DIRE DAWA UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF MARKETING MANAGEMENT

Research on: Effects of Electronic Banking on Financial Performance of Banks in Ethiopia

at Dire Dawa District.

By:

Mekdes Fanta Alemu

Advisor: Mingizem Birhan(Ass, Professor)

A Thesis Succumbed to Dire Dawa University Department of Marketing

Management in Partial Contentment of the Necessities for Degree of Master
of Marketing Management

December ,2023

Dire Dawa, Ethiopia

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 APPROVAL OF THE THESIS

BOARD OF EXAMINERS

________________ _______________ ______________

Advisor Signature Date

_______________ _______________ ______________

Internal Examiner Signature Date

_______________ _______________ ______________

External Examiner Signature Date

_______________ _______________ ______________

Chairperson of department Signature Date

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 DECLARATION

The witnesses hereby certifies that the work included in this thesis was completed entirely at
Dire Dawa University and has not been succumbed to any other university. Every source of
information exploited in this thesis has been properly credited.
Name: _____________
Signature: _____________
Date: ___________________

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 Acknowledgement

Above all, I would want to express my thoughtful thanks to the almighty GOD, master of the
universe, for his uncountable grace provided me in life.
My heartfelt and honest thanks also goes to all my advisor Assistance Professor Mingizem
Birhan for their repeated wise direction, useful remarks and helpful recommendations from their
rich sympathetic in research and general marketing. We really rise their politeness and patience.
He has taught me a lot about professional ethics in addition to drafting thesis.

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 Table of Contents
APPROVAL OF THE THESIS ...................................................................................................... ii

DECLARATION ........................................................................................................................... iii

Acknowledgement ......................................................................................................................... iv

Table of Contents ............................................................................................................................ v

List of Tables ............................................................................................................................... viii

List of Figures ................................................................................................................................ ix

Acronyms & Abbreviations ............................................................................................................ x

Abstract .......................................................................................................................................... xi

CHAPTER ONE ............................................................................................................................. 1

1.INTRODUCTION ....................................................................................................................... 1

1.1. Background of the study ...................................................................................................... 1

1.2.Statement of the problem ...................................................................................................... 3

1.3. Objectives of the Study ........................................................................................................ 5

1.3.1.General objective ............................................................................................................ 5

1.3.2.Specific objective: .......................................................................................................... 5

1.4. Research Hypothesis: ........................................................................................................... 5

1.5. Significance of the study ...................................................................................................... 6

1.6. Scope of the study ................................................................................................................ 7

1.7. Limitation of the study ......................................................................................................... 7

1.8. Organization of the study ..................................................................................................... 7

1.8. Definition of basic terms ...................................................................................................... 8

CHAPTER TWO ............................................................................................................................ 9

2. RELATED LITRATURE REVIEW........................................................................................... 9

2.1. Theoretical literature theory models .................................................................................... 9

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 2.1.1 Overview of Electronic banking ..................................................................................... 9

2.1.2 Technology acceptance theory (TAT) .......................................................................... 10

2.1.3. Task-technology fit models (TTF) .............................................................................. 10

2.1.4. Theory of reasoned action (TRA) ................................................................................ 11

2.1.5. Transactions cost innovative theory ............................................................................ 12

2.2 Role of E-Banking Service .................................................................................................. 12

2.3 Types of Electronic Banking Service .................................................................................. 13

2.4. Electronic Banking System in Ethiopian Banking Sector .................................................. 15

2.5. Factors affecting implementation of electronic Banking in Commercial Bank of Ethiopia

................................................................................................................................................... 16

2.5.1. Technological factors and adoption of E- banking ...................................................... 16

2.5.2 Environmental factors and adoption of E- banking ...................................................... 17

2.6. Empirical literature review ................................................................................................. 17

2.7. Conceptual Framework ...................................................................................................... 22

CHAPTER THREE ...................................................................................................................... 23

3. METHODOLOGY ................................................................................................................... 23

3.1 Introduction ......................................................................................................................... 23

3.2.Research approaches ........................................................................................................... 23

3.3. Research Design ................................................................................................................. 24

3.4. Target Population ............................................................................................................... 24

3.5.Sampling Technique ............................................................................................................ 24

3.7. Source and Types of Data .................................................................................................. 25

3.8 Methods of Data Analysis ................................................................................................... 26

3.9. Model Specification and Variable Description .................................................................. 26

CHAPTER FOUR ......................................................................................................................... 31

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4.RESULT AND DISCUSSION .................................................................................................. 31

4.1. Descriptive Statistics .......................................................................................................... 31

4.2. Correlation Analysis ........................................................................................................... 33

4.3. Tests Associated to Linear Regression Model ................................................................... 34

4.3.1. Normality test .............................................................................................................. 34

4.3.2. Tests for Hetroscedasticsity ......................................................................................... 35

4.3.3. Tests for Multicollinearity ........................................................................................... 36

4.3.4. Hausman Specification test for Fixed Effect Verses Random Effect Model .............. 36

4.4. Regression Analysis ........................................................................................................... 38

4.4.1. Hypothesis Testing ...................................................................................................... 42

CHAPTER FIVE .......................................................................................................................... 45

5. SUMMERY,CONCLUSSION AND RECOMMENDATION...................................................................... 45

5.1. Summary of Findings ......................................................................................................... 45

5.2. Conclusion.......................................................................................................................... 46

5.3. Recommendations .............................................................................................................. 47

REFERENCES ............................................................................................................................. 49

Appendix ....................................................................................................................................... 53

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 List of Tables
Table 1:Descriptive statistics of variable used.............................................................................. 32
Table 2: Correlation Coefficients.................................................................................................. 33
Table 3:Normality test .................................................................................................................. 34
Table 4:Heteroskedasticity Test: Breusch-Pagan Test for ROE ................................................... 35
Table 5:Heteroskedasticity Test: Breusch-Pagan Test for ROA .................................................. 35
Table 6:Multicollinearity Test ...................................................................................................... 36
Table 7:Hausman Test for (ROE) Equation.................................................................................. 37
Table 8:Fixed Effect Model of ROE Regression Result ............................................................... 38
Table 9:Fixed Effect Model of ROA Regression Result .............................................................. 39
Table 10:Summary of Hypothesis Testing on ROE ..................................................................... 44
Table 11:Summary of Hypothesis Testing on ROA ..................................................................... 44

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List of Figures
Figure 1:Technology-to-performance Chain Model ..................................................................... 11
Figure 2:conceptual Framework based ......................................................................................... 22

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 Acronyms & Abbreviations

ATM: Automated Teller Machine

CBE: Commercial Bank of Ethiopia
CLRM: Classical Linear Regression Model
DCS: Debit Cards
FEM: Fixed Effect Model
OLS: Ordinary Least Square
REM: Random Effect Model
ROA: Return on Assets
ROE: Return on Equity

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Abstract
The great economic welfares of lower bank costs and higher bank profitability are
driving the development of electronic banking systems. Despite the growing adoption of e-
banking as a delivery channel in Ethiopia's commercial banking sector, empirical research
offering a quantitative analysis of the impact of e-banking services on banks' performance is
comparatively scarce. This study is being carried out to close this gap as a result. This study's
primary goal is to look into how e-banking affects Ethiopian banks' financial performance. In
order to meet this broad goal, the study specifically looked into how certain Ethiopian
banks' profitability were affected by automated teller machines, point of sale systems, the
internet, debit card, bank size and mobile banking. A quantitative approach was used in an
explanatory research design. Secondary data from seven carefully chosen commercial
banks from 2018/2019 to 2022/2023 were used in the study. To analyze the data, panel data
regression modeling were used. Fixed effect panel data model and STATA version 16 were used
in order to analyze the data, the study's findings show that using an internet bank and debit card
had a positive and significant impact on return on assets (ROA). Nonetheless, ROA was
significantly impacted negatively by bank size. Conversely, the ROE of Ethiopian banks was
significantly impacted by the use of ATMs, point-of-sale (POS), internet banking, and mobile
banking. In general, Ethiopian banks' financial performance was significantly impacted by
electronic banking. It is evident that using e-banking is a promising activity to achieve financial
inclusion and enhance Ethiopian banks' performance. Therefore, this study proposes that banks
in Ethiopia should increase their use of e-banking by raising awareness, implementing the
newest e-banking products, and expanding those products throughout the nation in order to
improve return on asset.

Key word: ATM, mobile banking, internet banking, financial performance, e

banking

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 CHAPTER ONE

1.INTRODUCTION
This chapter of thesis was deal with the study of backgrounds research’s, maps statement of
problems, objectives of the study, research hypotheses of the study, scope of the study,
significance of the study, limitation of the study, and organization of the thesis.
1.1. Background of the study
The automated, seamless, and effective delivery of conventional and modern banking services
via electronic and communication channels is known as electronic banking. It encompasses the
systems that users utilize to get information via networks, such as the internet, access accounts,
and conduct business. These networks might be open or closed. Hence, the phrase "electronic
banking" refers to the entire process of carrying out these kinds of transactions without
physically visiting the financial institution. The terms "online banking," "home banking,"
"mobile banking," "virtual banking," and "personal computer (PC) banking" all refer to various
types of electronic banking (Shan, 2000). Online banking entails a bank having a physical
location but providing services online, whereas virtual banking involves banks conducting all of
their business online via mobile devices, emails, and automated teller machines.

In recent years, technology in the financial services sector has advanced at a quicker rate, and it
is swiftly becoming the norm rather than the exception (Khera et al. In 2022. Adoption of
technology innovation has greatly impacted how organizations function over the last 20 years by
reducing constraints linked to industry, geography, and laws (Zafar et al., 2011). As the winds of
change blew, most, if not all, banks began to embrace electronic banking for transactions
(Chauhan et al. Singh (2023; 2022). This technology breakthrough, in addition to creating value
for banks and consumers, has leveled the playing field in the banking sector by allowing clients
to make financial transactions online rather than in person (Khan, 2017). Internet banking,
mobile banking, automated teller machines (ATMs), POS terminals (point of sale), and any
online banking services commonly referred to as e-Banking are examples of these advances
(Khan, 2017). Electrical banking, or "e-Banking," is converting the financial facilities sector by
stimulating innovation, improving development, and increasing competitiveness(Shamsuddoha
,2008).

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The banking industry is one of Ethiopia's fastest growing industries (Banke and Yitayew,2022).
In 1990, there was just one state-owned bank in the business; today, there are eighteen. Despite
the sector's expansion, Ethiopian banks continue to employ traditional means for the majority of
their banking activities. Cash is still the most popular mode of payment because electronic
payment systems are still in their infancy (Teka, 2017). On the other way ,banks are now fiercely
vying with one another in order to incorporate technological transaction techniques.In order to
maintain client happiness and retention, banks are introducing unique tactics and technologies,
one of which is e-banking (Drigă and Isac ,2014). They also argue that the banking market has
been more competitive in recent years. Innovation, rivalry, globalization, and client needs are all
driving changes in the banking business. According to the study, as technology has improved
over the last ten years, banking services have undergone significant changes as a result of the
creation of a knowledge-based economy and society (Drigă and Isac, 2014).

E- banking is extensively utilized in industrialized countries, and it is rapidly growing in

developing countries (Fekadu, 2009).In the current era, e-banking has substituted conventional
branch banking, allowing clients to receive services from the convenience of their homes or
workplaces rather than having to go to the branch (Drigă şi Isac, 2014; Poon, 2008). This change
to e-service has helped banks and clients in a variety of ways, including personalized services,
transaction security, faster transaction processing, and overall higher-quality services
(Abdulfattah, 2012). A deeper knowledge of the challenges and factors influencing E-banking
adoption is necessary in order to support greater E-banking adoption in poor countries (Zhao et
al. 2008). Strategic insinuations for researchers and consultants on how to endorse the growth of
E-banking in developing countries can be generated by gaining an in-depth understanding of the
factors and situations that effects developing countries' ability to fully accept and understand its
benefits. Despite the significance of these adoptions, just three studies are now accessible in poor
nations, particularly Ethiopia. According to the Digital Literacy Fact Sheet (2015), the majority
of the population is still computer illiterate, particularly in Africa, due to poor and/or lack of
technological infrastructure and reliable power supply, a lack of proper legislation governing e-
transactions, and a preference for paper money over "virtual" cash in transactions.

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As a result, further research is needed to determine the importance of E-banking in the country
and to identify areas where the country falls behind, preventing E-banking acceptance and
spread.

1.2.Statement of the problem

Traditional banking system was often characterized by delay and inefficiency in the delivery
financial services which led to introduction of electronic banking. The implementation of
electronic banking systems was intended to increase financial inclusion, decrease wait times,
handle cash more efficiently, and improve efficiency in the provision of services. Most
customers protest of time wasted in banks, frequently due to long lines and network downtime
due to poor connectivity between vital server and branches. Bank clienteles still grip too much
money and rarely people thoughtful about electronic banking products and facilities obtainable
by banks.

Recently, there has been a radical increase in the use of electronic banking being practiced in of
commercial bank Ethiopia and other private banks. Thus, banks adopt different electronic
banking service to facilitate transaction and satisfy customer’s satisfaction. Automated
banking offers consumers significant advantages in terms of transaction ease and cost, but it
also presents new challenges for national authorities in terms of regulating and overseeing the
financial system as well as creating and implementing macroeconomic policy (Olivia
,2012). Nevertheless, the launch and management of this new venture is expensive. Additionally,
electronic banking facilitates customer comparison shopping, fosters bank
competition, and enables banks to enter new markets and thereby broaden their geographic
reach.

The effectiveness of deploying ATM, Debit card, POS, Mobile and Internet Banking of Banks in
Ethiopia therefore cannot be put to doubt. The fact leftovers the realism of using IT in banks
were necessitated by the large amount of evidence and business dealings being touched by these
electronic-banking on daily basis . On the consumer side, cash is taken or placed, checks are
deposited or cleared, statements of accounts are supplied, money transfers, bill payments are
enabled, and so on. At the same time, banks at any time may need up-to-date and on time
information on accounts, credit facilities and recovery, financial inclusion, charges, income,
growth indices, performance indicators and other control of financial information such as

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profitability and Return on Asset which enable evaluate monitor and build its strategic
competitive advantage (Chibueze et al., 2013). However, researchers have not paid much
attention to the revolution brought about by electronic banking in terms of financial performance
of Ethiopian banks; rather, the emphasis has been placed on customer satisfaction, adoption rate,
and some other variables of E-banking's effect on financial performance. The term "e-
banking," which describes the use of contemporary technology to enable users to access banking
services online, including cash withdrawal, fund transfers, bill payment, and the acquisition of
business intelligence and advice, is not widely recognized in Ethiopia.

Previous research on Ethiopian e-business has concentrated on an evaluation study of sample

banks from the banking industry and the relationship between E-banking and financial
performance (Assefa 2013). Other studies (Gemechu, 2014; Gardachew, 2010) looked at e-
banking adoption in the setting of bank perception. Also, they didn’t try to show the clarity,
reliability and effectiveness of their study by comparing electronic banking's implications on
financial performances of banks. Therefore, in order to fill the gap of previous studies, this paper
include some additional variables of Electronic-banking and investigate their effect on the Banks
in Ethiopia financial performance . Researchers (Maiyo, 2003), (Aduda, 2012), (Ogare, 2013),
and (Njogu, 2014) performed electronic banking research; however, their studies did not focus
on system costs, risk management, the speed and quality of electronic services, or the skills
required to utilize electronic services. So, this study sought to fill this gap by factoring in all
these factors in order to determine the effect of electronic banking adoption on financial
performance of banks in Dire Dawa district.
Research Questions

1. What is the effect of ATM banking on financial performance of banks in Dire Dawa
district?
2. What is the effect of mobile banking on financial performance of banks in Dire Dawa
district?
3. What is the effect of internet banking on financial performance of banks in Dire Dawa
district?
4. What is the effect of debit card financial performance of banks in Dire Dawa district?

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 5. What is the effect of POS on financial performance of commercial banks in Dire Dawa
district?
6. What is the effect of bank size on financial performance of banks in Dire Dawa district?

1.3. Objectives of the Study

1.3.1.General objective
The general objective of this study was to establish the effect of Electronic Banking on the
financial performance of Banks in Ethiopia at Dire Dawa District.

1.3.2.Specific objective:
The study specifically attempted to achieve the following specific objectives:
1. To identify the effects of ATM banking on financial performance of banks in Dire Dawa
district
2. To realize the effect of mobile banking on financial performance of banks in Dire Dawa
district
3. To assess the effect of debit card on financial performance of banks in in Dire Dawa district
4. To investigate the effect of internet banking on financial performance of banks in in Dire
Dawa district
5. To identify the effect of POS on financial performance of banks in in Dire Dawa district
6. To investigate the effect of bank size on financial performance of banks in in Dire Dawa
district

1.4. Research Hypothesis:

H0: ATM has no significant effect on banks financial performance.

H1: ATM has significant effect on banks financial performance.

H0: Mobile banking has no significant effect on banks financial performance.

H1: Mobile banking has significant effect on banks financial performance.

H0: Internet banking has no significant effect on banks financial performance.

H1: Internet banking has significant effect on banks financial performance.

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H0: Debit card has no significant effect on banks financial performance.

H1: Debit card has significant effect on banks financial performance.

1.5. Significance of the study

The outcome of this study will provide a factual information and demonstration the relationships
between electronic banking service and bank performance. Most banks are expected to enhance
their services through the increased use of external application programming interfaces (APIs).
This study will have great benefit to banking industry since the study relies on both the effect of
electronic banking. Further, the results of the study inform banks, which electronic banking
innovation there would have better link to financial performance and develops competitive
strategy for prioritized electronic banking innovations which enables banks to take over an
industry leader and to capitalize the financial performance to powerful competitive among
private banks.

Practically, the main significance of the study was to ensure efficiency in service delivery as the
software acts as middlemen by connecting all the banking applications such as mobile apps to
the back-end office IT systems of the banks as well as it facilitates banking money transaction.
This was realized to help commercial banks to introduce more services to the market and
maximize on the advantages of open banking. Banks are set to increasingly partner with financial
technology companies through opening of more APIs. On the other hand, the significance of
study tends to Ethiopian banks in order to see the impact of e-banking on financial performance
in comparison with the ordinary mortar and brick banking system.

Additionally, Banks in Ethiopia as a Government Bank have a great responsibility in playing a

pivotal role for the National development by supporting the country’s prior sectors(Agriculture,
Industry, Export & Import and Hotel & Truism) through extending sound finance. Thus, it
should mobilize resources which necessitates for its financing activities by enhancing the
Electronic banking to its mass based (existing and new) customers efficiently and in turn this
enables banks to direct its efforts in the right path to achieve its strategic themes (Business
growth and Operational Excellence).

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1.6. Scope of the study
Geographically, the scope of this study was delimited on 15 banks under Dire Dawa district in
which all electronic banking products provide e banking service. To achieve the stated
objectives, the study specifically investigated the use of ATMs, debit card, mobile banking ,POS
and internet banking as these are the e-banking product that were intensively in use in the
banking industry in Dire Dawa. Specifically, this study tried to investigate the role conducting
banking business through assessing effect of E- banking in Dire Dawa bank’s profitability.

Conceptually, the research was delimited to assess the effects of electronic banking on financial
performance of banks under Dire Dawa district. Though performance of banks by adopting e
banking service intended to enhance financial performance of banks.

Methodologically, But this research only focused on banks' financial performance under Dire
Dawa district. The study was employed secondary data collection for the period of banking
technology innovations. Implementing electronic service used in the study are automated teller
machines, debit cards, POS, mobile banking and Internet banking. Accordingly, data for the
period from 2018/2019- 2022/2023 was used to assess the effects of E-banking on banks'
financial performance in Ethiopia.

1.7. Limitation of the study

By considering stiff rivalries of banking business in Ethiopia, even though the study was able to
achieve its objective and provided empirical and theoretical insights into the relationships
between e-banking and financial performance of banks in Ethiopia, there were some
shortcomings that may limit interpretation of the study findings literally fear of other competitive
banks. The other limitation, the study was fully employed secondary data and the analysis was
fully based on secondary data. This study would look only profitability, it does not include all
financial performance indicators and it will not include all variables which have impact on
financial performance of banks. Also, there may be a methodology deviation when the main
thesis study conducted because data availability matters its consistency.

1.8. Organization of the study

This study paper is structured as follows; chapter one provides the introduction including the
background of study ,statement of the problem, research question, objectives of study,

7
significance of the study and scope and limitations of the study. Chapter two presents theoretical
literature review of the concepts, existed key theories relevant to the study; the empirical
literature review of e-banking on financial performance of commercial banks in general, role of
E banking, factors moving performance of bank few studies of e-banking on the financial
performance of banks in Ethiopia and the conceptual framework. Chapter three dealt with the
methodology employed in order to achieve the research objectives. Chapter four presents the
data analysis, presentation and discussion of the study findings. Finally chapter five presents the
conclusions and recommendations .

1.9. Definition of basic terms

1. Automated Teller Machine is a machine where cash withdrawal can be made over the
machine without going in to the banking hall. In addition, it offers cash transfers and
recharge cards. You may checkered your account equilibrium 24/7 .
2. Financial Performance- Financial performance is a subjective measure of how well an
organization can use assets from its primary mode of business and generate revenues.
3. Debit Card – When a payment card is utilized, money is deducted immediately from the
consumer's bank account. Also called ‘‘check cards’’ or ‘‘bank cards,’’ they can be used to
acquisition products or services, as well as to obtain cash from an automatic teller mechanism or
a retailer who permits you to increase the amount you pay for a purchase.
4. Point-of-Sale Transfer Terminals (POS) - Also sometimes referred to as point of purchase
(POP) or checkout is the place where a transaction occurs
5. Mobile banking (MB)-Mobile banking is a term used for accomplishment balance payments,
account dealings, payments, credit requests and other banking transactions through a mobile
expedient such as a mobile phone.
6. Internet banking- Internet banking refers to arrangements that allow bank customers to
become access to their books and general evidence on bank goods and facilities through the use
of bank’s website, without the involvement or troublesomeness of distribution cultures, faxes,
original signs and telephone validations (Witman & poust, 2008).

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 CHAPTER TWO

2. RELATED LITRATURE REVIEW

This chapter presents the literature relevant to e-banking. The literature review is divided into
two parts, which include the conceptual framework of the study. The first part focuses on the
theoretical review, discussing the concepts of e-banking, the role and types of e-banking, an
overview of e-banking in Ethiopia, indicators of financial performance, and relevant existing
theories on e-banking. The second part of the chapter organizes the reviews of empirical studies
on e-banking and financial performance in general, as well as the conceptual framework of the
study based on the literature.

2.1. Theoretical literature theory models

2.1.1 Overview of Electronic banking

The term "e-banking" was defined from various angles and in various ways. However,
researchers across the world have made extensive efforts to provide a precise and all-inclusive
concept of e-banking. This section presents e-banking concepts provided by different researchers
over the world. The Basel team on banking management defines electronic banking as "the
provision of modern and traditional banking goods and facilities through electronic channels"
(Basel committee banking supervision [BCBS], 2003). E banking is a system in which financial
service providers, customers, individuals and businesses are able to access their accounts, do
transactions and obtain latest evidence on financial goods and facilities from public or private
networks (Daniel, 1999). As of( Driga and Isac ,2014), e-banking, is a time used for new age
banking system, represents an automated delivery of new and traditional banking services
directly to customers through electronic, interactive communication channels. Through a public

9
or private network, such as the internet, it is a service that gives users the ability to access their
accounts, complete transactions, and get information on financial goods and services.

Dillon et al. (1996, P.282) cited in Damtew (2016), there are five factors which influence the
diffusion of an innovation. These are "observables (the degree to which the technology's benefits
and outputs are visible), trial ability (the capacity to test an innovation before committing to use
it), compatibility (the degree to which a technology is compatible with social practices and
norms among its users), complexity (the ease of use or learning), and comparable advantage (the
degree to which a technology improves on existing tools)." Since these factors do not exclude
one another, it is impossible to forecast the amount or rate at which innovations will spread.

2.1.2 Technology acceptance theory (TAT)

TAT is planned by Davis et al. (1989) to describe the conceptual model that users' intention or
acceptance degree towards information system or new technology. TAT is built on the principles
of perceived utility and perceived simplicity of use. Perceived usefulness relates to an
individual's belief in improving job performance by utilizing certain new technologies and
information systems. Davis et al., 1989; Gefen et al., 2003) define apparent ease of use as the
ease with which an individual learns to operate or utilize new technology or an information
system. The approach lays a greater emphasis on how apparent ease of use affects perceived
utility. Exogenous elements such as the surroundings can also influence perceived utility and
apparent ease of usage. TAT is thus dependent on significant perceptual characteristics such as
perceived usefulness and perceived simplicity of use. TAT is commonly used in information
technology research. Gefen et al. (2003) proposed an integrated model for understanding online
customer behavior by combining TAT and rust.

2.1.3. Task-technology fit models (TTF)

There are two key models or research lines that connect technology and performance. The usage
model is the first (and most prevalent). Theories of user attitudes, beliefs, and actions underpin
utilization study. This model implies that increasing usage will result in improved performance.
The second model is the task-technology fit (TTF). According to the TTF model, performance
will improve when a technology delivers features and support that are appropriate for the job
(Goodhue & Thompson, 1995).

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The drawbacks of adopting either of these models alone have been highlighted by researchers.
Taking solely the utilization model into account ignores the fact that not all utilization is
voluntary. For example, a system may be employed merely because it is the only technology
accessible, and the user has no choice but to use it. To the degree that usage is not unpaid,
presentation implications will increasingly be determined by task-technology fit rather than
usage (Goodhue & Thompson, 1995). Furthermore, as demonstrated by Pentland's study of IRS
auditors, increasing system use may not always result in improved performance. There are other
drawbacks to depending solely on the TTF model. Models that focus just on fit fail to recognize
that systems must be used before they can have an influence on performance. Because both
models have drawbacks, Goodhue and Thompson have presented a model that combines
utilization and task-technology fit. This paradigm, known as the technology-to-performance
chain (TPC), incorporates both lines of study and understands that in order to have a
performance impact, technologies must be used and suit the job they support. The TPC perfect
delivers a more realistic representation of how technologies, user tasks, and usage affect
performance changes (Goodhue & Thompson, 1995).

Figure 1:Technology-to-performance Chain Model

2.1.4. Theory of reasoned action (TRA)

The Theory of Reasoned Action (TRA), created by Fishbein and Ajzen in 1975, has been
frequently used in marketing research. TRA, which has been used to describe behavior beyond
technical adoption, includes four basic concepts: behavioral arrogances, personal norms,
intention to use, and actual usage. It argues that humans consider the potential effects of a
particular action and then create intentions to behave in accordance with those judgments.

11
Individuals' conduct may be anticipated by their intentions, which can be predicted by their
arrogances and personal norms, according to TRA. Following the prediction chain back further,
attitudes can be anticipated based on an individual's views about the consequences of their
conduct. Subjective standards are predictable.

From a technology aspect, TRA's notion that other factors only indirectly influence behavior by
influencing attitude and subjective norms is particularly valuable. These factors might include
things like system design features, user characteristics (such as cognitive styles and other
personality traits), and task characteristics. As a result, TRA is well suited to forecasting the
behavior of users of multimedia technologies. Although TRA is a fairly generic theory, it does
not identify what specific beliefs might be relevant in certain scenarios. Nonetheless, the
presence of subjective norm is a crucial feature that is not even included in more popular models.

2.1.5. Transactions cost innovative theory

Niehans (2006) proposed the transaction cost innovation theory, which contends that lowering
transaction costs is the fundamental driver of financial innovation. Financial innovation, in
reality, is a reaction to technical developments that resulted in decreased transaction costs.
Reduced transaction costs can spur financial innovation and enhance financial services.
According to the report, financial innovation lowers transaction costs. Transaction fees In this
context, innovation theory is also relevant: for example, the use of Internet-connected
Information Technology (IT) may significantly cut a firm's transaction costs by enabling
effective coordination, management, and use of information. Mobile, Internet-connected IT may
further reduce transaction costs by providing off-site access to the firm's internal database and
other relevant information sources. As a result, cost-cutting measures such as agency banking,
online banking, and mobile banking may have an impact on the bank's profitability growth.

2.2 Role of E-Banking Service

In today's increasingly competitive banking industry, implementing e-banking may provide
institutions with several competitive benefits. E-banking transactions are much less costly than
branch transactions. Among the primary advantages of internet banking are:-

Cost savings -The fundamental economic argument for e-banking has been the lowering of
overhead expenses involved with delivering banking services, which are often expensive when

12
delivered through conventional channels. Furthermore, it appears that once a critical mass of
consumers is reached, the cost per transaction in e-banking frequently declines at a quicker pace
than in traditional banks (Shah & Clarke, 2009).

Customers' choice and convenience- The convenience of e-banking outweighs any

disadvantages, making it a highly advantageous alternative. It is a highly desirable facility to be
able to perform transactions from the comfort of one's own home with the press of a button,
without the need to physically visit a bank. Furthermore, maintaining several accounts online is
far more efficient and convenient than visiting a bank for the same purpose. Even non-
transactional services, such as obtaining checkbooks, updating accounts, and enquiring about
interest rates on various financial products, have become easier to access thanks to the internet
(Sannes, 2001).

Load discount on other channels- Because most regular tasks, such as account examination,
are automated, the use of e-banking products has resulted in a large drop in strain on traditional
distribution channels. This trend is projected to continue when more complex services such as
mortgages and asset finance are introduced through e-banking channels. Even cash deposit
transactions are becoming automated in some nations, freeing up bank workers to deliver better
customer care (Shah and Clarke ,2009)

Easier expansion- In the past, if a bank required to increase its geographical reach, it had to
construct additional branches, which included large costs for both initial setup and continuing
maintenance. However, the advent of e-channels like as ATMs, point-of-sale systems, mobile
banking, and others has rendered this growth approach completely obsolete in a variety of
scenarios. As a result, banks that formerly served consumers in certain regions or nations may
now draw customers from all over the world, because the bulk of financial transactions no longer
require a physical presence near the customer's employment (Shah & Clarke, 2009).

2.3 Types of Electronic Banking Service

The common types of e-banking components implemented in commercial banks of Ethiopia are
following: -

Automated teller machines: Also referred to as an mechanical banking machine (ABM) or cash
machine, is a computerized telecommunications device that allows bank clients to conduct

13
banking dealings in a community area without the help of a cashier, human worker. When
utilizing contemporary ATMs, customers are recognized by introducing a plastic ATM card with
a attractive chip that includes a distinct card number and certain security details, such as an
ending date (Thompson, 1997). Authentication is achieved by the client incoming a individual
identification number, as stated by Thompson (1997).

Debit Cards- Debit cards have become the most popular form of Visa point-of-sale transactions
worldwide, surpassing credit postcards. In the united States alone, debit postcards were used for
over 15.5 billion POS transactions, amounting to $700 billion in 2002. This accounted for 35%
of automated payment deal volume and 12% of POS noncash expenses. The rise of debit
postcards has been rapid, with 46% of families using them in 2002, up from 19% in 1996.
Experts predict that debit postcards will continue to experience strong growth, while credit card
charge volume is expected to grow at a slower pace.

POS banking- A computer terminal is used at the point of sales transaction to capture data
immediately by the computer system. This retail payment system replaces cash, cheques, or
drafts with an electronic transfer of funds for purchasing retail goods and services. According to
(Gerlach, 2000), auctions and payment evidence are electronically saved in a POS banking
system, including the sale amount, transaction date and location, and consumer's account
number. Payment information is transmitted to the financial organization or expense processor if
the deal is made on a bank recognition, and sales data is sent to the seller's administration
evidence system for updating sales records.

Mobile banking -Mobile banking is a system that allows bank customers to conduct different
financial transactions through a mobile device, being the newest service in electronic banking;
mobile banking relies on WAP (wireless application protocol) skills since a mobile device needs
a WAP browser connected in order to permit admission to evidence (Driga & Isac, 2014). In
developing countries where modern telecommunication infrastructure is not well advanced,
mobile technologies is transforming accessibility to the internet based services (Driga & Isac,
2014). This type of banking is a small machine that can be found in banks, and all around the
city depending from the usage rate. Kaplan and Norton (2002), assume that ATM permits a bank
client to manner his/her banking dealings from almost each other ATM engine in the world. But
as a result of their extreme frustration—either the machines won't dispense cash or debit

14
transactions when cash isn't dispensed or cards get stuck in them—the proliferation of the
machines has been causing a lot of heat.

Internet banking- Internet banking refers to schemes that allow bank customers to become
access to their books and general evidence on bank goods and facilities through the use of bank’s
website, without the involvement or troublesomeness of distribution cultures, faxes, original
signs and telephone validations (Witman & poust, 2008). By definition, internet banking gives
users more flexibility and convenience in addition to nearly total control over their finances.
Both transactional (offering retail banking services) and informational (educating clients about
the bank's offerings, etc.) services are provided. It has the same productivity impact as PC
banking and telebanking as an alternate delivery channel for retail banking. Several empirical
investigations have been carried out to evaluate the influence of Internet banking on the
operational efficiency of commercial banks. For example, Young et al. (2006) noted how
Internet community banks' financial performance changed in the United States between 1999 and
2001. The study revealed that the adoption of the Internet had a positive impact on the
profitability of community banks. This was primarily due to the increase in revenues generated
from deposit service charges. Additionally, the adoption of the Internet was linked to a shift in
deposits from checking accounts to money market deposit accounts, a rise in the utilization of
brokered deposits, and an increase in the average wage rates for bank employees.

2.4. Electronic Banking System in Ethiopian Banking Sector

The financial sector in Ethiopia is still in its early stages of providing technology-based products
and services to its consumers. Electronic banking was first introduced in the country in late 2001
by the largest state-owned banks, through the implementation of ATMs. Despite having visa
membership since 2005,banks failed to fully utilize its membership due to a lack of appropriate
arrangements. Despite being a pioneer in introducing automatic teller machine-based payment
systems and attaining visa membership, banks was surpassed by Dashen Bank, which
aggressively continued to lead in the e-payment system (Gardachew, 2010).

The agreement signed between Wegagen bank and technology associates, a Kenyan information
technology (IT) firm, on December 30, 2008, marked a significant milestone in the advancement
of e-banking in the Ethiopian banking industry. This agreement aimed to develop solutions for
the payment system and establish a network of ATMs. Similarly, in February 2009, three private

15
banks, namely Awash global bank S.C., Nib international bank S.C., and United Bank S.C.,
signed an agreement to launch an ATM and POS terminal network (Ayana, 2012).

2.5. Factors affecting implementation of electronic Banking in Ethiopia

The majority of studies found that perceived risk in technology, organizational factors, human
and financial resources, environmental factors, national ICT infrastructure, and a lack of legal
and regulatory framework were the main drivers of e-banking adoption among Ethiopian banks.
The following are typically the variables influencing the use of electronic banking.

2.5.1. Technological factors and adoption of E- banking

There seems to be a lack of agreement regarding the elements that pertain to this particular
situation. For instance, a study conducted by Salwani in 2009 incorporates technology
competence, which encompasses both the current technology structure and the skills required to
apply the technology in this background. On the other hand, other studies conducted by Ellias in
2009 and Chang in 2007 consider certain pertinent characteristics of technology. In order to
prevent any overlap between skill and structural contexts, the researcher selects two fundamental
factors associated with technology competence that are relevant to the structural factors.
Specifically, the study focuses on the apparent benefits and apparent risks of the technological
factors.

Perceived Benefit- E-banking offers perceived benefits that encompass both direct and indirect
advantages for both the banking industry and its customers. Direct benefits consist of reduced
operational costs, enhanced organizational functionality, increased productivity, improved
efficiency, and heightened profitability. Indirect benefits include intangible advantages such as
improved customer satisfaction through better services, an enhanced banking experience, and the
fulfillment of evolving needs and lifestyles (Lu et al. 2005; Kuan & Chau 2001 & Iacovou 1995).

Perceived Risk-The adoption and growth of E-banking services are hindered by customers'
resistance to use them, which poses a significant risk to banking institutions. This resistance is
influenced by the perception of risks associated with E-banking, particularly security concerns
related to online transactions. (Zhao et al. 2008 & Laforet 2005; Chang 2007 & Rogers 2003).

16
2.5.2 Environmental factors and adoption of E- banking
Environmental factors primarily pertain to various factors that either facilitate or hinder
operations in a given area (Al-Qirim, 2006). The realm in which bank conducts its business and
adopts technological innovations encompasses its industry, competitors, access to resources
provided by external entities, and interactions with the government, all of which are considered
within the environmental contexts (Kvin Z. et al. 2004). The study also highlights the importance
of considering legal frameworks, the National ICT infrastructure, competitive pressure, and
government support as significant factors (Ayana, 2012).

1.Legal framework- The diffusion of online transactions, including electronic banking, is

influenced by the existence and maturity of legal frameworks on ecommerce within a country, as
highlighted in studies conducted by Tan & Wu (2002) and Martinson (2001).

2. National ICT Infrastructure -Insufficient development and subpar quality of the ICT
infrastructure hinder the successful implementation and utilization of e-banking services
(Efendioghu 2004 & Scupola 2003).

3. Competitive Pressure- The development and implementation of e-banking initiatives by

banks can be significantly influenced by competitive pressure, which in turn can impact the
bank's perception of innovation . The acceptance of novelty is stimulated by intense competition
(Mansfield et al., 1977).

4. Government support- The acceptance of E-banking can be influenced by the government,

both directly and indirectly, through the establishment of a conducive environment and the
generation of momentum for banking organizations and their clients. This enables the diffusion
of E-banking services within the public (Kuan 2001 & Iacovou 1995).

2.6. Empirical literature review

According to several studies, internet bankers are the bank's most profitable and rich customer
base (Robinson, 2000, Nyangosi, 2006). Thus, banks and customers alike can advantage greatly
from electronic banking. Across the globe, the majority of private bankers last to avoid using
electronic banking channels. There are several reasons behind this. First and foremost, in order to
use the service, users must have internet access . Second, nonusers frequently lament that there is
no social component to electronic banking, i. e. You don't receive the same level of

17
service at the branch as you would in person (Mattila et al. In 2003. Using the Structural
Equation Model, Beshir and Zelalem (2020) conducted research in Ethiopia
to examine the impact of e-banking service quality on customer satisfaction and loyalty.
Efficiency, responsiveness, ease of use, privacy, and commission were originate to be important
analysts of customer approval at a five percent significance level in the study, which
used customer gratification as a dependent variable. The study's findings also demonstrated that
customer loyalty is significantly positively impacted by customer satisfaction. The Zavareh et al.
finding. (2012) found a important positive relationship b/n customer gratification and successful
and dependable services, fulfillment, faith, site aesthetics, receptiveness, and comfort of use
in Iranian online banking.

According to a 2017 study by Mohamud, customer satisfaction is significantly positively

impacted by the e-banking service quality. The study found a linear relationship between the
qualities of e-banking services, meaning that cost, usefulness, and ease of use all have a direct
impact on customer satisfaction. Furthermore, the study found that in an effort to achieve higher
customer satisfaction, aspects of service quality like security, aesthetics, dependability,
responsiveness, and efficiency shouldn't be disregarded. It would be important to carry out
similar qualitative research in banks to determine whether similar results would be obtained.

Businesses across all industries can raise capital more cheaply and in greater quantities thanks to
e-banking (Lerner 2006). A bank's ability to obtain funds from its clients at the lowest possible
cost—that is, to purchase money, use it for some purpose, and then sell it for a profit—
determines its vitality (Dew 2007 cited in Damtew, 2016). The bank is therefore forced to
enhance the features of e-banking dealings, such as mobile telephone top-ups, ticketing, paying
phone or electricity bills, house taxes, etc., because the more electronic transactions, the extra
fee-based income gotten. Adopting a particular ATM network can also increase a bank's market
share and increase consumer awareness of it (Agboola 2006 cited in Damtew, 2016). Depending
on the degree of network effect, the relationship between IT spending and a bank's market share
or financial performance was only provisional. IT spending is likely to lower payroll costs, boost
revenue and profit, and expand market share if the network effect is too small (Nadia, et al., 2011
cited in Damtew, 2016).

18
After developing some innovations, succeeding banks find new opportunities in exploiting more
income for the bank (Nofie 2011). According to Nigel, et.al (2008) the impact of retail services
on bank performance is dominated by fee income. The technology used for retail payment
transactions itself can enhance bank performance and the variety of retail payment
methods. Instruments have been linked to improved bank performance. Similarly, increased
use of electronic retail payment methods appears to boost the banking industry (Ngumi
2013). Retail payment transaction technologies have an intensifying impact on the relationship
between retail payment services and bank performance in addition to their direct impact on bank
performance (Ngumi 2013). The retail banking industry will see growth and innovation thanks to
advanced technologies for retail payment transactions. For banks, this will further increase the
value of retail payment services. However, banks can operate more profitably and more
efficiently if more retail payment transactions are made through POS systems or ATMs rather
than retail payment offices. In nations where retail payment transaction technologies are
comparatively widely adopted, innovations in retail payment services have a greater effect on
bank performance (Iftekhar, et al. (2009)).

According to Sana et al. (2011) banks are also earning from novelty led services in a way of
commission and annual inferences by charge a certain amount or flat charges or a certain
percentage on products and services like ATMs, funds transfer etc. If the eras of traditional
banking are compared to the present e-banking eras, the results showed that e-banking has
contributed positively and maximize the profits of banks (Ngumi 2013). Rather than making the
abrupt switch to electronic banking, banks are progressively moving from manual to electronic
means. Efficiency has risen as the costs have been reduced; costs of labor, provision of services,
time saved, accuracy, reliability and quality of services has improved (Sana et al. 2011).

Ceylan Onay et al. (2008) observed that e-banking has a positive impact on financial
performance of Turkish commercial banks and found that Internet has changed the dimensions of
competition in the banking sector. Additionally, it has given emerging nations the chance to
expand their financial intermediation infrastructure. Many banks are using mobile banking as a
transaction and information offering mechanism due to the growth of protected deal
technologies. Thus, standard banking functions like check writing, bill payment, fund transfers,

19
and online account balance checks can be performed by users of Internet banking via a computer
(Acharya and Kagan, 2004).

From the previous review of relevant literature, it is obvious that research in the area of bank
innovations has been done but not in a comprehensive approach. All the literature reviewed
indicated that previous researcher only concentrated on customer satisfaction and behavior
towards e-banking focusing on the bank industry but, this research will focus to assess the effect
of E-banking variables on the financial performance of Banks in Ethiopia. This makes the study
more comprehensive. From survey of relevant literature, it has been found that there are a few
studies specific to Ethiopia on the link of e-banking and IT adoption and its impact towards
customer behavior of commercial banks. This study therefore intends to fill these pertinent gaps
in literature by studying the effect of e-banking on selected key financial performance indicator
of commercial bank of Ethiopia.

There are variations of bank perforx1mance measurement. Revell 1980 cited in Maiyo, 2009
used interest margin as a performance measure for U.S. banks. The difference between attention
income and outlay divided by total assets is how he defined interest margin. Arshadi and
Lawrence (1987) slow bank performance using normal correlation analysis. Their
multidimensional indexes include indexes of success, pricing of bank services & loan and market
share. Previous research, especially in the United States, indicates that scale economies appear in
small banks and not in large ones (Short, 1979; Miller and Noulas, 1996 cited in Maiyo, 2009).

According to more recent research, market liberalization and financial growth have increased the
sizes at which scale economies exist (Miller and Noulas, 1997 cited in Maiyo,
2009). Banks' success is largely strong-minded by their net income-generating
operations and associated expenses. Banks have altered the way they make income by shifting
away from traditional inter-mediation income-generating activities and toward non-
intermediation income-generating activities in response to industry tests with profitability and
fierce competition. Commercial banks must create and implement new technology products in
order to stay competitive in all of the aforementioned areas.

According to Malhotra and Singh (2009), cited in Abebe (2016),Mobile banking has become a
strategic tool for increasing productivity and profitability by substituting labor-intensive, paper-

20
based processes with automated ones, which improves efficiency and controls operations and
lowers costs. But as of yet, there isn't much proof from researchers about these possible
alterations. However, current empirical research suggests that internet banking is
not independently affecting bank profitability; however, these conclusions could alter as
internet usage increases.

The obtainability of a greater variety of financial services and goods online has increased
recently (Malhotra and Singh, 2009 cited in Abebe, 2016), and as a result, many banks now rely
heavily on this channel for distribution. Banks significantly increase their technology investment
spending in order to solve issues with revenue, cost, and keenness. Banks anticipate a short-
term impact on profitability for certain activities. The desire to maintain a
competitive edge or keep up with the competition drives other investments more than anything
else.

Technology on the internet has the power to radically alter banks and the banking sector.
According to a radical viewpoint, traditional approaches to developing and providing bank
services will be rendered obsolete by the internet (DeYoung, 2001). It is anticipated that the
broad availability of internet banking will have an impact on the range of financial
services that banks offer, how they offer these services, and how these banks perform financially
as a result. Whether banks utilize this new technology and whether this extreme viewpoint turns
out to be accurate will depend on how profitable they deem such a system of service delivery.
Furthermore, a great deal of interest and estimation regarding the influence of the Internet on the
banking sector has been aroused by industry analyses describing the possible effects of Internet
banking on cost savings, income growth, and risk outline of the banks (Berger, 2003;
Karjaluoto, Mattila and Pento, 2001, Simpson, 2002 cited in Kadzo and Kimani, 2015).

21
2.7. Conceptual Framework
Based on the literature review stated above, the researcher adapted the following schematic
depiction of the relation of the study variable developed by (Mary & Isola, 2019). The
conceptual framework illustrates the association of dependent and explanatory variable of the
study. In this particular study, the independent variable was electronic banking (ATM, POS
banking, mobile banking, debit card ,bank size and internet banking); the dependent variable was
the financial performance in commercial banks Ethiopia in Dire Dawa District. Based on this
concept the following diagram was developed.

Independent variable Dependent variable

ATM

POS

Internet banking financial performance(ROA ,ROE)

Mobile banking

Debit Card

Bank size

Source: Abebe ,2016

Figure 2:conceptual Framework based

22
 CHAPTER THREE

3. METHODOLOGY

3.1 Introduction
This chapter discussed the research plan and procedure that the researcher used in conducting the
study to answer the research questions modeled in the first chapter. It contains; description of the
study area, the research approach, the research design, the target population and sample design,
the data sources, the method of data collection and methods of data analysis, that was taken into
account when conducting the study.

3.2.Research approaches
According to Creswell (2009) there are three types of research method: the first one is qualitative
research involves emerging questions and procedures, data typically collected in the participant’s
setting. The second one is quantitative research; it is a means for testing impartial theories by
investigative the association among variables (Creswell 2009). The last one is mixed method
research, it also an approach to inquiry that combines or associates both qualitative and
quantitative forms (Creswell 2003). The studies are products of the pragmatic paradigm and
combine qualitative and quantitative approaches in different stages of the research process
(Grove 2003). All the three research approaches have their own strategies of enquiry; for
qualitative research ethnography is the strategies enquiry (Creswell 2009). For instance, Tony
(2005) described that ethnography has originate to be associated with almost any qualitative
research where the determined is to bring a full, in-depth account of normal life and repetition by
primary data collection through fieldwork. For quantitative method experiments are strategies
inquire (Creswell 2009). Experimental designs are research approach for obtaining information
about causal relationship and also allowing research to assess the correlation between one
variable and another (Kothari 2004). On the other hand mixed research method employed
sequential inquiry (Creswell 2009), according to Steven (2007 P.262) sequential explanatory
strategy is “the collection of quantitative data followed by the gathering and analyzing

23
qualitative data"; that is, the two stages are given equivalent heaviness and the data are combined
for interpretation.

3.3. Research Design

Based on the research purpose, the most commonly known research designs are descriptive,
exploratory, and explanatory. Descriptive research seeks to describe and interpret what is and
aimed to describe the current state. On the other hand, explanatory research aimed to identify the
cause-and-effect relationship between variables. The researcher uses the facts or information
already available to analyze and critically evaluate the data / information. Exploratory research is
less formal, sometimes even unstructured, and focuses on generating background information
and helping to better understand and clarify a problem. It should be used to grow hypotheses and
develop questions to be answered (Kothari, 1990).
Accordingly, both descriptive and explanatory research designs was used in this study. The
descriptive research design was used to define the type of conditions that exist and to describe
the factors influencing financial performance of banks in Ethiopia at Dire Dawa District. An
explanatory research design was used to explain, analyze and measure the effect of electronic
banking on the financial performance of commercial banks in Ethiopia at Dire Dawa district.

3.4. Target Population

According to Mugenda (2003), target population is the population to which a researcher wants to
generalize the results of the study. Target population is the collective of all the rudiments that
share some shared set of features and that include the universe for the drive of the research
problem (Malhotra, 2007). The target population of this study is all Fifteen (15) banks adopting
e-banking service in Ethiopia at Dire Dawa District banking industry namely; Abay bank, Addis
international bank, Awash international bank, bank of Abyssinia, Berhan international bank,
Buna international bank, Commercial bank of Ethiopia, Cooperative bank of Oromia, Dashen
bank, Debub global bank, Nib international bank, Oromia international bank, United bank ,Enat
bank and Wegagen bank .

3.5.Sampling Technique
Sample represents part of the study population that was studied, in order to understand the
population from which the sample was drawn (Maylor and Blackmon ,2005). The sample is a
subgroup of a larger population, selected by the researcher to participate in a research project

24
(Mugenda ,2003). A sample can be described as an element chosen to represent the target
population while a sampling technique can be defined as a framework in which the researcher
utilizes to assist in the choice of a sample. Moreover, sampling is the procedure of selecting a
suitable sample for the driving of defining parameters or features of the target population.

Due to non-uniformity by the commercial banks in terms of time of adoption and nature of
specific e-banking product, most of commercial banks operating in Ethiopia had no complete
data of each e-banking product still now. Therefore, banks those having organized e-banking
service report on widely expanded e-banking products in Ethiopian banking industry like ATM,
POS terminal, mobile banking ,debit card and internet banking considered as a sample. Due to
this reason, purposive sampling technique was used and seven commercial banks were selected.
These banks have adopted those e-banking products (ATM, POS terminal, mobile banking,
Debit card and internet banking) commonly based on information available from their annual
reports. Those are Awash bank, commercial bank of Ethiopia, Dashen bank, Enat bank, Oromia
international bank, Abay Bank, and Abyssinian Bank. The rationale behind selecting purposive
sampling techniques than others is, it enables the study to generate meaningful insights that help
to gain a deeper understanding of the research phenomena by selecting the most informative and
effective participants that is satisfactory to its specific needs (Bhattacherjee, 2012).

3.7. Source and Types of Data

This study used panel data covering a period of 5 years (2018/2019 to 2022/2023). The panel
data involves the pooling of observations over several time periods and provides results that are
simply not detectable in pure cross sections or pure time series studies (Brooks, 2008). Brooks
(2008) further 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, particular study can remove the
impact of certain forms of omitted variable bias in the regression result. Second, by combining
cross-sectional data and time series data, the study can increase the number of degree of
freedom, and thus the power of test, by employing information on the simultaneous dynamic
behavior of many different entities.

25
3.8 Methods of Data Analysis
In order to attain the stated research objectives and convert the raw data into meaningful form,
the data were analyzed based on the nature of the objective. The collected secondary data using
data collection sheet was sorted and cleaned. The data collected for the study have the dimension
of both time series and cross sections. Thus, the collected panel data were analyzed using
descriptive statistics, correlations and panel data regression analysis. Therefore, panel data
regression techniques were used to conduct the analysis. Analysis was done with the help of
STATA version 16 packages. 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 multicollinearity, hetroskadasticity,
autocorrelation, normality and zero mean error term tests were conducted to ensure reliability
and validity of the data. This study also conducted correlation analysis, specifically Pearson
correlation to measure the degree and direction of association between the variables under
considerations; F-test is used to test more 30 than one coefficient simultaneously different from
zero and to check the significance level of all explanatory variables in this study models; and
panel data regression analysis is used to estimate the relationship between dependent and
independent variables in order to conclude based on the collected data about the effects of e-
banking on financial performance of 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.

3.9. Model Specification and Variable Description

This section involves specifying a model that helped to demonstrate the influence of certain key
e-banking products that affect financial performance of banks in Ethiopia at Dire Dawa District.
The process of deciding which explanatory variables to contain or leave out of a
regression equation is known as model specification, according to Allen and Fildes (2001). An
actual theoretical claim about the fundamental association between one or more explanatory
variables and a response variable is made by a numerous regression
model (Allen and Fildes, 2001). Model requirement is the major and most critical stage of
regression analysis; followed by estimation of parameters and interpretation of those parameters.
The approximations of the constraints of a model and clarification of them be contingent on the

26
correct requirement of the model (Allen & Fildes, 2001). According to Brooks (2008), the
general panel data regression model can be written as follows:

Yit = α + βxit +uit

Where

Yi is the ith observation of the dependent variable,

X1i… Xki are the ith observation of the independent variables,

α represent constant term,

βx….. βk are the regression coefficients, and ui is the ith observation of the stochastic error term.

Based on previous research works in the subject area like; Obiekwe & Mike (2017), Rauf &
Qiang (2014), Karimzadeh et al. (2014), and Al-smadi & Al-wabel (2011), the following
empirical model was used to estimate the effect of identified independent variable (automated
teller machine, point on sale, mobile banking and internet banking) on dependent variable
(profitability of a bank ) indicated by return on asset and (how much profit a company earned
compared to the total amount of shareholder equity invested or found on the balance sheet)
indicated by return on equity. Hence, the effects of e-banking on return on asset and return on
equity of banks in Dire Dawa district can be modeled as described below. But, so as attain the
normal distribution of data, since the nature of independent variable (high variability in the value
of transaction) were transformed to the natural logarithm. The log conversion is used to
reduction data variability, particularly in data sets containing outlying observations. In line with
transformation to logarithm, the functional form of the study variable was re-written in the
following form:

ROE it= α + β1L(ATM) it + β2L(POS) it + β3L(MBAN) it + β 4L(IBAN) it + β 5L(BS) it + Uit

ROAit = α + β1L(ATM)it + β2L(POS)it + β3L(MBAN)it + β 4L(IBAN)it +β 5L(BS)it + Uit

Where:

α: Constant term

27
β1. . …5 are parameters to be estimated;

Uit = is the error component for company i at time t assumed to have mean zero E [Є it] =0

i = banks i = 1. . . 7; and t = the index of time periods and t = 1-5

ROE: is a financial ratio that shows how profitable a business was in relation to the total amount
of invested shareholder equity or equity shown on the balance sheet. ROE is what investors look
for after making an investment. An organization that can generate cash internally is more likely
to have a high return on equity. Therefore, the better the company is at generating
incomes. It shows the rate of return that investors in the bank have received on their capital. ROE
measures how well bank management uses the money of its shareholders (Khrawish,2011).
Therefore, the aforementioned statement suggests that management is more efficient in using
shareholders' capital if the ROE is higher:

ROE = Net Income after Taxes / Total Equity Capital

ROA: In this research, bank success serves as a proxy for financial presentation. Although
net income provides an suggestion of a bank's performance, it does not account for
the bank's size, making it hard to compare the performance of different banks. ROA is a essential
metric of bank success that accounts for the size of the bank. ROA events how efficiently a
company can grasp profit from its assets, regardless of size.

Return on asset is competence in asset operation and shows how much net income is produced
out of total assets. It indicates the ability of bank organization to generate profits by using the
available assets of the bank. As a result, a high ROA ratio suggests improved performance in
order to turn a profit.

ROA = net profit after tax / total Asset

Almost all previous studies used return on asset as an indicator of profitability in the subject
area.

ATMjt; is the automatic teller machine which is an electronic fatal which gives customers the
chance to get banking facility at almost any time. To withdraw cash, make deposits or transfer
funds among accounts, a consumer wants an ATM card and a personal identification number

28
(PIN) (Ayana, 2012). In line with preceding studies (Eze & Egoro, 2016; Mary & Isola, 2019;
Osewa & Muturi, 2017) ATM is operationalized with the log of value of transaction conducted
through ATM for the banki in yeart .

POSjt; POS system allows client to pay for retail purchase with a check card, a new name for
debit card. The debit card holder's account and the store's account receive the money for the
purchase right away (Malak, 2007). Log value of transaction of POS was included as
independent variable in this study to see its influence on profitability in line with previous
studies (Eze & Egoro, 2016; Mary & Isola, 2019).

DCjt; When a payment card is utilized, money is deducted immediately from the consumer's
bank account. Also called ‘‘debit cards’’ or ‘‘bank cards,’’ they can be used to acquisition
products or services, as well as to obtain cash from an automatic teller mechanism or a retailer
who permits you to increase the amount you pay for a purchase. In line with previous study
Osewa & Muturi, 2017). Debit card was measured as the log value of transaction conducted
through debit card for the banki in yeart .

MBjt; is the mobile banking service that enables customers to comportment some banking
services such as account review and funds transfer, by using of short text message (Ayana,
2012). In line with previous study (Adewoye, 2013; Eze & Egoro, 2016; Osewa & Muturi,
2017,) mobile banking was measured as the log value of transaction conducted through mobile
banking for the banki in yeart .

IBANit: Internet banking is the practice of a bank so long as its services to customers through an
online distribution system. Registered clients can access the bank's website and behavior
account-related transactions by logging on to internet banking. In line with previous study (Eze
& Egoro, 2016; Osewa & Muturi, 2017; Mary & Isola, 2019) internet banking was
operationalized as the log value of transaction conducted using internet banking.

BSit: The size of the bank is included in this study as a control variable to separate the effects of
ebanking. As noted in (Kapur & gualu, 2012) presence of this variable assistances to account for
size linked economies (gauge economies with summary prices, or choice economies that result in
credit and creation change, thus providing admittance to markets that a small bank cannot entry)
and diseconomies of scale. The banks that like economies of gauge incur a lower cost of meeting

29
and processing material resulting in high financial suppleness and ultimately high spreads (Afzal,
2011). This means bigger banks can have lower costs per unit of revenue and therefore higher
net attention margin. The concept of bank size is used to demonstrate how larger banks
are usually better located than smaller banks to take benefit of frugalities of scale in dealings,
which interprets into higher levels of income. Since the working scale touches the banks
operating cost, this study included bank size in estimation model as a control variable to separate
the effects of electronic banking. Bank size was rummage-sale as control variable in line with
many previous studies (chin et al, 2009; Yosef, 2017; Njogu, 2014). In a offer to choice the
usage of the greatest model for the panel data regression study, sequence of tests was approved.
As cited by Abubakar, Nasir, and Haruna (2013) . The greatest linear unbiased estimator were
fixed-effects or random-effects estimates were used (Yaffee ,2005). To attain this, the Hausman
specification test was secondhand.

30
 CHAPTER FOUR

4.RESULT AND DISCUSSION

The study variables' panel data regression analysis, Pearson correlation analysis, and descriptive
statistics are presented in this chapter. The first section presents the descriptive statistics which
summarizes the main features of the study variable with measures of central tendency. The
Pearson correlation analysis, which illustrates the degree of relationship between the
study variables, is presented in the second section. A variety of test results related to the linear
regression model are shown in the third section. The results of the fixed effect estimation
regression analysis are shown in the final section.

4.1. Descriptive Statistics

Table 1 displays the associations between the study's variables through descriptive statistics.
These variables were: independent, control, and dependent. The value of POS, ATM, debit card,
Internet, and mobile bank transactions serves as the explanatory variable, and return on equity
(ROE) and return on asset (ROA) serve as the dependent variables in this study's evaluation of
banks' performance. In addition to the main explanatory variables, the model also included the
Size (or Total asset) variables as control variable.

31
Table 1:Descriptive statistics of variable used

Variables N Mean Std.dev Minimum Maximum

Return on Equity 35 .2407143 .0624161 .14 .40
Return on Asset 35 .0496429 .0223577 .01 .09
Value of ATM 35 226131185 547412529 342788 230088779
Transaction in Eth Birr
Value Mobile Bank 35 708069312 1844544266 13724 878921565
Transaction in Eth Birr
Value POS Transaction in 35 95541902 211855833 10389 104769125
Eth Birr
Value Internet Banking 35 342051796 990227973 18626 490297536
Transaction in Eth Birr
Number of Debt Card 35 846794 1884786 93137 7996494
Issued
Size(or Total asset in Eth 35 843158868 165613998 114359169 6687723479
Birr)

As shown in table 1 above, from 15 banks that operates in Dire Dawa District, 7 banks that have
five years (2018/19-2022/23) complete data on the variable of interest were considered.
Following the seven sampled banks for five consecutive years makes the total observations 35.
The sampled banks' overall return on equity is 24.07 percent (mean = 0.2407), with highest and
minimum values of 40.0 and 14.0 percent, respectively. The standard deviation of ROE is 6.24
percent from the mean value. This shows that the returns on equity of sampled banks deviated
from the mean value by 6.24 percent. On the other hand, the average value of the sampled banks
return on asset (ROA) is 4.96 percent (mean = .0496). The value of ROE deviates by 2.2 percent
from the mean value of the sampled banks. Regarding the value of transaction with ATM, POS,
Internet Banking and Mobile Banking, the average value of ATM, POS, Internet Banking and
Mobile Banking are 226131185, 95541902, 342051796 and 708069312 birr respectively. While
the standard deviation of ATM, POS, Internet Banking and Mobile Banking is found to be
5474125287, 211855833, 990227973 and 1844544266 respectively. This indicates that the
banks at Dire Dawa District are not at equal position in delivering e-banking service.
32
4.2. Correlation Analysis
The linear relationship of the independent variables with the financial performance (ROA and
ROE) can be analyzed using Pearson correlation coefficient in order to determine the extent and
direction of the linear relationship between explanatory variables and financial performance
measures of the sampled banks as shown in table 2 below.
Table 2: Correlation Coefficients
ROE ROA lnATM lnMB lnIB lnPos lnDC lnS
ROE Pearson
1
Correlation
Sig. (2-tailed)
N 35
ROA Pearson
.072 1
Correlation
Sig. (2-tailed) .716
N 35 35
lnATM Pearson
.133* .096* 1
Correlation
Sig. (2-tailed) .001 .028
N 35 35 35
lnMB Pearson
.092* .921* .895** 1
Correlation
Sig. (2-tailed) .041 .020 .000
N 35 35 35 35
lnIB Pearson
.789* .074* .849** .976** 1
Correlation
Sig. (2-tailed) .043 .007 .000 .000
N 35 35 35 35 35
lnPos Pearson
.432* .606* .708** .559** .565** 1
Correlation
Sig. (2-tailed) .022 .040 .000 .002 .002
N 35 35 35 35 35 35
lnDC Pearson
.818* .866* .714** .581** .497** .698** 1
Correlation
Sig. (2-tailed) .045 .033 .000 .001 .007 .000
N 35 35 35 35 35 35 35
lnSize Pearson
.124 .480* .206 .100 .045 .155 .40* 1
Correlation
Sig. (2-tailed) .531 .010 .294 .614 .821 .431 .033
N 35 35 35 35 35 35 35 35
**.At the 0.01 level, correlation is significant (2-tailed).

33
*. At the 0.05 level, correlation is significant (2-tailed).
Source: Own computation using banks financial statement, 2018/2019 – 2022/23
Note: Scale of interpretation 0.10 to 0.29 or -1.10 to -0.29 –weak correlation,0.30 to0.49 or -
0.30 to -0.49- Moderate, 0.5 to 1.0 or -0.5 to -1.0 –Strong correlation(cooper,2010)
As shown in table 2 above ROE and the explanatory variables like ATM ,mobile banking
,internet banking and POS have positive and significant linear relationship with ROA and ROE.
The correlation coefficient of ATM was 0.133 with p-value 0.001, which is significant at 5
percent level of significance indicates the positive association between the value of ATM
transaction and return on equity (ROE). Similarly, the correlation coefficient 0.432 with p-value
0.022 which is significant at 5 percent level of significance indicates the positive association
between the value of POS terminal transaction and return on equity (ROE). On the other hand,
the Return on Asset (ROA) and value of Mobile banking have Positive and significant linear
relationship, as indicated by the correlation coefficient 0.921 with p-value 0.020 which is
significant at 5% level of significance. The implication is that, an increase in the value of mobile
banking factor lead in the increase in ROA.

4.3. Tests Associated to Linear Regression Model

Various diagnostic tests must carry out to ensure the validity of the basic assumptions of
classical linear regression model and panel model estimation. The regression model's assumption
test is necessary for reliable hypothesis testing as well as to provide data for trustworthy
outcomes. Accordingly, the study has gone through the most critical regression diagnostic tests
consisting of Normality, Multicollinearity, heteroskedasticity, and Hausman Specification test as
presented in the following sub sections below.

4.3.1. Normality test

The Shapiro-Wilk tests used separately for the model ROE and ROA models to determine
whether the distributions of the error terms were significantly different from that of the
theoretical normal distribution. The result below shows the Shapiro-Wilk test for normality, if
the test is not significant, then the data are normal. Hence, the p-value for both models is quite
above the standard 5 percent level of significance indicating that the data is normally distributed.

Table 3:Normality test

34
 Shapiro-Wilk W test for normal data
Dependent Variables Obs W V Z Prob>z
ROE 35 0.95437 1.378 0.660 0.25466
ROA 35 0.99254 0.225 3.069 0.99893

4.3.2. Tests for Hetroscedasticsity

To test the assumption for classical linear regression model is that the disturbances appearing in
the population regression are homoscedastic that means the variance of the error term is constant.
Breusch-Pagan Test for Hetroscedasticsity conducted separately for the two models of this study.
The result obtained from Breush- Pagan test confirmed there is no Hetroscedasticsity in the
model ROE and ROA used as dependent variable.

Table 4:Heteroskedasticity Test: Breusch-Pagan Test for ROE

Breusch-Pagan / Cook-Weisberg test for heteroskedasticity

Ho: Constant variance
Variables: residual

chi2(1) = 0.15
Prob > chi2 = 0.7028

Table 5:Heteroskedasticity Test: Breusch-Pagan Test for ROA

Breusch-Pagan / Cook-Weisberg test for heteroskedasticity

Ho: Constant variance
Variables: residual

chi2(1) = 2.69
Prob > chi2 = 0.1009

35
4.3.3. Tests for Multicollinearity
To diagnose the existence of multicollinearity problem, Variable Inflation Factor (VIF)
technique is employed. The variance inflation factor (VIF) is a measure of the reciprocal of the
inter-correlation among the predictors: VIF=1/(1-R-squred) .A variable whose VIF values are
less than 10 indicates there is no problem of multicollinearity. Thus, the results of VIF prevails
that there is no multicollinearity problem.

Table 6:Multicollinearity Test

Variable VIF 1/VIF

LnSize 1.28 0.780441
LnPos 3.22 0.311019
LnDebitCard 3.57 0.280218
LnATM 8.83 0.113273
LnInternet~g 3.87 0.258397
LnMobileBa~g 4.8 0.208333

4.3.4. Haussmann Specification test for Fixed Effect Verses Random Effect Model
The diagnostic tests conducted to detect the assumptions of CRLM are not violated in this study,
so the estimation of the parameter through regression can be safely applied. However, since this
study uses a panel data, it may have unobserved group effects, time effects or both included in
the error term. These effects are either fixed effects, random effects or both. According to Brooks
(2008), the panel data models, fixed effects (FE) model and random effects (RE) model, allow
for heterogeneity across panel units (and possibly across time) but restricts that variation to the
relationship's intercept terms. Furthermore, all of the slope estimates in the most basic fixed
effects models are fixed over time, but the regression model's intercept is allowed to vary cross-
sectional but not over time. The random effects method offers different intercept terms for each
entity and again these intercepts are constant over time, with the relationships between the
independent and dependent variables assumed to be the same temporally (Brooks, 2008).
Therefore, there must be determined model; either random effects (RE) model or the fixed
effects (FE) model is most suitable for particular panel dataset.

36
Generally, the RE model assumes that the unobserved effect is uncorrelated with this not
associated with the independent factors; 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). So, 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. There are circumstances in which these two methods will diverge significantly, even if
they produce results that are almost identical. The Hausman test was used to determine whether
of the two models (FEM or REM) provided consistent estimates for this investigation, and the
results are reported below. The null hypothesis for this test is that the unobservable heterogeneity
factor is uncorrelated or that the random effect model is acceptable, as stated below. The
Hausman Test Hypothesis Is:

H0= Random effect model is appropriate \

H1= Fixed effect model is appropriate

The null hypothesis will not be rejected if the PV>chi2 is insignificant (>0.05) (Brooks, 2008).

Table 7:Hausman Test for (ROE) Equation

---- Coefficients ----

Variables (b) (B) (b-B) sqrt(diag(V_b-V_B))
fe re Difference S.E.
LnATM .0192009 .0129428 .006258 .0025399
LnMobileBa~g .0150304 .0431395 .0581699 .005743
LnPos .0273118 .0243516 .0029602 .0005478
LnInternet~g .0469509 .0356895 .0112614 .0039585
LnDebitCard .0240025 .022696 .0013065 .0013064
LnSize .0036251 .002246 .001379 .0016092

37
b = consistent under Ho and Ha; obtained from xtreg
B = inconsistent under Ha, efficient under Ho; obtained from xtreg
Test: Ho: difference in coefficients not systematic
chi2(6) = (b-B)'[(V_b-V_B)^(-1)](b-B)
= 53.91
Prob>chi2 = 0.0000

Source: STATA outputs

Table: 7 above shows hausman specification test for ROE equation; the P-value of the test is
0.0000, which is less than 5%, statistically significant. Hence, at a 5% significance level, the null
hypothesis of the random effect model is to be rejected. Therefore, the relationship between
dependent and the independent variables of this equation was examined by the fixed effects
model in this study. The hausman specification test for ROA equation table were in appendix;
the P-value of the ROA hausman specification test was less than 5%, statistically significant.
Hence, at a 5% significance level, the null hypothesis of the random effect model is to be
rejected. Therefore, the relationship between dependent and the independent variables of this
equation was examined by the fixed effects model in this study.

4.4. Regression Analysis

This section presents the results and discussions of the regression output that obtained from the
two models. In order to examine the impact of electronic banking on the sampled banks financial
performance, two panel data regression models were estimated. The fixed-effect panel data
regression model is used in order to analyze the impact of explanatory variables on financial
performance measures of selected banks in Ethiopia. Accordingly, table 8 and table 9 present
regression results of the model that uses ROE and ROA as dependent variable respectively.

Table 8:Fixed Effect Model of ROE Regression Result

Fixed-effects (within) regression Number of obs = 35

Group variable: Year Number of groups = 5

R-sq: Obs per group:

38
 within = 0.6582 min = 7
between = 0.1711 avg = 7.0
overall = 0.5597 max = 7
F(6,18) = 5.78
corr(u_i, Xb) = -0.3538 Prob > F = 0.0017
ROE Coef. Std. Err. t P>|t| [95% Conf. Interval]
LnATM | .0192009 .0100779 1.91 0.037 .0019719, .0403736
LnMobileBanking .0581699 .0143188 4.06 0.001 .0182525 ,.0680873
LnPos .0273118 .0050226 5.44 0.000 .0178638 ,.0617598
LnInternetBanking .0469509 .0110075 4.27 0.000 .023825, .0700769
LnDebitCard .0240025 .0074699 3.21 0.005 .0083088 , .0396962
LnbankSize .0036251 .006522 0.56 0.585 .0010772 ,.0173273
_cons .1689513 .1538203 1.10 0.029 .1542132, .4921159
sigma_u .02622714
sigma_e .04325611
rho .26880631 (fraction of variance due to u_i)
F test that all u_i=0: F(3, 18) = 2.00

Table 9:Fixed Effect Model of ROA Regression Result

Fixed-effects (within) regression Number of obs = 35

Group variable: Year Number of groups = 5

R-sq: Obs per group:

within = 0.4774 min = 7
between = 0.3107 avg = 7.0
overall = 0.4602 max = 7
F(6,18) = 2.74
corr(u_i, Xb) = -0.0491 Prob > F = 0.0452
Variables Coef. Std. Err. t P>|t| [95% Conf. Interval]
LnATM | .022597 .00439 0.51 0.0201 .0114828 ,.069633

39
LnMobileBanking .0219261 .0062374 1.91 0.027 .0150303,.0311782
LnPos .0023713 .0021879 0.63 0.539 .0019679 .0132253
LnInternetBanking .0110503 .004795 2.30 0.033 .0009764 , .0211243
LnDebitCard .0070078 .003254 2.15 0.045 .0001715, .0138441
LnbankSize .0073757 .0028411 2.60 0.018 .0033445,.0114068
_cons .236127 .0670057 3.52 0.002 .0953532 ,.3769007
sigma_u .00653509
sigma_e .0188428
rho .10737028 (fraction of variance due to u_i).
F test that all u_i=0: F(3, 18) = 0.80
Source: STATA outputs

This section delves into the findings analysis for each independent variable and their significance
in influencing the return on asset and return on equity of banks in Ethiopia's Dire Dawa District.
Furthermore, the discussion of statistical findings of the study in relation to the previous
empirical evidences was provided. Therefore, the following discussions present the interpretation
on the fixed effects model regression results of relationship between independent variable; in
value of transactions on ATM, POS, mobile banking, internet banking, debit card and bank
size(as control variable) and ROA and ROE as dependent variable.

The study established the following regression equation arising from the table 8 and 9 result as
follows;

ROAit = 0.236 + .022597 ATM+0.011Ibanking +0.0071 DCard +0.007size + Uit

ROEit = 0.1689+0. 0192ATMit +0. 0273POSit +0. 0582MBANit + 0.0469 Ibanking + Uit

The regression equation above can be interpreted starting from the constant variable as follows;
According to the table 8 it shows that if any banks in Ethiopia was not conducted their banking
transaction through those electronics banking products the ROA was declined by 2.36% and
statically significant at 5% significance level on average. For the constant term of ROE equation
in the table 8, shows that if any banks in Ethiopia was not conducted their banking transaction
through those electronic banking products their ROE was rised by 16.89% and statically

40
significant at 5% significance level on average. The interpretation of study variable is presented
as follows;

The coefficient of usage of ATM is 0.0192 for ROE. Indicating that holding other thing remains
constant when usage of ATM increase by 1% banks ROE will be increased by 1.92% and the
relationship is also significant at 5% significance level with ROE and when usage of ATM
increase by 1% banks ROA will be increased by 2.26%. Moreover, this finding is consistent with
previous studies (Monyoncho, 2015; Ngango, 2015; Josiah & Nancy, 2012; Onay, Ozsoz, &
Helvacıoğlu, 2008; and Hernando & Nieto, 2007) found that the usage of ATMs service had
positive and significant effect on return on equity of studied banks. According to Jayawardhena
and Foley (2000), ATM has the volume to transmit out the same, basically monotonous
transactions as do human cashiers in bank offices but at half the cost and with more advantage in
productivity. By deploying ATMs, banks may give consumers with quick, low-cost access to the
bank 24 hours a day, seven days a week.

The coefficient of usage of POS is 0.0273 for ROE . Indicating that holding other thing remains
constant when usage of POS increase by 1% ,return on equity will be increased by 2.73% and the
relationship is significant at 5% significance level but POS is insignificant at ROA. The findings
show that there is a positive association between POS usage and banks return on equity in
Ethiopia. Moreover, these result also consistent with the existed reality in the Ethiopian banking
industry. Surprisingly, as the usage of POS increases, the return on equity of banks in Ethiopia
increases. This is due to the fact that usage of POS machine in Ethiopia banking industry does
generate any service charge to the banks in Ethiopia rather than its huge adoption. And also its
availability and accessibility is very low compared with ATM to capture high value customers.
Conversely, these finding contradict with the finding of (Abaenewe, Ogbulu, Maxwell, &
Ndugbu, 2013; and Oyewole et al., 2013) made studies on Kenya and their result showed that
POS has posative effect on bank performance measured by return on equity. And also the finding
of (Hassan, Maman, Farouk, & Musa, 2013) contradicts with this finding; they concluded that
POS has positive effect on bank performance measured by ROE. However, the above-mentioned
studies measured POS banking based on its number of POS and revenue generated from POS.

The coefficient of usage of internet banking is (0.011) and (0.0469) for ROA & ROE
respectively. Indicating that holding other thing remains constant when usage of internet banking

41
increase by 1% banks ROA will be increased by 1.1% and the relationship is significant at 5%
and ROE will be increased by 4.7% and the relationship is significant at 5% significance level.
The results of this study are also in agreement with Gakure and Ngumi, (2013) their finding
revealed that internet banking innovations had a moderate influence on profitability of
commercial banks in Kenya.

4.4.1. Hypothesis Testing

The goal of the hypothesis was to determine whether independent variables [ATM, POS, Mobile
Banking, Internet Banking and Debit Card] had a significant impact on the dependent variables
(ROE and ROA). Hypothesis testing is one of the most popular techniques in statistical
decision-making. In general hypothesis test involves presuming an initial claim to be true and
then testing it with a sample of evidence.
The alternative hypothesis (donated by H1) and the null hypothesis (denoted by Ho) are both
included in the hypotheses test. The probability value (P-value) for the specified test can be used
to inform the decision-making process for the hypothesis test.
✓ We reject the null hypothesis and declare support for the alternative hypothesis if the p-
value is less than or equal to a preset 0.05 level of significance.
✓ If the P-value is greater than 0.05, the null hypothesis is not rejected and the alternative
hypothesis is not accepted.
Based on this, the researcher created two hypotheses, using the results of Table 10 &11 below.

1. ATM
Hypothesis H1 ATM has a favorable link with banks' return on equity in Ethiopia. As seen in the
table below, NATM (number of automated teller machines) and ROE (return on equity) have a
positive =0.0192 with a P value of 0.037 statistically significant at the 5% level of significance.
As a result, the null hypothesis that ATM has a positive connection with bank return on equity in
Ethiopia is rejected. ATMs have a favorable link with banks' return on assets in Ethiopia. As
seen in the table below, NATM (number of ATM) and ROA (return on assets) have a positive
=.022597 with a P value of 0.0201, indicating that the null hypothesis is rejected.

2. POS

42
H2 Hypothesis In Ethiopia, POS has a link with the banks' equity return. As shown in the table
below, POS (point of sales) and ROE (return on equity) have a positive = 0.0273 with a P value
of 0.000, indicating that the null hypothesis that POS has a positive association with banks'
equity return in Ethiopia is rejected. In Ethiopia, POS has a link with the banks' asset return. As
seen in the table below, the POS (point of sale terminals) and ROA (return on assets) have a
positive = 0.00137 with a P value of 0.539, indicating that the null hypothesis is not rejected.

3. Bank debt cards

Hypotheses H3 – Bank debt cards have a favorable link with banks' return on equity in Ethiopia.
As can be observed from table below NDC (number of debit cards) and ROE (return on equity)
have close to zero β=.0240025 with a P value of 0.005 thus the null hypothesis is rejected. As
can be observed from table below NDC (number of debit cards) and ROA (return on assets) have
a positive β= .0070078 with a P value of 0.045 thus the null hypothesis is rejected.

4. Internet Banking

Hypotheses H4 – Internet banking has a favorable link with banks' return on equity in Ethiopia.
As can be observed from table below Internet Banking and ROE (return on equity) have close to
zero β=.0469509 with a P value of 0.000 thus the null hypothesis is rejected. Internet banking
has a favorable link with banks' return on equity in Ethiopia. As can be observed from table
below Internet Banking and ROA (return on assets) have a positive β= 0.0110503 with a P value
of 0.033 thus the null hypothesis is rejected.

5. Mobile Banking

Hypotheses H5 – mobile banking has a favorable link with banks' return on equity in Ethiopia.
As can be observed from table below mobile Banking and ROE (return on equity) have close to
zero β = .0581699 with a P value of 0.001 thus the null hypothesis is rejected. Mobile banking
has a favorable link with banks' return on equity in Ethiopia. As can be observed from table
below mobile Banking and ROA (return on assets) have a positive β= .0119261with a P value of
0.027 thus the null hypothesis is rejected.

43
Table 10:Summary of Hypothesis Testing on ROE

Variables Coefficient P-value Observation Decision

ATM .0192009 0.037 p-value<0.05 Reject null
POS .0273118 0.000 p-value<0.05 Reject null
Internet Banking .0469509 0.000 p-value<0.05 Reject null
Mobile Banking .0581699 0.001 p-value<0.05 Reject null
Debit Card .0240025 0.005 p-value<0.05 Reject null

Table 11:Summary of Hypothesis Testing on ROA

Variables Coefficient P-value Observation Decision

ATM .022597 0.0201 p-value<0.05 Reject null
POS .0013713 0.539 p-value>0.05 Fail to reject
Internet Banking .0110503 0.033 p-value<0.05 Reject null
Mobile Banking .0119261 0.027 p-value<0.05 Reject null
Debit Card .0070078 0.045 p-value<0.05 Reject null

44
 CHAPTER FIVE

5.SUMMERY, CONCLUSSION AND RECOMMENDATION

In chapter four of the study's analytical result has been mentioned. However this chapter's is
going to be overview the findings, conclusion and recommendation was its main focused.

5.1. Summary of Findings

The main aim of this study was to study the effect of electronic banking on financial
performance of selected banks in Ethiopia at Dire Dawa District. purposive sampling technique
were used in order to select the representative sample banks. This study used panel data covering
a period of 5 years (2018/2019 to 2022/2023). From 15 banks that operates in Dire Dawa
District,7 banks that have five years (2018/2019-2022/2023) complete data on the variable of
interest were considered. Following the seven sampled banks for five consecutive years makes
the total observations 35. The standard deviation of ROE is 6.24 percent from the mean value.
This shows that the returns on equity of sampled banks deviated from the mean value by 6.24
percent. On the other hand, the average value of the sampled banks return on asset (ROA) is 4.96
percent (mean = .0496). The value of ROE deviates by 2.2 percent from the mean value of the
sampled banks

Effect of E-banking on the Rate of Return on Assets and Return on Equity

The effects of ATM on Return on Assets and Return on Equity

The coefficient of usage of ATM is 0.0192 for ROE. Indicating that holding other thing remains
constant when usage of ATM increase by 5% banks ROE will be increased by 1.92% and the
relationship is also significant at 5% significance level with ROE and also ATM is significant
under ROA. ATM has the volume to carry out the similar, basically monotonous transactions as
do human cashiers in branch offices but at half the cost and with more advantage in productivity.

The effects of POS on Return on Assets and Return on Equity

The coefficient of usage of POS is 0.0273 for ROE . Indicating that holding other thing remains
constant when usage of POS increase by 5% banks ROE will be increased by 2.73% and the
relationship is significant at 5% significance level but POS is insignificant at ROA. The result

45
reveals that there exists significant positive relationship between usage of POS and profitability
of banks in Ethiopia. Moreover, these result also consistent with the existed reality in the
Ethiopian banking industry.

The effects of Internet banking on Return on Assets and Return on Equity

The coefficient of usage of internet banking is (0.011) and (0.0469) for ROA & ROE
respectively. Indicating that holding other thing remains constant when usage of internet banking
increase by 5% banks ROA will be increased by 1.1% and the relationship is significant at 5%
and ROE will be increased by 4.7% and the relationship is significant at 5% significance level.
This means that internet banking have a significant impact on financial performance of banks in
Ethiopia.

5.2. Conclusion
The main aim of this study was to study the effect of electronic banking on financial
performance of selected banks in Ethiopia at Dire Dawa District. Purposive sampling technique
were used to select sample banks. The average value of ROE for the sampled banks is 24.07
percent (mean = 0.2407) percent. The standard deviation of ROE is 6.24 percent from the mean
value. This shows that the returns on equity of sampled banks deviated from the mean value by
6.24 percent. On the other hand, the average value of the sampled banks return on asset (ROA) is
4.96 percent (mean = .0496). The value of ROE deviates by 2.2 percent from the mean value of
the sampled banks.

Effect of E-banking on the Rate of Return on Assets and Return on Equity

The usage of ATMs service had positive and significant effect of ROE of studied banks and also
ATM is significant effect on ROA. ATM has the volume to transport out the same, basically
monotonous transactions as do human cashiers in branch offices but at half the cost and with
more benefit in output. Thus banks can deliver customers suitable, cheap access to the bank 24
hours a day and seven days a week by using ATM.

The study concludes that procedure of POS banking had a significant positive influence on the
ROE and insignificant influence on ROA of banks in Ethiopia. The positive effect of POS
banking may have arisen from unavailability of POS machine in different marketing (super-mini

46
marketing) sites in Ethiopia to increase the usage of banking with POS. if there is high
availability of POS banking, this in turn enables banks to increase its customer base.
Consequently, large customer base enables banks to improve its financial performance through
deposit mobilization.

On the other hand, the study established a significant positive relationship between mobile
banking, as indicated by the value of mobile banking transaction and ROE. This is due to the fact
that mobile banking in Ethiopian banking industry has made basic financial services more
accessible, and also has provided an opportunity for banking institutions to extend banking
services to new customers thereby increasing their market through financial inclusion. Usage of
mobile banking is widely expanding in Ethiopian banking industry next to ATM banking; this is
one of the reasons behind positive effects of mobile banking of banks in Ethiopia.

5.3. Recommendations
Based on the findings of this research the following recommendation was made:

✓ From the findings, the study established that ATM had positive effect on the financial
performance of banks in Ethiopia over the 5 (five) year period. Therefore, it is better for
banks in Ethiopia at Dire Dawa District to do great in creating awareness on the
advantage of ATM than traditional banking system in order to increase customer
satisfaction in return to improve their financial performance.
✓ From the findings, the study also established that Mobile banking as a bank innovation
has the significant level of effect on the financial performance of banks in Ethiopia at
Dire Dawa District over the 5 (five) year period. Therefore, the study recommends that
the management of banks and all other stakeholders should join efforts to increase the
mobile users in Ethiopia. The study more indorses that the banks managers should
emphasize on training their clients on use of mobile banking through advertisements
✓ The study also recommends to the management of banks, can save on money by not
paying for tellers or for managing banks. Plus, it's inexpensive to make dealings over e
banking and improve financial performance. Profitability is crucial to shareholders and
the market is also keen on the profitability of organizations. Any ethical and responsible
attempts to improve profitability of a company will be appreciated by the shareholders.

47
 banks should therefore continue to adopt new technologies which will improve their
margins and hence their profitability in order to maximize shareholder wealth.
✓ Since the findings of this research concluded that e-banking affect bank performance
positively, The National Bank of Ethiopia should prepare various capacity building
activities for banks regarding e-banking operation and provide incentives for banks to
invest rigorously on ICT and use of e-banking by banks and customers.
✓ Additionally, the government should have a policy to change all cash marketing into
electronic marketing to fatten its revenue and curb tax evasions as well as reducing cost
printing and minting money.
✓ Finally, researchers specializing in financial sector strongly recommended to exploit the
e-banking contribution as the economy and finance of the nation astronomically rises in
the near future.

48
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 Appendix
Appendix 1: Hausman Test for (ROA) Equation

---- Coefficients ----

Variables (b) (B) (b-B) sqrt(diag(V_b-V_B))
fe re Difference S.E.
LnATM .0022597 .0024761 .0002164 .0019836
LnMobileBa~g .0119261 .0105893 .0013368 .0033408
LnPost .0013713 .0008557 .0005156 .0008759
LnInternet~g .0110503 .0099808 .0010695 .0024453
LnDebitCard .0070078 .0063516 .0006562 .0011909
LnSize .0073757 .0075988 .0002231 .0012766

b = consistent under Ho and Ha; obtained from xtreg

B = inconsistent under Ha, efficient under Ho; obtained from xtreg

Test: Ho: difference in coefficients not systematic

chi2(6) = (b-B)'[(V_b-V_B)^(-1)](b-B)
= 1.35
Prob>chi2 = 0.0389

53
Appendix 2: : Data Collection Sheet

1. Commercial Bank of Ethiopia

Years ATM POS Mobile Internet Debit Bank ROE ROA

Banking Banking Card Size

2018/19
2.3E+10 1.05E+09 8.79E+09 4.9E+09 7996494 3.04E+11 0.29 0.09

2019/20
1.87E+10 80151524 3.85E+09 2.16E+09 4476549 3.85E+11 0.31 0.02

2020/21
3.94E+09 58413941 3.32E+09 5.18E+08 4735276 4.86E+11 0.23 0.01

2021/22
6.94E+09 90004939 1.27E+09 3.44E+08 2928079 6.69E+11 0.26 0.01

2022/23
7.05E+09 80204338 2.23E+09 6.23E+08 5625367 7.16E+11
0.26 0.06

2. Awash Bank

Years ATM POS Mobile Internet Debit Bank ROE ROA

Banking Banking Card Size

2018/19
2.58E+08 5.03E+08 323682 983812 625254 2.52E+10 0.2 0.07

2019/20
3.06E+08 2.11E+08 141112 818804 479160 3.11E+10 0.19 0.05

2020/21
1.83E+08 48781782 533617 983993 300446 4.5E+10 0.15 0.03

2021/22
1.47E+08 6013885 648007 574032 193648 5.53E+10 0.29 0.02

2022/23
2.74E+08 445231 248684
4.12E+06 383212 6.25E+10 0.31 0.07

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3.Dashin Bank

Years ATM POS Mobile Internet Debit Bank ROE ROA

Banking Banking Card Size

2018/19
1.02E+09 1.18E+08 6.19E+08 6.19E+08 205824 1.14E+09 0.26 0.06

2019/20
7.58E+08 83276180 4.01E+08 4.01E+08 171677 1.29E+09 0.14 0.05

2020/21
8.14E+08 37365077 2.17E+08 2.17E+08 134684 2.06E+09 0.26 0.08

2021/22
8.18E+08 17912161 18085041 18085041 93137 3.26E+09 0.29 0.09

2022/23
29721616 23954401
1.26E+09 1.29E+08 625254 2.52E+09 0.2 0.07

4. Abyssinia Bank sc.

Years ATM POS Mobile Internet Debit Bank ROE ROA

Banking Banking Card Size

2018/19
2453117 746294 13724 36182 193648 1.68E+10 0.31 0.07

2019/20
1728149 412749 84201 27020 121945 2.59E+10 0.23 0.08

2020/21
9750289 207276 31679 18626 111000 3.2E+10 0.26 0.04

2021/22
3423788 10389 16795 21320 73954 3.93E+10 0.26 0.03

2022/23
4531229 61392 23632 26001 53086 1.07E+10 0.14 0.04

5. Oromia International Bank

Years ATM POS Mobile Internet Debit Bank ROE ROA

Banking Banking Card Size

55
2018/19
8.99E+08 61392177 23632635 2600181 53086 1.07E+10 0.14 0.04

2019/20
2.93E+08 50463985 1358237 2790102 49806 1.78E+10 0.26 0.04

2020/21
2.25E+08 2155008 9843552 1728243 54651 2.99E+10 0.29 0.03

2021/22
2.22E+08 6864323 3903555 465828.4 26604 4.18E+10 0.2 0.04

2022/23
1.02E+09 79137127 41423536 5123818 29524 1.58E+10 0.19 0.05

6. Enat Bank sc.

Years ATM POS Mobile Internet Debit Bank ROE ROA

Banking Banking Card Size

2018/19
1.02E+08 118967 6.19E+08 169803 205824 1.58E+10 0.19 0.05

2019/20
7.58E+08 832180 4.01E+08 133456 171677 2.11E+10 0.15 0.06

2020/21
8.14E+08 37577 2.17E+08 464825 134684 2.67E+10 0.15 0.05

2021/22
8.18E+08 170161 18085041 327989 93137 3.37E+10 0.23 0.07

2022/23 432546
912279 21580016 864341
8.27E+08 2.34E+10 0.23 0.04

7. Abay Bank sc.

Years ATM POS Mobile Internet Debit Bank ROE ROA

Banking Banking Card Size

2018/19
8.18E+08 912161 8085041 32798990 93137 3.37E+10 0.23 0.04

2019/20
8.27E+08 165401 9346478 1117688 131737 6.19E+09 0.27 0.05

2020/21
3.36E+08 82111 8568327 996637.3 76729 8.69E+09 0.4 0.05

56
2021/22
1.34E+08 71846 4567674 972892.3 48212 1.23E+10 0.3 0.07

2022/23 0.3 0.06

29790915 37500 2101756 972892.3 16927 1.51E+10

57