Solomon Worku

Role of Electronic Banking on Financial
Performance of Commercial Banks in

Ethiopia
By:
Solomon Worku
Addis Ababa University
Faculty of Business and Economics
Department of Accounting and finance
December, 2016
Addis Ababa, Ethiopia
Role of Electronic Banking on Financial
Performance of Commercial Banks in
Ethiopia
Advisor
Dr. Venkati Ponnala
A thesis submitted to Addis Ababa University Faculty of Business and
Economics department of accounting and finance in partial fulfillment of the
requirements for the degree of Masters of Science in accounting and finance
December, 2016
Addis Ababa, Ethiopia
Declaration
I, Solomon Worku, hereby declare that the thesis work entitled “Role of Electronic
Banking on Financial Performance of Commercial Banks in Ethiopia” submitted
by me for the award of the degree of Master of Accounting and Finance of Addis
Ababa University at Addis Ababa Ethiopia, is original work and it hasn’t been
presented for the award of any other Degree, Diploma, Fellowship or other similar
titles of any other university or institution.
Name Solomon Worku Advisor’s Name Dr. Venkati P.
Signature: _______________ Signature: _______________
i
Certification
Addis Ababa University
School of graduate studies
This is to certify that the thesis prepared by Solomon Worku entitles: Role of Electronic
Banking on Financial Performance of Commercial Banks in Ethiopia and submitted in
partial fulfillment of the requirements for the degree of Masters of Science in Accounting
and Finance compiles with the regulations of the university and meets the accepted
standards with respect to originality and quality.
Approved by:
Internal Examiner Alem Hagos (PhD) Signature ________ Date______
External Examiner Mengistu Bogale (PhD) Signature ________Date_____
Advisor Venkati Ponnala (PhD) Signature ___________Date____
____________________________________________________
Chair of Department or Graduate Program Coordinator
ii
Abstract
This thesis aims to examine the Roles of E-banking on Financial Performance of

Commercial Banks in Ethiopia. A successful bank in presenting good services to clients
and gaining profit is the one using new banking tools. The study has examined the roles
of e-banking on return on assets as one of the most fundamental indexes of profitability.
The study used secondary data employed purposive sampling technique to select ten
banks for the study commercial banks operating in Ethiopia covering the periods from
2013 to 2015. In light of prior literature, key explanatory variables were identified to
disclose their relationship and influence on financial performance of commercial banks.
These independent and other control variables are value or price of transaction of ATM,
value or price of transaction of POS, debit card, number of automated teller machine
terminals, number of point of sale terminal and market share of banks. Result using
random effect panel least square regression with the aid of E-view 8 application
exhibited that numbers of ATM terminals, number of POS terminals and bank market
share have positive and significant role on financial performance of commercial banks
measured by return on asset. The study shows that increased number of ATM, POS and
market share had a positive role on the financial performance of commercial banks
with many banking institutions indicating that increased market share allowed a
company to achieve greater scale in its operations which generally improved its
profitability. Therefore, this study recommends for enhancing return on asset commercial
banks should exert more on awareness creation about e-banking service and timely
support for users will cause an increase in e-banking practice in Ethiopia.
Key Words: Electronic Banking; Commercial banks; ROA; Profitability
iii
Acknowledgments
First of all, I give all the Glory to almighty God for his unfailing love and grace that he
has poured in my life and for helping me each day to fulfill my dream.
I would like to express my sincere appreciation to my advisor Dr. Venkati Ponnala for his
strong support of this research. His profound skill provided me with opportunity to
broaden my knowledge and make significant progress.
Special thanks to my family for the great love, support, prayers and always believing in
me, that I can achieve what my heart sets out to achieve. “Worku Sima” my Dad, thank
you for your great support and encouragement and “Tesfanesh Denbel”, my mom, for
your prayers, encouragements and love all the time. I love you both.
I also want to thank my colleagues, their sharing of knowledge, teamwork and

encouragement was very enlightening. To all my classmates from whom I received
valuable comments. I say thank you all.
Last but not the least; I would like to express my sincere gratitude and gratefulness to my
friends, families and relatives and all those who were beside me with your prayers and
support to accomplish the thesis.
May the LORD bless you all!
iv
Contents
Declaration ........................................................................................................................ i
Certification ..................................................................................................................... ii
Abstract ............................................................................................................................ iii
List of figures ................................................................................................................ viii
List of acronyms ............................................................................................................. ix
CHAPTER ONE: INTRODUCTION.............................................................................. 1
1.1 BACKGROUND OF THE STUDY ........................................................................................ 1
1.2 STATEMENT OF THE PROBLEM ................................................................................. 3
1.3 RESEARCH QUESTIONS ................................................................................................ 5
1.4 OBJECTIVE AND RESEARCH QUESTIONS, HYPOTHESIS..................................... 5
1.4.1 General Objective of the study ...................................................................................... 5
1.4.2 Specific Objectives .......................................................................................................... 5
1.4.3 Research Hypothesis....................................................................................................... 6
1.5 SIGNIFICANCE OF THE STUDY................................................................................... 7
1.6 SCOPE AND LIMITATIONS OF THE STUDY .............................................................. 8
1.7 ORGANIZATION OF THE PAPER ................................................................................. 8
CHAPTER TWO LITERATURE REVIEW.................................................................... 9
2.1 THEORETICAL REVIEW ................................................................................................ 9
2.1.1 Innovation diffusion theory ............................................................................................ 9
2.1.2 Task Technology Fit (TTF) Theory ................................................................................. 11
2.1.3 Theory of planned behavior ......................................................................................... 12
2.1.4 Technology acceptance model ..................................................................................... 13
2.1.5 Definition of E-Banking................................................................................................. 15
2.1.6.1 Overview of e-banking in Ethiopia ............................................................................... 19
2.1.6.2 Economic Significance of Banks.................................................................................... 19
2.1.7 Types of E-Banking Service ........................................................................................... 21
2.1.7.1 Debit card...................................................................................................................... 21
2.1.7.2 Credit Card .................................................................................................................... 21
2.1.7.3 Automated Teller Machine (ATM)................................................................................ 22
2.1.7.4 Point of sale (POS) ........................................................................................................ 23
2.1.7.5 Mobile Banking Service ................................................................................................ 23
v
2.1.7.5.1 M-PESA ...................................................................................................................... 23
2.1.7.6 Internet Banking Service............................................................................................... 25
2.1.7.7 Agent Banking Service .................................................................................................. 26
2.1.8 Measure of Bank performance..................................................................................... 28
2.1.8.1 Measurement of Bank’s Financial Performance.......................................................... 30
2.2 Review of Empirical studies .............................................................................................. 31
2.2.1 Studies in Developed and emerging market countries................................................ 31
2.2.2 Studies in Sub-Saharan African countries .................................................................... 35
2.2.3 Empirical studies related to E-Banking in Ethiopia...................................................... 37
2.2.4 Gaps in literature .......................................................................................................... 40
2.2.5 Conceptual framework ................................................................................................. 41
CHAPTER THREE RESEARCH METHODOLOGY AND DESIGN........................ 43
3.1 RESEARCH DESIGN...................................................................................................... 43
3.1.1 Population of the study and Sampling Techniques ..................................................... 43
3.1.2 Source and types of Data.............................................................................................. 44
3.1.3 Data analysis................................................................................................................. 45
3.2 MODEL SPECIFICATION............................................................................................. 46
3.3 VARIABLES DEFINITION AND HYPOTHESIS DEVELOPMENT ......................... 48
3.3.1 Dependent Variable...................................................................................................... 48
3.3.2 Independent Variable ................................................................................................... 49
3.3.2.1 Value of transaction of Automated Teller Machine (VATM) ...................................... 49
3.3.2.2 Value of transaction of Point of sale (VPOS) ............................................................... 50
3.3.2.3 Debit Card (DC) ............................................................................................................. 50
3.3.2.4 Number of Automated Teller Machine terminals (NATM).......................................... 50
3.3.2.5 Number of Point of sale terminals (NPOS)................................................................... 51
3.3.2.6 The bank market share (MS) ........................................................................................ 52
3.4 OPERATIONALIZATION OF STUDY VARIABLES................................................... 54
CHAPTER FOUR DATA ANALYSIS AND INTERPRETATION ............................. 55
4.1 DESCRIPTIVE STATISTICS ......................................................................................... 55
4.2 CORRELATION ANALYSIS........................................................................................... 56
4.3 REGRESSION MODEL TESTS ..................................................................................... 57
4.3.1 Classical linear regression model (CLRM) Assumptions .............................................. 57
vi
4.3.1.1 Constant Assumption 1: E(ut) = 0 ................................................................................. 58
4.3.1.2 Test for heteroskedasticity assumption (var(ut ) = σ2 <∞) ......................................... 58
4.3.1.3 Test for absence of autocorrelation assumption (cov(ui , uj ) = 0 for i _= j) ............... 59
4.3.1.4 Test of normality (ut ∼N(0, σ2)) ................................................................................... 60
4.3.1.5 Test for multicollinearity .............................................................................................. 62
4.3.1.6 Choosing Random effect (RE) Vs. fixed effect (FE) models.......................................... 63
4.4 RESULT OF THE REGRESSION ANALYSIS.............................................................. 65
4.4.1 Operational model........................................................................................................ 66
4.4.2 Interpretations on regression results and research Hypothesis.................................. 67
4.4.2.1 Number of ATMs and Return on Assets ....................................................................... 68
4.4.2.2 Number of POS and Return on Assets .......................................................................... 69
4.4.2.3 Market share and Return on Asset .............................................................................. 70
4.4.2.4 Value of transaction of ATM and Return on Assets..................................................... 71
4.4.2.5 Value of transaction of POS and Return on Assets...................................................... 72
4.4.2.6 Debit card and Return on Assets ................................................................................. 73
CHAPTER FIVE CONCLUSION AND RECOMMENDATIONS ............................. 74
5.1 CONCLUSION ................................................................................................................. 74
5.2 RECOMMENDATIONS .................................................................................................. 75
5.3 FURTHER RESEARCH SUGGESTIONS ..................................................................... 75
APPENDICES ............................................................................................................................... I
Appendix A: - Heteroskedasticity Test: Breusch-Pagan-Godfrey.................................................... I
Appendix B: - Breusch-Godfrey Serial Correlation LM Test ........................................................ I
Appendix C: - Correlated Random Effects - Hausman Test ........................................................... II
Appendix D: - Random Effects test result...................................................................................... III
Appendix E: - Commercial banks in Ethiopia................................................................................ IV
vii
List of tables
Table 3.1 Definition, notation and expected sign of the explanatory variables ............... 50
Table 4.1 Descriptive statistics................................................................................................ 51
Table 4.2 Correlations analysis of variables..................................................................... 53
Table 4.3 Heteroskedasticity test...................................................................................... 56
Table 4.4 Breusch-Godfrey Serial Correlation LM Test ................................................. 57
Table 4.5: Correlations matrix of explanatory variables ................................................. 59
Table 4.6 Hausman test.................................................................................................... 60
Table 4.7 Random effects model regression results......................................................... 62
Table 4.8 Comparison of test result with expectation……….......................................... 69
List of figures
Figure 2.1 the conceptual framework or model of the study............................................ 39
Figure 4.1 Normality test for residuals............................................................................. 58
viii
List of acronyms
ATM - Automated Teller Machine
CLRM - Classical Linear Regression Model
DC - Debit Card
DW - Dublin Watson
E-banking Electronic banking
EFT - Electronic Fund Transfer
EFTPOS Electronic fund transfer point of sale
ETB - Ethiopian Birr
ICT - Information and Communication Technology
Ksh - Kenyan Shilling
LM - Linear Model
LOG - Logarithm
FEM - Fixed Effect Model
NBE - National Bank of Ethiopia
NIBT - Net income before tax
OLS - Ordinary List Square
PBT Profit before Tax
POS - Points of Sale
REM - Random Effect Model
ROA- Return on Asset
ix
ROE- Return on equity
SMS Short Message Service
SSA - Sub Saharan African
TPB Theory of Planned Behavior
x
CHAPTER ONE: INTRODUCTION
This chapter begins by presenting brief background of the study which is followed
by the statement of the problem. Under the statement of the problem, the study states the
reasons to carry out this study. Following the statement of the problem, the general
and specific objectives of the study are presented. The next section presents the
research hypothesis. Finally, significance of the study, scope and limitation of the
study including organization of the paper are presented.
1.1 Background of the study

Banking industry has been in a process of significant transformation. They are the main
intermediaries between those with excess money (depositors) and those individuals and
businesses with viable projects but requiring money for their investment (creditors). The
force behind this transformation of the banking industry is innovation in information
technologies Abaenewe et al., (2013)
The banking industries play a significant role in supporting economic development
through efficient financial services Dube et. al., (2009).
Traditional banks offer many services to their customers, including accepting customer
money deposits, providing various banking services to customers and making loans to
individuals and companies. Compared with traditional channels of offering banking
services through physical branches, e-banking uses the internet and telecom (SMS) to
deliver traditional banking services to their customers, such as cash withdrawals, foreign
currency exchange, transferring funds, balance inquiry, electronic bill payment, applying
for letter of credit, downloading copies of bank statement, cheque book request, cheque
stop payment request, account alerts, security alerts and reminders and more recurring
services Girma Abebe (2016).
Due to emergence of global economy, e-business has increasingly become a necessary

component of business strategy and a strong catalyst for economic development. E-
banking has become popular because of its convenience and flexibility, and also
transaction related benefits like speed, efficiency, accessibility, etc. Elisha, (2010)
1
Impacts of electronic banking on financial performance of commercial Banks in Ethiopia Solomon W.
The new information technology (IT) is turning into the most important factor in the
future development of banking, influencing banks’ marketing and business strategies. In
recent years, the adoption of e-banking began to occur quite extensively as a channel of
distribution for financial services due to rapid advances in IT and intensive competitive
banking markets Mahdi and Mehrdad, (2010); Dube, et. al., (2009).
The e-banking is transforming the banking and financial industry in terms of the nature of
core products or services and the way these are packaged, proposed, delivered and
consumed. It is an invaluable and powerful tool driving development, supporting growth,
promoting innovation and enhancing competitiveness Gupta, (2008); Kamel, (2005).
The primarily role of commercial banks is to mobilize deposit and avail such resource for
investment. Banks also play a pivotal role in the financial system; in the clearing and
settlement of transactions .This intermediary role removes deficiency of capital which in
turn plays significance impact in bringing economic development in a nation.
A sound banking system mobilizes the small and scattered savings of the community, and
makes them available for investment in productive enterprises.
Expanding the banking system will create greater savings opportunities that will in turn
boost funding via savings. The alternative is a country’s heavy reliance on external
sources, private or official value transfers such as remittances, and external borrowing
(Keatinge, 2014).
Ethiopian commercial banks continue to offer most of their banking transactions using
electronic means. Electronic communication means are particularly coming to the
forefront. These are more convenient, faster and often cheaper for clients. Banking
experience shows it is suitable to use combinations of several communication means,
depending on individual segments, clients and types of operations, products and
situations. Electronic banking is a service that specifically uses electronic communication
forms. Electronic banking can be divided on the basis of the instruments used; telephone
connection, personal computers, means of payment (bank cards) and self-service zones
NBE (2015).
2
In the face of rapid expansion of e-payment systems throughout the world, the Ethiopian
financial sector cannot remain an exception in expanding the use of the system
(Gardachew, 2010). E-banking plays a crucial role in the banking industry by creating
value for banks and customers. E-banking has enabled banking institutions to compete
more effectively in the global environment by extending their products and services
beyond the restriction of time and space Turban, (2008).
Currently the use of cash has been replaced by digital cash and digital wallets. It can be
precisely said that this is the fourth stage of evolution after Barter, Currency, Paper
money (Cheques) and now digital cash Hannington, (2013).
Today’s business environment is extremely dynamic and experience rapid changes as a
result of technological improvement, increased awareness and demands Banks to serve
their customers electronically.
Objectively Commercial Banks are established to earning profits by providing banking
services. They seeking to achieve their strategic objectives of profitability and growth in
an effective and efficient manner in order to maximizing their market value and increase
the wealth of the owners. This can be done in various ways by improve their performance
and increase profits under the age characterized by competition through technological
development and knowledge. They invest huge amount of financial resources on capacity
building and electronic system which promote efficiency of their services and facilitate
decision-making process using data and accurate information.
1.2 Statement of the problem
In the emerging global business, Commercial Banks play an important role as financial
mediators in the economic development of the nation. Banks collect financial resources
from individuals and organizations, and redistribute it to others so as to have further
benefit Okoth & Gemechu (2013). For sustainable intermediation, banks need to be
profitable and get necessary earnings to cover their operational cost they incur. Beyond
the intermediation function, the financial performance of banks has critical implications
3
for economic growth of countries. Good financial performance rewards the shareholders
for their investment. This in turn, gives confidence for additional investment and brings
about economic growth. On the other hand, poor bank performance may lead to banking
failure and crisis which have negative consequence on the economic growth (Okoth et al.
2013).
Electronic banking system like ATM, Pay direct, electronic check conversion, mobile
banking and e-transact has a great impact on bank performance because they increase
profitability, reduce bank cost of operations, and increase bank asset and bank efficiency
(Ngango, 2015). Electronic banking has made banking transaction to be easier by
bringing services closer to its customers hence improving banking industry performance
(Josiah and Nancy, 2012).
Girma, (2016) conducted a research about the impact of ICT on the performance of
Ethiopian banking industry using secondary data over the period 2010 – 2014. The
study employed purposive sampling technique to select the required sample of banks
from commercial banks in Ethiopia. Using ROA as a measure of performance in the
study and the explanatory variables were ICT investment, ATM, POS, INF, BRAN and
GDP. The finding shows that the ICT, ATM and POS have no statistically significant
effect on return on asset on commercial banks in Ethiopia. Moreover the study result
showed that the POS, ICT and number of branches have negative effect on return on asset
on commercial banks in Ethiopia.
Despite the potential benefits of e-banking, there is debate about whether and how their
adoption improves bank performance. Attempts have been made to investigate the role of
electronic banking on bank performance. A research carried out by Kariuki (2005)
showed the positive impacts of e-banking on their banking performance using bank
turnover and profits as measure of performance. He established that those banks with
high profit growth are more likely to be using greater numbers of e-banking services. He
concluded that e-banking leads to higher profits though in long-term but not in short-term
4
due to high ICT investment cost. The study used profit and turnover as measures of bank
performance.
Studies on the role of e-banking regarding the financial performance of commercial
banks have been published although the outcomes of the research are contradicting each
other. Such as (Abaenewe et al., 2013) Adoption of electronic banking has positively and
significantly improved the returns on equity (ROE) of Nigerian banks. On the other hand
and on the contrary, it also revealed that e-banking has not significantly improved the
returns on assets (ROA) of Nigerian banks.
However, in Ethiopia as far as the knowledge of the researcher is concerned, there are
few research conducted on adoption of e-banking (Gardachew 2010) and (Abenet, 2010),
Challenges and Opportunities in adapting e-banking (Abreham, 2012), customer
satisfaction to measure the efficiency of e-banking (Sintayehu, 2015) are conducted.
There results of the studies in general agreed that e-banking in Ethiopia is slow and less
adaptable. It creates and necessitates the researcher to carry out a study from Ethiopian
context to establish the roles of e-Banking on banks financial performance.
1.3 Research Questions
Based on the above statement of the problems a research question is developed to answer
that; what is the role of e-banking service on the financial performance of banks?
1.4 Objective and research questions, hypothesis
1.4.1 General Objective of the study
Objective of this study is to examine the role of electronic banking service on financial
performance of commercial banks in Ethiopia, focusing on its role on return on assets.
1.4.2 Specific Objectives
A Bank financial performance can be measured in its profitability that evaluates the
performance.
5
Specifically to detect:
 The roles of ATM on the financial performance of commercial banks
 The roles of POS on the financial performance of commercial banks
 The roles of Debit card on the financial performance of commercial banks
 The roles of market share on the financial performance of commercial banks
1.4.3 Research Hypothesis
In order to be more formal statement of research the researcher used to employs

hypotheses. These hypotheses are predictions about the outcome of the results, and they
may be written as alternative hypotheses specifying the exact results to be expected. They
also may be stated in the null form, indicating no expected difference or no relationship
between groups on a dependent variable as stated by. (Creswell J., 2009). Accordingly,
the followings are hypothesis to be tested based on selected variables. The researcher
assumed that:
= + , + , + , + , + ,
+ , +Є ,
Where;-
ROA = Profit before tax / Total Asset
DC = Number of Debit Card
NATM= Number of ATM
NPOS = Number of POS
MS = the Market share index of bank (other control variable)
VATM = Value of transaction executed by ATM = (Natural logarithmic of value
of ATM transaction)
VPOS = Value of transaction executed by POS= (Natural logarithmic of the value
of POS transaction)
βo = Constant term
β1, 2, 3, …..7 are parameters to be estimated;
6
Є = is the error component for company i at time t assumed to have mean zero E [Є it] =
0
i = commercial banks i = 1. . . 10; and
t = the index of time periods and t = 1- 3
Hypothesis 1: Number of ATM has positive and significant role on ROA of commercial
banks in Ethiopia,
Hypothesis 2: Price of transaction of ATM has positive and significant role on ROA of
commercial banks in Ethiopia,
Hypothesis 3: Number of transaction of POS has positive and significant role on ROA of
Hypothesis 4: Price of transaction of POS has positive and significant role on ROA of
Hypothesis 5: Using of debit cards has positive and significant role on ROA of
Hypothesis 6: Market share has positive and significant role on ROA of commercial
banks in Ethiopia,
1.5 Significance of the study
The research would have the following importance. Many researchers have conducted
research related to adoption of electronic banking; however, there is no study was made
regarding of the roles of electronic banking on banks financial performance in Ethiopian
context.
The study is also important for those concerned government regulatory authorities like
national bank for decision they made pertaining electronic banking and also for other
related government and foreign banks too. Finally, the study helps other academic
researchers as a source of reference and as a stepping stone for those who want to make
further study on the area afterwards.
7
1.6 Scope and limitations of the study
The scope of the study would be limited to commercial Banks in Ethiopia pertaining
electronic banking on banks financial performance. Even though, net income gives an
idea of how well a bank is doing, it suffers from one major drawback: It does not adjust
for the bank’s size, thus making it hard to compare how well one bank is doing relative to
another. Selection of dependent variables which fit the study was also part of limitation.
Because, there are many variables which determinants of performance but not relevant
for this study but sited by many researchers and the researcher needs to choose the more
appropriate variables so that it is suitable with the dependent variable. It is necessary to
highlight that return on asset as an indicator have been chosen to study the roles of the
degree to which electronic banking have on financial performance of commercial banks
in Ethiopia. And ten banks are considered for the study regarding adoption of electronic
banking service. Three years data to include banks recently established and started e-
banking service since 2013.
1.7 Organization of the paper
This study is organized into five chapters. Chapter one presents introductions of the
study. The literature review part of the study is presented in chapter two. The literature
review includes the theoretical review in its first section which is followed by the review
of previous studies. Chapter three presents the research design and methodology and
analysis and data interpretations are presented in chapter four. The final chapter presents
summary, Conclusion and recommendation of the study.
8
CHAPTER TWO LITERATURE REVIEW
This chapter presents the literature related with e-banking. Accordingly, the review of the
literature is divided into two parts. The first part discusses the theoretical foundation for
the study, while the second part presents the empirical studies. Under the theoretical
foundation, the definition of e-banking, overview of e-banking in Ethiopia, economic
significance of banks and the measure of bank performance is presented. The review of
empirical studies done on the e-banking service on developed and emerging market,
studies in Sub-Saharan African countries, studies related to e-banking in Ethiopia, and
the gaps that necessitates this study .
2.1 Theoretical Review
There are numerous theoretical foundations that serve as basis to formulate a model to
practice a research. For instance, in determining the performance and profitability of the
bank service employing high technology devices and machines there are four significant
theories. These are innovation diffusion theory; task technology fit theory, theory of
planned behavior, and technology acceptance model. According to (Ajzen 1991), a
theoretical framework guides research, determining what variables to measure, and what
statistical relationships to look for in the context of the problems under study.
Thus, the theoretical literature helps the researcher to identify clearly the variables of the
study; provides a general framework for data analysis; and helps in the selection of
applicable research design.
2.1.1 Innovation diffusion theory
An innovation is an idea, practice, or object that is perceived as new by an individual or

other unit of adoption. There is a wide gap in many fields, between what is known
and what is actually put into use. Many innovations require a lengthy period, often of
some years, from the time when they become available to the time when they are widely
adopted. Therefore, a common problem for many individuals and organizations is how to
speed up the rate of diffusion of an innovation (Rogers 2003).
9
Diffusion is the process by which an innovation is communicated through certain
channels over time among the members of a social system. Diffusion, therefore, is a
special type of communication in which the messages are concerned with a new idea. It is
this newness of the idea in the message content of communication that gives diffusion its
special character. In other words, diffusion is a kind of social change, defined as the
process by which alteration occurs in the structure and function of a social system.
Hence, diffuse an innovation into a system is a challenge. The theory on the diffusion of
new ideas and practices was investigated by various scholars and few of them are
discussed below.
According to Dillon et al. (1996, P.282) there are five factors which influence the
diffusion of an innovation. These are “relative advantage (the extent to which a
technology offers improvements over currently available tools), compatibility (its
consistency with social practices and norms among its users), complexity (its ease of use
or learning), trainability (the opportunity to try an innovation before committing to use
it), and observability (the extent to which the technology's outputs and its gains are clear
to see)”. These elements are not mutually exclusive thus unable to predict either
the extent or the rate of innovation diffusion.
Further, Moore & Benbasat (1991) expanded the array of innovation characteristics to
seven. In addition to the previously known four features they added relative
advantage, compatibility, and trainability. The fourth characteristic, ease of use, is a close
relative complexity. It is worth noting that both relative advantage and ease of use are
subjective characteristics since they can be viewed differently depending on an
individual’s perceptions. Very further, Fishben and Ajzen (1975) concur, attitudes
towards an object and attitudes regarding a particular behavior relating to that
object can frequently differ. Explicitly, diffusion theory begins to describe the
innovation-decision process within organizations, but not to the level of addressing
whether and how the characteristics of an innovation interact to affect its adoption
within organizations, or whether organizational type, size, or industry affect adoption.
In addition, while there is an innovation-decision process described for individuals and
10
within organizations, there is no description of how the variables interact when
innovations are diffused across organizations (Lundblad & Jennife, 2003).
2.1.2 Task Technology Fit (TTF) Theory
Task technology fit (TTF) theory contends that information technology (IT) is more
likely to have a positive impact on individual performance and be used if the
capabilities of the IT match the tasks that the user must perform (Goodhue & Thompson
1995). Further, Goodhue & Thompson (1995, P.141) mentioned the factors that
measure task-technology fit as; quality, floatability, authorization, and compatibility,
eases of use/training, production timeliness, systems reliability and relationship with
users”. Their model is useful in the analysis of various context of a diverse range of
information systems including electronic commerce systems and combined with or
used as an extension of other models related to information systems outcomes.
According to TTF theory the success of an information system have a strong correlation
between task and technology, hence success has been related to individual performance
(Goodhue and Thompson 1995) and to group performance (Zigurs & Buckland 1998).
For group support systems, a specific theory of TTF was developed Zigurs & Buckland
(1998) and later tested by Wilson et al. (1999) and detailed the requirements of group
support systems to fit group tasks. For mobile information systems, TTF has been
shown to be generally relevant, but more specific questions regarding the
applicability of task technology fit to mobile information systems remain
unanswered (Gebauer and Shaw2004).
The theory of task-technology fit maintains that a match between business tasks
and information technology is important to explain and predict the success of
information systems (Goodhue and Thompson 1995; Zigurs & Buckland 1998). For
various scenarios of task and technology, statistical significance has been
established of a positive association between task-technology fit and information
system success measures, such as use Dishaw & Strong (1999), and impact on
individual performance Goodhue and Thompson (1995) and on group performance
(Zigurs et.al 1999). The concept of task technology fit promises to help identify
11
aspects that are critical to support a given business task, and can, thus,
contribute to the success of technology innovations (Junglas & Watson 2006).
One such innovation is represented by mobile technology to support an increasingly
mobile workforce (Barnes 2003).
2.1.3 Theory of planned behavior
The theory of planned behavior (TPB) started as the theory of reasoned actions in
1980 to predict an individual’s intention to engage in a behavior at a specific time
and place. The theory was intended to explain all behaviors over which people have the
ability to exert self control. The key component to this model is behavioral intent;
behavioral intentions are influenced by the attitude about the likelihood that the behavior
will have the expected outcome and the subjective evaluation of the risks and benefits of
that outcome.
However, the theory is ill-equipped to predict situations where people possess low
volitional control. The common limitations of the theory are it assumed regardless
of intention the person with opportunities and resources can easily acquired the
desired behavior. This assumption set aside several variables such as fear, threat, mood
or past experience. Further, the theory assumes that the behavior is the direct result of
linear decision making process disregarding the change over time. Very further, it does
not say anything about actual control over behavior nor the time frame between ‘intent’
and ‘behavioral action’ were not addressed. In the theory of planned behavior (TPB),
Ajzen (1991) incorporates perceived behavioral control (PBC) as an antecedent of
behavioral intentions to overcome the limitations.
Therefore, in the TPB, a person’s performance of certain behavior depends on his

or her intention toward that behavior; intention in turn relies on attitudes, subjective
norms (SN), and PBC. Ajazen (2006, P.54) defines PBC as “people’s perceptions of
their ability to perform a given behavior”, and empirical evidence suggests that it
improves predictions of intentions (Ajzen 1991). Subjective norms (SN) refer to
perceived pressures to perform a behavior; according to what important others say or do
(Fishben and Ajzen 1975).
12
E-commerce acceptance research suggests mixed results regarding this variable; some
researchers find that SN has no significant influence on intentions (e.g., Shim et al. 2001;
Shih and Fang, 2004), whereas others reveal a significant relationship (Taylor & Todd
1995). Nevertheless, Vijayasarathy (2000) suggests that perceptions of relevant others
may differ according to the type of behavior. Likewise, Barki & Hartwick (1994), show
that SN has a significant effect on intentions for mandatory system usage but not when
usage is voluntary. However, Davis et al. (1989) fail to find a significant relationship
between SN and intentions. Scholars tackle the confusion from different angles:
Venkatesh, et.al (2003) discuss compliance; Moore & Benbasat (1991) raise issues of
image and social influence; Barki & Hartwick (1994); Taylor & Todd (1995) argue that
system experience decreases the direct effect of SN on intentions; and Cournega (2000)
propose substituting SN with social support. Despite these efforts, ambiguity still
surrounds the SN construct.
2.1.4 Technology acceptance model
User acceptance remains a barrier to the success of new information technologies (IT). In
an attempt to explain the idea, Davis (1989) introduced Technology Acceptance Model
(TAM) based on the attitude-behavior paradigm from cognitive psychology. Davis
(1989, P.35) argues that “people adopt an application primarily because of the functions
it performs and secondarily because of the ease or difficulty associated with making the
system perform these functions”. The model provides a basis for tracking the impact of
external factors on internal beliefs, attitude, and behavior (Davis et al. 1989).
TAM assumes that behavior “the manifest, observable response in a given situation”
Ajzen (1991, P.60) is volitional. Behavioral intention indicates a person’s readiness to
perform the given behavior Ajazen (2006), which makes it the main predictor of the
actual behavior. In
TAM, intention is a function of attitude and perceived usefulness (PU). Attitude is “the
degree of evaluative affect that an individual associates with using the target system”
(Davis, 1993). It represents what a person feels about a concept, which may be any entity
13
about which persons can think and attach feeling (East 1997). Thus, attitude plays an
important role in the decision to adopt a new computer technology (e.g., Davis et al.
1989; O'Cass and Fenech 2003). Fishben and Ajzen (1975) define attitude as (1) attitude
toward objects, i.e. evaluation of a specified object, and (2) attitude toward action
(behavior), or evaluation of a specified behavior. Little evidence supports the idea that
attitude toward objects stimulates action (Bagozzi 1992). Previous IS research tends to
treat attitude as a fragile and vague variable, although psychology research consistently
recognizes its importance for individual behavior and social influence (e.g., Olson &
Zanna 1993).
In the technology acceptance domain, some researchers emphasize the relationship

between attitude and intentions (e.g., Hausman & Siekpe 2008), whereas others
argue its little significance (e.g., Venkatesh, et.al 2003), suggesting that IS usage
decisions might be dominated by cognitive beliefs, such as perceived usefulness, rather
than affect, such as attitude. Yang and Yoo (2004) argue that researchers fail to
distinguish between the two types of attitudes, where the potentially significant influence
of cognition attitude gets offset by the insignificant influence of affect attitude. The
originality of the TAM derives from two related beliefs, perceived usefulness (PU) and
perceived ease of use (PEOU), which generalizes across different settings. TAM assumes
that users engage in behaviors because they have evaluated the benefits and expect
certain results (Dishaw & Strong 1999). Snoj et.al. (2004) find that users do not use a
system for its own sake but instead use it because of its attributes that drive value,
according to the utility provided by the combination of attributes, less the disutility
represented by any sacrifices required to use the system.
As the ability of Internet users to find their way around a site and keep track of where
they are (Richard & Chandra 2005), PEOU affects attitude either directly or indirectly
through its effect on PU “even if potential users believe that a given application is useful,
they may at the same time believe that the systems are too hard to use and that
performance benefits of usage are outweighed by the effort of using the application”
(Davis 1989, p.320). Both PEOU and PU are influenced by external stimuli, such as
information richness, web quality, and experience.
14
2.1.5 Definition of E-Banking
Technological innovations have been identified to contribute to the distribution channels

of Banks. The electronic delivery channels are collectively referred to as Electronic
Banking. Electronic Banking is really not a technology, but an attempt to merge
several different technologies. The Electronic banking is a systematic use of several
technological products to facilitate the service of banking. In this section the electronic
delivery channels used by banks to maximize their accessibility and profitability shall be
discussed briefly.
Electronic banking service is the use of electronic and telecommunication networks to

deliver a wide range of value added products and services to bank customers. E-banking
thus involves collaboration (local and international) on payments systems, cashless
transactions, digital cash and other electronic based projects.
E-banking refers to electronic banking. It is like e-business in banking industry. E-
banking is also called as "Virtual Banking" or "Online Banking". E-banking is a result of
the growing expectations of bank's customers. E-banking involves information
technology based banking. (Shraddha and Mohsin, 2014)
Technological innovations have been identified to contribute to the distribution channels
of banks and these electronic delivery channels are collectively referred to as electronic
banking, (Goi, 2005).
E-banking is the term used for new age banking system. E-banking is also called online
banking and it is an outgrowth of PC banking. E-banking uses the internet as the delivery
channel by which to conduct banking activity, for example, transferring funds, paying
bills, viewing checking and savings account balances, paying mortgages and purchasing
financial instruments and certificates of deposits (Mohammed, et. a.l, 2009). It is difficult
to infer whether the internet tool has been applied for convenience of bankers or for the
customers’ convenience. But ultimately it contributes in increasing the efficiency of the
banking operation as well providing more convenience to customers. Without even
15
interacting with the bankers, customers transact from one corner of the country to another
corner.
Electronic banking is an electronic payment system that enables customers of a bank or

other financial institution to conduct a range of financial transactions remotely through
the financial institution’s website, ATM’S, using an electronic device (mobile phone,
tablet, using software usually called an app, provided by the financial institution for the
purpose).
Electronic banking is the use of electronic and telecommunication networks to deliver a
wide range of value added products and services to bank customers (Steven, 2002).
Electronic banking is a high-order construct, which consists of several distribution

channels. It should be noted that electronic banking is a bigger platform than just banking
via the Internet.
However, the most general type of electronic banking in our times is banking via the
Internet, in other words Internet banking. The term electronic banking can be described in
many ways. In a very simple form, it can mean the provision of information or services
by a bank to its customers, via a computer, television, telephone, or mobile phone
(Daniel, 1999). Burr (1996), for example, describes it as an electronic connection
between bank and customer in order to prepare, manage and control financial
transactions. Internet banking allows consumers to access their bank and accounts to
undertake banking transactions.
At an advanced level Internet banking is called transactional online banking, because it
involves the provision of facilities such as accessing accounts, transfer of funds, and
buying financial products or services online (Sathye, 1999).
2.1.6 Overview of banking in Ethiopia
Modern banking in Ethiopia started in 1905 with the establishment of Abyssinian Bank
which was based on a fifty year agreement with the Anglo-Egyptian National Bank. In
16
1908 Socite Nationale d’Ethiope pour le Development Dei’ Agricalture et du and two
other foreign banks (i.e Banque de l’Indochine and the Compagnie del’ Afrique
Orientale) were also established (Degefe 1995 cited in Geda 2006). As noted in Geda
(2006) these banks were criticized for being wholly foreign owned. In 1931 the Ethiopian
government purchased the Abyssinian Bank, which was the dominant bank, and renamed
it the Bank of Ethiopia. i.e., the first nationally owned bank on the African continent
(Gedey 1990, pp. 83, cited in Geda 2006).
It operated for only a few years, being closed after the Italian invasion. During the Italian
occupation, several Italian banks opened branches in Ethiopia. (Harvey, 1996).
After the liberation in 1942, the State Bank of Ethiopia was established. It became
operational in 1943, with 43 employees and two branches, and acted as the country’s
central bank. The first governor was a Canadian. The Bank also acted as the country’s
main commercial bank, while a few much smaller foreign banks continued to operate.
In 1963, a new banking law split the functions of the State Bank of Ethiopia into central
and commercial banking as the National Bank of Ethiopia and the Commercial Bank of
Ethiopia respectively. Both were government-owned. The very interesting part of this law
is it allowed other commercial banks to operate. This included foreign banks provided
they were 51% owned by Ethiopians. The biggest of these was the Addis Ababa Bank. It
was 40% owned by Grindlays Bank (British owned) and had 26 branches by 1975. There
were also two foreign commercial banks: the Banco di Roma and the Banco di Napoli,
which had eight branches and one branch respectively in 1975.
After the fall of the imperial government in 1974, since the remaining private sector
commercial banks were relatively small; they were nationalized and concentrated into the
Commercial Bank of Ethiopia (CBE). The new Ethiopian socialist government merely
shifted, therefore, from owning most of the banking system to owning it completely
(Harvey, 1996).
Even after the fall of DERGU regime, the financial sector reforms in Ethiopia do not
allow private sector participation in existing government banks, nor do they allow the
entry of foreign banks until 1994.
1994 is considered as another turning point in the history of banking business whereby
local private commercial banks are allowed to operate in the country. Awash
17
international bank S.c is the first indigenous private commercial bank in Ethiopia which
was established by 486 founder shareholders with a paid-up capital of Birr 24.2 million.
It was licensed on November 10, 1994, and started banking operations on February 13,
1995.
Currently, the industry comprises one state-owned development bank and 17 commercial
banks, one of which is state-owned, which is the dominant Commercial Bank of Ethiopia
(CBE). After the merger of Construction and Business bank, with CBE that make the
composition of the sector to two state owned banks; Commercial bank of Ethiopia and
Development bank of Ethiopia and 16 private commercial banks. The private commercial
banks currently operating in Ethiopia alphabetically: Abay bank, Addis International
Bank, Awash International bank, Bank of Abyssinia, Birhan International bank, Bunna
International bank, Cooperative bank of Oromia, Dashen bank, Debub global bank, Enat
bank, Lion International bank, Nib international bank, Oromia International bank, united
bank, Wegagen bank, and Zemen bank. (www.nbe.gov.et)
Studies made regarding the financial sectors in Ethiopia witness its infancy and
dominancy by the state owned Commercial bank. Keatinge(2014) strengthen this claim
declaring, State owned CBE dominate the sector with assets accounting for
approximately 70 percent of the industry’s total holdings. The dominance of public sector
banking certainly restricts financial intermediation and economic growth. It contrasts
with regional and international peer countries where banking industries have a much
higher share of private sector and foreign participation. (Keatinge, 2014)
Literatures revel, compared to most countries, Ethiopia has taken a cautious approach
toward the liberalization of its banking industry. For all intents and purposes, its industry
is closed and generally less developed than its regional peers. (Keatinge 2014 and Harvey
1996).
The Ethiopian financial sector is dominated by the banking sector. Banks are the
important component of any financial system. They play important role of channeling the
savings of surplus sectors to deficit sectors. The efficiency and competitiveness of
banking system defines the strength of any economy. Like other developing countries in
Ethiopia banks plays a vital role in the process of economic growth and development.
18
2.1.6.1 Overview of e-banking in Ethiopia
The appearance of E-banking in Ethiopia goes back to the late 2001, when the largest
state owned, commercial bank of Ethiopia (CBE) introduced ATM to deliver service to
the local users. Despite being the pioneer in introducing ATM based payment system,
CBE lagged behind Dashen Bank, which worked aggressively to maintain its lead in E-
payment system. As CBE continued to move at a snail’s pace in its turnkey solution for
card based payment system, Dashen Bank remained so far sole player in the field of E-
banking since 2006 (Gardachew, 2010). By the end of 2008 Wegagen Bank has signed an
agreement with Technology Associates, a Kenyan based information technology firm, for
the development of the solutions for the payment system and installation of network of
ATM. While Zemen Bank, the only Ethiopian bank anchored in the idea of single branch
banking, by launching full-blown internet banking in 2010, which is new to Ethiopian
banking industry (Asrat 2010).
Binyam (2009), claimed United Bank being the first to introduce telephone and internet
banking systems including text messages (SMS) by the end of the year 2008 which
continued launching ATM and POS services in collaboration with Awash International
Bank and Nib International Bank in the year 2012 later joined by Birhan International
Bank, Addis International bank and Cooperative Bank of Oromia. The three banks
planned to install over 140 ATM machines and over 340 POS across Ethiopia. And there
will be one ATM at every branch of the consortium banks, all domestic airports and
shopping complexes. Binyam (2009), also stated that this agreement is the first
significant cooperation between competing banks in Ethiopia, which others should be
encouraged to follow as there is no single bank in Ethiopia that can afford to provide
extensive geographical coverage and access
2.1.6.2 Economic Significance of Banks
Performance of commercial banks in Ethiopia grew impressively between years 2013 to

2015 where total assets grew by 49% from 49,910.7 million to 74,547.5 million while net
profit grow from 10.2 billion to 14.7 billion (NBE, 2015). According to National Bank
Supervision Report (2015), the banking sector reflected solid performance in 2014. This
19
performance can partly be attributed to improvement in the GDP growth which grew to
10.2%.
The Ethiopian economy continued to register a notable growth. In fiscal year 2014/15,
the real GDP grew by 10.2 percent relative to 11.2 percent growth target set in the first
GTP for the fiscal year. The growth of the economy has also been remarkable
compared to the 4.4 percent growth estimated for Sub - Saharan Africa in 2015 ( IMF,
2015).
The existence of a strong and effective banking system is very important for the
economic development of a country. According to Li yuqi (2007) banks through
acceptance of deposit of money from persons who do not need it at the present and
lending it to persons who want it for investment, serve as financial intermediaries
thereby providing ideal source of fund for investment that is crucial in increasing
production, exports, creation of jobs and foreign exchange earnings of the country.
Similarly, bank lending to customers who need the money for consummation, purchase
of various goods and services, construction of houses, and education increases
demand for those goods and services, thereby encouraging producers and service
providers to expand their undertakings and increase production (Fasil and Merhatibeb,
2009). Expansion and increase in production requires employment of additional
workers, thereby creating new jobs, encourage producers and suppliers of raw
materials to increase their production and supply. Banks also play a positive role
in encouraging savings by providing an incentive to save through payment of interest
on deposits/savings and providing safety and security. Saving is also an important
source of future investment and the improvement of the living standards of the society
(Wubitu, 2012).
The power of the national bank in fixing interest rates is particularly crucial in
both investment and saving. If the rate of interest fixed by the bank on deposits /i.e. the
interestbanks pay on money deposited on saving and other accounts / is attractive, it will
encourage people to save their money rather than spend it (Fasil and Merhatibeb, 2009).
However, such interest should not discourage people from investment and productive
20
activities and turn them to rent collection /potential investors may decide to deposit their
money and collect interest.
According to (Fasil and Merhatibeb, 2009) if the rate of interest charged by banks on
money given on loan to borrowers is lower, it may encourage potential borrowers and
investors to borrow and invest, thereby contributing their part in the expansion and
increase of production of goods and services, creation of employment opportunities,
increase in exports and foreign exchange earnings of the country. The existence of a
network of banks covering all parts of a country facilities business transactions in the
country by making payments easier, safer and cheaper. Payment through banks also
avoids the risk of loss or theft of money.
2.1.7 Types of E-Banking Service

2.1.7.1 Debit card
A debit card (also known as a bank card or cheque card) is a plastic card that provides an
alternative payment method to cash when making purchases. Functionally, it can be
called an electronic cheque, as the funds are withdrawn directly from either the bank
account or from the remaining balance on the card. In some cases, the cards are designed
exclusively for use on the internet, and so there is no physical card (Mavri & Ioannou,
2006).
In many countries the use of debit cards has become so widespread that their volume of
use has overtaken or entirely replaced the cheque and, in some instances, cash
transactions. Like credit cards, debit cards are used widely for telephone and Internet
purchases and, unlike credit cards, the funds are transferred immediately from the bearer's
bank account instead of having the bearer pay back the money at a later date. Debit cards
may also allow for instant withdrawal of cash, acting as the ATM card for withdrawing
cash and as a check guarantee card.
2.1.7.2 Credit Card
21
A credit card is a small plastic card issued to users as a system of payment. It allows its
holder to buy goods and services based on the holder's promise to pay for these goods
and services. The issuer of the card creates a revolving account and grants a line of credit
to the consumer (or the user) from which the user can borrow money for payment to a
merchant or as a cash advance to the user (Mavri & Ioannou, 2006). A credit card is
different from a debit card in that it does not withdraw money from the users account
after every transaction. The issuer lends money to the consumer to be paid to the
merchant. Holders of a valid credit card have the authorization to purchase goods and
services up to a predetermined amount, called a credit limit. The vendor receives
essential credit card information from the cardholder, the bank issuing the card actually
reimburses the vendor, and eventually the cardholder repays the bank through regular
monthly payments. If the entire balance is not paid in full, the credit card issuer can
legally charge interest fees on the unpaid portion.
2.1.7.3 Automated Teller Machine (ATM)
Rose (1999) describes ATMs as follows: it combines a computer terminal, recordkeeping

system and cash vault in one unit, permitting customers to enter the bank’s book keeping
system with a plastic card containing a Personal Identification Number (PIN) or by
punching a special code number into the computer terminal linked to the bank’s
computerized records, 24 hours a day”. Once access is gained, it offers several retail
banking services to customers. They are mostly located outside of banks, and are also
found at airports, malls, and places far away from the home bank of customers. At the
outset they were function as cash dispensing machines. However, because of the
advancement of technology, ATMs are able to provide a wide range of services, such as
making deposits, funds transfer between two or more accounts and bill payments.
The primary advantages of ATMs are they save the customer’s time in service delivery
and it is cost efficient way of yielding higher productivity per period of time than human
tellers.
Furthermore, as the ATMs continue when human tellers stop, therefore, there is continual
productivity for the banks even after banking hours.
22
2.1.7.4 Point of sale (POS)
POS also sometimes referred to as point of purchase (POP) or checkout is the location
where a transaction occurs. A "checkout" refers to a POS terminal or more generally to
the hardware and software used for checkouts, the equivalent of an electronic cash
register. A POS terminal manages the selling process by a salesperson accessible
interface. The same system allows the creation and printing of the receipt. POS systems
record sales for business and tax purposes (Shittu, 2010).
2.1.7.5 Mobile Banking Service
Mobile banking also known as M-Banking is a term used for performing balance checks,
account transactions, payments, credit applications and other banking transactions
through a mobile device such as a mobile phone or PDA. The earliest mobile banking
services were offered over
Short Message Service (SMS), a service known as SMS banking. Mobile banking is used
in many parts of the world with little or no infrastructure, especially remote and rural
areas. This aspect of mobile commerce is also popular in countries where most of their
population is unbanked.
In most of these places, banks can only be found in big cities, and customers have to
travel hundreds of miles to the nearest bank. The scope of offered services may include
facilities to conduct bank and stock market transactions, to administer accounts and to
access customized information (Tiwari et al., 2007).
2.1.7.5.1 M-PESA
A mobile money service called M-PESA was introduced into the market by Safaricom,
Kenya’s largest mobile operator (MO). Within eight months of its inception in March
2007, over 1.1 million Kenyans had registered to use M-PESA, and over US$87
million had been transferred over the system (Safaricom, 2007). M-PESA registered
23
customers reached 19.34 million by the end of March 31, 2014 (Safaricom , 2014). The
application facilitates a variety of financial transactions through the mobile phone.
This includes account balance checks, deposits and withdrawals, bill and merchant
payments, airtime purchases, and money transfers (Hughes & Lonie, 2007; Vaughan,
2007, cited in Morawczynski, 2009). M-PESA is designed in such a way that
people without bank accounts can use it.
Customers’ money is held safely in a bank account run by M-PESA on behalf of the
customer. A customer does not have any contact with the bank and the bank does not
have customers’ details. An individual who have M-PESA account can have a balance
between 0 ksh and 100,000 ksh (Kenyan Shilling). M-PESA is driven by a secure
application on Safaricom SIM cards. Registered customers have a menu on their
phone giving them the ability to move money to other phone based accounts. To
load money into M-PESA account a customer need to go to an M-PESA Agent and make
a cash deposit which results in electronic money being transferred into customers’ M-
PESA account (This is confirmed by an SMS received by both the Agent and the
Customer). Then, a customer can conveniently transfer money to other mobile
phone users by SMS transaction.
To withdraw cash from M-PESA account or (for unregistered customers to get cash), a
customer need to go to an M-PESA agent and make an electronic transfer to the agent
who will exchange this for cash. An M-PESA agents are Safaricom dealers, selected
Banks & Micro-Finance Institution, and other retailers with a substantial
distribution network like petrol stations, distributors, supermarkets & registered
SMEs. Wrong transfers are reversible on the M-PESA system, upon rigorous vetting of
the sender & recipient and if the money has not yet been cashed or withdrawn. If a
customer makes an incorrect transaction, there is a free assistance call service. According
to Morawczynski (2009) the liberalization of the telecommunications sector, among
other things, plays a crucial role for the success of M-PESA. The government has
taken numerous strategies to increase the penetration rates of ICTs in general and the
mobile phone in particular. This includes instigating competition in the market and
including universal service stipulations in license agreements. Such stipulations
24
made it easier for M-PESA to penetrate rural areas, which are under-served by
financial institutions. In addition, the super and retail agents were aligned to
facilitate the scalability of the agent network and to make it easier to move cash
and e-money around the system. The main function of the retail agents is to provide
cash-in & cash-out services to the customers and provide customer support. The super-
agents are responsible for balancing cash and e-money requirements of the retail agents.
2.1.7.6 Internet Banking Service
Internet banking is a new age banking concept. It uses technology and brings the bank
closer to the customer. Internet banking refers to systems that enable bank customers to
get access to their accounts and general information on bank products and services
through the use of banks website, without the intervention or inconvenience of
sending letters, faxes, original signatures and telephone confirmations (Thulani et al,
2009). For those that have access to the internet and a computer all you need to do is
proceed to your banks website and login. From there you have access to all of your
accounts that you have at that bank. Transfer funds between your accounts with ease.
You can also use online banking to see how much money you have in your accounts and
where the money you have spent has gone.
Broadly, the levels of banking services offered through internet can be categorized in to
three types:
1. The Basic Level Service is the bank’s websites which disseminate information on
different products and services offered to customers and members of public in
general. It may receive and reply to customers’ queries through e-mail.
2. In the next level are Simple Transactional Websites which allows customers to submit
their instructions, applications for different services, queries on their account balances,
etc, but do not permit any fund-based transactions on their accounts.
3. The third level of Internet banking services are offered by Fully Transactional
Websites which allows the customers to operate on their accounts for transfer of funds,
payment of different bills, subscribing to other products of the bank and to transact
purchase and sale of securities. The above forms of Internet banking services are offered
25
by traditional banks as an additional method of serving the customer. There are also
banks that deliver banking services primarily through Internet or other electronic delivery
channels.
Some of these banks are known as virtual banks or Internet- only banks and may not have
any physical presence in a country despite offering different banking services (Adriana,
2006)
Internet banking allows customers of a financial institution to conduct financial
transactions on a secure website operated by the institution, which can be a retail or
virtual bank, credit union or society. It may include any of transactions related to online
usage. Banks increasingly operate websites through which customers are able not only to
inquire about account balances, interest and exchange rates but also to conduct a range of
transactions. Unfortunately, data on Internet banking are scarce, and differences in
definitions make cross-country comparisons difficult
(Alabar, 2012)
2.1.7.7 Agent Banking Service
A banking agent is a retail or postal outlet contracted by a financial institution or a mobile

network operator to process clients’ transactions. Rather than a branch teller, it is the
owner or an employee of the retail outlet who conducts the transaction and lets clients
deposit, withdraw, and transfer funds, pay their bills, inquire about an account balance, or
receive government benefits or a direct deposit from their employer. Banking agents can
be pharmacies, supermarkets, convenience stores, lottery outlets, post offices, and many
more. (NBE, 2015)
Banking agents are usually equipped with a combination of POS card reader, mobile
phone, barcode scanner to scan bills for bill payment transactions, PIN pads, and
sometimes personal computers (PCs) that connect with the bank’s server using a personal
dial-up or other data connection. Clients that transact at the agent use a Magnetic Stripe
bank card or their mobile phone to access their bank account or e-wallet respectively.
Identification of customers is normally done through a PIN. With regard to the
transaction verification, authorization, and settlement platform, banking agents are
similar to any other remote bank channel (NBE, 2015)
26
Banking agents are the backbone of mobile banking, i.e., performing transactions over a
mobile device, most often a mobile phone. To enable clients to convert cash into
electronic money and vice versa which can be sent over their mobile phone, clients will
have to visit a branch, ATM, or banking agent. Especially in remote and rural locations,
where cash is still the most important way to pay and transact, a mobile banking service
is dependent on banking agents to enable clients to effectively use the service. (NBE,
2015)
 Hibir Agent Banking
According to NBE Directive, agent banking is the conduct of banking business on behalf
of a financial institution through an agent using various service delivery channels. Mobile
banking is performing banking activities which primarily consists of opening and
maintaining mobile/regular accounts and accepting deposits; furthermore, it includes
performing fund transfer or cash in and cash out services using mobile devices.
Following the permission of mobile and agent banking, United bank established a team
responsible for the implementation of the service in line with the Bank’s strategic focus
on technology led banking which synchronize with its new motto “Beyond Core Banking
to Technology Led Excellence”.
The service enables the Bank to use Banking agents that double as a kind of branch to
process basic banking services including opening M-wallet account, making deposits and
withdrawals, transferring funds as well as sending and receiving money. United bank
received the approval to go on delivering the service on March 31, 2015. In its Agent
Banking Services, United will provide branchless services banking especially for the
unbanked society. It provides the following banking service packages using agents.
Financial Services
 Cash–in (Deposit accepting)

 Cash-out (Withdrawal)
27
 Person to Person (P2P) Money Transfer
 Send cash to Walk-in customer
 Receive cash by Walk-in customer
 Money transfer between own accounts (internal) that is from physical
account to m-wallet and vice versa
 Bulk payment dispatch (Bank payment dispatch to customers) – B2P like
case of salary, remittance, etc.
Non-financial services
 Account opening /Customer registration

 Account balance inquiries
 PIN change
2.1.8 Measure of Bank performance
There are various types of bank performance measures in order to understand them it is
better to classify them in terms of internal and external factors. Internal factors described
as efficiency, productivity and profitability of the bank concerning size optimizes and
capital structures.
External factors are that reflect the economic and legal environments where the
financial institutions operate. They represent events outside the influence of the bank.
The management can anticipate changes in the external environment and try to
position the institution to take advantage of anticipated developments (Anna p.I Vong,
2008).
Performance: Performance is deemed to be the fulfillment of an obligation. Bank

performance: Is a combination of various aspects which cannot be observed directly but
economically important. However, stockholders are view performance in terms of the
profits made on their behalf, whether or not adjusted for risks taken. There is also
contribution financial institutions make to the common wealth, on behalf of consumers
and businesses.
28
Financial performance has been studied under different yardsticks of performance i.e.,
size, profitability, financing pattern, economic efficiency, operational efficiency, asset
quality, diversification and cost of operations (DeYoung 2001).
Profitability offers clues about the ability of the bank to undertake risks and to expand its
activity. The main indicators used in the appreciation of the bank profitability are: Return
on equity, ROE (Net income / Average Equity), Return on Asset, ROA (Net income
/Total assets) and the indicator of financial leverage or (Equity / Total Assets) (Rose,
1999).
Many studies have attempted to explain the contribution of a particular variable on the
performance of banks. It should be noted that very often, the authors found different
results even contradictory. This is mainly due to the different data they use, which covers
different areas and periods. Following the above literatures argument and also others
scholars. However, this study uses ROA and ROE as the dependent variable.
Return on asset: Is one of measure of Bank performance which measured by the ratio of
the return on average assets (ROA), calculated as net profit before tax divided by total
assets. It is the most common profitability ratio of performance measure used by banks in
order to evaluate performance comparing the efficiency of a number of different
investments.
The ROA reflects the ability of a bank’s management to generate profits from the
bank’s assets. It shows the profits earned per birr of assets and indicates how effectively
the bank’s assets are managed to generate revenues, although it might be biased due to
off-balance-sheet activities. This is probably the most important single ratio in
comparing the efficiency and operating performance of banks as it indicates the returns
generated from the assets that bank owns (Tan et al. 2012).
Return on equity: ROE is more concerned about how much the bank is earning on their
equity investment, the net income per birr of equity capital. The amount of net income
returned as a percentage of shareholders equity. It measures how efficiently a bank can
use the money from shareholders to generate profits and grow. Unlike return on Assets
29
ratios, ROE is a profitability ratio from the investor's point of view. This ratio calculates
how much Investment is made based on the investors' investment in the bank, not the
company's investment in assets or something else.
Return on equity is the return to shareholders on their equity. This means that,
return on equity reflects the capability of a bank in utilizing its equity to generate
profits (Tan et al. 2012).According to Dietrich et al. (2009), banks with a lower
leverage ratio (higher equity) report a higher ROA, but a lower ROE. However, the ROE
disregards the higher risk that is associated with a higher leverage. Even if ROE is
commonly used in different studies, it is not the best measure of profitability (Ghazouani
et al.2013).
Kumbirai and Webb (2010) use financial ratio analysis to measure the performance of
commercial banks in South Africa. They mainly investigate the profitability performance,
liquidity performance and credit performance of commercial banks in South Africa
during the period 2005-2009.
According to Kumbirai and Webb (2010), financial ratio analysis that primarily based on
accounting data permits a historical sketch of bank returns and risks which are the only
source of information for evaluating the management’s potential to generate satisfactory
returns in future.
2.1.8.1 Measurement of Bank’s Financial Performance
Financial performance has been studied under different yardsticks of performance i.e.,
size, profitability, financing pattern, economic efficiency, operational efficiency, asset
quality, diversification and cost of operations (DeYoung 2001).
Nowadays banks contribute the lion share to the growth of the economy. Enormous
studies have been conducted to find out the reason behind the alarming profitability of
banks whether it is due to either internal or external factors. Various researches employed
various characteristics and the external variables of bank level data across countries
Williams (2003) employed key performance indicators (KPIs) and argued that it provide
intelligence in the form of useful information about a public and private agency’s
30
performance. Scholar like Modell (2004) have maintained that the implementation of
performance measurement systems possess important symbolic value.
Profitability offers clues about the ability of the bank to undertake risks and to expand its
activity. The main indicators used in the appreciation of the bank profitability are: Return
on equity, ROE (Net income / Average Equity), Return on Asset, ROA (Net income
/Total assets) and the indicator of financial leverage or (Equity / Total Assets) (Rose
1999).
A commonly used measure of bank performance is the level of bank profits (Ceylan, et.al
2008). Bank profitability can be measured by the return on a bank’s assets (ROA), a ratio
of a bank’s profits to its total assets. In other words, the income statements of commercial
banks’ profits report before and after taxes. Another good measure on bank performance
is the ratio of pre-tax profits to equity (ROE) rather than total assets since banks with
higher equity ratio should also have a higher return on assets (Ceylan, et.al 2008).
= + , + , + , + , + ,
+ , +Є ,
2.2 Review of Empirical studies

2.2.1 Studies in Developed and emerging market countries
Elisha (2010) studied e-banking in developing economy: empirical evidence from

Nigeria. States due to emergence of global economy, e-business has increasingly become
a necessary component of business strategy and a strong catalyst for economic
development. E-banking has become popular because of its convenience and flexibility,
and also transaction related benefits like speed, efficiency, accessibility, etc.
Ngango (2015) conducted a research on Electronic Banking and Financial Performance
of Commercial Banks in Rwanda, a Case Study of Bank of Kigali from 2008 to 2012
using descriptive research design based on qualitative and quantitative approach then
31
their findings was established that Electronic banking system like ATM, Pay direct,
electronic check conversion, mobile telephone banking and E transact has a great role on
bank performance because they increase profitability, reduce bank cost of operations, and
increase bank asset and bank efficiency.
A research conducted by Hannington (2013) the effect of electronic banking on the
financial performance of commercial banks in Kenya from 2008 to 2012 using
descriptive survey research design, the study investigated the relationship between e-
banking and performance of commercial banks in Kenya. Specifically, the study was
meant to establish whether there exists a relationship between the dependent variable,
performance measured by profit after tax and the independent variables consisting of
number of ATMs, number of debits and credit cards issued to customers, number of point
of sales terminals and the usage levels of Mobile banking, Internet banking and
Electronic funds transfer, as components of e-banking. The findings of the study were
that e-banking has a strong and significant effect on the profitability of commercial banks
in the Kenyan banking industry. Thus, there exists positive relationship between e-
banking and bank performance.
Josiah and Nancy (2012) studied the Relationship between Electronic Banking and
Financial Performance among Commercial Banks in Kenya from 2006 to 2010 using
descriptive and inferential statistics. The study established whether there is relationship
between the dependent variable return on assets and the independent variables:
investments in e-banking, number of ATMS and number of debits cards issued to
customers as proxy for e-banking. The study revealed that e-banking has strong and
significance marginal effects on returns on asset in the Kenyan banking industry. Thus,
there exists positive relationship between e-banking and bank performance.
A study conducted on electronic banking and bank performance in Nigeria using
Judgmental sampling method was adopted by utilizing data collected from four Nigerian
banks. The study revealed that the adoption of electronic banking has positively and
significantly improved the returns on equity (ROE) of Nigerian banks. On the other hand
and on the contrary, it also revealed that e-banking has not significantly improved the
returns on assets (ROA) of Nigerian banks. (Abaenewe et al., 2013)
32
In the recent years, mobile banking has gained competitive advantage through
diversification, maintaining customer loyalty. It has also assisted in increasing market
share to grow their profitability and improve financial position. The study focused on
mobile banking technology in relation to its effect on commercial banks’ financial
performance indicators namely: Return on Assets (ROA) and Return on Equity (ROE).
The study established that the number of mobile banking transactions has tremendously
increased in the last five years since the introduction of M-banking. The study thus
concludes that, banks that have adopted M-banking services have to a large extent
increased their customer outreach, and hence have improved their financial performance.
The findings revealed that many mobile banking products are being offered by banks
such as Fund Transfer between Accounts/ E-funds transfer, Bill Payment, order for
cheque books and bank statements and therefore concluded that the financial
performance of the banks that provide these mobile banking products has improved
because they ensure efficiency of the banking services. (Kathuo et. al., 2015).
Financial institutions have been in the process of significant transformation. The force
behind the transformation of these institutions is innovation in information technology.
The study sought to determine the impact of mobile and internet-banking on performance
of financial institutions in Kenya where the survey was conducted on financial
institutions in Nairobi. The study also sought to identify the extent of use of mobile and
internet banking in financial institutions. The study investigated 30 financial institutions.
The study found that the most prevalent internet banking service is balance inquiry while
the least is online bill payment. Cash withdrawal was the most commonly used mobile
banking service whereas purchasing commodities was the least commonly used
(Kennedy, 2013)
A study called “Does Internet Banking Affect the Performance of Community Banks?”
shows that banks that provide extensive online banking services tend to perform better
than those who lag behind. Results show that online banking helps community banks
improve their earning ability as measured by return on equity and improve asset quality
by reducing the proportion of overdue or underperforming assets. (Albert et al 2015)
33
The resultant of technological advancement has been the transformation in operational
dimension of banks over some decades. Internet technology has brought about a
paradigm shift in banking operations to the extent that banks embrace internet technology
to enhance effective and extensive delivery of wide range of value added products and
services. Consequently, the study examined the role of electronic banking on banks’
performance in Nigeria. Panel data comprised annual audited financial statements of
eight banks that have adopted and retained their brand name banking between 2000 and
2010 as well as macroeconomic control variables were employed to investigate the role
of e-banking on return on asset (ROA), return on equity (ROE) and net interest margin
(NIM).Result from pooled OLS estimations indicate that e-banking begins to contribute
positively to bank performance in terms of ROA and NIM with a time lag of two years
while a negative impact was observed in the first year of adoption. It was recommended
that investment decision on electronic banking should be rational so as to justify cost and
revenue implications on bank performance. (Oginni et al 2013)
Banking industry has been in a process of significant transformation. The force behind
this transformation of the banking industry is innovation in information technologies.
Information and communication technology is at the centre of this global change curve of
electronic banking system in Kenya today. Specifically, the study established whether
there is relationship between the dependent variable i.e., performance measured by return
on assets and the independent variables: investments in e-banking, number of ATMS and
number of debits cards issued to customers as proxy for e-banking. The study used
secondary data. The data was collected from annual report of target banks and Central
Bank of Kenya. The study used both descriptive and inferential statistics in analyzing the
data. In general the study revealed that e-banking has strong and significance marginal
effects on returns on asset in the Kenyan banking industry. Thus, there exists positive
relationship between e-banking and bank performance. In general conclusion the
electronic banking has made banking transaction to be easier by bringing services closer
to its customers hence improving banking industry performance. (Josiah and Nancy
2012)
34
2.2.2 Studies in Sub-Saharan African countries
A research by Isaac and David, 2011 on M-Pesa a mobile phone based money transfer
system in Kenya which grew at a blistering pace following its inception in 2007. The
researchers examine how M-Pesa is used as well as its economic impacts. Analyzing
data from two waves of individual data on financial access in Kenya, they found that
increased use of M-Pesa lowers the propensity of people to use informal savings
mechanisms such as ROSCAS, but raises the probability of their being banked. Using
aggregate data, researchers calculated the velocity of M-Pesa at between 11.0 and 14.6
person-to-person transfers per month. In addition M-Pesa causes decreases in the prices
of competing money transfer services such as Western Union. While they found little
evidence that people use their M-Pesa accounts as a place to store wealth, their results
suggest that M-Pesa improves individual outcomes by promoting banking and increasing
transfers.
According to Assalam Bank (2013), and Faisal Islamic Bank (2013), cited in
Tingari and Mahmoud (2014), m-banking in Sudan was firstly adopted in 2009 that
could be categorized to informational m -banking services (such as exchange rate,
balance inquiry, check status inquiry and short statement), and interactive m-banking
services (including e-payments, money transfer, account management).
Tingari and Mahmoud (2014) studied about the revolution of ICT. It deals with the
evolution of BT, e-banking and m-banking in Sudan. It intends to explore the practice of
m -banking in Sudan. The focus is on the availability of adequate infrastructure and on
the challenges and risks that face m-banking services in Sudan. Their findings showed
that although m-banking is believed to be essential, still the services provided are at
an infant stage. It is also found that concerned parties are not fully cooperating. This
raises risks and constitutes challenges that hinder full utilization of m-banking in Sudan.
Faisal (2013) in Ghana showed that the main rejection factors in using m-banking
technology by customers were m-banking requires knowledge & learning, attracts
additional banking charges, and Poor telecommunication technology.
35
Ayo et al., (2010) in their study on “the state of e-banking implementation in
Nigeria” investigated into the influence of trust on e -payment using the extended
Technology Acceptance Model (TAM). Similarly, they also evaluated the influence of
Perceived Trust, Perceived Risk and Organizational Reputation on Customer
Loyalty to technology diffusion. According to Chemekie et al. (2006), cited in Ayo et
al. (2010); most of the Nigerian banks ability to sustain; retain and satisfy their
customers even after the era of considerable consolidation of the commercial banks
depended largely on their ability to develop their information infrastructure
mechanisms.
Another empirical study done by Korir (2012) revealed that there were losses to
customers of Kenya Commercial Bank (KCB), who use the M-Banking services, due to
fraudulent access of customers’ accounts through hacking. Since an incident like this
will have a ruinous impact on the reputation of the bank there is need to employ
disciplined, qualified and well remunerated ICT in the bank and at the level of mobile
provider.
The qualitative studies on M-Pesa such as Morawczynski and Pickens (2009) have
suggested that M-Pesa serves as a partial substitute for the formal banking system. Prior
to the introduction of M-Pesa, most Africans were excluded from modern financial
services. Using data ranging between 2001 and 2005, Beck et al. (2007) show that
African countries lagged in financial access. During those periods they show that Ghana
had 1.6 branches per 100,000 and Kenya had 1.3 branches per 100,000, while Uganda
and Tanzania both had less than 0.6 branches per 100,000. The ATM penetration of
these countries was even lower ranging from 1 per 100,000 in Kenya to less than 0.20 per
100,000 in Tanzania. In contrast, the U.S. had 31 bank branches and 120 ATMs per
100,000 people during that period.
A study done by Shakila and Faria (2012) on practice of E-banking in commercial bank
focused on prospects and some drawbacks of E-banking in banking sector of
Bangladesh. The study used structured questionnaire and conversation with bankers and
found out that prospect of E-banking in Bangladesh were expansion of market for new
banking products and services, and reduction in operation costs for banks. More broadly,
36
the continued development of E-banking contributes to improving the efficiency of the
banking and payment system and reduces the cost of retail transaction. The government
emphasis of raising allocation for developing ICT infrastructure, waving taxes on
computer peripherals and competition among banks in improving customer services have
accelerated the prospects of E-banking in Bangladesh. The study also mentioned that E-
banking can play a significant role in uplifting the entire banking services and thus
positively affect the country’s economy. Some of the short term advantages found by the
study include increase in productivity and efficiency, avoidance of duplication of
work and wastage and reduction in service delivery time. While the long term
advantages are proper use of resources, planning and monitoring. The study also
found constraints of E-banking being limited availability and growth of
telecommunication infrastructure, culture of using E-banking, legal and regulatory
framework, the user of E-banking being limited to urban areas and infrastructure of
villages being not suitable for E-banking.
A study conducted towards effective implementation of E-banking in Nigeria by (Pedro

2012), focused on issues of E-banking as well as strategies that may help to strengthen
customer-bank relations for a better public service delivery and to close the design-reality
gaps and thus improve E-banking project success rate in Nigeria. The study concluded,
for an effective E-banking, the strategic response should be built on institutional,
technological, data systems’ awareness and commitment, human legislative and
leadership. The design-reality gap challenge associated with E-banking initiatives,
western E-banking models and systems should be addressed by customizing the match
between Nigerian reality and the design. Thus it will certainly reduce the failure rate and
increase the success of E-banking initiatives.
2.2.3 Empirical studies related to E-Banking in Ethiopia
Girma, 2016 conducted a research about the impact of ICT on the performance of
Ethiopian banking industry using secondary data over the period 2010 – 2014. Data
analysis is carried out in panel environment. The study employed purposive sampling
37
technique to select the required sample of banks from commercial banks in Ethiopia.
Using ROA as a measure of performance in the study and the explanatory variables were
ICT investment, ATM, POS, INF, BRAN and GDP. The finding shows that the ICT,
ATM and POS have no statistically significant effect on return on asset on commercial
banks in Ethiopia. Moreover result showed that the POS, ICT and number of branches
have negative effect on return on asset on commercial banks in Ethiopia.
A research undertaken by Ayana (2014) on factors affecting adoption of E-banking

system in Ethiopian banking industry, focused on factors that affect adoption of E-
banking in Ethiopian banking industry. The study statistically analyzes data
obtained from survey of staffs of 4 purposely selected banks using qualitative and
quantitative research approach on a research framework developed based on
Technology Organization Environment mode (TOE). And conclude E-banking system
such as ATM, mobile banking, internet banking and others were not well adopted by
Ethiopian banking industry, due to low level of ICT infrastructure and lack of legal
frameworks at NBE. In addition to this the result of the study also showed that security
risk and lack of trust on the use of technological adoption are other major barriers for the
system. Limited technical and managerial skills available in Ethiopian banks were also
mentioned as an influential factor for the choice of technology in Ethiopian banks.
A study conducted by Gardachew (2010) on practices, opportunities and challenges of E-

banking in Ethiopia, analyzed the main challenges and opportunities of E-banking. After
conducting a survey he came up with the challenges being low level of internet
penetration and poorly developed telecommunication infrastructure, lack ofsuitable
legal and regulatory framework for e-commerce and e-payment, high rates of
illiteracy, high cost of internet, absence of financial networks that link different banks,
lack of reliable power supply and cyber security issues. And mentioned opportunities
offered by ICT through e-learning programs, the help of nongovernmental agencies
like ECA and World Bank to developing countries to design national estrategies like e-
commerce and commitment of the government on ICT as prospects for Ebanking
development.
38
A study undertaken by Senait (2007) on prospects and challenges of E-banking,
focused on prospects and challenges of E-banking in Ethiopia from the banks
perspective and aims to gain a deep understanding of the factors influencing the adoption
of E-banking by banks operating in Ethiopia. She used a model of perceived influential
factors and tested using questionnaire using a sample drawn from Ethiopian banks’
officials who believed to have exposure to the subject matter. In her study she
mentioned determinant factors of E-banking in Ethiopia include technological and
infrastructural requirement, customers’ attitude, capacity of existing banks, capacity
of regulatory and supervisory organs in relation to authorization and security and risk
management capacity of banks. She also revealed benefits of E-banking which
includes reduction of transaction cost, perfect information about customer, increased
profitability, variety of products enhancing cross selling, customer loyalty (branding) and
wider geographical reach. And the risks involved include strategic risk, compliance risk,
and total reliability risk. Thus she concluded the factors tested for the risks
involvedtowards E-banking and the determinant factors of E-banking are found to be
effective and recognized as the challenges of e-banking for its successful adoption
in Ethiopian market.
Abraham (2012) described that among the common problems known in Ethiopian
which are related to electronic banking few of them are lack of banking services through
the web or other electronic means such as using mobile phone, weak
telecommunications, lack of Internet awareness, broken and slow Internet
connections, data and network security and privacy, lack and limitation of
government policies, regulations and e-commerce laws, as well as legislation to protect
workers and to make the Internet secure.
Banking in Ethiopia faces numerous challenges to fully adopt and adopt E-banking
application and seize the opportunities presented by ICT applications in general. Part of
key challenges for e- banking applications are low level of internet penetration and
poorly developed telecommunication infrastructure, lack of infrastructure for
telecommunications, lack of suitable legal and regulatory framework for e-commerce
and e-payment, high rate of illiteracy, high cost of internet, absences of financial
39
institutions networks that link different banks, frequent power interruption, resistance to
changes in technology among customers and staff due to lack of awareness on the
benefits of new technologies, fear of risk, lack of trained personnel in key areas,
tendency to be content with the existing structures and people may be resistance to new
payment systems (Gardachew,2010). in Ethiopia; their objective was studying of E-
payment practices in developing countries, Africa and Ethiopia and found that, the main
obstacles to the development of E-payments are, lack of customers trust in the initiatives,
unavailability of payment laws and regulations particularly for E-payment, lack of skilled
manpower and Frequent power disruption.
Ayana (2010) explored in his study on “Adoption of Electronic banking system in
Ethiopian Banking industry: Barriers and Drivers” that E-banking system, such as ATM,
mobile banking, internet banking and others were not well adopted by Ethiopian banking
industry. This is due to low level of ICT infrastructure and lack of legal frame work at
NBE, which can initiate banking industry to implement the system. In addition to the
above two basic factors affecting adoption of E banking in Ethiopia, result of the study
also shows that security risk and lack of trust on the use of technological adoption are
other major barriers for the system. The level of security risk associated with E-
banking product or service, such as ATM, internet banking, mobile banking and
others, pose different challenges to different banks. Improvements are required to
ensure client confidence. Lack of competition among local and foreign banks is also
another challenge for the adoption of E-banking in the country. Technical and
managerial skills available in Ethiopian banks for the adoption of E-banking are also
limited.
2.2.4 Gaps in literature
The literature review shows that research in the area of e-banking has been done but not
on the roles of financial performance of banks. The literature reviewed indicated that
40
previous researchers concentrated on e-banking adoption, Barriers and Benefits,
Challenges and Prospect, customer satisfaction and behavior towards e-banking but, this
research focused on the roles of e-banking on the financial performance of banks. This
makes the study more relevant. From survey of relevant literature, it has been found that
there are a few studies conducted in Ethiopia on the area of e-banking and IT adoption
and its impact towards customer behavior of commercial banks. This study
therefore intends to fill these relevant gaps in literature by studying the roles of e-banking
service on return on asset as a financial performance indicator of commercial banks in
Ethiopia.
2.2.5 Conceptual framework
From the theoretical and emperical literature reviews, the following conceptual
framework of the study is developed by the researcher.
41
Figure 2.1 The conceptual framework or model of the study
Factors influencing
Affected by
I
Profitability
N
D D
Measured by
E E
P P
E Expected Sign E
N Debit Card N
D D
+
E Value of transaction E
by POS
N N
T + T
Value of
transaction by
V
ATM + V
A A
ROA
R R
Market share +
I I
A A
B
Number of ATM + B
L L
E Number of POS +
E
S
Source: - Compiled by the researcher
42
CHAPTER THREE RESEARCH METHODOLOGY AND
DESIGN
This chapter deals with research design and methodology used to carry out the research.
The chapter is organized in six sub sections. In its introduction part highlight the
research paradigms, then the chapter concisely present study design, data type, data
collection & sampling technique, data analysis and model specification. The final two
sub parts present variables definition & Hypothesis development and operationalization
of study variables.
3.1 Research Design
The primary aim of this study is to examine the role of electronic banking on bank's
financial performance. To achieve this objective explanatory type of research design with
a quantitative approach is used. The explanatory type of research design helps to identify
and evaluate the causal relationships between the different variables under consideration
Marczyk et al., (2005). So that, in this study the explanatory research design has
employed to examine the relationship of the stated variables. A panel data study design
which combines the attributes of cross-sectional (inter-firm) and time series data was
used. The advantage of panel data analysis is that more reliable estimates of the
parameters in the model can be obtained (Gujarati, 2004). EViews 8 statistical software;
panel least square regression method was used to analyze the data. Furthermore,
descriptive analysis, normality test, the autocorrelation matrix analysis, F-test and the
regression analysis has conducted.
3.1.1 Population of the study and Sampling Techniques
The target population of the study is all commercial banks adopting e-banking service in
Ethiopia. The annual audited financial statement of selected commercial banks in
Ethiopia for a period covering from 2013-2015 are used as a main source of data to
gather important information for the study. However to conduct the research commercial
banks operating in Ethiopia, have no complete data of all the e-banking service is
43
available before 2013. Therefore, banks those having organized e-banking service report
to NBE since 2013 are considered as a sample. Due to this reason, by using purposive
sampling technique from seventeen Commercial banks operating in Ethiopia this study
took ten banks which are the banks that have invested heavily in e-banking based on
information available from their annual reports and apply ATM and POS. Those are
commercial bank of Ethiopia, Awash International bank, Dashen Bank, Bank of
Abyssinia, Wegagen Bank, United Bank, Nib International bank, Cooperative bank of
Oromia, Oromia International Bank and Zemen Bank.
3.1.2 Source and types of Data
The study employed a quantitative research approach by using secondary data gathered
from National Bank of Ethiopia and published annual reports of commercial banks.
Financial statements and other published and unpublished documents also used to
construct the literature part of this thesis and cited accordingly. The Panel data involves
the pooling of observations on a cross section of units over several time periods and
provides results that are simply not detectable in pure cross sections or pure time series
studies Brooks, (2008). In addition Hsiao, (2003) described panel or a longitudinal data
set is one that follows a given sample of individuals over time, and thus provides multiple
observations on each individual in the sample.
Brooks, (2008), states that, panel data set has two major advantages; first, it can address a
broader range of issue and tackle more complex problem than pure time series or pure
cross-sectional data alone and by structuring the model in appropriate way, the researcher
can remove the impact of certain forms of omitted variable bias in the regression result.
Second, it is often examined how the relationships between variables change. Hence, by
combining cross-sectional data and time series data, the researcher can increase the
number of degree of freedom, and thus the power of test, by employing information on
the dynamic behavior of a large number of entities at same time.
A multiple linear regression tests used to determine the significance level of each
independent and control variable in influencing financial performance. The multiple
linear regressions model using OLS through E-Views 8.0 econometric software package,
44
to test the casual relationship between the banks’ financial performance and electronic
banking in order to determine the most significant and influential indicators and other
control variables affecting the financial performance of commercial Banks in Ethiopia.
3.1.3 Data analysis
The data collected using data collection sheet are edited, coded and cleaned. To achieve
the broad research objective, the paper was primarily based on panel data, which was
collected through structured document review. Thus, the collected panel data was
analyzed using descriptive statistics, correlations and multiple linear regression analysis.
Mean values and standard deviations were used to analyze the general trends of the data
from 2013 to 2015 based on the sector sample of ten banks and a correlation matrix was
also used to examine the relationship between the dependent variable and explanatory
variables. For this study, the regression analysis known as OLS was used to estimate the
relationship between return on asset and its determinants. The multiple linear regressions
model was run, and thus OLS was conducted using E-views 8 econometric software
package, to test the casual relationship between the bank’s financial performance and
their potential determinants and to determine the most significant and influential e-
banking explanatory variables affecting the financial performance of commercial banks.
Regression is concerned with describing and evaluating the relationship between a given
variable (usually called the dependent variable) and one or more other variables (usually
known as the independent variables) Brooks, (2008).
Descriptive statistics including minimum, mean, maximum and standard deviation is used
to describe and provide detailed information about selected variables; diagnostics tests of
CLRM assumptions including Muliticollinearity, Hetroskadasticity and autocorrelation
tests were conducted to ensure safe application of least square method; this study also
conducted correlation analysis, specifically Pearson correlation to measure the degree of
association between the variables under considerations; F-test is used to test more than
one coefficient simultaneously different from zero and to check the significance level of
all explanatory variables in this research models; and panel data regression analysis
(panel least square method) is used to examine the relationship between dependent and
45
independent variables in order to conclude based on the collected data about the roles of
e-banking on financial performance in commercial banks in Ethiopia; the P-value was
used to determine the significance of the constant term and the coefficients terms for the
regressions. The importance of each of the regressions was determined by carrying out
the F-test at 95% confidence level. The coefficient of determination R was used to
measure the strength to which independent variables explain the variations in the
dependent variables. The data collected for the study has the dimension of both time
series and cross sections. Therefore, panel data regression technique is used to conduct
the analysis and EViews 8 statistical software has employed.
3.2 Model Specification
A regression with only one independent and one dependent variable is a simple linear
regression model, used to identify whether the independent variable has an effect on
dependent variable. Whereas, if there are more than one independent variables, the model
appropriate to test the significance of these variables to explain about the change on
dependent variable would be multiple linear regression model (Brooks, 2008)
The literature reviewed in the previous chapter identified the roles influencing financial
performance of e-banking. This chapter presents a framework of analysis on the basis of
these studies, and involves adopting a model that would help demonstrate the
responsiveness of certain key variables that influence financial performance of
commercial banks in Ethiopia.
Although the data consists of both cross sectional and time series information, it does not
contain equal information of all commercial banks in the sample for the entire period.
Therefore, unbalanced panel estimation techniques are used in this study. Panel
techniques take into account the heterogeneity present among individual commercial
banks, and allow the study of the impact of all factors with less co linearity among
variables, more degree of freedom and greater efficiency (Christopher and Rim, 2014).
The process of measurement is central to quantitative research because it provides the

fundamental connection between empirical observation and mathematical expression of
quantitative relationships Brooks, (2008).
46
Similar model is use in the studies like Al-Smadi and Al-Wabel (2011), Itah and
Emmanuel (2014), Rauf and Qiang (2014), Karimzadeh (2014), Valahzaghard and
Bilandi (2014) to examine the effect of cashless banking on banks in different countries
of the world.
According to Brooks, (2008), the general multivariate regression model with K

independent variables can be written as follows:-
Yi = β0 + β1X1i +β2X2i + …+ βkXki + εi (i 1,2,3…,n)
Where Yi is the ith observation of the dependent variable, X1i,…,Xki 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, the
roles of e-banking on profitability of commercial banks can be modeled as described
below:-
= + , + , + , + , + ,
+ , +Є ,
Where;-
ROA = Profit before tax / Total Asset
DC = Number of Debit Card
NATM= Number of ATM
NPOS = Number of POS
MS = the Market share index of bank
VATM = Value of transaction executed by ATM = (Natural logarithmic of value
of ATM transaction)
VPOS = Value of transaction executed by POS= (Natural logarithmic of the value
of POS transaction)
βo = Constant term
β1, 2, 3…7 are parameters to be estimated;
Є = is the error component for company i at time t assumed to have mean zero E [Є it] =0
i = commercial banks i = 1. . . 10; and
47
t = the index of time periods and t = 1- 3
3.3 Variables Definition and Hypothesis development
According to Creswell, (2009), to make it is clear to readers what groups are receiving
the experimental treatment and what outcomes are being measured, the variables need to
be specified in quantitative researches.
3.3.1 Dependent Variable
Return on Asset; bank performance has often been measured using return on asset
(ROA) and profit before tax. Return on asset is defined as net income before tax divided
by total assets. This ratio is an indicator of managerial efficiency; it indicates how
capable the management of the bank’s assets in to net earnings (Adegbaju, 2008).
Thus, in this research use return on asset will be used as a proxy on bank’s
financial performance.
Return on Asset (ROA) represents efficiency in asset utilization and shows how much net
income is generated out of assets. It indicates the ability of bank management to generate
profits by utilizing the available assets of the bank. Thus, if the ratio of ROA is high, it
indicates that it is better performance in order to generate profit. It is measured by the
ratio of net profit to total asset as follows: ROA = Net Profit before tax / Total Asset
Measurement of bank performance is complicated activity. Researchers used different
approaches to assess the performance of banks in various times. However, some of the
most reliable yardsticks that have been used in the past to measure financial
performance of bank are return on assets (ROA).
According to Ross et al., (2006) return on asset (ROA) is a comprehensive
measure of overall bank performance from an accounting perspective. It is a primary
indicator of managerial efficiency. It indicates how capable the management of the bank
has been converting the bank’s assets in to net earnings.
The ROA reflects the ability of a bank’s management to generate profits from the
bank’s assets. It shows the profits earned per birr of assets and indicates how effectively
the bank’s assets are managed to generate revenues, although it might be biased due to
48
off-balance-sheet activities. This is probably the most important single ratio in
comparing the efficiency and operating performance of banks as it indicates the returns
generated from the assets that bank owns (Tan et al. 2012).ROA is the most
comprehensive accounting measure of a bank’s overall performance (Birhanu, 2012).
Because of this, the bulk of studies employed ROA as performance measure, for instance,
(Amdemikael, 2012, Belayneh 2011, Mohana et. al., 2012, Li Yuqi 2006, Sufian 2011,
Syafri 2012).
3.3.2 Independent other control Variable
Banks performance is affected by both internal and external factors. Internal factors are
factors over which banks management has control whereas external factors are factors
over which the management of the bank lacks control.
Internal factor that is called the bank specific factors is determinants that are
mainly influenced by a bank’s management and policy objectives. That is, according to
Mohana et al, 2012 the bank specific factors reflect the difference related to policies and
decisions of a bank’s management. Such performance determinants are capital structure,
bank size, income diversification and operating costs which are derived from
balance sheet and income statement.
The independent variables are number of ATM, value of transaction executed by ATM,
number of POS, value of transaction executed by POS, debit Card, and market share of
commercial banks there are also many e-banking service that can be considered as
independent variables but due to lack of organized data the researcher obliged to exclude.
3.3.2.1 Value of transaction of Automated Teller Machine (VATM)
Kashif and Muhammad (2016) used value of transaction of ATM to examine the impact
of cashless banking on profitability of Pakistani banking industry. To measure cashless
banking in the country proxies of Automated Teller Machines Transactions (ATMT),
Point of Sales Transactions (POST), Call Center Banking Transactions (CCT) and
Mobile Banking Transactions (MOBT) are used to examine their impact on aggregate
49
Return on Equity (ROE) of the banking industry, Ordinary Least Square (OLS) multiple
regressions.
Price of transaction of ATM was undertaken as independent variable by Hamed et al.,

2016 the results of study showed that the effect of price of ATM, POS on ROA of
selected banks is positive and significant. The effect of POS on bank ROA is higher than
that of ATM, insofar as ATMs have the lowest effect.
3.3.2.2 Value of transaction of Point of sale (VPOS)
Value of transaction of POS (price of transaction) was included as independent variable

to study profitability (return on asset) of Iranian banks by Hamed et al., 2016 the results
of study showed that the effect of price of ATM, POS on ROA of selected banks is
positive and significant. The effect of POS on bank ROA is higher than that of ATM,
insofar as ATMs have the lowest effect.
3.3.2.3 Debit Card (DC)
Debit card issued by banks to customers with accounts and they can be at cash machines
ATMs to withdraw money from bank account and used to purchase items at stores and
online (Nyanamba and Steve 2014). In this section Debit Card is proximate by total
number of Debit Card users.
3.3.2.4 Number of Automated Teller Machine terminals (NATM)
Saeid et.al, (2014) have done a research entitled “The effects of e-banking on banking
expansion on profitability of a commercial bank in Iran”. For this study, they have used
return on asset considering as dependent variables and the number of ATM machines,
terminal branches, and point of sales, market concentration and bank size were
considered as independent variables covering the period from 2004 to 2012. Results
50
showed that the number of terminal branches, ATMs, POSs, bank size and market
concentration have positive effects on the bank profitability; the number of terminal
branches had more effect on the bank profitability than other variables has significant and
positive effect on profitability of Sepah bank.
Delgado et al., (2004), argues that the development of electronic communication channels
has had a profound impact on the banking industry. The electronic distribution of retail
banking services for example, emerged with the introduction of automated teller
machines (ATM), a technology pioneered by Barclays Bank in 1967.
Evidence from other empirical studies conducted on the contribution of automated
teller
machines (ATM) to bank’s profitability reveal that investment in ATMs increases both
the volume and value of deposit accounts, reduces banking transaction costs, reduces
number of staff and the number of branches and consequently improves bank’s
profitability (Abdullah, 1985).
In this section ATM is proximate by total number of ATM terminals and value of
transaction executed by ATM (VATM)
3.3.2.5 Number of Point of sale terminals (NPOS)
According to Dieterich (2014), POS covers a variety of services rendered through

machines located at retail establishments. POS terminals are generally clerk generated
devices located at the checkout or convenience counter or retail establishment. Electronic
cash register versions of these terminals have been in operation for several years,
maintaining store records on sales, inventories, accounts receivable and the like. Now,
POS devices have been linked to financial institution computers, allowing retail
customers to receive approval for check cashing and electronically initiate transfers
from their accounts to the retailer’s. In some installations, customers can make deposits
to their accounts. POS devices accept either a plastic credit card or a plastic debit card,
depending on whether the customer wants to delay payment by charging the purchase
51
deducted directly from customer’s account. As electronic POS systems proliferate, their
use will probably replace many of the paper transactions accomplished through cash
payments and check and credit transactions.
In this section POS is proximate by total number of POS terminals and value of
transaction executed by POS (VPOS)
Ngumi (2013) research conducted in Kenya on effects of innovation on financial

performance of commercial banks in Kenya; Mabrouk & Mamoghli (2010) employed in
Tunisia so called financial innovation for banks profitability; Nofie (2011) study on the
diffusion of electronic banking in Indonesia and Kemppainen (2003) Competition and
regulation in European retail payment systems used number of ATM terminals, number
of POS terminals and number of debit card used as independent variables.
External factors are variables that reflect the economic and legal environments
where the financial institutions operate. They represent events outside the influence of
the bank. The management can anticipate changes in the external environment and
try to position the institution to take advantage of anticipated developments (Anna p.I
Vong, 2008).
3.3.2.6 The bank market share (MS)
The market share of each bank is equal to the ratio of bank deposit to the total deposit of
selected banks, the researcher employed as a control variable. The higher market share
means higher deposit (Asadzade and Kiani, 2012, 191) [2]
The bank market share = Deposit of each bank (Eq1)
Total deposit of studied banks
Both Vong et al (2009) and Devinaga Rasiah (2010) included market share in their
studies. According to Devinaga Rasiah (2010) market share could be included in the
profitability model as an external determinant because if commercial banks could be able
to expand their market share then they may be able to increase their income as well hence
profit. This is because the ability to increase market share requires selling more so in the
case of banking if commercial banks are able for example offer more loans to more
52
customers then they stand a greater chance of increasing interest income as well as
profits. More over being able to sell more in order to increase your market share requires
efficiency and low cost in your operation and Smirlock (1985) with his efficient structure
hypothesis advocate that commercial banks that are in the position to ensure superior
efficiency and having low cost structures stand the chance of achieving supernormal
profits.
Furthermore, according to Karkrah and Ameyaw (2010) market share or size of banks is
normally used to capture potential economies or diseconomies of scale in the banking
sector. Secondly, the size of banks as a variable control for cost differences and product
and risk diversification. They argue that the first factor (economies or diseconomies of
scale) is expected to lead to a positive relationship between bank size and profitability if
there are significant economies of scale and their argument was based on the empirical
evidence of Akhavein, Berger & Humphrey (1997) Bourke (1989), Molyneux &
Thornton (1992), Bikker & Hu (20029, Goddard, Molyneux & Wilson (2004) which they
cited.
53
3.4 Operationalization of study variables
Table 3.1 Definition, notation and expected sign of the study variables
Variables Notation Measure Used By Expected
(Source) Result
Dependent Variables
Return on Asset
ROA Net Income before tax / Total (Amidu &

Asset Abor, 2006).
Debit card DC Natural logarithmic of number Sundas, 2014 +

of Debit card users
Value of VATM Natural logarithmic of Value Hamed et al., +

transaction of transaction by ATM 2016
executed by
ATM
Independent Variables
Number of NATM Natural logarithmic of number Mohammed, +

ATM of ATM deployed 2006
Value of VPOS Natural logarithmic of Value Hamed et al., +

transaction of transaction by POS 2016
executed by
POS
Number of NPOS Natural logarithmic of number Hamed et al., +

Point of Sale of POS deployed 2016
Market Share MS Hamed et al., +

2016
Source: Compiled by researcher
54
CHAPTER FOUR DATA ANALYSIS AND INTERPRETATION
This chapter deals with the analysis and presentation of the results of the study. The data
were analyzed by using E-view software version 8. The descriptive statistics and the
correlation analysis were discussed. Followed by the diagnostic test, which is
necessary to fulfill the assumption of the classical linear regression model. Then,
econometric analysis and discussion of the main finding of the study were
presented. Finally, the results of the regression analysis were discussed by supporting
empirical evidence.
4.1 Descriptive Statistics
Table 4.1 provides a summary of the descriptive statistics of the dependent and
independent variables for ten commercial banks from the year 2013 to 2015 with a total
of 30 observations. The table shows the mean, minimum, maximum, standard deviation
and number of observations for the dependent variable Return on asset (ROA) and
independent variables Number of Debit Cards (DC), Number of POS (POS), Number of
ATM (ATM), Value of transaction executed by ATM (VATM) Value of transaction
executed by POS (VPOS), and market share of banks (MS).
Table 4.1 Descriptive statistics (Source: E-Views output)
ROA DC NATM NPOS MS VATM VPOS

Mean 0.037667 4.809333 1.931000 2.240667 0.103500 3.098333 0.220333
Median 0.040000 4.780000 2.020000 2.305000 0.030500 3.615000 -0.235
Maximum 0.060000 6.210000 2.810000 3.280000 0.664000 4.310000 3.170000
Minimum 0.020000 3.510000 0.000000 1.000000 0.010000 0.310000 -1.52
Std. Dev. 0.010063 0.635496 0.567756 0.576595 0.196082 1.353848 1.484421
Skewness 0.066693 0.164775 -1.24494 -0.46489 2.399230 -1.39458 0.545024
Kurtosis 3.309129 2.581084 5.795870 2.669883 7.028021 3.143460 2.019197
Jarque-Bera 0.141691 0.355117 17.52049 1.216816 49.06272 9.749946 2.687725
Probability 0.931606 0.837312 0.000157 0.544217 0.000000 0.007635 0.260836
Sum 1.130000 144.2800 57.93000 67.22000 3.105000 92.95000 6.610000
Sum Sq.
Dev. 0.002937 11.71179 9.348070 9.641387 1.114996 53.15422 63.90170
Observations 30 30 30 30 30 30 30
Table 4.1 shows the average indicators of variables computed from the financial
55
statements and the standard deviation that shows how much dispersion exists from the
average value. According to Brooks, (2008), a low standard deviation indicates that the
data point tend to be very close to the mean, whereas high standard deviation indicates
that the data point are spread out over a large range of values.
It shows the summary data for the variables used in the analysis. The data are average
values across years and reported showing the trend of the key variables over the period
2013 to 2015. The data shows that during 2013 to 2015 the average profit level; ROA of
Ethiopian banks are 3.78 percent. However, there is much difference in profitability among
the banks as witnessed by the values of the standard deviations which is 0.010 as indicated
in table 4.1. This implies that the volatility of ROA ratio varies from the mean by 1%.
4.2 Correlation Analysis
Table 4.2 Correlation Analysis of Variables

Correlation ROA DC NATM NPOS MS VATM VPOS
Probability
ROA 1.00000
DC -0.21162 1.0000
NATM 0.368587 0.554134 1.0000
NPOS 0.309906 0.655922 0.530282 1.0000
MS 0.140068 0.581628 0.408532 0.28776 1.0000
VATM 0.158656 0.504452 0.21451 0.676045 0.352045 1.0000
VPOS 0.01657 0.653768 0.227724 0.417845 0.709595 0.624961 1.0000

Source: EViews output
The most widely-used type of correlation coefficient is Pearson r, also called linear or
product-moment correlation. The significance level calculated for each correlation is a
primary source of information about the reliability of the correlation. The significance of
a correlation coefficient of a particular magnitude will change depending on the size of
56
the sample from which it was computed. The values of the correlation coefficient are
always between -1 and +1. A correlation coefficient of +1 indicates that the two variables
are perfectly related positively; while a correlation coefficient of -1 indicates that two
variables are perfectly related in a negative linear sense. A correlation coefficient of 0, on
the other hand indicates that there is no linear relationship between two variables
(Gujarati, 2004).
The correlation result in Table 4.2 shows that debit card and value of transaction by POS
are negatively related to ROA of Banks. It shows that when the increase in these factors
leads in the decrease in ROA.
The matrix showed that in general the correlation between the explanatory
variables is not strong suggesting that multicollinearity problems are either not
severe or non-existent. According to Kennedy (2008), multicollinearity will be a severe
problem when the correlation is above 0.80.
In general, even though the correlation analysis shows the direction and degree of
associations between variables, it does not allow the researcher to make cause and effect
inferences regarding the relationship between the identified variables. Thus, in examining
the effects of selected independent variables on dividend payout ratio, the econometric
regression analysis which is discussed in the forthcoming section of the paper gives
assurance to overcome the shortcomings of correlation analysis.
4.3 Regression model tests
For valid hypothesis testing and to make data available for reliable results, the test of
assumption of regression model is required. Accordingly, the study has gone through the
most critical regression diagnostic tests consisting of Normality, Multicollinearity,
heteroskedasticity, and autocorrelation and model specification accordingly.
4.3.1 Classical linear regression model (CLRM) Assumptions

57
To maintain the data validity and robustness of the regressed result of the research, the
basic classical linear regression model (CRLM) assumptions must be tested for
identifying any misspecification and correcting them so as to augment the research
quality Brooks, (2008). There are different CLRM assumptions that need to be satisfied
and that are tested in this study, which are: errors equal zero mean test, normality,
homoscedasticity, autocorrelation, and multicollinearity.
4.3.1.1 Constant Assumption 1: E(ut) = 0
The first assumption required is that the average value of the errors is zero. In
fact, if a constant term is included in the regression equation, this assumption will never
be violated (brook, 2008). In chapter three the researcher expected a constant term
in his regression model. Similarly, according to the random effect result this study has a
constant term (i.e. 0.011528). Which means the mean value of the errors is zero,
and the estimates of slope coefficients are not biased. Therefore, this assumption is not
violated.
4.3.1.2 Test for heteroskedasticity assumption (var(ut ) = σ2 <∞)
The condition of classic linear regression model implies that there should be
homoskedasticity between variables. This means that the variance should be constant and
same. Variance of residuals should be constant otherwise, the condition for existence of
regression, homoskedasticity, would be violated and the data would be heteroskedastic
Brooks, (2008). To check for this, Breusch-Pagan-Godfrey test were applied. The
Breusch-pagan tests of the null hypothesis that the error variances are all equal versus the
alternative that the error variance are a multiplicative function of one or more variables.
Hence, following the general null hypothesis of Breusch-pagan tests, the researcher
develops the following hypothesis to check the presence of heteroskedasticity:
 H0: homoskedastic error term

 H1: heteroskedasticity error term
58
Table 4.3 Heteroskedasticity Test
Heteroskedasticity Test: Breusch-Pagan-Godfrey
F-statistic 0.264487 Prob. F(6,23) 0.9479

Obs*R-squared 1.936298 Prob. Chi-Square(6) 0.9255
Scaled explained SS 1.363469 Prob. Chi-Square(6) 0.9680
Both F-statistic and chi-square (χ 2) tests statistic were used. As can be presented in the
above Heteroskedasticity test both the F- and χ2 -test statistics give the same conclusion
that there is no significant evidence for the presence of Heteroskedasticity. Since the p-
values in all of the cases were above 0.05, the null hypothesis of homoskedasticity is
failed to reject at 5 percent of significant level. This implying that there is no significant
evidence for the presence of heteroskedasticity in these research models. The third
version of the test statistic, “scaled explained SS”, which as the name suggests is based
on a normalized version of the explained sum of squares from the auxiliary regression,
also give the same conclusion. (See Appendix A for detail).
4.3.1.3 Test for absence of autocorrelation assumption (cov(ui , uj ) = 0 for i _= j)
Another basic assumption of regression model says that the covariance between error
terms should be zero. This means that error term should be random and it should not
exhibit any kind of pattern. If there exists covariance between the residuals and it is non-
zero, this phenomenon is called autocorrelation Brooks, (2008). To test for
autocorrelation, three methods can be used.
Breusch–Godfrey Serial Correlation LM test
The Breusch–Godfrey serial correlation LM test was run. Breusch–Godfrey tests area
joint test for autocorrelation that will allow examination of the relationship between uˆ t
and several of its lagged values at the same time. According to Brooks (2008), The
Breusch--Godfrey test is a more general test for autocorrelation up to the rth order.
Hypothesis of this test are:-
59
Following the general null hypothesis of Breusch–Godfrey serial correlation LM test, the
researcher develops the following hypothesis to check the absence of autocorrelation:
H0 = No autocorrelations errors
H1 = Autocorrelations errors
Table 4.4: Breusch-Godfrey Serial Correlation LM Test:
Breusch-Godfrey Serial Correlation LM Test:

As can be seen in the above table 4.4, F test result and the P value of F-statistic 0.97
which is beyond the significance level of 5%. Hence, the null hypothesis of no
autocorrelation is failed to reject at 5 percent of significant level. This implying that there
is no significant evidence for the presence of autocorrelation in this model. The Chi-
Square P-value of the model also supports the absence of autocorrelation. (See Appendix
B for detail). Therefore, can be concluded that, the covariance between residuals is zero,
data is normal and absence of autocorrelation problem was found conclusively from the
LM test.
4.3.1.4 Test of normality (ut ∼N(0, σ2))
Normality test was applied to determine whether a data is well-modelled by a normal

distribution or not, and to compute how likely an underlying random variable is to be
normally distributed. If the residuals are normally distributed, the histogram should be
bell-shaped and the Jarque-Bera statistic would not be significant. This means that the p-
value given at the bottom of the normality test screen should be greater than 0.05 to
support the null hypothesis of presence of normal distribution at the 5% level.
Theoretically, if the test is not significant, then the data are normal, so any value above
0.05 indicates normality. Jarque-Bera formalizes this by testing the residuals for
normality and testing whether the coefficient of skeweness and kurtosis close are zero
and three respectively. Skewness refers to how symmetric the residuals are around zero.
60
Perfectly symmetric residuals will have a skewness of zero. Skewness measures the
extent to which a distribution is not symmetric about its mean value. Kurtosis refers to
the ‘‘peakedness’’ of the distribution. For a normal distribution the kurtosis value is 3.
Kurtosis measures how fat the tails of the distribution are, the Jarque–Bera test for
normality is based on two measures, skewness and kurtosis.
The hypothesis of normality distribution is:
H0= residuals follows a normal distribution

H1 = residuals do not follows a normal distribution
Figure 4.1 Normality test for residuals
7
Series: Standardized Residuals
6 Sample 2013 2015
Observations 30
5
Mean 5.93e-19
4
Median 0.000187
Maximum 0.011014
Minimum -0.012595
3
Std. Dev. 0.005321
Skewness -0.293367
2
Kurtosis 2.974549
1 Jarque-Bera 0.431130
Probability 0.806086
0
-0.015 -0.010 -0.005 0.000 0.005 0.010
As shown in the histogram above in the figure 4.1 kurtosis close to 3 (i.e. 2.974549) and
skewness approaches to 0 (i.e.-0.293367). Violation of normality might affect the
estimation process or the interpretation of results especially in Ordinary Least squared
analysis. For instance, it may increase the chi-square value and may possibly cause
under estimation of fit indices and standard errors of parameter estimates (Hair et al.,
2006). One approach to diagnose normality is through visual check or by graphical
analyses such as the histogram and normal probability plot that compare the
observed data values with a distribution approximating the normal distribution. If the
61
observed data distribution largely follows the diagonal lines then the distribution is
considered as normal (Hair et al., 2006). Beside the shape of distribution, normality can
also be inspected by two multivariate indexes i.e. Skewness and kurtosis.
Hence, null hypothesis of the residuals follows a normal distribution is failed to reject at
5 percent of significant level. Hence, it seems that the error term in all of the cases
follows the normal distribution and it implies that the inferences made about the
population parameters from the samples tend to be valid.
4.3.1.5 Test for multicollinearity
Multicollinearity indicates a linear relationship between explanatory variables which may

cause the regression model biased (Gujarati, 2004). If an independent variable is an exact
linear combination of the other independent variables, then we say the model suffers from
perfect collinearity, and it cannot be estimated by OLS Brooks (2008). When independent
variables are multicollinear, there is overlap or sharing of predictive power. This may
lead to the paradoxical effect, whereby the regression model fits the data well, but none
of the explanatory variables (individually) has a significant impact in predicting the
dependent variable Gujarati, (2004). According to Lewis-Beck, (1993) suggestion in
order to find out the multicollinearity problem, the bivariate correlations among the
independent variables should be examined and the existence of correlation of about 0.8 or
larger indicates a problem of multicollinearity. Also, Cooper and Schendlar, (2003)
suggested that a correlation above 0.8 should be corrected.
62
Table 4.5: Correlations matrix of explanatory variables
Correlation ROA DC NATM NPOS MS VATM VPOS

Probability
ROA 1.000000
DC -0.21162 1.0000
NATM 0.368587 0.554134 1.0000
NPOS 0.309906 0.655922 0.530282 1.0000
MS 0.140068 0.581628 0.408532 0.28776 1.0000
VATM 0.158656 0.504452 0.21451 0.676045 0.352045 1.0000
VPOS 0.01657 0.653768 0.227724 0.417845 0.709595 0.624961 1.0000

The Pearson correlation, which varies between -1 and 1, if the p-value is 0, there is no
linear correlation, and if the p-value is -1 or 1 we have a perfectly negative or positive
relationship between the variables. According to Pallant (2005), the results in the above
correlation matrix table 4.5 show that the highest correlation of 0.709595 which is
between market share and value of transaction by POS. Since there is no correlation
above 0.8 in this study according to Cooper and Schendlar (2003) and Lewis-Beck
(1993), it can be concluded in this study that there is no problem of multicollinearity, thus
enhanced the reliability for regression analysis.
4.3.1.6 Choosing Random effect (RE) Vs. fixed effect (FE) models
Panel data may have unobserved group effects, time effects or both included in
the error term. These effects are either fixed effects, random effects or both. These
effects may lead to heterogeneity or even endogeneity and the OLS estimators will be
biased and inconsistent. The panel data models, fixed effects (FE) model and
random effects (RE) model, allow for heterogeneity across panel units (and possibly
across time) but confines that heterogeneity to the intercept terms of the relationship
(Brooks, 2008).
63
There must be determined model, the random effects (RE) model or the fixed effects (FE)
model is most suitable for this dataset. The RE model assumes that the unobserved
effect is uncorrelated with the independent variables; the individual-specific effects
are parameterized as additional random disturbances. In the FE model the unobserved
effects are permitted to correlate with the explanatory variables, hence this model allows
a limited form of endogeneity (Gujarati, 2004). The fixed effects model can be used to
control for omitted variables that differ between the banks but are constant over time,
hence it is bank fixed effects. The random effects model can be used to control for some
omitted variables that are constant over time and vary between banks and other omitted
variables that vary over time and are constant between banks. The Housman test has
conducted to test which model, RE or FE, fits the data best.
The results so far indicate that all CRLM assumptions are not violated, so the ordinary
least square regression can be safely applied. However, since this study uses a panel data,
there are two types of panel estimator approaches that can be employed, namely: fixed
effects models (FEM) and random effects models (REM) Brooks, (2008).
The simplest types of fixed effects models allow the intercept in the regression model to
differ cross-sectionally but not over time, while all of the slope estimates are fixed both
cross-sectionally and over time. The random effects approach proposes different intercept
terms for each entity and again these intercepts are constant over time, with the
relationships between the explanatory and explained variables assumed to be the same
both cross-sectionally and temporally Brooks, (2008). To examine whether individual
effects are fixed or random, a Hausman specification test was conducted providing
evidence in favor of the REM model Baltagi (2005). The null hypothesis for this test is
that unobservable heterogeneity term is not correlated or random effect model is
appropriate, with the independent variables. If the null hypothesis is rejected then we
employ Fixed Effects method. Brooks, (2008).
64
The Hausman test hypothesis is
H0= Random effect model is appropriate

H1= Fixed effect model is appropriate
Table 4.6 Hausman test

Correlated Random Effects - Hausman Test
Equation: RANDOMRESULTFINAL
Test cross-section random effects
Chi-Sq.
Test Summary Statistic Chi-Sq. d.f. Prob.
Cross-section random 2.694756 6 0.8461
Table 4.6 above shows Hausman specification test, the P-value of a model is 0.8461,
which is more than 5% level of significance. Hence, the null hypothesis of the random
effect model is appropriate is failed to reject at 5 percent of significant level. This
implying that, random effect model is more appropriate than fixed effect model and
gives more comfort that random effects model results are valid (see Appendix C for
detail).
4.4 Result of the regression analysis

EViews regression output is divided into three panels. The top panel summarizes the
input to the regression, the middle panel gives information about each regression
coefficient, and the bottom panel provides summary statistics about the whole regression
equation. The two most important numbers, “R-squared” (the one who answered how
much percent of the variance in the dependent variable in the regression accounted for)
and “S.E. of regression.” and the one that shows how far is the estimated standard
deviation of the error term. Five other elements, “Sum squared residuals,” “Log
likelihood,” “Akaike info criterion,” “Schwarz criterion,” and “Hannan-Quinn criter.” are
used for making statistical comparisons between two different regressions. The next two
numbers, “Mean dependent var” and “S.D. dependent var,” report the sample mean and
standard deviation of the left hand side variable Brooks, (2008).
65
“Adjusted R-squared” makes an adjustment to the plain-old to take account of the
number of right hand side variables in the regression. Measures what fraction of the
variation in the left hand side variable is explained by the regression. The adjusted,
sometimes written, subtracts a small penalty for each additional variable added.
“F-statistic” and “Prob (F-statistic)” come as a pair and are used to test the hypothesis
that none of the explanatory variables actually explain anything. Put more formally, the
“F-statistic” computes the standard F-test of the joint hypothesis that all the coefficients,
except the intercept, equal zero. “Prob (F-statistic)” displays the p-value corresponding to
the reported F-statistic.
The final summary statistic is the “Durbin-Watson,” the classic test statistic for serial
correlation. A Durbin-Watson close to 2.0 is consistent with no serial correlation, while a
number closer to 0 means there probably is serial correlation Brooks, (2008). Hence, as
concluded in the Hausman test (Table 4.6) above the random effects model is appropriate
regression analysis to this study.
4.4.1 Operational model

The operational panel regression model used to find the significant factors of financial
performance of commercial banks in Ethiopia measured by Return on Asset (ROA) was:
= + , + , + , + , + ,
+ , +Є ,
Table 4.7 Random effects model regression results
Dependent Variable: ROA
Variable Coefficient Std. Error t-Statistic Prob.
C 0.085820 0.012455 6.890525 0.0000

VATM 8.50E-05 0.001462 0.058148 0.9541
VPOS 0.001245 0.001552 0.802572 0.4304
DC -0.019570 0.003234 -6.052106 0.0000
NATM 0.010189 0.002822 3.610275 0.0015
NPOS 0.010648 0.003707 2.872467 0.0086
MS 0.016659 0.009651 1.726105 0.0977
R-squared 0.731549 Mean dependent var 0.034660

Adjusted R-squared 0.661518 S.D. dependent var 0.009504
S.E. of regression 0.005529 Sum squared resid 0.000703
F-statistic 10.44609 Durbin-Watson stat 2.116567
Prob(F-statistic) 0.000013
66
Source: Eviews output
Rationale why OLS model is selected: OLS methods involve data observations
with minimum of 30 observations in order to regression the data. In Ethiopia the number
of banks and hardly able to collect sufficient data as indicated in this research. Further, a
number of similar research topics with this research idea were conducted using OLS and
the results were relevant and accepted by numerous scholars. For instance, the study
conducted by Nader (2011) to assess financial performance of Saudi Arabia banks
reported results that are both statistically significant but with mixed coefficient variables.
Likewise Agboola (2006) results on the performance of Nigeria banks showed significant
and positive coefficient variables it also holds true for Iftekhar, et.al. (2009) study results
across the European Union and Ngumi (2013) study conducted in Kenya that used OLS
model to measure the financial performances of commercial banks used PBT as
dependent variable
In the following section it was attempted to explain about the significance of the OLS
model by taking results of the study and explain what the model says about the variable
results and the discussion on scholars that explain about the significance of OLS figures.
4.4.2 Interpretations on regression results and research Hypothesis
This section discusses in detail the analysis of the results for each explanatory variable
and their importance in determining financial performance. Furthermore, the discussion
analyzes the statistical findings of the study in relation to the previous empirical
evidences. Hence, the following discussions present the interpretation on the Random
effects model regression results and relationship between explanatory variables and
ROA.
As shown from the above table the R-square and Adjusted R-squared values of the model
was of 0.73 and 0.66 respectively the result indicates that about 73.15 % of the variability
in the dependent variable (Return on Asset) is explained by the independent variables
used in the model. That is Number of Debit Cards, Number of POS, Number of ATM,
Value of transaction executed by ATM Value of transaction executed by POS, and
67
market share of banks collectively explain 66.15% of the change in ROA. The remaining
33.85% of the variability in the dependent variable is left unexplained by the explanatory
variables used in the study. This means that the remaining 33.85% of the changes was
explained by other variables which are not included in the model.
In this study ROA was used as a main financial performance measure. The reason for
using ROA as the measurement of bank performance was because the ROA reflects
the ability of a bank’s management to generate profits from the bank’s assets and also
indicates how effectively the bank’s assets are managed to generate revenues. Moreover,
performance is best measured by ROA (Tan et al., 2012). The regression analysis result is
presented by using separate table for each model. Table 4.7 shows the regression analysis
for ROA. In this regression analysis the dependent variable is ROA while the
independent variable is Number of Debit Cards (DC), Number of POS (POS), Number of
ATM (ATM), Value of transaction executed by ATM (VATM) Value of transaction
executed by POS (VPOS), and market share of banks (MS).
Furthermore, the F-statistic was 10.44 and the probability of not rejecting the null
hypothesis that there is no statistically significant relationship existing between the
dependent variable (ROA) and the independent variables, is 0.0000 indicates that the
overall model is highly significant at 1% and that all the independent variables are jointly
significant in causing variation in return on asset.
The panel random effect estimation regression result in the above table 4.7 shows that,
coefficient intercept (α) is 0.085820. This means, when all explanatory variables took a
value of zero, the average value ROA would be take 0.085820 unit and statistically
significant at 5% level of significance.
4.4.2.1 Number of ATMs and Return on Assets
According Table 4.7 the regression coefficient of number of ATMs is 0.010 and its P-
value is 0.0015. It indicate that where other explanatory variables remain constant
number of ATMs terminals have a positive influence on ROA and implies that when
number of ATM increase by 1% then the ROA will increase proportionally with
68
statistically significant at 1%. This means commercial banks with high number of ATM
are more profitable than commercial banks with low number of ATM.
The result agrees with previous researches (Rahimzadeh et al.,2015), (Josiah and Nancy,
2012), (Ngango, 2015), (Jegede, 2014) found that the number of ATMs service had
positive and significant effect on profitability of studied banks. Accordingly Saeid
et.al., (2014) and Salehmanesh et al., (2014) also concluded that there was a positive
and significant association between the number of ATM and profitability.
Akram & Allam (2010) conducted a study in Jordan and found that use of information
technology which is embodied in ATMs improved the matrix of financial and
operational performance. The study concluded that number of ATM had role on return
on assets which is consistent to the findings of this study. Likewise Ngumi (2013) the
study conducted in Kenya “impact of e-banking on financial performance” conclude that
ATMs have a positive significant impact on ROA. Furthermore, in the study done in the
US by Nadia et.al.(2003) it was observed that use of ATMs led to responses on internal
cost cutting leading to better return on assets; based on the regression result, this
study accepts the null hypothesis which states number of ATM has positive and
significant impact on ROA of commercial banks in Ethiopia.
The possible reason are the bank customers can easily access their account at any time
irrespective of banking hours, ATM is a modern convenience that seems to be on every
street corner, in every retail store and attached to every bank buildings and customers by
using bank card either withdrawing or transferring money. ATMs facilitate bank
customer’s cash faster than going to the bank without long lines. These led banks in
Ethiopia to get more foreign currency and return in the form of charge fee and customer
attraction.
4.4.2.2 Number of POS and Return on Assets
Table 4.7 shows that the regression coefficient of number of POS is 0.010 and its P-
value is .0086 implies that when number of POS terminals increase by 1% then the ROA
will increase proportionally. It indicated in the result where other explanatory variables
remain constant number of POS terminals have a positive influence on ROA and
69
statistically significant at 1%. Which means commercial banks with high number of POS
terminals have more profitable than commercial banks with low number of POS
terminals. According to the regression result number of POS from the random regression
result reveals that a significant positive relationship with return on asset of sampled
commercial banks.
The analysis is in agreement with Asadzade and Kiani (2012) in a study “The effect of
using ATM, POS and branches on profitability of selected banks during 2002-2009.
They found that ICT and the mentioned e-banking branches had positive effect on
performance and profitability of Iranian banks.
The result findings of this research is also agree with the result of Kemppainen (2003 &
2008) the study done among the EU countries found that POS terminals were capable of
improving banks’ profitability and hence return on assets. The findings are further
supported by Nofie (2011) and Iftekhar et.al. (2009), which was in line with findings of
this study, as observed from the study that POS terminals contributed to banks’ income
and return on assets where there is more retail payments transaction equipment like the
POS terminals.
The possible reasons are bank customers can easily access their account to transfer
money from cardholder to the merchant’s bank account at market centers, hotels and
restaurants and etc. Bank customers can save the time no need for counting, specialized
transport or cashiers commissions and the payment is guaranteed as the bank becomes a
part of the payment process. Better reporting and accounting due to merchants statements
in the bank. These led banks get more return in the form of charge fee and customer
attraction.
4.4.2.3 Market share and Return on Asset
Table 4.7 also shows that; the Regression coefficient of market share is 0.016659 and its
P-value is 0.0977. Market share of banks from the random regression result reveals that a
significant positive relationship with return on asset of sampled commercial banks. This
variable has been included to provide information on the impact of the size or market
share of the banks and profitability. Empirical evidences shows that this variable has a
70
role on profitability. A positive relationship indicates that the bank enjoys economies of
scale; Hanweck & Humphrey (1987); Boyd & Runkle (1993); Miller & Noulas (1997);
Athanasoglou, Brissimis & Delis (2008) who were cited by Sufien et al., (2008). While a
negative relationship implies that the bank suffers from diseconomies of scale when it
expands to a larger size; Sufian et al. (2008). Therefore, the study found that increased
market share had a positive effect on the financial performance of commercial banks
with many banking institutions indicating that increased market share allowed a
company to achieve greater scale in its operations which generally improved its
profitability.
The result is consistent with the previous studies of Gul (2011),Athanasoglou et

al.(2006), Sufian et al. (2009), Weersainghe et.al.(2013), Yadollahzadeh et al.(2013),
Sarita et. al.,(2012),Masood et al.(2012) suggesting that large banks may benefited
from economies of scale. In contrast, Dietrich et. al., (2009) and Ezra (2013) found
negative relationship between bank size and performance suggesting that the smaller the
bank, the more efficient the bank will be. Therefore, the finding of this study shows that
in Ethiopian banking industry the large bank size perform better than the smaller banks
due to the existence of economies of scale. Thus, this study accepted the hypothesis
which stated there is a positive relationship between bank size and bank
performance in Ethiopia. Based on the regression result, this study accepts the null
hypothesis which states effective tax rate negatively affects performance.
The possible reasons are the more deposit collected the highest would be the lending
capacity of commercial banks.
4.4.2.4 Value of transaction of ATM and Return on Assets
As the above random effect regression output table 4.7 presented that, the coefficient of
Value of transaction executed by ATM (VATM) measured by return on asset is 8.5 and
its P-value is 0.95. Holding other independent variables constant at their average value,
when value of transaction of ATM (VATM) increased by one percent, return on asset
(ROA) of sampled commercial banks would be increased by 8.5 percent but statistically
71
insignificant at 5% level of significance. Even though probability value is insignificant at
5% the researcher failed to reject the null hypothesis that value or price of transaction of
ATM has a positive role on return on asset. This means, there is no sufficient evidence to
reject the null hypothesis.
The relationship is positive as expected and this positive relationship between value of
transaction of ATM and return on asset could be attributed to the fact that more
transaction of ATM tend to more return on asset.
This finding is similar to the finding of (Hamed et al., 2016) Price of transaction of ATM
studied as independent variable the results of study showed that the effect of price of
ATM of selected banks is positive role on return on asset.
The possible reasons are increasing in amount of ATM transaction executed the more
commission will generated by commercial banks.
4.4.2.5 Value of transaction of POS and Return on Assets
Table 4.7 also presented that, the coefficient of value of transaction of POS (VPOS)
measured by ROA is 0.001245 and its P-value is 0.4304. Holding other independent
variables constant at their average value, when value of transaction executed by POS
(VPOS) increased by one percent, return on asset (ROA) of sampled commercial banks
will be increased by 0.12 percent but statistically insignificant at 5% level of significance.
Therefore, the researcher failed to reject the null hypothesis that value of transaction of
POS has a positive effect on return on asset. This means, there is no sufficient evidence
to support the negative relationship between value of transaction of POS and ROA. This
finding is similar to the finding of (Hamed et al., 2016) Price of transaction of POS
studied as independent variable the results of study showed that the effect of price of POS
of selected banks is positive role on return on asset.
The possible reasons are increase in amount of POS transaction will increase banks
depositors (i.e. merchants like Hotels and marketing centers).
72
4.4.2.6 Debit card and Return on Assets
The results of random effect regression model in the table 4.7 above indicated that debit
card had coefficient of -0.019570 and its P-value is 0.0000. Holding other independent
variables constant at their average value, when number of debit card user increased by
one percent, return on asset (ROA) of sampled commercial banks will decrease by 0.12
percent and statistically significant at 1% level of significance. The result has negative
role on financial performance of the sampled commercial banks measured by ROA,
which is in contrary to the expected sign. Therefore, the researcher failed to accept the
null hypothesis that debit card has a positive role on return on asset. This means, there is
no sufficient evidence to support the positive relationship between debit card and return
on asset.
In contrary to this finding (Sundas et. al., 2014), (Ngumi, 2013), (Nofie, 2011) and
(Kemppainen, 2008) studied that increased in debit card usage enhance the profitability
of banking industry in form of return on banks asset.
The possible reasons are Lack of awareness by customer even holding bank card, cost of
produced and undelivered cards in a bank, discouraged users because of long lines around
campus and salary pay days.
Table 4.8 Comparison of test result with expectation

Independent Variables Expected Actual Statistical Hypothesis
Relationships result Significance test Status
with ROA
Value of transaction of ATM + + insignificant Failed to Reject
Value of transaction of POS + + Insignificant Failed to Reject
Debit card + - Significant at 1% Failed to accept
Number of ATM terminals + + Significant at 1% Failed to Reject
Number of POS terminals + + Significant at 1% Failed to Reject
Market share of bank + + Significant at 10% Failed to Reject
73
CHAPTER FIVE CONCLUSION AND RECOMMENDATIONS
On this chapter based on the finding of the study conclusions were drawn and possible
recommendations were forwarded. Accordingly, the first section presents the conclusion
part and the second section presents the possible recommendation.
5.1 Conclusion
This study originated from the researcher’s aim of examining the roles of e-banking
service on financial performance of commercials banks in Ethiopia. Using a non-random
sampling method (purposive sampling) selected ten commercial Banks in Ethiopia for the
period covering 2013 to 2015, the study was carried out by constructing a balanced panel
regression model based on OLS and random effects estimates of the secondary data
obtained from the financial statements, mainly Annual Audited report of the commercial
Banks in Ethiopia under the study.
Accordingly, the roles of e-banking service (such as value or price of transaction of

ATM, value or price of transaction of POS, debit card, number of automated teller
machine terminals, number of point of sale terminal and market share of banks) as an
independent variable on financial performance measured by return on asset (dependent
variable) on commercial banks in Ethiopia were carefully analyzed. The regression
result showed that numbers of ATM terminals, number of POS terminals and bank
market share have significant and positive roles on financial performance of commercial
banks measured by return on asset. The researcher summarized that increased number of
ATM, POS and market share had a positive roles on the financial performance of
commercial banks with many banking institutions indicating that increased market
share allowed a company to achieve greater scale in its operations which generally
improved its financial performance.
The result from the F-statistic and R-square show that the model is stable over the study
period thus become a formidable policy reference point in banking reform planning
74
To sum up the e-banking fuelled the Commercial Banks of Ethiopia a great deal of cash
capital flow that increase the ROA of the banks. Although the result indicated some
negative influences by the selected variables, it is very clear that e-banking is promising
activity to increase the performance of Ethiopian Commercial Banks. Further, although
evidences from previous studies on whether E-banking influence bank performance
showed that there was mixed results based on the operating environment and the level of
adoption. In Ethiopia where there is a low level of adoption of e-banking service in the
banking sector the results on performance of banking is not controversial and confusing.
5.2 Recommendations
Based on the positive roles of e-banking on ROA of sampled banks in Ethiopia, this issue
should be focused more. For high profitability and attraction of their share and increase
of satisfaction of customers and absorbing more deposits, the bank managements
should focus their attempts on development of E-banking service.
Also, by increase of services via e-banking points and increase of quality of

presenting e-banking services, by updating equipment and software and increase of
ATM numbers, POS and optimal location, banks can achieve the mentioned goals.
Therefore, this study recommends for enhancing return on asset of commercial banks,
should exert more on awareness creation about e-banking service and timely support for
users will cause an increase in e-banking practice.
5.3 Further research suggestions
This research is an important contribution to the literature due to the findings of the study
which will help policy makers to formulate policy. Due to rapid changes, e-banking
service is a good field for study. Thus, by data mining and detection of relations, the
researchers should choose the results of applied knowledge. Some items are proposed for
further study:
75
 Comparative comparison of the effect of other new electronic-bank tools on
profitability of commercial banks and other financial institutions.
 Investigation of the effect of e-banking on banks concentration index.
 Investigation of the effect of e-banking on commercial banks Deposit
 Study on innovations like agency banking, mobile banking and internet banking
role on the financial performance of commercial banks.
76
References
1. Abaenewe et.al., (2013). Electronic banking and bank performance in Nigeria:
West African journal of industrial & Academic research Vol.6 No.1
2. Abenet Y. (2010) Key factors that determine adoption of internet banking in
Ethiopia. Thesis. Addis Ababa.
3. (AICPA), A. I. (1966). The Statement of Basic Accounting Theory.
4. Abdllah, Z. (1985), A Critical Review of the Impact of ATMs in Malaysia,
Banker's journal of Malaysia, Vol. 28 pp.
5. Adesina, A. and Ayo, C. (2010), An Empirical Investigation of the Level of Users
Acceptance of E- banking in Nigeria, Journal of Internet Banking and Commerce,
Vol. 15, No.1.
6. Agboola, A. A. Electronic Payment Systems and Tele-banking Services in
Nigeria, Journal of Internet Banking and Commerce, Vol. 11, No. 3, December
2006,
7. Ajzen. 1991, "The theory of planned behavior". Organizational Behavior and
Human Decision Processes." 50 : pp 179-211.
8. Akram Jalal-Karim, & Hamdan, Allam M. (2010): “The Impact of Information
Technology on improving Banking Performance Matrix: Jordanian Banks as
Case Study”, EuropeanMediterranean and Middle Eastern Conference on
Information System, April 12th –13th, Abu Dhabi, UAE.
9. Athanasoglou, P. B. (2008). Bank-specific, industry-specific and
macroeconomic determinants of bankprofitability. Journal of International
Financial Markets, Institutions and Money, 18 (2), 121–136.
10. Ayo, C.K., Adewoye, J.O., & Oni, A.A. (2010), “The State of E-Banking
Implementation in Nigeria: A Post-Consolidation Review”. Journal of Emerging
Trends in Economics and Management Sciences (JETEMS), 1 (1), pp. 37-45.
11. Barros, C. F. (2007.). Analysing the determinants of performance of best and
worst European banks: A mixed logit approach. . Journal of Banking & Finance,
31, 2189–2203.
12. Barth, J. C. (2004). Bank regulation and supervision: what works best? Journal of
Financial Intermed. , 13, 205–248.
77
13. Barki and Hartwick. 1994,"The role of user participation in information
system." ManagementScience,: 59-82.
14. Barnes, S.J. 2003,"Enterprise mobility: Concepts and examples." International
Journal of Mobile Communications 1(4): 341-359.
15. Berger, A. (1995). The profit–structure relationship in banking: tests of
market-power and efficient structure hypotheses. Journal of Money, Credit and
Banking, 27 (2), 404–431.
16. Berger, A. (2003.). The economic effects of technological progress: Evidence
from the banking industry. Journal of Money, Credit, Banking, 35(2).
17. Birritu(2015), National Bank of Ethiopia, No. 119, February
18. Binyam T., (2009, February, 20), Daily Monitor, Addis Ababa C.S.V. Murthy
92004) “E-commerce, Concepts, models and Strategies(ed), Himalya Publishing
House, Mumbai.
19. Brook, c. (2008). Introductory Econometrics for finance.Cambridge.
20. Cheung, M.T. and Liao, Z, (2003), Challenges to Internet E-banking.
Communications of the ACM, vol.46, No.12
21. Cournega. 2000, "The strongest predictors of goals and behaviour." Management
,: 255-80.
22. Creswell.2003, Research Design: Qualitative, Quantitative and Mixed Methods
and Approaches. 2nd ed. CA:
23. Ceylan, Onay. Ozsoz, Emre. Helvacioglu, AsliDeniz. (2008)."The impact of
Internet-Banking on Bank Profitability-The Case of Turkey". Oxford Business
&Economics Conference Program, June 22-24, 2008.
24. D. A. (2011). Investing on trainning for innovation. The International Journal of
Digital Accounting Research Vol 11, 1577-8517.
25. Daniel, E. 2004, "Provision of electronic banking in the UK and the Republic of
Ireland." International Journal of Bank Marketing Vol. 17: pp. 72-82.
26. Daniel, L. and Mead, D. (1999). The contribution of small enterprises to
household and national income in Kenya. Economic Development and Cultural
Change, 47(1), 45 -71
78
27. Davis, F. D. "Perceived usefulness, perceived ease of use, and user
acceptance of information technology." MIS Quarterly 13(3) (1989): 319–340.
28. Davis, F.D. 1993, “User acceptance of information technology: system
characteristics, user perceptions and behavioral impacts." International Journal of
Man-Machine Studies 38(3): 475-487.
29. DeYoung, R. 2001,"Learning-by-Doing, Scale Efficiencies, and Financial
Performance at Internet-Only Banks." Working Paper (Federal Reserve Bank of
Chicago), September. 2001: 2001-06.
30. Deakin, K. M. (1999). Are some firms better at it? Differing Relationships
Between Productivity and IT Spending.
31. Deitrich A, (2014), what are Automatic Teller Machines.
32. Delgado, J. and Neito, M. J. (2004), Intent Banking in Spain, Some Stylized
Facts: Monetary Integration
33. Demirgüç-Kunt, A. H. (1999). Determinants of commercial bank Interest margins
and profitability: some international evidence.World Bank Economic Review.
34. Dietrich, A. W. (2011). Determinants of bank profitability before and during the
crisis: Evidence from Switzerland. J. Int. Finance. Markets Inst. Money, doi:,
10.1016.
35. Dillon, A., & Morris, M. 1996, "User acceptance of new information
technology:theories and models."
36. Dishaw & Strong. 1999, "Extending the technology acceptance model with
task technology fitconstructs." Information & Management 36(1) : 9-21.
37. Dube, T., Chitura, T., & Langton, R. (2009). Adoption and Use of Internet
Banking in Zimbabwe: An Exploratory Study. Journal of Internet Banking and
Commerce, 14(1).
38. Elisha, M. A. (2010) E-banking in Developing Economy: Empirical Evidence
from Nigeria, Journal of Applied Quantitative Methods (summer),5(2), pp. 212-
222.
39. Ethiopia, NBE (2015). www. Retrieved from
www.nbe.gov.et/financial/banks.htlm.
79
40. Fasil,A and Merhatbeb,T 2009, ‘Law of Banking , Negotiable Instruments and
Insurance.
41. Fishben and Ajzen. 1975, Belief, attitudes, intention and behavior: An
introduction to theory and research. MA: Addison-Wesley,.
42. Gardachew, W 2010, “Electronic -banking in Ethiopia: practices, opportunities
and Challenges”, Journal of internet Banking and commerce, 15 (2)
43. Gebauer and Shaw. 2004, "Success factors and impacts of mobile business
applications:Results from a mobile e-procurement study." International Journal of
Electronic Commerce 8(3): 19-41.
44. Girma A. (2016) The Impact of information and communication technology on
performance of commercial banks in Ethiopia. Thesis. Addis Ababa
45. Geda, A 2006, Structure and performance of Ethiopia‟s financial sector in
the pre & post reform period: with special focus on banking‟, Research
paper no. 2006/112, Addis Ababa University.
46. Goi, C. L. E-banking in Malaysia: Opportunities and Challenges, Journal of
Internet Banking and Commerce Vol. 10, No. 3, December 2005
47. Goddard, J. A. (2004). Dynamics of Growth and Profitability in Banking.
Journal of Money, Credit and Banking, forthcoming.
48. Goodhue & Thompson. 1995, "Task-technology fit and individual performance."
MIS Quarterly 19(2) : 213-236.
49. Gupta, P. K. Internet Banking in India: Consumer Concern and Bank Strategies,
Global Journal of Business Research, Vol. 2, No. 1, 2008, pp. 43-51
50. Gujarati N. (2004): Basic Econometrics, 4 th ed. McGraw-Hill Companies.
51. Hair, J. W. (2006). Multivariate Data Analysis.New Jersey: Pearson.
52. Harvey. (2010). Banking Reform in Ethiopia. p. 37.
53. Hughes, N. and Lonie, S. (2007). M-PESA: Mobile Money for the Unbanked.
54. Josiah and Nancy 2012, The relationship between electronic banking and
financial performance among commercial banks in Kenya. Journal of finance and
investment analysis Vol.1, no.3, 2012, 99-118
55. Junglas & Watson. 2006, “The u-constructs: Four information drives."
Communications of the Association for Information Systems 17: 569-592.
80
56. Kariuki, N. (2005), Six Puzzles in Electronic Money and Banking IMF Working
Paper, IMF Institute. Vol. 19.
57. Kathuo S., Rotich and Anyango effects of mobile banking on the financial
performance of banking institutions in Kenya. Journal of Business and change
management Vol.2(98), pp 1440-1457.
58. Kennedy Okiro
59. Li , Y 2007, ‘Determinants of Banks’ Profitability and Its Implication on Risk
Management Practices’, Panel Evidence from the UK, the University of
Nottingham.
60. Lewis-Beck, Michael S. 1993. "Applied Regression: An Introduction," in
Regression Analysis,ed. Michael S. Lewis-Beck. International Handbook of
Quantitative Applications in the Social Sciences, vol. 2, Singapore: Sara Miller
McCune, Sage Publications, Inc: 1:68
61. Liu, H. W. (2010.). The profitability of banks in Japan. Applied Financial
Economics, 20: 24, 1851–1866.
62. Lundblad & Jennife. 2003, A review and critique of Rogers' diffusion of
innovation theory as it applies to organizations. Working Paper Series, National
Bureau of Economic Research (NBER).
63. Mahdi, S. and Mehrdad, A. E-Banking in Emerging Economy: Empirical
Evidence of Iran, International Journal of Economics and Finance, Vol. 2, No. 1,
February 2010, pp. 201-209
64. Miller, S. a. (1997). “Portfolio Mix and Large-Bank Profitability in the USA.”
Applied Economics, 29, 505-512.
65. Mohana, K and Tekeste, B (2012), Determinants of profitability of commercial
banks in developing country, Evidence from Ethiopia, International Journal of
accounting and finance, Vol.2,Issue 3.
66. Moore & Benbasat. 1991, "Development of an instrument to measure the
perceptions of adopting an information technology innovation." Information
Systems Research 6(2) : 144-176.
81
67. Morawczynski, O., & Miscione, G. (2009). Examining Trust in Mobile Banking
Transactions in Kenya: The Case of M-PESA in Kenya. Paper presented at the
IFIP WG 9.4-University of Pretoria Joint Workshop, Pretoria, South Africa.
68. National Bank of Ethiopia Annual Report, 2013/14
69. Ngango A, Mbabazize M, Shukla J., E- Banking and performance of
commercial banks in Rwanda (case study: bank of Kigali). European Journal of
Accounting Auditing and Finance Research Vol 3, No.4. 2015, pp. 25-57.
70. Nyanamba, Steve Ondieki. 2014, "Use of automated teller machine debit cards to
make payments in supermarkets in Kisii town: challenges and economic impact.".
71. Oginni et. al., 2013, E-banking and Bank Performance: Evidence from Nigeria
International Journal of Scientific Engineering and Technology; Volume No.2,
Issue No.8, pp : 766-771
72. Richard and Chandra. 2005, "e-consumer behavior core." Journal of wood
chemistry and technology 32: 69-81.
73. Rogers, E. 1983, Diffusion of Innovations,. 3rd edition. New York: The Free
Press,.
74. Sathye, Milind. Adoption of Internet Banking by Australian Consumers: An
Empirical Investigation, International Journal of Bank Marketing, Vol. 17, No. 7,
1999, pp. 324–334
75. Shaik, Mohammed Arif. 2011, "Ethiopian Banker’s Perception of Electronic
Banking in Ethiopia – A Case of Adama City." International Journal of Scientific
and Research Publications Volume 4, no. Issue 9 (September 2014).
76. Simpson, J. 2002, "The impact of the internet in banking: observations and
evidence from developed and emerging markets." Telematics and Informatics 19 :
315-330.
77. Snoj et.al. 2004, "Purchasing behaviour: Ethnocentric or Polycentric." journal of
business,: 204-29.
78. Shittu, O. (2010) The Impact of Electronic Banking in Nigeria Banking System:
Critical Appraisal of Unity Bank Plc. Unpublished MBA project, Ladoke
Akintola University of Technology, Ogbomoso, Oyo State Nigeria.
82
79. Short, B. (1979). The relation between commercial bank profit rates and banking
concentration in Canada, Western Europe and Japan. Journal of Banking and
Finance , 3, 209–219.
80. Smirlock, M. (1985). Evidence on the (non) relationship between
concentration and profitability in banking. Journal of Money, Credit, and
Banking, 17, 69–83.
81. Sintayehu (2015) Customer satisfaction to measure the efficiency of e-banking.
Thesis. Addis Ababa.
82. Sufian, F. &. (2009). Determinants of bank profitability in a developing economy:
Empirical evidence from Bangladesh. Journal of Business Economics and
Management, 10, 207-217.
83. Taylor, S., and Todd, P. 1995, "Decomposition and crossover effects in the
theory of planned behavior: A study of consumer adoption intentions."
International Journal of Research in Marketing 12: 137-155.
84. Tom Keatinge; (2014). The Role of Public and Private Sector Banking in
Ethiopia’s Future Economic Growth. Washington,D.C: Global Center on
Cooperative Security
85. Thulani, D., Tofara, C., & Langton, R. (2009). “Adoption and Use of Internet
Banking in Zimbabwe: An Exploratory Study”. Journal of Internet Banking and
Commerce, 14 (1), 1- 13.
86. Venkatesh, V., Morris, M.G., Davis, F.D., and Davis, G.B. 2003, "User
Acceptance of Information Technology: Toward a Unified View." MIS Quarterly
27 : 425-478.
87. Vijayasarathy. 2000, " Perceptions of conflict and success in information
systems development projects." Journal of Management, 301-3045.
88. Wubitu , E 2012, ‘Factors Determining commercial Bank Deposit: An
Empirical study on Commercial Bank of Ethiopia’, Msc thesis, Addis Abeba
university.
89. XLRI, D. S. (1918). Human Resources and perfrmance . Business & Human
Resources.
83
90. Zigurs, I., Buckland, B.K., Connolly, J.R., & Wilson, E.V. 1999, "A test of task
technology fit theory for group support systems. Database for Advances in
Information Systems." MIS Quarterly 30(3) : 34-50.
84
Appendices
Appendix A: - Heteroskedasticity Test: Breusch-Pagan-Godfrey

Heteroskedasticity Test: Breusch-Pagan-Godfrey

Scaled explained SS 1.363469 Prob. Chi-Square(6) 0.9680
Test Equation:
Dependent Variable: RESID^2
Method: Least Squares
Date: 12/19/16 Time: 14:39
Sample: 1 30
Included observations: 30
C -3.97E-05 9.99E-05 -0.397657 0.6945

DC 1.00E-05 2.72E-05 0.368097 0.7162
NATM 2.65E-06 2.54E-05 0.104160 0.9179
NPOS 1.61E-06 2.65E-05 0.060895 0.9520
VATM 5.33E-06 1.14E-05 0.469635 0.6430
VPOS -3.96E-06 1.20E-05 -0.329194 0.7450
MS -4.68E-05 7.11E-05 -0.658130 0.5170
R-squared 0.064543 Mean dependent var 2.78E-05

Adjusted R-squared -0.179489 S.D. dependent var 4.37E-05
S.E. of regression 4.75E-05 Akaike info criterion -16.87230
Sum squared resid 5.18E-08 Schwarz criterion -16.54535
Log likelihood 260.0845 Hannan-Quinn criter. -16.76771
Appendix B: - Breusch-Godfrey Serial Correlation LM Test

Breusch-Godfrey Serial Correlation LM Test:

Test Equation:
Dependent Variable: RESID
Method: Least Squares
Date: 12/19/16 Time: 14:37
Sample: 1 30
Included observations: 30
Presample missing value lagged residuals set to zero.
I
C -0.001017 0.014248 -0.071350 0.9438

DC 0.000186 0.003786 0.049090 0.9613
NATM 5.58E-05 0.003630 0.015379 0.9879
NPOS 5.68E-05 0.003558 0.015970 0.9874
VATM -2.09E-05 0.001522 -0.013716 0.9892
VPOS 3.49E-05 0.001611 0.021653 0.9829
MS -0.000562 0.009929 -0.056634 0.9554
RESID(-1) -0.047307 0.249902 -0.189301 0.8517
RESID(-2) -0.022010 0.251804 -0.087408 0.9312
R-squared 0.001957 Mean dependent var -9.53E-18

Adjusted R-squared -0.378250 S.D. dependent var 0.005359
S.E. of regression 0.006291 Akaike info criterion -7.056047
Sum squared resid 0.000831 Schwarz criterion -6.635688
Appendix C: - Correlated Random Effects - Hausman Test
Correlated Random Effects - Hausman Test

Equation: Untitled
Test cross-section random effects
Chi-Sq.
Test Summary Statistic Chi-Sq. d.f. Prob.
Cross-section random 2.694756 6 0.8461
Cross-section random effects test comparisons:
Variable Fixed Random Var(Diff.) Prob.
VATM 0.021144 0.000085 0.002637 0.6817

VPOS -0.003231 0.001245 0.000435 0.8300
DC -0.019272 -0.019570 0.000171 0.9818
NATM 0.009035 0.010189 0.000003 0.4907
NPOS 0.005774 0.010648 0.000048 0.4818
MS 0.028044 0.016659 0.000618 0.6471
Cross-section random effects test equation:

Method: Panel Least Squares
Date: 12/20/16 Time: 13:49
Sample: 2013 2015
Periods included: 3
Cross-sections included: 10
II
Total panel (balanced) observations: 30
C 0.032118 0.111527 0.287985 0.7776

VATM 0.021144 0.051372 0.411586 0.6869
VPOS -0.003231 0.020907 -0.154526 0.8794
DC -0.019272 0.013456 -1.432256 0.1740
NATM 0.009035 0.003282 2.752981 0.0156
NPOS 0.005774 0.007859 0.734705 0.4746
MS 0.028044 0.026674 1.051352 0.3109
Effects Specification
Cross-section fixed (dummy variables)

S.E. of regression 0.005975 Akaike info criterion -7.097862
Sum squared resid 0.000500 Schwarz criterion -6.350556
Appendix D: - Random Effects test result

Method: Panel EGLS (Cross-section random effects)
Date: 12/20/16 Time: 13:49
Sample: 2013 2015
Periods included: 3
Cross-sections included: 10
Total panel (balanced) observations: 30
Swamy and Arora estimator of component variances
C 0.085820 0.012455 6.890525 0.0000

VATM 8.50E-05 0.001462 0.058148 0.9541
VPOS 0.001245 0.001552 0.802572 0.4304
DC -0.019570 0.003234 -6.052106 0.0000
NATM 0.010189 0.002822 3.610275 0.0015
NPOS 0.010648 0.003707 2.872467 0.0086
MS 0.016659 0.009651 1.726105 0.0977
Effects Specification
S.D. Rho
Cross-section random 0.001468 0.0569

Idiosyncratic random 0.005975 0.9431
Weighted Statistics
III
S.E. of regression 0.005529 Sum squared resid 0.000703
Unweighted Statistics

Sum squared resid 0.000730 Durbin-Watson stat 2.045150
Appendix E: - Commercial banks in Ethiopia
Commercial Banks in Year of

No. Ethiopia Estabilishement
1 Commercial Bank of Ethiopia 1963
2 Awash International Bank 1994
3 Dashen Bank 1995
4 Bank of Abyssinia 1996
5 Wegagen Bank 1997
6 United Bank 1998
7 Nib International Bank 1999
8 Lion International Bank 2006
9 Oromia International Bank 2008
10 Buuna International Bank 2009
11 Zemen Bank 2009
12 Abay Bank 2010
13 Berhan International Bank 2010
14 Addis International Bank 2011
15 Cooperative Bank of Oromia 2011
16 Debub Global Bank 2012
17 Enat Bank 2012
IV
V

Solomon Worku

Uploaded by

Copyright:

Available Formats

Solomon Worku

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Solomon Worku

Uploaded by

Copyright:

Available Formats

Role of Electronic Banking on Financial

Performance of Commercial Banks in

Addis Ababa University

Faculty of Business and Economics

Department of Accounting and finance

A thesis submitted to Addis Ababa University Faculty of Business and

Economics department of accounting and finance in partial fulfillment of the

requirements for the degree of Masters of Science in accounting and finance

Name Solomon Worku Advisor’s Name Dr. Venkati P.

Signature: _______________ Signature: _______________

Internal Examiner Alem Hagos (PhD) Signature ________ Date______

External Examiner Mengistu Bogale (PhD) Signature ________Date_____

Advisor Venkati Ponnala (PhD) Signature ___________Date____

This thesis aims to examine the Roles of E-banking on Financial Performance of

Key Words: Electronic Banking; Commercial banks; ROA; Profitability

I also want to thank my colleagues, their sharing of knowledge, teamwork and

May the LORD bless you all!

Table 4.1 Descriptive statistics................................................................................................ 51

Table 4.2 Correlations analysis of variables..................................................................... 53

Table 4.3 Heteroskedasticity test...................................................................................... 56

Table 4.4 Breusch-Godfrey Serial Correlation LM Test ................................................. 57

Table 4.5: Correlations matrix of explanatory variables ................................................. 59

Table 4.6 Hausman test.................................................................................................... 60

Table 4.7 Random effects model regression results......................................................... 62

Table 4.8 Comparison of test result with expectation……….......................................... 69

Figure 2.1 the conceptual framework or model of the study............................................ 39

Figure 4.1 Normality test for residuals............................................................................. 58

ATM - Automated Teller Machine

CLRM - Classical Linear Regression Model

E-banking Electronic banking

EFT - Electronic Fund Transfer

EFTPOS Electronic fund transfer point of sale

ETB - Ethiopian Birr

ICT - Information and Communication Technology

Ksh - Kenyan Shilling

FEM - Fixed Effect Model

NBE - National Bank of Ethiopia

NIBT - Net income before tax

OLS - Ordinary List Square

PBT Profit before Tax

POS - Points of Sale

REM - Random Effect Model

ROA- Return on Asset

SMS Short Message Service

SSA - Sub Saharan African

TPB Theory of Planned Behavior

1.1 Background of the study

Due to emergence of global economy, e-business has increasingly become a necessary

1.2 Statement of the problem

1.3 Research Questions

1.4 Objective and research questions, hypothesis

1.4.1 General Objective of the study

1.4.3 Research Hypothesis

In order to be more formal statement of research the researcher used to employs

1.5 Significance of the study

1.7 Organization of the paper

2.1 Theoretical Review

2.1.1 Innovation diffusion theory

Signature: _ Signature: _

Internal Examiner Alem Hagos (PhD) Signature __ Date

External Examiner Mengistu Bogale (PhD) Signature ____Date_

Advisor Venkati Ponnala (PhD) Signature _______Date