm's human resource requirements, and improving customer loyalty
to the bank are all of lesser value. Electronic banking and its five components (i.e., automated
teller machines, bank cards, online banking, telephone banking, and point of sale) have a
favorable link with bank profitability, according to the empirical investigation.

Solomon (2016) looked at the impact of e-banking on return on assets, one of the most
important indicators of profitability, in his study on the Roles of E-banking on Financial
Commercial Banks in Ethiopia. Secondary data from 4 commercial banks operating in Ethiopia
branch was selected using a purposeful sampling strategy for the years 2016. Solomon used
the E-view 8 application to perform a Random effect panel least square regression with ROA as
the dependent variable, and six independent explanatory variables and other control variables,
including the value or price of an ATM transaction, the value or price of a POS transaction, a
debit card, the number of automated teller machine terminals, the number of point of sale
terminals, and the market share. The researcher came to the conclusion that having more ATMs,
POS, and market share had a positive impact on commercial banks' financial performance, with
many banking institutions stating that having more market share allowed them to achieve
greater scale in their operations, which improved their profitability. Finally, the study
concluded that, in order to improve return on assets, commercial banks should focus more on
raising knowledge about e-banking services and providing fast support to consumers.

Girma, E. (2019) conducted research on the role of e-banking on the financial performance of
commercial banks in Ethiopia on secondary data collected from ten commercial banks in
Ethiopia for the year covering 2015 to 2018. Number of ATM terminals, number of debit cards,
number of mobile banking users, value of ATM transactions, value of mobile banking
transactions, bank size and inflation rate were independent variables used for the study with
ROE as a dependent variable to study the banks performance on the role of bank specific
variables. STATA 13 was used to analyze the data and the result shows that number of
mobile banking users and value of ATM transactions had positive and significant roles on
bank’s profitability measured by return on equity. Whereas, bank size had negative and
significant role while inflation had a positive significant role from macroeconomic variable on
bank’s profitability.

2.10 Research Gaps

In general, there are a large number of researches made in this area, especially in the African
commercial banking industry. When it comes to the Ethiopian context, however, only a few
studies have been made to see the relationship between digitalization and profitability of
commercial banks. Even if there are a few previous works, most of them are focused on e-
banking adoption, barriers and benefits, challenges and prospect, customer satisfaction and
behavior towards e-banking, identifying the relationship between bank performance and IT
infrastructure investments and automation costs.

From the review of the relevant literature relating to the impact of electronic banking on
financial performance of commercial banks, it’s possible to see the existence of knowledge gap.
As it can be seen, Girmas and Dewitt’s studies focused on the impact of investment on IT
automation and basic ICT infrastructural components than digitalizing the banking service
which is the use of IT and other digital technologies as a strategic focus to derive the Banking
business. As it can be seen, Kasha’s study is focused on the benefits adopting e- banking
services by CBE to bring operational cost reduction in the Bank (e.g., reducing transaction
processing errors, saving time, reducing risk of caring cashes, and improving operational
reliability of the bank), which highly relates to operational excellence. The study made by
Girma, E. was dealing with the role of e-banking on selected commercial banks in Ethiopia with
the intention of determining ROE on bank specific variables such as number of mobile banking
and ATM user and their value of transactions and bank size and macroeconomic variable of
inflation rate which is more or less focused on bank’s performance variables instead of e-
channel products. On the contrary, the current researcher is proposing to explore not only
how profitability of the commercial banks in Ethiopia would be impacted through digital
banking products but also the impact on service quality and operational excellence of the
banks as a result of adopting digitalization strategy.

In addition, most local studies have been performed before the introduction of the National
Digital Payment Strategy. However, the current researcher is proposing to make the research
after the introduction of the National Digital Payment Strategy which could add a new
knowledge because the introduction of the strategy is generally expected to bring a change in
the behavior of local financial ecosystem.

2.11 Conceptual Framework

Digital Banking and Service Quality

In a competitive environment, service quality is important for the success of any organization. It
is one aspect that affects the organization’s competitiveness of business. In such environment
Banks should increase the quality of service constantly since there is no assurance that the
current outstanding service is also suitable for future. In addition, banks should “develop new
strategy” to fulfill their customer’s need and should provide quality service to distinguish
themselves from competitors (Siddiqi; 2011). High-quality banking services give banks a
competitive advantage in terms of revenue, customer loyalty, and retention Kumar et al. (2010).
In this regard, digital banking would be one aspect that has a big role to distinguish the service
quality of one bank over the other. The adaptation and fulfillment of customer needs are
important to the understanding of service quality, while setting the standards and later
evaluating up to which point the expectations are met. Digital banking service quality can be
perceived into five dimensions namely: reliability, tangibles, responsiveness, assurance,
empathy (Nahusenay, 2016).

Reliability: refers to the ability to provide a service as expected by customers in terms of speed,
accuracy and efficiency. How fast that one transaction can be done without error and in a 24-
operation mode. This ability to perform the promised service dependably and accurately is what
we call reliability.

Tangibles: refers to the physical appearance of e-banking which relates to facilities, equipment
and communication materials. The surrounding should draw favorable attention of the
customers.

Responsiveness: Employees readiness to provide prompt service and willing to support

customer in case of and disputes arise from the customer’s side regarding the use of digital
banking services.

Assurance: refers to the knowledge and skill of employees pass on trust and confidence on the
customer in case of any default arise while using digital banking services. A 24/7 good working
condition of the digital banking service may also generate confidence on the customers.

Empathy: giving extra care or individual attention to customers at times when they demand
extra help to fulfill their personal need with regard to the digital banking service provision.

2.12 Digital Banking and Operational Excellency

To achieve different customer experience with speed and simplicity requires new business
models that focus on back-office efficiency and operational excellence. One positive impact of
digitalization for banks as well as for the public is improving back-office efficiency to provide
new avenues for business efficiency and customer experience improvement. Banks are focusing
on standardization, optimization, convenience, effectiveness and efficiency to bring operational
excellence through cost minimization, wastage reduction, and efficient resource utilization work
process transformation by leveraging on digital technology and deterring of fraud and
corruption. It vastly elaborates the positive impacts of digital payments for the service user as
well as for the bank, using mobile money, for example. Digital payments can bring
operational excellence and transform developing countries like Ethiopia by offering
convenience and cost savings. The multi-faceted advantages of digitalization include: cost-
savings, minimizing inefficiency and inconvenience of traditional banking, wastage of time and
other resources (e.g. passbook printing costs and costs associated with transportation in search
of branch offices of the banks), eases of accessibility of funds, traceability of funds and security
of transactions. In this way, digital payments also deter fraud and corruption. Moreover,
Olanrewaju (2014) found that the trail of digitalization in commercial banking and financial
sector in Africa is heavily impacting towards cost-saving potential and also creating fresh
revenue sources.

The recent trend of digitalization has also unlocked huge potential for organizations pursuing
operational excellence value through leveraging not only on better price on but also automation
and digitization. Organizations find it rewarding to leverage on digital solutions, hence they are
working on integrating digital solutions to their operational excellence framework (BCG, 2018).

Figure 2.13. Conceptual framework

The researcher develops the following conceptual frame work of the study
Conceptual Framework figure

Independent Variable Dependent Variable

Training program

Training component

Training method
 CHAPTER THREE

RESEARCH METHODOLOGY

This section deals with the research design and methodology applied to carry out this particular
research. Research is a logical and systematic search for new and useful information on a
particular topic. A systematic approach to problem-solving is known as the research
methodology. It is the specific procedures or techniques used to identify the way the research
can be carried out. In research, the methodology section allows the reader to critically evaluate a
study's overall validity and reliability. The research contributes new ideas to the existing
knowledge. It can be done with the help of study, experiment, observation, analysis,
comparison, and reasoning. Most importantly research seeks predictions of events and
explanations, relationships, and theories for them (Grounder, 2012).

The chapter is organized into five parts; begins with research design, the study population and
sampling techniques, data type and data collection method, data analysis, and model
specification.

3.1 Research Design

The study aimed to examine the impact of digitalization on profitability of commercial banks in
Ethiopia. To achieve this objective quantitative research method use. Descriptive and
explanatory types of research design will be employ. Explanatory research design helps to
identify and evaluate the causal relationships between the different variables under the study
(Mercy et al., 2005). Explanatory research design is important to show how one variable affects,
or is “responsible for,” changes in another variable. And it also helps to understand, explain,
predict, and control relationships between variables Cooper and Emory (2006). Whereas,
descriptive survey research design is suitable since the research is designed to construct a
picture for the readers about observed effects of digitalization and trends in performance of the
banks in relation to profitability, service quality and operational excellence due implementation
of the digital banking service.

3.2 Population of the study and Sampling Technique

Target Population

The study's target population is all commercial banks that have adopted digital banking services.
However, due to the lack of available organized digital banking data and no complete data on
internet banking the researcher considers those banks with the required data on hand.
Accordingly, nine banks from the Based on the target population for this specific study.

3.3 Sample Size Determination

Sample size determination is the most frequently asked question considering sampling in every
research. It is influenced by a number of factors, including the purpose of the study, population
size, the risk of selecting a "bad" sample, and the allowable sampling error. In addition, the
level of precision, the level of confidence or risk, and the degree of variability in the attributes
being measured are the three important criteria that usually will need to be specified to
determine the appropriate sample size (Glenn D. Israel, 2009).

Therefore, a representative sample of the selected commercial bank branches was calculated
based on the formula for sample size determination and for finite population.

According to Kothari (2004) the sample size for this study was computed by using the formula
below.
Where, n = the desired sample size

z = the value of the standard variation at a given confidence level (to be read from the table

giving the areas under normal curve)

p = the proportion of target population estimated (50%)

q = 1-p
e = acceptable error (the precision)
N = population size
Therefore, representative sample of population was determined at 95% degree of confidence.
Hence at 95% degree of confidence;
Z=1.96 p=0.5 q=1-p e=5% (0.05); by substituting;

Let’s calculate the sample size step by step using the given formula:

n=e2⋅(N−1)+Z2⋅p⋅qZ2⋅p⋅q⋅N

Given:

 ( Z = 1.96 )
 ( p = 0.5 )
 ( q = 1 - p = 0.5 )
 ( e = 0.05 )
 ( N = 1948 )

Substituting these values into the formula:

n=(0.05)2⋅(1948−1)+(1.96)2⋅0.5⋅0.5(1.96)2⋅0.5⋅0.5⋅1948

Let’s break it down:

1. Calculate the numerator:

(1.96)2⋅0.5⋅0.5⋅1948=3.8416⋅0.25⋅1948=3.8416⋅487=1871.1552

2. Calculate the denominator:

(0.05)2⋅(1948−1)+(1.96)2⋅0.5⋅0.5=0.0025⋅1947+3.8416⋅0.25=4.8675+0.9604=5.8279

3. Divide the numerator by the denominator:

n=5.8279 x 1871.1552≈321.1

So, the desired sample size ( n ) is approximately 321.

Therefore, from the population size of 1948 a total sample of 321 branches was used as a
representative for the study.

3.3.1 Sampling Techniques

Data collection is critical in research since the data is intended to aid in the comprehension of a
theoretical framework. It is then critical that the method of obtaining data and from whom the
data will be obtained be chosen with prudence, especially since no amount of analysis will
substitute for inaccurately collected data. Purposive sampling, also known as judgment
sampling, is the deliberate selection of a participant who is willing to contribute information
because of their expertise or experience.

Purposive or judgmental sampling is used when the researcher’s prior knowledge and judgment
indicate that it will best suit the study’s goals and gives the best information (Aitken, 2016). To
recruit participants for this study, the researcher used a purposive sampling strategy. Moreover,
in this study the researcher also applied stratified sampling techniques to select sample branches
from the selected bank branches which are located in Ethiopia. In stratified random sample, the
population is divided into groups or strata. A random sample is selected from each stratum
based upon the percentage that each strata represents in the population. The basis of
stratification was geographical area location of the bank’s branches due to the fact that they are
located in geographical areas that span the state.

Stratified sampling primary interest is in the representativeness of the sample for purposes of
commenting on the population. Stratified proportionate random sampling technique produce the
overall population parameters with greater precision and ensures a more representative sample
is derived from a relatively heterogonous population.

To find the percentage of 321 out of 1948, you can use the formula:

Percentage=(WholePart)×100

Substituting the given values:

Percentage=(1948321)×100≈16.48%

So, 321 is approximately 16.48% of 1948.

Table 3.1. Sample Frame

Selected commercial No. of branches Sample Size Percentage (%)

banks located in Ethiopia
Commercial bank 1948 321 16.48%
of Ethiopia

TOTAL 1948 321 16.48%

3.4 Source and Types of Data

The study employed quantitative research approach collect from bank’s manager and published
and unpublished documents of the banks. In addition, financial statements and Annual reports
of the banks were the main sources of secondary data while primary data collect from formal
survey using self-structured questionnaire and out of 48 copies of the questionnaires which were
distributed to the selected 10 bank branches employees, only 25 (10%) copies were responded.
The data for this study is analyze using descriptive statistics such as frequency counts and
inferential statistics. Four years of secondary data starting from year 2018 to 2021 where most
of the commercial banks started their internet banking services and taken most initiatives to
boost digitalization, are use to study the impact of digitalization on profitability of the
commercial banks in Ethiopia.

3.5 Methods of Data Collection

In this study, the researcher collect primary data through structured questionnaire which
contained general questions and specifies questions and are administer through a drop and pick
later method. Secondary data collect from the banks‟ manager, annual report and other
published and unpublished documents of the banks for four years, between year 2018 and 2021
were used. The secondary data sources collected enough and reliable data for the study that was
used to enrich the analysis from primary data.

3.5.1 Methods of Data Analysis

Once collected, the data analyzed using descriptive and inferential statistics procedures.
Descriptive statistics enables the researcher to analyze the impact of digitalization on
profitability using both the quantitative and qualitative approaches. In this study, the primary
data was analyzed by using descriptive statistics which include mean, standard deviation,
percentages, and frequency of occurrence. In order to test the relationship between variables on
secondary data, the inferential test particularly the Pearson product-moment correlation and
multiple regression analysis were used. Data entry is the next step and then the analysis done
using Statistical Package for Social Sciences to get the desired output and trends of the
secondary data from year (2018 to 2021).

Model Specification

When a researcher wants to quantitatively define the link between independent variables and the
dependent variable, he or she uses model specification. It is the process of deciding which
independent variables to include in a regression equation and which to leave out. It primarily
necessitates a review of the literature in order to gain a theoretical grasp of the key

Independent variables, their interactions with the dependent variable, and the expected
coefficient signs and effect magnitudes. Despite the fact that statistical measures are an
important part of model definition, the foundation for model selection should be based on
theoretical issues. In general, rather than empirical or methodological factors, the specification
of a regression model should be based primarily on theoretical considerations.

In this study the researcher adopted multiple regression analysis method to establish the
correlation of profitability which is taken as the dependent variable and regressed against the
chosen independent variables.

Therefore, the general multivariate regression model with K independent variables is defined as
follows:

Yi =β0 + β1x1 + β2x2 + β3x3+ β4x4 + …….+ βkxi+ εi (i=1,2,3,4,…n)

Where Yi is the ith observation of the dependent variable, X1,…, Xi are the ith observation of
the independent variables, β0,…,βk are the regression coefficients, εi is the ith observation of
the stochastic error term, and n is the number of observations. Hence, empirical model to be
used to test the impact of digital banking on the profitability of commercial banks can represent
as:-

ROE = β0 + β1VATMTi,t + β2VIBTi, t + β3NIBUi, t + β4VMBTi, t +

Β5NMBTi, t + εi,t
Where;
ROE = Net Income/ Shareholder’s equity NIBU= Number of internet banking users
VATMT = Value of transactions executed by ATM = (Natural logarithm of the value of ATM
transactions)
VIBT=Value of transactions executed by Internet banking = (Natural logarithm of the value of
Internet banking transactions)

NMBT= Number of mobile banking transaction count

VMBT= Value of mobile banking transaction executed βo = Constant term

β1, 2, 3…5 are parameters to be estimated

ε = is the error component for Bank i at time t assumed to have mean zero E [Є it] =0 i =
commercial banks i = 1. . . 9; and
t = the index of time periods and t = 1 to 4
The significance of the regression model will be determined at 95% confidence interval and 5%
level of significance.

Variable Definition

As Nwankwo and Emunemu (2014) mentioned in their study, variables are the names that are
given to the variance we wish to explain and it is very critical to the research process as the
researcher uses them to find out the nature and direction of the research. It also varies or
changes in value according to situations or how treated. In a research variables are main focus
of the subject which is going to change due to circumstances.

Dependent Variable

Anbar and AL per (2011) in their study mentioned that bank performance is divided into
internal and external factors. Internal factors are factors that are under the control and influence
of the bank management and the board. However, an external factor is independent of the
management control and depends on the external environment. Among the internal factors,
ROA and ROE are those of the traditional accounting measures of analysis mostly used by
researchers and scholars to determine a bank’s profitability (Fisseha, 2015)

The return on assets (ROA) measures the capability of a bank’s management to make profits
from its assets. It is a good indicator of how well a bank’s management is managing the assets
of the bank. Return on Asset is a basic measure of bank profitability that corrects for the size of
the bank, which divides the net income of the bank by the number of its assets. ROA is a useful
measure of how well a bank is doing on the job because it indicates how well a bank’s assets
are being used to generate profits (Sarawak & Mustafa, 2018).

ROE is one of the most important ratios to measure bank profitability which tells us how much
stake holders are earning on the funds they invest to the firm. ROE generally increase the stock
price. When it is high the stock price will be high. Even though ROA is not distorted by high
equity multipliers, its relationship with ROE is explained by equity multiplier which is the result
of assets divided by equity tells ROE’s effect when a bank holds a smaller amount of capital.
With the critics that ROE has on risk associated with financial leverages, it is also the most
popular measure of performance which considers the effect of borrowed capital in financing the
assets to generate profit and suggests a direct assessment of the financial return of a
shareholders investment.

ROE= Net Income

Shareholder’s equity
Independent Variables
Value of Automated Teller Machine Transaction

Automated Teller Machines (ATMs) is one of existing replacements of the bricks and mortar,
labor intensive transaction system and paper based payment instruments. An automatic teller
machine allows a bank customer to conduct banking transactions from almost every other ATM
machine in the world. The ATM, therefore, performs the traditional functions of bank cashiers
and other counter staff (Ogbuji, C. N. et al., 2012).

The combined services of automated and human tellers mean that the bank will be more
productive during banking hours. Customers can also invest the time saved in other productive
activities because it saves them time in service delivery as opposed to queuing in bank halls.
ATMs are a cost-effective technique to increase productivity because they produce more
transactions per hour than human tellers (an average of 6,400 transactions per month for ATMs
vs. 4,300 for human tellers (Rose, 1999). Furthermore, because ATMs continue to operate even
when human tellers are unavailable, banks maintain a high level of productivity even after
normal business hours (C.A., 2014). "Effects of Automated Teller Machines on the Performance
of Nigerian Banks," according to the report, because of the rising rate of ATM fraud, the
data show that the deployment of ATM terminals has

enhanced the performance of Nigerian banks on average. Similarly, the security and privacy of
customers and suppliers have less of an impact on ATM service quality.

According to a study made by Madugba et al. (2021) on “Effect of electronic banking on

financial performance of deposit money banks in Nigeria” ATM has a positive and significant
association with ROA; POS and National Electronic Fund Transfer significantly affect ROA
only, while Web Banking has an insignificant impact on ROA. It is concluded that electronic
banking significantly affects financial performance of deposit money banks in Nigeria.

Evidence from other empirical study on Automated Teller Machines and Profitability of
Commercial Banks in Rwanda reveal that there is a significant relationship between automated
teller machines and profitability of Bank of Kigali with an increase of ROE from year 2013 to
2014. The correlations between ATM and ROA, ROE and net margin are found to be positively
correlated. The finding also shows that Bank of Kigali ATM user’s satisfaction level is
determined by lower cost, differentiation and accessibility. Other factors such as competitive
market, advertisement and increase ATM services are strategies to optimize the usage of ATM
at Bank of Kigali (Boscov Harelimana, 2018).

3.6 Number of Internet Banking Subscribers/Users

With the introduction of internet banking, bank customers now have access to their accounts as
well as general information on bank products and services via the bank's website, without the
need for intervention or the inconvenience of sending letters, faxes, original signatures, or
phone confirmations. Banks have made significant expenditures in telecommunications and
electronic systems, and users have been validated in their acceptance of electronic banking as
beneficial and simple to use. Many banks have been compelled to focus on information
technology initiatives in order to keep ahead of the competition as a result of the development
of Internet Banking. In terms of cost, customer service, and profit, Internet Banking has become
an important part of the bank (Manoranjan, Bhusan, Kenta, & Suryakanta, 2012).
Over the last few decades, Internet Banking has become more widely used to assist and improve
the banking industry's operational and managerial performance. According to Goggle

et al. (2015), a study on the influence of online banking on bank performance found that internet
banking had a favorable and significant impact on bank revenue. Internet banking has been a
crucial driver of cost management in banks due to its ease of use, convenience, and quick
transactions for customers.

In his study on E-Banking and Kenyan’s commercial banks financial performance, Mueni
(2019) discovered that all of the independent variables in the study (internet banking, mobile
banking, automated teller machine banking, and debit/credit banking) were positively and
significantly related to the Return on Assets. Mobile banking and internet banking, rather than
ROA and ROE, were found to be positively and significantly related to Net Profit.

In this study, Internet Banking is measured in terms of the total number of users/subscribers and
the value of transactions completed via Internet Banking during the indicated years.

Number of Mobile Banking Transactions

Kingoo, (2011) defines mobile banking as the provision and use of banking and financial
services via a mobile phone device. Financial services can be accessible by minimizing the time
and distance to the nearest retail bank branches with the help of mobile banking. It also reduces
the bank’s overhead and transaction related costs. With the extension of mobile banking service
to their customer’s financial service can create a great deal of opportunity which in turn can
increase their market share (Mabwai, F., 2016). A study made by Simpson (2002) suggests that
e-banking is driven largely by the prospects of operating costs minimization and operating
revenues maximization. Banks which have conventionally depended on physically setting up
branches to offer banking services are now moving towards the taking up of mobile banking
services as a structure of branchless banking which in effect has reduces banking costs, and thus
improving the profitability ratios. Mabwai, F. (2016) sought to determine the effects of mobile
banking on the financial performance of commercial banks. The results reveal that the number
of mobile banking transactions (MBT) had a positive influence on the ROE of commercial
banks in Kenya.
According to Wadhwa (2016) a study on the “Impact of Mobile Banking on Profitability of
Scheduled Commercial Banks in India.” In this study volume of transactions and value of
transactions performed through mobile banking considered as the factors of mobile banking

and Profitability considered in terms of Return on Assets (ROA) and Return on Equity (ROE).
The result of the study showed that although the usage of mobile banking has increased
extremely during the period of study, it has not played any significant role towards the
improvement of the profitability of these banks. The study that if all the banks concluded that if
the banks follow proper proceed to the path of mobile banking, the overall profitability due to
mobile banking will improve in coming years.

In the current study Mobile Banking is considered in terms of total number of Mobile Banking
transaction count and value of transaction executed through Mobile Banking on the years
specified.

3.7 Instrument validation and reliability

Validity

Validity has been defined by Bolarinwa (2015) as the degree to which an instrument measures
what it`s intended to measure. To strengthen the questionnaire's validity, the researcher engaged
specialists in the field, particularly the supervisor, who assessed the content's relevance and
assisted in the review and modification of the questionnaire.

Reliability
The consistency with which a method measures something and achieves the same result over
time is referred to as reliability. According to Heale and Tw cross (2015), reliability refers to the
degree to which a research instrument consistently produces the same results. Cronbach's Alpha
can be used to determine internal consistency. Pre-testing the questionnaire with five
commercial bank e-banking staffs ensured its reliability. The information gathered aided in
determining the need for any changes, ensuring that the research instrument measured what it
was designed to assess and therefore enhancing the questionnaire's reliability.

3.8 Ethical Consideration

Ethical considerations have been put into practice during and after the research process. Some
of the information that was required for this study was considered by the commercial banks to
be private and confidential. In this regard, any private information that was given
by the respondents for this study was treated with the desired confidentiality and was purposely
meant for the academic work and was not disclosed to the public. The respondents to the study
were coded to protect their anonymity.

Table 3.2. Operationalized of Dependent and Independent variables

Type of variables Name of the Indicator Measurement
variable
Dependent Profitability ROE Net income after tax
Variable Average shareholder’s
equity
ATM Value of ATM Total amount transacted on
transaction ATM
Mobile Banking Number of MB Total number of MB
Independent transaction transaction count
Variables Value of MB transaction Total money transacted by
mobile banking
Internet Banking Number of Total number of IB
IB transaction transaction count
Value of IB transaction Total money transacted by
internet banking

This scholar (Saunders, 2009) has described that to ensure the validity, reliability, and quality of
the research report; the researcher will follow and maintain relevant ethical issues during the
completion of the research project. Therefore, consideration of some ethical issues is vital for the
completion of the research project.

Item Unit Quantity Duration Unit Total

 in days cost cost
Personal
Transportation cost for the researcher
1 Person 30 600 18000
Equipment , supplies printing ,mobile 5000
phone, and publication expense
Stationary and Back up 4000
Grand Total 10,000

3.9. Budget and time allocation

3.10 Time breakdown

S. No Activity June July August September October
1 Review of Literatures XX
2 Research design XX
3 Data collection XX
4 Data analysis and interpretation XX XX
5 Report writing XX
6 Presentation of the result XX

CHAPTER FOUR
DATA ANALYSIS, RESULTS AND INTERPRETATION

This chapter presents the data findings to determine Assessment Of the impact of
digital banking on profitability of Commercial banks in Ethiopia. The data were
analyzed by using SPSS software version 20. The descriptive statistics analysis
was done and the findings were presented in form of figures and tables. The result
of tests of assumptions; inferential analysis which is performed to examine
relationship of variables, influence of independent variable over dependent
variable was examined and hypothesis analysis was tested.

A total of 48 questionnaires were distributed out of which 25 (10%) were

responded, while 23 (%) questionnaires were not returned from respondents.
Therefore, 25 questionnaires served as a source of data for analysis, findings
presentation and drawing conclusions.

Profile of Respondents

This part examines a descriptive study of the respondents' personal profiles as

commercial bank workers. The educational qualifications, years of experience in
the respective bank, and current professional position assumed are all included in
the personal profile.
Table 4.1. Respondents Profile

ITEM FREQUENCY PERCENT CUMULATIVE

PERCENT
Educational Diploma 3 1.2 1.2
Qualification Degree 15 79.6 80.8
Masters and 5 19.2 100
above
Total 25 100
Current Officer 162 64.8 65.1
Professional Senior Officer 44 17.6 82.7
Position Manager 42 16.8 99.6
Director 1 .4 100
Total 249 99.6
Missed system 1 .4
Total 250 100
Working Less than 2 years94 37.6 37.6

Experience 2-5 years 11 39.2 76.8

6-10 years 9 15.6 92.4
More than 10 5 7.6 100
years
Total 25 100
Source; Research Findings, 2022

From the data findings on respondents profile with regard to educational level of
the respondents, the largest portions 15(79.6%) were university graduates with
Bachelor’s degree, 3 (1.2%) of them were College graduates with Diploma and the
remaining 5(19.2%) of them were Second Degree or Master’s Degree holders.
This reveals that the majority of the employees of the banks are first degree
holders.
In terms of work experience or service years 11(39.2%) of the respondents served
between 2 to 5 years, (37.6%) of the respondents served less than 2 years, 9
(15.6%) of the respondents served between 6 years to 10 years and the rest
5(7.6%) of the respondents served for more than 10 Years.

In general, majority of the respondents have 5 years and less experience in the
bank. Whereas, as far as the current professional position of employees is
concerned, 206 (82.4%) of respondent of employees assumes a current position of
Officer and Senior Officer. Only 42 (16.8%) of the respondents are currently in the
Managerial position.

Descriptive analysis on Operational Excellence and Service Quality

In order to see the general perception of the respondents regarding Assessment Of

the Impact of Digital Banking on operational efficiency, the researcher has
analyzed the variable using frequency, percentage, mean and standard deviation.
Thus, the mean indicates to what extent the sample group on average agrees or
disagrees with the different statements. Weighted averages were calculated for the
Liker scales, from Strongly Agree=1 to Strongly Disagree=5.

Thus, the bench mark standard for the descriptive analysis of this study was a
weighted average score between 1and 1.79 indicates Strong Agreement, between
1.80 and 2.59 indicates Agreement, between 2.60 and 3.39 indicates Neutral or Not
Known, between 3.40 and 4.19 indicates Disagreement and finally between 4.20
and 5 indicates Strong Disagreement (Alonazi, Beloff.. and White, 2019).
Table 4.2. Descriptive statistical analysis result on Operational Excellence

Description Responses Mean SD

1=SA 2=A 3=N 4=DIS. 5=SDI
S.
The uniform digital banking10 13 2 - - 1.92 0.771
service such
as ATM attendants gives the30% 49.2% 18.4% 1.2%
feeling of
standard communication to the
customer.
Adoption of digital banking15 8 2 - - 1.588 0.729
service
enables the banks to deliver51.6% 41.2% 4.8% 1.6% 0.8%
retail services
24 by 7 to customers.
The 24-by-7-by-365 availability10 13 2 - - 1.811 1.502
of the
digital banking service makes42% 46.8% 7.2% 2.8% 0.8%
customers
be loyal to bank.
The availability of digital12 8 3 2 - 1.46 0.640
banking as an
option to a branch office saves61.2% 32.4% 5.6% 0.8% -
time to
customers and minimizes the
need for
physical engagements with the
Bank branch.

Availability of digital banking10 13 2 - - 1.766 0.805

reduce the
need and the cost to establish40.8% 45.2% 10% 2% 1.2%
and
operationalize a branch office
Availability of digital banking9 11 3 2 3 2.06 0.905
reduce the
need and the cost to hire, train,28.0% 46.8% 17.6% 6.4% 1.2%
onboard
and engage banking officers
Adoption of digital banking12 7 4 2 - 1.61 0.749
enables the
bank to reduce stationary cost by51.2% 38.8% 7.6% 1.2% 0.8%
making
the transaction ideally paperless.
Adoption of digital banking10 10 3 2 - 1.608 0.663
products and
services reduces the cost of47.6% 45.6 5.2% 1.6%
handling
transactions by reducing
customer visit to
bank branch.
Adoption of online banking12 9 4 - - 1.526 0.718
reduces the
cost of handling cash and the57.2% 34.8% 6% 0.8% 0.8%
risk of
carrying cash.
 Adoption of digital banking has8 10 4 3 - 2.04 1.048
reduces
error committed by employees28.4% 48.4% 18% 4% 0.8%
and
customers while transaction has
been
made manually.
Digital banking has contributed8 11 5 1 - 1.94 0.85
a
significant role in mobilizing34.8% 40.8% 20% 4.4%
local
currency deposit to the Bank.
Availability of Digital banking12 8 3 2 3 1.755 0.847
products
and service such as ATM, ITM44.8% 39.2% 12% 2.4% 1.2%
(in the
case of BOA) and POS has
special
advantage to the inflow of
foreign
currency to the Bank.
Total Mean and Standard Deviation 1.757
Source; Research Findings

SA= Strongly Agree, A= Agree, N=Neutral, DIS= Disagree, SDIS= Strongly Disagree

The result in (Table 4.2.) above shows that 23 (79.2%) of the respondents with the mean score
of 1.92 agree that the introduction of ATM (Automated Teller Machine) on the digital banking
service has created the feeling of standard communication to customers. The mean score of
1.588 also infers that 23(92.8%)of the sample group respondents strongly agree that adoption
of digital banking service enables the bank to deliver retail services 24 by 7 to customers.
Thus, growth as one of the Bank’s strategic themes can be achieved through convenient and
inexpensive accessibility option to customers. By the same taken 23 (88.8%) of respondents
has strongly agreed that the 24 by 7 digital banking service availability contributed to have
loyal customer to the bank. The most important factors encouraging customers to use digital
banking are reducing paper work and human error, which subsequently minimize disputes
Kiang et al. (2000).

The results obtained in table 4.2 above also revealed that 18(76.8%) of the
respondents agreed and above did state that digital banking does reduce transaction
errors while only 18(4.8%) of the respondents were of the opposite view when
compare and contrast the transaction done manually.

According to Chakava (2015) digital banking service adoption has an impact on

cost reduction associated with transaction and stationery by making it ideally
paperless. With this regard, 20(97.6%) of the sample groups of respondents with
mean score of 1.2 responded with neutral and above that digital banking adoption
has contributed huge amount to the cost of handling transactions and stationary
costs by minimizing customer’s visit to the branch. With the mean score of 1.755
and 1.94 respondents also reviled that digital banking availability has contributed a
significant role to mobilized local and foreign currency resources to the bank.
In general, the researcher finds out that most of the respondents agree that digital
banking adoption has a significant contribution to increase operational excellence
of the commercial banks.
Table 4.3. Descriptive statistical analysis result on Service Quality

Questions Responses Mean SD

1=SA 2=A 3=N 4=DIS. 5=SDIS

.
Digital banking services such as10 11 2 2 - 2.34 1.03
ATM,
POS, ITM(in case of BOA),18.8% 47.6% 16% 14.4% 2.8%
Mobile
banking, Internet banking and
Mobile
Wallet are operational in a 24/7
mode
without interruption in
delivering service
to customers.
Digital banking services are9 11 3 2 - 2.31 0.99
technically easy to access and18.8% 48.8% 15.2% 15.2% 1.6%
load quickly.
Digital banking offered by10 10 4 1 - 2.89 1.14
banks is 11.2 29.6% 24.0% 27.2% 7.2%
applicable for customers in any
level of
literacy.
Employees who have direct13 10 1 1 5 2.18 0.96
access to 22.8% 49.2% 16.0% 9.6% 2.0%
deliver the digital banking
service have
sufficient knowledge of the
products/services.
The number of steps required to8 9 4 4 - 2.56 1.13
 process 16.8%
digital banking services such as17.2% 39.6% 21.6% 4.4%
Mobile
banking, Internet banking and
Mobile
Wallet is short and precise.
System response time of digital7 12 5 1 3 2.38 0.92
banking services is reasonably14.0% 48.4% 22.8% 13.2% 1.2%
short.
made by employees and
customers.
The banks has availed a secured9 11 3 2 - 1.96 0.88
set of digital services. 31.6% 47.2% 14.8% 4.4% 1.6%
Total grand Mean and Standard Deviation 2.34
SA= Strongly Agree, A= Agree, N=Neutral, DIS= Disagree, SDIS= Strongly
Disagree Source: The Researcher
As shown in the above table 4.3, the mean score of 2.34 implies that respondents
agreed on the banks digital banking services are operational in a 24/7 mode
without interruption in delivering service to its customers. On the other hand,
20(67.6%) of the respondents are agreed and strongly agreed that digital banking
services are technically easy to access to

customers. On the contrast, 3(15.2%) respondents are neutral and the other
2(15.2%) of respondents are disagreed. 23 (72 %) respondents agreed or strongly
agreed that personnel with direct access to supply digital banking services are
knowledgeable. However, 5(11.2%) of the respondents reveal their disagreement
and above, the remaining 16% respondents do not have any idea. Digital banking
services have to be easy and convenient for customers to choose over the
traditional baking services. The study revealed that only 56.8% of the respondents
agree and 26% of them disagree with a mean score of 2.56 which implies
respondents agree on that the banks provide short and precise digital banking
service to customers. Security is a critical aspect of digital banking. It has to be
transformed with innovative capabilities to provide consumers with a secure
banking experience, where they can access their financial data without fear and
conduct transactions with ease. The study finds out that 9 (78.8%) of the
respondents with mean score of 1.96 strongly agreed that the banks has availed a
secured set of digital services.
In general the researcher summarizes that the grand mean score of 2.34 indicates
that majority of the respondents agreed on digital banking adoption has improves
the service quality of the banks.

Reliability Test

A reliability test is done to test internal consistency of items in variables. The total
number of complete feedback received was 25 sample populations. In order to
confirm the reliability of the data, Cronbach‟s Alpha was calculated for each
variable. As below table indicate, all variables Cronbach‟s alpha test result shows
to be larger than 0.7 which is known to be satisfactory.
Table 4.4.Scale: Reliability Statistics on Operational Excellence
Reliability Statistics

Cronbach's N of
Alpha Items

.792 12

Table 4.5. Scale: Reliability Statistics on Service Quality

Reliability Statistics

Cronbach's N of
Alpha Items
 .862 8

Correlation Analysis

Gujarati (2004) defines correlation as a statistical measure that reflects how closely
two variables are associated linearly, or how they change at a steady pace. The
Pearson product- movement coefficient, sometimes known as the Pearson
correlation, is the most generally used bi-variant correlation statistic. It's crucial to
evaluate the correlation between the variables used in the regression before looking
at the results. The Pearson correlation analysis is utilized in this study to look at
the correlations between the secondary data variables. The correlation coefficient,
abbreviated as r, can be anywhere between -1 and 1. The most powerful potential
positive correlation is +1, and the most powerful possible negative correlation is -
1, where the value of one variable increases while the value of the other variable
decreases. As a result, the closer the coefficient is to one of these figures, the
higher the data connection it represents. The value of 0 in the correlation
coefficient suggests a weaker linear relationship. Correlation coefficients of 0.80
to 1.00 are considered extremely strong, 0.60 to 0.79 are considered strong, 0.40
to 0.59 are considered moderate,
0.20 to 0.39 are considered weak, and 0.00 to 0.19 are considered very weak,
according to (Meghan than, N. 2016).

Table 4.6. Correlation matrix between Dependent and Independent variables

Correlations

ROE LVAT LVIBT NIBU LVMBT NMBT

MT

Pearson
1 .607** .486** .079 .454** .445**
Correlation
ROE
Sig. (2-tailed) .000 .003 .645 .006 .007
 N 36 36 36 36 35 36

Pearson
.607** 1 .647** .130 .717** .515**
Correlation
LVAT
MT Sig. (2-tailed) .000 .000 .449 .000 .001

N 36 36 36 36 35 36

Pearson
.486** .647** 1 .301 .493** .343*
Correlation
LVIBT
Sig. (2-tailed) .003 .000 .075 .003 .040

N 36 36 36 36 35 36

Pearson
.079 .130 .301 1 .254 -.024
Correlation
NIBU
Sig. (2-tailed) .645 .449 .075 .141 .892

N 36 36 36 36 35 36

Pearson
.454** .717** .493** .254 1 .444**
Correlation
LVMB
T Sig. (2-tailed) .006 .000 .003 .141 .008

N 35 35 35 35 35 35

Pearson
.445** .515** .343* -.024 .444** 1
Correlation
NMBT
Sig. (2-tailed) .007 .001 .040 .892 .008

N 36 36 36 36 35 36

**. Correlation is significant at the 0.01 level (2-tailed).

*. Correlation is significant at the 0.05 level (2-

tailed). Source: Researcher computed on SPSS
Table 4.6 demonstrates the relationship between the dependent and
independent variables, as well as the relationship between the independent
variables. According to the findings, the value of ATM transactions has a high
positive link and is statistically significant (r= 0.607, p<0.01) with ROE. The
study's correlation matrix also shows that the value of internet banking
transactions, the number of mobile banking transactions, and the value of
mobile banking transactions all have a positive moderate correlation and
significance with ROE, with (r=0.486, p<0.05), (r=0.445, p<0.05), and
(r=0.454, p<0.05) respectively. Internet banking customers, on the other hand,
have a very weak positive link with ROE. All of the independent variables
have a positive correlation with the dependent variable, according to the
correlation matrix table.

Multiple Regression Analysis

The relationship between one dependent variable and a number of independent

factors is explained using multiple regression analysis (Pall ant, 2005). It also
indicates how much of the variance in the dependent variable may be accounted
for by independent factors. A number of assumptions must be made in order to
implement the Multiple Regression Analysis model. If the assumptions are tested
and met, inference from the model is valid. The researcher will test the following
assumptions.

Linearity Assumption Test

The dependent variable and each of the independent variables must have a linear
relationship, according to this assumption. To visually check the linearity of the
assumption, a scatterplot is created between the independent and dependent
variables. The scatterplot generated by SPSS demonstrates that the dependent and
each of the independent variables have a linear relationship, as seen in the figure
below.
Figure 4.1. Linearity Assumption Test

Source: Computed by the researcher on SPSS 20

Normality Assumption Test

The cumulative probability plot of residuals (P-P plot) is used to determine

whether a variable's distribution is compatible with a given distribution. If the
Standardized residuals are normally distributed, the scatters of the residuals
basically fall straightly on the normal distribution line indicating a normal
distribution of residual. The variance of errors is the same across all levels of the
Independent variables, which is known as homoscedasticity. Heteroscedasticity is
defined as a difference in the variance of errors at different values of the
independent variables. Visual study of a plot of the standardized residuals (errors)
by the regression standardized projected value helps confirm this assumption
(Matsaany, Bayun & Adinda, Gebri & Amora, Ria & Fuzzy, Akhmad. 2016). For
this study, the P-P Plot Normality test is examined with the histogram below,
which clearly shows that the standardized residuals are normally distributed, and
the Test of Normality table for Kolmogorov-Smirnov and Shapiro-Wilk both show
that the p-value is greater than 0.05, indicating that the normality assumption test
has been met.

Table 4.7. Test for Normality Assumption

Tests of Normality

Kolmogorov-Smirnova Shapiro-Wilk

Statistic df Sig. Statistic Df Sig.

Standardized
.091 35 .200* .965 35 .330
Residual
*. This is a lower bound of the true
significance. Source: Computed by
researcher on SPSS Figure 4.2.
Normality Assumption Test

Source: Computed by the researcher on SPSS 20

Multicollinearity Assumption Test

Simply assessing the correlation coefficient between independent variables is the

simplest multicollinearity test. The correlation matrix result (Table 4.3.) in this
study reveals that the connection between the explanatory variables is weak,
implying that multicollinearity issues are either minor or non-existent. When the
correlation between independent variables exceeds 0.80, it becomes a serious
issue. According to Tabachnick and Fidel (2001), the presence of multicollinearity
in the data is indicated if the Tolerance value is 0.1 and the VIF is >10. Correlation
analysis in this scenario does not allow the researcher to draw conclusions about
the source and effect of the relationship between variables. According to the
findings of this investigation, as indicated in the table 4.8 below all of the
independent variables were found to have a tolerance of more than 0.1 and a VIF
value of less than 10 which indicates that there doesn’t exists the problem of
Multicollinearity in this study.

Table 4.8. Multicollinearity Assumption Test

Model Collinearity Statistics

Tolerance VIF
(Constant)
LVATMT .340 2.938
LVIBT .554 1.804
NIBU .837 1.195
NMBT .699 1.431
LVMBT .445 2.245
Dependent variable: ROE
Source: Computed by the researcher on SPSS
Homoscedasticity Assumption Test
The assumption of homoscedasticity is that the variance in the residual (amount of
error in the model) is similar throughout the model. To put it another way, the
dispersion of the residuals at each point of the predictor variables should be
reasonably constant (or across the linear model). The assumption of
homoscedasticity is tested in this study using an SPSS scatter plot for standardized
residuals and standardized predicted values of the outcome or dependent variable,
as shown below. The scatterplot resembles a rectangle, with no points on the x and
y axes outside the -2 point, showing that hetroscedasticity was not a severe
concern.

Figure 4.3. Test for Homoscedasticity

Source: Computed by researcher on SPSS

Independent of Residuals Assumption Test

In Multi Linear Regression all observations must not be related or has to be

independent. This assumption can be tested using Durbin-Watson statistics which
can range between 0-4. The result from the under stated table shows that there is
no correlation between observations in the data or the residuals are independent.
Table 4.9. Independency of Residuals Test

Model Summaryb

Model R R Square Adjusted R Std. Error ofDurbin-

Square the Estimate Watson

1 .660a .436 .338 7.7017 .732

• Predictors: (Constant), NMBT, NIBU, LVIBT, LVMBT, LVATMT
Dependent Variable: ROE
Source: computed by researcher on SPSS

Multiple regression analysis was performed after checking that all the required
assumptions have been fulfilled. The researcher uses the result from SPSS to
determine how well the regression model fits the data, statistically significance of
the explanatory variables over the dependent variable and regression coefficient of
the explanatory variables.

Model Summary

To determine how well the total regression model fits the study hypotheses. This is
accomplished by first looking at the adjusted R squared (R2) to determine the
percentage of total variance explained by the regression model for the dependent
variables. The adjusted number shows us how much variance in the dependent
variable would be accounted for if the model had been created from the population
from which the sample was obtained, whereas R2 tells us how much variation in
the dependent variable is accounted for by the regression model. It expresses the
model's goodness of fit to the population while taking into account the sample size
and number of predictors utilized. According to researchers, this amount must be
equal to or more than 0.19

The following tables indicated that the, R2 value of .436 indicates that 43.6% of
the goodness of the model is fairly good. The variation in the dependent variable,
ROE can be explained by the predictors, Number of Mobile Banking Transaction
(NMBT), Number of Internet Banking Users (NIBU), Value of Internet Banking
Transaction (LVIBT), Value of Mobile Banking Transaction (LVMBT) and Value
of ATM Transaction (LVATMT). The remaining 56.4 % variation is explained by
stochastic error term (e) meaning that 56.4% of changes in ROE are explained by
factors that are not explained in the model.

Table 4.10. Model summary for Dependent variable and Predictor

Model Summary

Mode l R R Square Adjusted R Std. Error of

Square the Estimate

1 .660a .436 .338 7.7017

• Predictors: (Constant),
NMBT, NIBU, LVIBT, LVMBT,
LVATMT

Dependent Variable: ROE

Source: computed by researcher on SPSS

ANOVA Model Fit

ANOVA analysis is normally used to compare the mean scores of more than two
variables. It is also called analysis of variance because it compares the variance
between variables and tests whether the R-squared is significantly greater than zero
and that the overall regression model is a good fit for the data (Pall ant, 2005).

Accordingly (Table 4.11.) of this study shows that the overall regression model
was significant, F (5, 29)= 4.48, P-value < 0.05, R2= .436) and it can be said that
there is a relationship between ROE of the commercial banks in Ethiopia and the
predictors: NMBT, NIBU, VIBT, VMBT and VATMT.

Table 4.11. ANOVA (test using alpha = 0.05)

ANOVA

Model Sum of Df Mean F Sig.

Squares Square

Regression 1327.080 5 265.416 4.475 .004b

1 Residual 1720.156 29 59.316

 Total 3047.235 34

Dependent Variable: ROE

Predictors: (Constant), NMBT, NIBU, LVIBT, LVMBT,

LVATMT Source: computed by researcher on SPSS

Regression Coefficient

Standardized Coefficient

After rescaling variables with a mean of 0 and a standard deviation of 1,

standardized coefficients are generated by running a regression model on
standardized variables. It's a tool for comparing the influence of various predictors
Xi on the outcome Y. As a result, the standardized Beta coefficient may be used to
determine the intensity of each independent (predictor) variable's influence on the
criteria (dependent) variable. As a result, the regression coefficient explains the
average amount of change in the dependent variable produced by a unit of change
in the independent variable, such as a change of 1 standard deviation in X is
related with a change of Y.

According to the regression coefficient table below (Table 4.12.) out of five
explanatory variables only the value of ATM transaction had statistically
significant at 5% since the p- value for this variable was 0.05. While assessing
coefficients of correlation, the value of ATM transaction, number of mobile
banking transaction and value of internet banking transaction had a positive or
direct relationship with return on equity (ROE) of commercial banks, which
suggested that, an increase in these independent variables would result in an

increase in ROE. Whereas the rest two variables such as: value of mobile banking
transaction and the number of internet banking users had a negative coefficient,
that means these explanatory variables had an inverse relation with return on
equity (ROE) of commercial banks in Ethiopia.

Unstandardized Coefficient

After running a regression model on variables measured in their original scales,

unstandardized coefficients are generated. A one-unit change in the independent
variable X corresponds to a one-unit change in the result Y. It's utilized to figure
out how X affects Y on an individual basis.

As stated in chapter three, the study used the following multiple regression
operational model to establish the statistical significance of the independent
variables on the dependent variable.

ROE = β0 + β1VATMTi,t + β2VIBTi, t + β3NIBUi, t + β4VMBTi, t + Β5NMBTi,

t + εi,t ROE= -36.177 + 5.883VATMT + .901VIBT -3.239NIBU - .229VMBT +
1.202NMBT +
εi,t

The constant value (α = -36.177) shows that ROE would be -36.177 if other
variables (VATMT, VIBT, NIBT, NIBU AND VMBT) of the model were zero.
On the other hand, a beta coefficient of 5.883, .901 and 1.202 indicates that if there
is one unit increase in the value of ATM transaction, value of internet banking
transaction and number of mobile banking transaction it leads to 5.883 percent,
0.901percent and 1.202 unit increases in ROE of the commercial banks
respectively. Whereas, one unit increase in the number of internet banking user
and value of mobile banking transaction would lead to 3.239 and .229 decrease in
ROE of the commercial banks respectively. Furthermore, the Error term ( ꞓ)
estimate was set to zero.
Table 4.12. Regression coefficients

Model Unstandardized Standardized t Sig.

Coefficients Coefficients

B Std. Error Beta

(Constant) -36.177 19.937 -1.815 .080

LVATMT 5.883 2.939 .479 2.002 .055

LVIBT .901 1.045 .162 .862 .396

1
NIBU -3.239 .000 -.007 -.043 .966

LVMBT -.229 1.350 -.036 -.170 .866

NMBT 1.202 .000 .153 .918 .366

Source: computed by researcher on SPSS

Interpretations on Regression Results and Research Hypothesis

Analysis of the results for each explanatory variable and their importance in
determining the profitability of the commercial banks discussed in detail in this
part. Furthermore, the discussion analyzes the statistical findings of the study in
relation to the previous empirical evidences.

Value of ATM Transactions and Return on Equity

The logarithm of the value of ATM transactions is used to measure the value of
ATM transactions. When the value or amount of ATM transaction increased by
one percent, the return on equity (ROE) of sampled Ethiopian commercial banks
increased by 0.05883 units or 5.883 percent on average and statistically significant
at the 5% level of significance, according to the regression coefficient model in
table 4.12. Because there was insufficient evidence to support the negative
hypothesis, the researcher accepted the null hypothesis that the value or volume of
ATM transactions had a positive substantial impact on return on equity.
The link between VATMT and ROE was positive, as expected, and this positive
relationship may be attributable to the fact that more ATM transactions resulted
in a higher return on equity. This finding was in line with Mueni, M. (2019),
Girma, E. (2019), Bosco Harelimana, 2018, Joseph M.V. (2017), Itah, and
Emmanuel's (2014) previous research. The value of ATM transactions, according
to those experts, had a positive and considerable impact on return on equity.

The reason for the large positive link could be that the more ATM transactions
completed the more commission commercial banks generate, particularly when
customers transact with banks other than the card issuing bank. Furthermore, as
more ATM transactions were performed, banks would benefit from transaction-
related cost reductions in ordinary business, with a cost of $1.07 per transaction
against 27 cents for ATM banking transactions (Allen and Hamilton, 1996).

Value of Internet Banking Transactions and Return on Equity

The proxy used to measure value of internet banking transactions (VIBT) is natural
logarithm of the value of internet banking transaction. The result of regression
coefficient model in table 4.12 above shows that the coefficient of value of
internet transactions was
.901 and its P-value was 0.396, holding other variables constant, when value or
amount of transactions of internet banking (VIBT) increased by one percent, return
on equity (ROE) of sampled Ethiopian commercial banks would be increased by
0.00901 units or 0.901 percent on average and statistically insignificant at even
10% level of significant. Though the correlation between VIBT and ROE had a
positive result as it was expected, but it was not statistically significant. Therefore,
the researcher failed to accept the null hypothesis that value or amount of
transactions of internet banking had a positive significant impact on return on
equity. The result shows that the impact of value of internet banking transaction on
the profitability of commercial banks is minimal or negligible.

Similarly, previous researchers have reported the positive impact of internet

banking on banks profitability Tunney et.al., (2015), Malhotra, P., & Singh, B.
(2009), Hernando, I., & Nieto, M. J. (2007. According to those researchers internet
banking transaction reduces the overhead expenses of the banks and the cost
reduction result in bank’s profitability. Such findings could be attributed to
commission on internet banking which currently most commercial banks in
Ethiopia do not collect on internet banking service and moreover the

initial cost allocated for infrastructure development and fail to attract customer to
adopt online banking in mass scale.

Number of Internet Banking Users and Return on Equity

The result regression coefficient model in table 4.12 above indicated that the
coefficient of the number of internet banking was -3.239 with p-value (0.966). In
other words, there was insignificant negative correlation between number of
internet banking users (NIBU) and return on equity (ROE) of sampled Ethiopian
commercial banks. As a result, the researcher rejected the null hypothesis that
there was positive significant relationship between NIBU and ROE. In contrary to
the hypothesis of this research, NIBU showed a negative relationship with return
on Equity (ROE) of sampled Ethiopian commercial banks. The researcher finding
was consistent with the findings of Shah Alam et al. (2007), Khrawish & Al-Sadi
(2011), Hussein (2013) and Gutu 's (2014) that number of internet banking users
had negative insignificant relationship with return on equity. In contrast, previous
studies for instance Hassan (2002), Pigni et al. (2002), Anabolic & Claeys'n
(2008), and Ciciretti et al. (2009) stated that NIBU had significant positive effect
on ROE.

The findings of NIBU negative relation with ROE could be attributed to lack of
sufficient number of active customers using internet banking due to level of
education of the customer and awareness in relation with the risk of using the
service and the bank's website functionality, resulted in the negative relation of
NIBU with ROE.

Value of Mobile Banking Transaction and Return on Equity

The logarithm of the value of mobile banking transactions is used to measure the
value of mobile banking transactions. The coefficient of the value or volume of
transactions conducted via mobile banking was -0.229 with a p-value of 0.866,
according to the regression coefficient in table 4.12.

In other words, there was no statistically significant negative/inverse association

between the value of mobile banking transactions (VMBT) and the commercial
banks' return on equity (ROE). As a result, the researcher rejected the null
hypothesis that there was a positive significant link between VMBT and ROE,
because the results of the investigation found no evidence to support this
hypothesis.

VMBT indicated a negative association with Return on Equity (ROE) of tested

commercial banks in Ethiopia, contrary to the research premise. The findings were
comparable to those of Erne, (2017), who discovered that the value of mobile
banking transactions had no meaningful association with return on equity. Many
prior studies, such as Kithaka (2014), Momanyi N.D. (2015), Kashif, M., Kamboh,
M., and Javaid, M. (2016), and Akon N. and Amaegberi A. (2018), found that
VMBT had a beneficial influence on ROE.

The possible reason behind this negative correlation of VMBT and ROE would be
that banks have signed up a large number of customers for mobile banking
services, despite the fact that few of them are actively transacting on the service
due to a lack of awareness about how to use the application and little support from
banks on service usage. As a result, many people may have had doubts about the
functionality of mobile banking, resulting in an increase in the number of
unsuccessful mobile banking transactions.
Number of Mobile Banking Transaction and Return on Equity

Table 4.12 shows the regression coefficient's outcome above indicated that the
coefficient of the Number of Mobile Banking Transaction (NMBT) was 1.202 with
p-value (0.366). In other words, there was a positive relationship between NMBT
and return on equity (ROE) of commercial banks under study.

However, the relationship was not statistically significant even with significance
level of 10%. Therefore, the researcher rejects the null hypothesis that there was
positive significant relationship between NMBT and ROE, as the result from the
analysis has no evidence to support the positive relationship between NMBT and
ROE.

The result was consistent with the findings Mutua (2011) of that number of mobile
banking transaction had positive but no significant relationship with return on
equity. However, many previous studies for instance Kithaka (2014), Mabwai, F.
(2016), stated that NMBT had significant positive effect on ROE.

According to Mutua (2011), this is due to trends that suggest that macro-economic
variables such as inflation and foreign exchange rate changes, among other macro-
economic variables, have a significant impact on commercial bank financial
performance. The reason for this positive negligible relationship of NMBT in the
context of commercial banks in Ethiopia is that most commercial banks registered
their customers for the goal of growing the number of mobile banking users
instead of creating a profit. In addition, bank’s website functionality, system
delays, slow processing of transactions and network interruption limits customers‟
willingness to transact on mobile banking and will impact negatively on the
profitability of banks.

Digitalization and Operational Excellence

The descriptive statistical analysis result of Table 4.2 above shows that
digitalization has a significant impact on operational excellence with a mean score
of 1.757. Therefore, the researcher accepted the null hypothesis which stated that
digitalization has impact on operational excellence of the commercial banks in
Ethiopia. The result is consistent with previously made researches that Tornjanski,
V., Marinković, S. and Janacek, Z.,(2017), BCG, (2018), Chipwatanga,T.& Kara,
B. (2019) Digitalization has unlocked huge potential for organizations pursuing
operational excellence value through leveraging not only on better price but also
on automation and digitization. Organizations find it rewarding to leverage on
digital solutions, hence they are working on integrating digital solutions to their
operational excellence framework. Digital capabilities enable banks to automate
processes, boost efficiency, and reduce costs, while also improving the customer
experience through different digital channels such as mobile banking, online
banking and gaining market share (BCG, 2015).

Digitalization and Service Quality

The descriptive statistical analysis result of Table 4.3 above shows that
digitalization has a significant impact on service quality with a mean score of 2.34.
Therefore, the researcher accepted the null hypothesis which stated that
digitalization has impact on service quality of the commercial banks in Ethiopia.
The result is evidenced with previous research Hammond et al. (2018) which
revealed that not only is service quality a significant component in consumer
happiness with E-Banking services, but that reliability is the most important
attribute of service quality in affecting customer satisfaction. Hammond et al.,
(2018) also discovered that the four independent variables associated with E-
Banking service quality (efficacy and ease of use, dependability, security and
privacy, and responsiveness and communication) had a significant impact on
electronic banking with consumer satisfaction. Quality digital banking services
allow users to be more cost-effective in their transactions, not just in terms of
money but also in terms of time, which could be the explanation for this

attribution. Customers must also be able to rely on regular E-Banking service

delivery, as well as timely responsiveness and good communication, which can be
crucial when dealing with E-Banking issues. All of these factors appear to have a
significant effect on customer satisfaction. In this way, digital banking is one
factor that can help differentiate one bank from another in terms of service quality.

Table 4.13. Summary of Variables, Hypothesis Test and Decisions

Explanatory Variables Expected Sign Actual Sign Decision

Value of ATM Positive and Positive and Accepted
Transaction Significant Significant
Value of IB Transaction Positive and Positive andRejected
Significant insignificant
Number of IB user Positive and Negative and Rejected
Significant insignificant
Value of MB Transaction Positive and Negative and Rejected
Significant insignificant
Number of MB Positive and Positive andRejected
Transaction Significant insignificant
CHAPTER FIVE

CONCLUSION AND RECOMMENDATION

The chapter discusses the conclusions and drives recommendations based on the
data findings analyzed and finally it provides suggestions for further research.

Conclusion

The overall goal of this study was to estimate the impact of digitalization on
commercial banks profitability in Ethiopia from year 2018 to 2021. For secondary
data analysis, nine purposefully selected commercial banks with 36 observations
were employed, while 48 questionnaires were distributed to obtain primary data on
stratified randomly selected bank branches. Descriptive statistics and multiple
regression models were used to analyze the sample data. Return on equity was the
dependent variable employed as a profitability indicator (ROE). The return on
equity (ROE) was calculated by dividing net income after taxes by average
stockholders' equity, and it was regressed with independent variables such as the
value of ATM transactions, the number of mobile banking transactions, the value
of internet banking transactions, and the number of internet banking users, and
value of mobile banking transaction.
The researcher found that digitization has an effect on the profitability of Ethiopian
commercial banks based on the study's findings. The relationship between digital
products and their impact on bank profitability, on the other hand, varies. As a
result, ATM transaction value has a large beneficial influence on commercial bank
profitability in Ethiopia, as measured by return on equity. This suggests that
raising the transaction value of ATM transactions has a beneficial influence on
commercial bank profits. The underlying causes for this could be related to the
bank's own overheads and transaction-related operational costs involved with
hosting and servicing customers at a branch counter as a result of providing basic
financial services more accessible to the customer which in turn minimizes the
service time and increases convenience to the customer who will be willing to pay
commissions in return.

On the other hand, the value of internet banking transactions and the number of
mobile banking transactions have positive relationship with the profitability of the
commercial banks in Ethiopia; however, this relationship is statistically
insignificant. The weak association may also suggest that commercial banks
subscribe a number of customers on mobile banking services; however, only a few
of the subscribers actively engage and transact on the service. The underlined
reasons for weak mobile transaction engagement of the subscribers may include
lack of awareness on how to use the application and little support provided from
the banks‟ on service usage, which in turn leaves the subscribers doubting with
regard to the functionality of mobile banking and increased number of
unsuccessful mobile banking transactions. On the other hand, the huge
infrastructure cost on internet banking and lack of sufficient number of customers
may have adversely affected the profitability of commercial banks in Ethiopia.

The rest of the independent variables (i.e. number of internet banking user and
value of mobile banking transaction) were not powerful to influence the
profitability of commercial banks in Ethiopia. The study also aimed at determining
whether digitalization affects, service quality offered by the commercial banks in
Ethiopia. Based on the findings, the researcher has established that digitalization
has a positive impact on the service quality offered by the banks. This is because
customers have been able to consistently transact on various banking services
electronically, in a 24/7 mode. On the other hand, by availing the mobile banking
service, the banks provided ease of access of their service to customers and
therefore saved their valuable time. These would indirectly have a positive impact
on the banks profitability by keeping the customers‟ loyalty to the banks.

The study also examined whether digitalization has an, impact of on operational
excellence of the commercial banks in Ethiopia. Based on the result, it was
established that digitalization has a positive impact on operational excellence as
operational excellence ultimately aims at providing standardized internal
communication through different digital channels, optimized and convenient
service which minimize customer physical engagement with bank branches, and
reduced overhead of transactional costs through efficient and effective integration
of front and back offices of the banks. These would have provided for increased
profitability of commercial banks.

In general, it can be concluded that digital banking has brought a great opportunity
to improve the profitability of commercial banks in Ethiopia. In addition, the
existing digitalization efforts of the Ethiopian banks goes with and supported by
new national digital strategy of the country and ultimately brings better returns on
investment.

Recommendation

From the research findings it has been revealed that the value of ATM transactions
was the significant drivers of profitability of commercial banks in Ethiopia during
from year 2018 to 2021. Special emphasis has to be given to this indicator in order
to further enhance profitability of commercial banks in Ethiopia. Even though,
value of mobile banking transaction and number of internet banking user have a
weak significance over profitability of commercial banks there must be a way to
identify the reason and take measure towards improvement on their performance.
Based on the study findings the following possible recommendations were
forwarded:

Commercial banks should work on awareness creation to their customers with

regard to usage of online and mobile banking services and its benefits to time and
cost reduction.

Banks should also have to exert maximum effort to increase mobile and internet
banking user activation rate targeting to achieve an increased number of internet
banking users and value of mobile banking transactions.

Commercial banks should consider commission based mobile and internet banking
service transactions as they are currently doing for bill payments and other bank
transfers.

Commercial banks should provide proactive and reactive service to customers in a

remote location whenever desperations and dropping of services are common. A
few examples include the digital customer’s complaints on the service, handling of
disputed and long outstanding payments and unreleased payments and stacked
ATM cards

To deliver quality service to their customers, commercial banks should ensure the
ATM service quality and accessibility. One mechanism of doing this better can be
fortifying their call centers which serve as direct access points for customer service
complaints.

Commercial banks should consider periodic review and continual improvement of

the digital channel and associated services by working on the digital customer’s
specific pain points.

Limitation and Area for Future Research

This research was done while passing through various limitations including but not
limited to the infant stage of digitalization as well as the initial efforts of
implementing the digital financial strategy of the country. Even if the entire data is
collected and analyzed from nine local commercial banks, it’s still too small and
talks just the partial truth. Except ATM related services, the commercial banks are
just beginning to open up their digital scopes and many of them are not getting
return out of the digital services (e.g. mobile banking service hasn’t yet been
influencing the financial return to the Banks). On the other hand, the research has
been done in the down of the new digitalization strategy of the country as well as
[partial] privatization of the telecom service, which in turn maximizes the role of
banks as central players in fin-tech based services. The most recent examples
include ethio-telecom’s multi-purpose tele-birr payment service which necessarily
demands a B2B integration with commercial banks.

The current research, however, can be a springboard for future new researchers
who will be aspiring to see the impacts of digitalization on the return of the local
commercial banks, their services and their effort to achieve operational excellence
while other digital players like new telecoms with associated fin-tech products,
new B2B, B2C and B2G digital-based integrations, and other determinants of the
above specified parameters.
Indeed, future researchers may raise the same research questions tested in the
current research when a better public awareness on the use of digital banking
service is created, cash holding limits are truly enforced, and when other
provisions of the financial digitalization strategy in banking services will soon be
extended beyond serving the very primitive banking activities like cash
withdrawals and making small fund transfers through the banking platform.
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ANNEX

QUESTIONNAIRE ON IMPACT OF DIGITAL BANKING ON

PROFITABILITY OF BANK OF ABYSSINIA

Dear respondents,

I would like to express my sincere appreciation for your time, candid and prompt response.

This questionnaire is designed for partial fulfillment for the requirement of Master
in Business Administration. This study is conducted to assess the Impact of Digital
Banking on Profitability in the banking business in Ethiopia, the case of
commercial banks in Ethiopia. It will mainly assess the impact of adopting digital
banking with the intent and strategy delivering quality service and maintaining
operational excellence. As a strategic theme of the banks, this study is believed to
determine the effectiveness of investing on digital banking for the profitability of
the Banks and provide information to the bank‟s stake holders to make further
decision whether to invest more on technology or not. The information collected
will be kept confidential and used to serve the academic purpose only. So kindly,
spare a few minutes of your valuable time to fill up the questionnaire.

Thank You

Keno Diyesa 0925831355

General instructions

• Writing your name on the questionnaire is not required

• Please tick (✓) against the appropriate box

I. Background information

• Educational qualification

Diploma [ ] Degree [ ] Masters and above [ ]

• Current professional position

Officer [ ] Senior-officer [ ] Manager [ ]

Director [
]

• Working experience in Banks

Less than 2years [ ] 2-5 years [ ] 6-10 years [ ]

More than 10 years [ ]

• Digital banking services/products provided at your bank/at your

respective branch /it is possible to tick more than once)

ATM [ ]

POS [ ]

Mobile banking [ ]

Internet Banking [ ]

ITM /Case of BOA/ [ ]

Mobile Wallet /Money [ ]

I. DIGITAL BANKING AND Strongly Agree Neutral Disagree Strongly

OPERATIONAL EXCELLENCE Agree Disagree
The uniform customer greetings and closure
statements by digital banking service such as
ATM attendants gives the feeling of standard
communication to the customer.
Adoption of digital banking service enables the
bank to deliver retail services 24 by 7 to
customers.
The 24-by-7-by-365 availability of the digital
banking service makes customers be loyal to
the bank
The availability of digital banking as an
option to a branch office saves time to
customers and minimizes the need for
physical engagements with the Bank branch
Availability of digital banking reduce the need
and the cost to establish and operationalize a
branch office
Availability of digital banking reduce the need
and the cost to hire, train, onboard and engage
banking officers
Adoption of digital banking enables the bank to
reduce stationary cost by making the
transaction ideally paperless.
Adoption of digital banking products and
services reduces the cost of handling
transactions by reducing customer visit to bank
branch.
Adoption of digital banking reduces the cost of
handling cash and the risk of carrying cash.
Adoption of digital banking has reduces error
committed by employees and customers
while transaction has been made manually.
Digital banking has contributed a
significant role in mobilizing local
currency deposit to the Bank.
Availability of Digital banking products and
service such as ATM, ITM/case of BOA/ and
POS has special advantage to the inflow of
foreign currency to the Bank.

III. DIGITAL BANKING AND Strongly Agree Neutral Disagree Strongly

SERVICE QUALITY Agree Disagree
BOA‟s digital banking services such
as ATM, ITM /case of BOA/, Mobile
banking, Internet banking/Abyssinia
Online/ and Mobile Wallet/Wallet are
operational in a 24/7 mode without
interruption in delivering service to its
customers.
Digital banking services are
technically easy to access and load
quickly.
Digital banking is applicable for
customers in any level of literacy.
Employees of the bank who have
direct access to deliver the digital
banking service have sufficient
knowledge of the products/services.
The number of steps required to
process digital banking services such
as Mobile banking, Internet banking
and Mobile Wallet is short and precise.
System response time of digital
banking services of the bank is
reasonably short.
Digital banking is secured and
reduces transaction frauds made by
employees and customers.
The bank has availed a secured set of
digital services
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