The Influence of Digital Banking Innovations on Profitability: The

Case of Selected Banks in Addis Ababa

A Thesis Submitted to the School of Graduate Studies of Jimma University in
Partial Fulfillment of the Requirements for the Award of the B.A Degree of
Accounting and Finance

BY:

TSEGAYE KEBEDE

JIMMA UNIVERSITY

COLLEGE OF BUSINESS & ECONOMICS

B.A DEGREE IN ACCOUNTING AND FINANCE

JANUARY 1, 2025

ADDIS ABABA, ETHIOPIA

 Statement of Declaration

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

Signature:

Tsegaye Kebede

DU0164/12-0

I
 Abstract

This research examines the influence of digital banking innovations on the profitability of
selected banks in Addis Ababa, using return on equity (ROE) as a proxy for profitability. The
study focused on banks operating in Addis Ababa between 2018 and 2021, employing
secondary data and a purposive sampling technique. Additionally, primary data was collected
through questionnaires distributed to employees in digital banking departments across banks.
Key variables were selected based on existing literature to reveal their relationship with
profitability. These variables included the number of mobile banking transactions, ATM
transaction value, internet banking transaction value, and the number of internet banking users.

The study found that ATM transaction value significantly and positively impacts profitability,
largely due to its ability to reduce operational costs and improve customer accessibility.
Mobile banking transactions also showed a positive effect, though hindered by low adoption
rates. Conversely, the number of internet banking users and the value of mobile banking
transactions demonstrated mixed results, suggesting the need for improved infrastructure and
user engagement. The findings underscore the importance of operational excellence and
service quality as critical mediators in enhancing profitability through digital banking
innovations.

The research recommends that banks in Addis Ababa prioritize user-centric strategies to
increase the adoption of digital banking platforms. Furthermore, investment in secure, reliable
infrastructure and the implementation of commission-based incentives for mobile and internet
banking transactions are vital. By aligning digital banking initiatives with national digital
strategies, banks can maximize returns on investment and contribute to broader financial
inclusion.

Keywords: Digital Banking, Profitability, Addis Ababa, ROE, Service Quality, Operational
Efficiency.

II
 Acknowledgment

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

I'd like to thank Asteraye Enyew, the advisor of my research paper, for his helpful advice.

My heartfelt gratitude also goes to my friends and relatives, for their unwavering support and
encouragement throughout the years, as well as for all of the ideas they have shared with me.

III
 Table of Contents

Statement of Declaration ..............................................................................................................................................I

Abstract .......................................................................................................................................................................II
Acknowledgment .......................................................................................................................................................III
List of Tables .............................................................................................................................................................VI
ACRONYMS ...........................................................................................................................................................VII
CHAPTER ONE ..........................................................................................................................................................1
1. INTRODUCTION ...................................................................................................................................................1
1.1 Background of the Study ............................................................................................................................. 1
1.2 Statement of the Problem .............................................................................................................................3
1.3 Basic Research Questions ............................................................................................................................4
1.4 Objectives of the Study ................................................................................................................................4
1.4.1 General Objectives .......................................................................................................................... 4
1.4.2 Specific Objective ........................................................................................................................... 4
 1.5 Significance of the Study ............................................................................................................. 4
1.6 Scope of the Study ............................................................................................................................. 5
1.7 Organization of the Study .................................................................................................................. 5
CHAPTER TWO .........................................................................................................................................................6
2. LITERATURE REVIEW ........................................................................................................................................6
2.1. Theoretical Review ..................................................................................................................................... 6
2.1.1. Impacts of Digitization on Bank Profitability and Performance ....................................................6
2.1.2. Digital Banking .............................................................................................................................. 7
2.1.3. Definition of Important Terms and Concepts ................................................................................ 7
2.1.4. The Application of Digitalization in Business ............................................................................... 9
2.1.5. Banking practice in Ethiopia .......................................................................................................... 9
2.1.6. Digital Banking practice in Ethiopia ............................................................................................11
2.1.7. Digital Banking Forms ................................................................................................................. 13
2.1.8 Determinants of Financial Performance ........................................................................................16
2.1.9 Digital Banking and Financial Performance ................................................................................. 17
2.1.10 Banks performance measurement ............................................................................................... 18
2.2. Empirical Review ..................................................................................................................................... 19
2.2.1 Related Empirical Studies ............................................................................................................. 19
2.2.2 Digital Banking and Operational Excellency ................................................................................21
CHAPTER THREE ................................................................................................................................................... 23
3. RESEARCH DESIGN & METHODOLOGY ...................................................................................................... 23
3.1 Research Design And Approach ................................................................................................................23
3.2 Target Population .......................................................................................................................................23
3.3 Data Type And Sources ............................................................................................................................ 24
3.4 Data Collection Instruments ...................................................................................................................... 24
3.5 Sampling Techniques .................................................................................................................................24
3.6 Sample Size Determination ....................................................................................................................... 25
3.7 Method Of Data Analysis And Presentation ..............................................................................................25
CHAPTER FOUR ..................................................................................................................................................... 26
4. DATA ANALYSIS, RESULTS AND INTERPRETATION ............................................................................... 26
4.1 Profile of Respondents ...............................................................................................................................26
Educational Background ..................................................................................................................................27
Professional Positions ...................................................................................................................................... 27
Age Distribution .............................................................................................................................................. 28
Years of Experience: ........................................................................................................................................28
4.2 Descriptive Analysis of Key Performance Parameters in Digital Banking .............................................. 28
4.2.1 Operational Excellence ................................................................................................................. 29
4.2.2 Service Quality ..............................................................................................................................30
IV
 4.2.3 Employee Productivity ..................................................................................................................31
4.2.4 Financial Performance ...................................................................................................................32
CHAPTER FIVE ....................................................................................................................................................... 34
5. Conclusion and Recommendation .........................................................................................................................34
5.1 Conclusion ................................................................................................................................................. 34
5.2 Recommendation ....................................................................................................................................... 34
5.3 Limitation and Area for Future Research .................................................................................................. 35
References ................................................................................................................................................................. 37
Appendix ................................................................................................................................................................... 41

V
 List of Tables

Table 1 : Respondents Profile .............................................................................................26

Table 2 : Descriptive Statistics for Operational Excellence ............................................... 29

Table 3 :Descriptive Statistics for Service Quality .............................................................30

Table 4 :Descriptive Statistics for Employee Productivity .................................................32

Table 5 :Descriptive Statistics for Financial Performance ................................................. 33

VI
 ACRONYMS

ICT Information and Communication Technology

CBE Commercial Bank of Ethiopia
BOA Bank of Abyssinia
ATM Automated Teller Machine
POS Point of Sale
ITM
MW Iterative Teller Machine
Mobile Wallet
ROA Return on Asset
ROE Return on Equity
NBE National Bank of Ethiopia
WWW World Wide Web
PC Personal Computer
PSS Premium Switch Solutions
SPSS Statistical Package for Social Science
PLS Partial Least Square
BCG Boston Consulting Group
GDP Gross Domestic Product

VII
 CHAPTER ONE

1. INTRODUCTION

1.1 Background of the Study

Advancements in information and communication technology (ICT) have profoundly transformed

the banking sector, enabling financial institutions to enhance service delivery, improve risk
management, and boost productivity. Investments in ICT have been pivotal in facilitating the
transition to digital banking, which has emerged as a critical driver of efficiency and profitability
(Abbasi and Weigand, 2017).

Rapid developments in internet and telecommunications technology have fueled the growth of
electronic commerce and introduced the digital economy. These advancements have provided banks
with opportunities to improve speed, efficiency, and cost-effectiveness, placing digital banking at the
forefront of competitive strategies in the financial sector (Shah and Clarke, 2009). Digital banking
innovations such as mobile banking, internet banking, and ATMs have proven instrumental in
enhancing accessibility and operational efficiency, which directly impact profitability (Faiedh et al.,
2004).

The adoption of digital banking in Ethiopia, particularly in Addis Ababa, has seen a significant
increase as financial institutions strive to provide better and more effective services. These
innovations have revolutionized the banking sector by enabling the delivery of financial services
through internet banking, mobile banking, mobile money, and electronic payment platforms. The
availability of 3G and 4G internet technologies and the widespread use of smartphones have further
propelled these advancements, enabling banks to reach both existing clients and the unbanked
population (Abbasi and Weigand, 2017).

Traditionally, the financial sector relied heavily on high-cost infrastructure such as branches, ATMs,
and POS machines. However, the introduction of agent and mobile banking channels has provided
lower-cost alternatives, allowing banks to expand their reach and support financial inclusion. Despite
these advancements, challenges remain, including uneven infrastructure distribution and frequent
issues with ATMs and POS systems, which hinder demand for digital services. Addressing these

1
issues is crucial for growing digital payment adoption and improving customer experiences in urban
and rural areas (National Bank of Ethiopia, 2021).

Debit cards and ATMs have gained widespread adoption in Ethiopia, but credit cards remain largely
unavailable. Internet access, while improving, continues to be a barrier due to high costs and limited
reliability.

The Ethiopian banking sector has made strides in connectivity through initiatives like ET Switch
S.C., which promotes bank-to-bank interoperability and serves millions of ATM cardholders across
the country (Ethiopia-Country Commercial Guide, 2021). However, the journey toward
comprehensive digital banking adoption is ongoing, with foreign companies often providing critical
technical services.

Digital financial services (DFS) are increasingly viewed as strategic tools to connect industries and
enhance financial inclusion. New initiatives, such as a national switch service aimed at creating
interoperability among banks, highlight Ethiopia’s efforts to modernize its financial sector and
streamline digital transactions (ictet.org, 2021). While these initiatives hold promise, challenges such
as cybersecurity threats, high initial investments, and resistance to change must be addressed to
ensure sustainable growth.

ICT methodologies and policies have reshaped service delivery standards in banking, making
services like ATMs and mobile banking more accessible to customers. These changes are driving the
transition toward a cashless society, where consumers rely on digital wallets and online payments to
manage their financial needs (Mapesa, 2018). However, Ethiopia’s banking industry faces significant
challenges, including limited digital payment adoption and reliance on cash transactions. Efforts to
modernize the system through e-banking platforms like ATMs, internet banking, and mobile banking
are ongoing but require robust infrastructure and consumer education (Gardachew, W. 2010).

Given global economic uncertainties and increased competition, banks must prioritize customer
retention and operational efficiency. High-quality service delivery is essential for gaining a
competitive edge, as it fosters customer loyalty and increases revenue (Kumar et al., 2010).
Ethiopian banks, like their global counterparts, are responding to these demands by adopting cutting-
edge technologies to meet the needs of an increasingly digital-savvy clientele.

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Ethiopia’s banking sector is poised for transformation as institutions embrace digital solutions to
enhance customer experiences, streamline operations, and boost profitability. By leveraging
innovations like mobile and internet banking, banks in Addis Ababa can address evolving customer
expectations and drive financial inclusion. This study seeks to explore the impact of digital banking
innovations on profitability and identify strategies for overcoming challenges to maximize their
potential.

1.2 Statement of the Problem

Digital strategy is a vital component of organizational planning and must align with a bank’s vision,
mission, and market conditions. There are three primary models for digital transformation in banking:
becoming a fully digital bank, introducing standalone digital channels, or creating subsidiaries
dedicated to digital banking services. These approaches provide flexibility, enabling banks to pursue
digitalization incrementally, balancing investments and risks (IFC, 2018).

Banks in Addis Ababa have been making significant investments in digital banking to stay
competitive in a dynamic environment (National Bank of Ethiopia, 2021). However, these
investments require strategic planning to ensure they lead to fully integrated e-banking systems that
enhance profitability. Without thorough cost-benefit analyses and robust controls, digital banking
could strain bank performance or expose institutions to risks such as cyberattacks (Josiah and Nancy,
2012).

Previous studies have explored the relationship between digital banking and financial performance.
For instance, Solomon (2016) examined the impact of e-banking on the return on assets (ROA) of
Ethiopian banks, highlighting the positive effects of variables such as POS transactions, debit card
usage, and ATM terminals. Similarly, Elias (2019) investigated the role of e-banking on return on
equity (ROE), identifying mobile banking users and ATM transactions as key contributors to
profitability. These studies emphasize the potential of digital banking to improve financial
performance but also point to challenges such as limited user adoption and inadequate infrastructure.

Although existing research has provided valuable insights, gaps remain. Much of the literature
focuses on the adoption and operational aspects of digital banking rather than its direct influence on
profitability in the Addis Ababa context. This study seeks to address the knowledge gap on the direct
impact of digital banking on profitability, operational excellence, and service quality among selected

3
banks in Addis Ababa. The findings will offer actionable insights for stakeholders to make informed
investment decisions in digital banking products and services.

1.3 Basic Research Questions

1. How do digital banking innovations influence the profitability of selected banks in Addis Ababa?

2. What is the impact of digital banking innovations on operational excellence in these banks?

3. How do digital banking innovations affect the quality of services provided by these banks?

1.4 Objectives of the Study

1.4.1 General Objectives

The general objective of the study is to explore the influence of digital banking innovations on the
profitability of selected banks in Addis Ababa.

1.4.2 Specific Objective

 Examine the impact of digital banking innovations, including ATM usage, mobile
banking, and internet banking, on the profitability of selected banks in Addis Ababa.

 Assess the role of digital banking innovations in achieving operational excellence for
selected banks.

 Evaluate the contribution of digital banking innovations to service quality

improvements in these banks.

1.5 Significance of the Study

Digitization is a ubiquitous influence nowadays, impacting many industries, including the banking
sector. Banks are facing tremendous competitive pressure, and the need for the development of
digital opportunities is urgent to ensure future success. As a result, the question is not if or whether
digitization affects a bank's profitability, but rather how. The way business is conducted is being
challenged, and it must adapt to changing market conditions. While the topic of digitization has been
discussed for more than 20 years, only recently have banks recognized its present and strategic
relevance. Digitization in banking, along with factors such as changing customer expectations,

4
operational excellence, accessibility options, and increasing regulatory frameworks, is a crucial
influencing factor for banks.

The findings of the study will be of great importance in identifying the impact of digitization as a
strategic theme on the profitability of commercial banks, enabling decision-makers to wisely invest
in digitization. It also provides insights for policymakers and regulatory bodies to assess the legal
frameworks, policies, and procedures surrounding digital regulation and service implementation.

Furthermore, the study will serve as a reference for researchers and scholars, providing additional
knowledge on electronic banking and forming a foundation for further research in this field.

1.6 Scope of the Study

The objective of this study is to examine how the implementation of digitization affects profitability,
operational excellence, and service quality in commercial banks in Ethiopia. The study is limited to
five commercial banks branches. Questionnaires were developed only for employees of the
institutions, excluding external stakeholders such as customer feedback.

1.7 Organization of the Study

The study is organized as follows: The first chapter is introductory and consists of a general
background, statement of the research problem, basic research questions, research hypothesis,
objectives of the study, significance of the study, and delimitation/scope of the study. Chapter two
summarizes related literature reviews of theoretical and empirical studies on digital banking and its
impact on profitability. Chapter three covers the methodology, including the design of the study,
population and sampling techniques, data types and instruments, sources of data collection, and
methods of data analysis. Analysis and data interpretations are presented in chapter four. The final
chapter provides conclusions, recommendations, and areas for further study

5
 CHAPTER TWO

2. LITERATURE REVIEW

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

2.1. Theoretical Review

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

2.1.1. Impacts of Digitization on Bank Profitability and Performance

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

A service for digital banking activity has become a hot topic in the financial business in the new
millennium (Wadesango, N., & Magaya, B., 2020). Digitization has been known to affect the
performance of commercial Banks, both positively and adversely. In the past decade various scholars
from different corners of the world have studied the various effects of digitization on profitability,
operations and service quality of commercial banks. There are also researches made in the African
continent, especially in countries like Rwanda, Nigeria, and Kenya where there are relatively better
digital banking experiences. These countries have clear digital vision and policy frameworks.
Although very few, local researches have been made in order to determine the effects of digitization
on the performance of Ethiopian commercial Banks.

6
 2.1.2. Digital Banking

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

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

2.1.3. Definition of Important Terms and Concepts

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

2.1.3.1. Digitization

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

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

7
Different firms are being pushed to reassess their existing business models and operating methods as
a result of new prospects brought on by digitalization, or to focus on finding fresh market
opportunities Bouwman et al. (2019). The way banks and other financial institutions learn about,
communicate with, and please clients is changing dramatically as a result of digitalization.
Understanding digital client behavior, preferences, choices, likes, dislikes, and stated as well as
implicit needs is the first step toward digitalization. (Kamra, 2019).

2.1.3.2. Key Enablers for Digitalization

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

Digitalize customer experience: Taking full control of customer experience and managing the stated
or unstated needs of existing and new customers and develop business model accordingly. Customers
can promptly adapt to the digital world expecting seamless multichannel experience and consistent
service. They label their experience on three basic issues: How well companies understand their
needs; simplicity of doing business; and how delightful it is.

Digitalize products and services: Traditional banking practice has focused on increasing sales targets
rather than understanding the needs of customers. Recently, banks are more interested to become
customer centric. Digitalization can provide billions of customers with minimum cost and affordable
price. To maintain competitive edge in the industry, banks need to develop innovative products and
services that meet customer needs.

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

Digitalize operations: The digital world becomes possible as customers, competitors and even
regulatory agencies fully engaged in the transparency and convenience of anywhere banking system.
Banking does not guarantee customer loyalty instead it can identify opportunities by looking at the
overall customer life cycle, enabled better customer service through the practice of digital marketing
and customer service strategies and focus on improving customer experiences.
8
 2.1.4. The Application of Digitalization in Business

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

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

banking applications on smart phones, online banking, e-wallet and other digital products
have made banks to optimize their processes efficiency, its quality, attractiveness, ease of
use and delivery to their customers.

 Automation of production and other internal processes of the company: While significantly
reducing costs with the help of new payment modalities and cashless transactions and
optimizing production processes to preserve the environment, save human, money and time
resources, and also improve the standard of living in general.

 Increased number of clients: the growth of financial technologies in financial institution

particularly in banking sector increase the number of customers in the use of mobile
application and online banking losing interest on traditional banking. Digitalization of the
financial institutions contributes a great deal on how banks carry out their performance to
avoid customer loss.

2.1.5. Banking practice in Ethiopia

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

9
Italian invasion. Several Italian bank branches had been established by the time of the Italian
invasion.

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

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

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

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

10
The banking sector dominates Ethiopia's financial sector. The strength of any economy is determined
by the efficiency and competitiveness of its financial system. Ethiopian banks, like those in other
developing countries, play a critical part in the country's economic growth and development. Banks
are a necessary component of every financial system. They serve a crucial role in moving surplus
sector savings to deficit sectors.

Since the financial liberalization in Ethiopia, the numbers of financial institutions come to operation
increase rapidly. However, Cash remains the most widely used medium of exchange (Garedachew,
W. 2010).

2.1.6. Digital Banking practice in Ethiopia

Ethiopia's main state-owned bank, Commercial Bank of Ethiopia, began e-banking in 2001. With
eight ATMs in Addis Ababa, CBE was a pioneer in establishing ATM service for local users.
Furthermore, CBE had been a Visa member since November 14, 2005. However, due to lack of
adequate infrastructure, the membership was not successful.

Dashen bank began offering ATM and POS services to Visa cardholders in 2004. In 2008, the bank
received a membership license from MasterCard and began taking MasterCard in addition to Visa
cards. Customers might withdraw a maximum of 3,000 birr in a single transaction. The bank has
worked hard to maintain its position as the market leader in electronic payment systems
(Garedachew, W. 2010). Dashen Bank is the first bank in Ethiopia to provide a full-fledged payment
card service as a primary plus member of AMEX, VISA, MasterCard, and Union Pay, as well as the
first African bank to sign such an

arrangement. Dashen Bank has placed 389 ATMs and 1,283 plus Point-of-Sale (POS) terminals
across the country. Through its Omni channel banking services, the bank provides digital payment
capabilities as well as access to aggregated digital products and services. One of a kind in Ethiopia is
the launch of an international commerce gateway that accepts international cards such as Amex, Visa,
and MasterCard (Dashen bank annual report, 2021).

On December 30, 2008, Wegagen Bank inked an agreement with Technology Associates (TA), a
Kenyan information technology (IT) business, for the construction of an ATM network and a
payment system solution. Currently the bank offers different digital banking products to its
customers (Wegagen bank).
11
Zemen Bank launched a full-fledged version of its internet banking services in 2010, allowing users
to conduct online bank transfers to other banks, examine balances, and track loan progress, among
other things. Zemen bank's services are still available through a variety of banking channels, all of
which are adapted to the needs and tastes of its customers and are all incorporated into Omni channel
banking (Zemenbank, 2021).

On July 5, 2012, three private commercial banks agreed to launch Premium Switch Solutions S.C.
(PSS) with a capital of 165 million birr. Awash International Bank, Nib International Bank, and
United Bank have created a consortium to provide electronic banking services. Berhan Bank joins
the consortium on June 27, 2013. The arrangement is Ethiopia's first significant cooperation between
competing banks, setting a precedent for other banks to follow in their footsteps, as no single bank in
Ethiopia can afford to provide vast regional coverage (Wondimu, M. 2013).

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

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

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

2.1.7. Digital Banking Forms

2.1.7.1. Automated Teller Machines (ATM)

ATM has been around for quite some time now. ATMs are convenient since they are open

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

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

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2.1.7.2. Point of Sale (POS)

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

2.1.7.3. Internet Banking (IB)

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

2.1.7.4. Mobile Banking (MB)

Mobile banking refers to the use of electronic mobile devices such as cell phones and PDAs to
access banking services and facilities. The use of a mobile phone or another mobile device to
conduct financial transactions tied to a customer account is known as mobile banking (m-banking)
Saleem & Rashid, (2011). In his study on the association between mobile banking and commercial
bank financial performance in Kenya, Kingoo, N. (2011) noted that m-banking refers to the
provision and use of banking and financial services via a mobile communications device.
14
Mobile Banking enables financial transactions to be carried out on mobile devices such as
smartphones and tablets. This service is provided by financial institutions, particularly banks. Unlike
the internet banking, it makes use of software, commonly referred to as an app that is offered by the
financial institution. Mobile banking has revolutionized the way people in underdeveloped countries
transfer money, and it is now set to offer more complex banking services that might have a
substantial impact on people's lives (Mabwai, F. 2016). Mobile banking allows users to monitor
account balances, make electronic bill payments, receive short notifications on their phones telling
them of instant transactions in their bank accounts, and make cash transfers between one customer's
and another's accounts, depending on the institution.

2.1.7.5. Mobile Wallet (MW)

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

2.1.7.6. Virtual Banking (ITM)

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

2.1.7.7. Credit/Debit Cards

With a certain amount of digit card numbers, expiration dates, and magnetic strips, credit and debit
cards look remarkably identical. Both can make purchasing in stores or online simple and convenient.
Debit cards are used to make purchases by withdrawing monies from a customer's bank account.
Credit cards allow customers to borrow money from the card issuer for purchases or cash
withdrawals up to a certain limit. Credit cards are issued by financial entities, most commonly banks,

15
and allow cardholders to borrow funds that must be repaid with interest. When it comes to fraud
protection, credit cards outperform debit cards (Cussen, P.M. 2021).

2.1.8 Determinants of Financial Performance

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

The ultimate goal of a given firm performance is measured through profit. Banks' profitability
determinants are normally consisting of factors that are within the control of commercial banks.
These factors which affect the revenue and the cost of the banks are classified into two categories
namely the financial statement variables and non-financial variables. Bank‟s balance sheet and
income statement have a direct relationship with the financial statement variables. Whereas, the non-
financial statement variables include factors like management quality, efficiency, and productivity,
the number of branches of a particular bank location, size of the bank, and technology. Banks have
deployed different ratios to measure profit of which Return on the asset, return of equity, and net
interest margin are the major ones (Devinaga Rasiah, 2010).

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

16
 2.1.9 Digital Banking and Financial Performance

Prior to the emergence of information technology, the cash-based transaction was the only channel of
conducting banking transactions which were characterized with risk, inefficiency and inconvenience
to both the banks and the customers (Boateng, 2020). With the advancement of technology over the
past two decades, the banking sector has embraced and offered a variety of electronic banking
channels with the goal of increasing efficiency, convenience, and financial inclusion.

In previous decades, a bank's large branch network might have been leveraged to gain a competitive
advantage over rival banks. In today's banking world, however, this is not the best method for banks
to service their customers and urge them to stay with them. Instead, by using the e-banking platform
to consistently generate novel products and services at a cheaper cost, future consumers will be
attracted to the bank and existing customers' loyalty will be increased, causing them to stay with the
bank (OBENG-OSEI, 2019). Banks that want to gain a competitive advantage use the internet and
other communication technologies like mobile banking to maintain a smooth flow of information
with their consumers (Shah,2009).

Increases in new customer acquisition, customer retention, resource mobilization, and cross- selling
opportunities have all been identified as possible drivers of the revenue rise brought about by e-
banking channels. There is still a debate about whether the increase in revenue is sufficient to
provide banks with a satisfactory return on investment (Shah, 2009). One of the main economic
arguments for e-banking has been the lowering of overhead costs, as it eliminates the need for more
bank branches and their accompanying operational costs. According to Young (2007), the
implementation of e-banking entails a significant financial expenditure. System integration, internet
security, and labor costs all have a tendency to undermine profits.

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

17
addition, customers believe that ATM is safer and much secure than internet banking (Mawutor,
J.K.M., 2014).

Due to its 24/7 convenience service to clients, the introduction of mobile banking into the digital
banking channel has resulted in a significant growth in banking users. Commercial banks'
profitability has improved as a result of a growth in the number of users and transactions on mobile
banking. The greater the number of mobile banking transactions, the higher the capital adequacy
ratio, the larger the market share, and the greater the number of mobile banking users, the better
financial performance (Mabwai's, 2016). Banks' profitability improved as a result of their use of e-
banking, resulting in increased income. The driving reason behind digital banking is operating cost
minimization and operating profit maximization (Simpson, 2002).

2.1.10 Banks performance measurement

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

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

18
Although ROA is important measure to in profitability but it has also shortcomings that we should
consider while using for performance measurement. Its limitation is that, it does not consider for
outstanding liabilities and may indicate a higher profit level than the actual. ROA is a measure of
firm‟s success in using assets to generate profit without looking at how the assets were financed.

2.2. Empirical Review

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

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

2.2.1 Related Empirical Studies

Giudice, M. D., Campanella, F., & Dezi, L. (2016)

A study was conducted to determine the impact of e-banking products on banks' profitability. The
research used 3692 banks located in 28 European countries as a sample and adopted a classification
analysis method to assess the impact of independent variables on the dependent variable, ROE. The
researchers concluded that high return on equity (ROE) for banks is achieved by offering retail and
corporate internet services and home banking services to customers.

Kimani, N. (2015)
A study on mobile banking and operational efficiency of Kenyan commercial banks was carried out.
The researcher conducted a census survey of the 43 Kenyan commercial banks. For the period 2011
to 2014, the study analyzed secondary data on the number of registered mobile banking clients, the
quantity of money moved through mobile banking, bank earnings, and operational costs. Data was
analyzed using Pearson correlation analysis between dependent and independent variables. The
results indicated that mobile banking positively and significantly impacts the operational efficiency
of commercial banks in Kenya, and the research recommended policymakers to constantly adopt
mobile banking technologies.

19
Mbama, C. (2018)
A survey on UK bank customers’ perceptions of digital banking was conducted. The study applied
independent variables such as customer experience, loyalty, and satisfaction, while the dependent
variable was financial performance. Structural Equation Modeling (SEM), ANOVA, and
Multivariate Factor Analysis were used to determine customer experience in digital banking through
variables like service quality, perceived value, employee-client engagement, perceived risk, and
usability. The study revealed a significant connection among customer loyalty, experience, and
satisfaction, which enhances financial performance.

Vekya, J. M. (2017)
A study was carried out on the impact of ATM transactions and Point of Sale (POS) transactions on
the profitability of commercial banks (ROE) in Kenya. The study adopted a descriptive design, with
a census survey of the population comprising 43 Kenyan commercial banks operational in 2014.
SPSS was used to analyze secondary data obtained from various Kenya Central Bank publications.
The study revealed that a rise in ATM and POS transactions leads to a rise in bank profitability
(ROE).

Morufu, O. (2016)
This study examined the adoption of e-payment systems and profitability in Nigerian banks. Internet
banking transactions were used as an independent variable, while ROA was the dependent variable.
The research used secondary data for the period 2005 to 2012 and applied Panel Regression. The
researcher concluded that internet banking transactions negatively affected banks’ profitability.

Agboola et al. (2019)

Using a purposive technique and simple random sampling, the study examined how digitalization
improves the performance of commercial banks in Nigeria. A sample of 370 non-managerial staff
from a bank participated in the study. A self-structured questionnaire was processed using SPSS
version 25. The findings indicated a minor but significant and positive association between
digitization and bank performance (r = 0.114*; p < 0.05). Additionally, a significant positive link
between product innovation and bank performance was observed.

Boateng & Nagarju (2020)

The study analyzed the impact of digital banking on the profitability of Ghanaian deposit banks.

20
Secondary data from the annual reports of the Central Bank of Ghana were employed. Data were
analyzed using the Partial Least Square (PLS) regression model. Results revealed that only two out
of six independent variables significantly impacted profitability. A positive relationship with
profitability was seen in cheque code line clearing and interbank settlements. However, mobile
money and E-zwich showed a negative relationship with profitability due to issues like double
charge policies and insufficient infrastructure.

Ogare (2013)
This research explored the impact of e-banking on the financial performance of commercial banks in
Kenya. The study examined the relationship between profit after tax (dependent variable) and
independent variables such as the number of ATMs, debit and credit cards issued to customers, and
mobile banking usage levels. Descriptive and inferential statistical analyses revealed that e-banking
adoption significantly and positively impacted the profitability of commercial banks in Kenya.

Mawutor, J.K.M. (2014)

A study investigated the influence of electronic banking on the profitability of Ghana's Agricultural
Development Bank. Data were collected through structured questionnaires from selected branches.
SPSS analysis revealed an increase in net profit margins for 2011 and 2013. The study concluded
that e-banking positively impacts profitability.

Taiwo, J.N., & Agwu, E. (2017)

This study analyzed the role of e-banking in improving organizational performance in Nigerian
banks. Primary data were collected via questionnaires administered to staff from four purposively
selected commercial banks. Statistical Package for Social Sciences (SPSS) analysis revealed that e-
banking adoption improved operational efficiency, increased revenue, and enhanced customer
loyalty.

2.2.2 Digital Banking and Operational Excellency

To achieve different customer experiences with speed and simplicity requires new business
models that focus on back-office efficiency and operational excellence. One positive impact of
digitalization for banks, as well as for the public, is improving back-office efficiency to provide
new avenues for business efficiency and customer experience improvement. Banks are focusing on
standardization, optimization, convenience, effectiveness, and efficiency to bring operational

21
excellence through cost minimization, wastage reduction, and efficient resource utilization. This
involves transforming work processes by leveraging digital technology and deterring fraud and
corruption.

Digital payments offer multifaceted advantages, including cost savings, minimizing inefficiencies,
reducing the inconvenience of traditional banking, and saving time and resources such as passbook
printing and transportation to branch offices. Additionally, digital payments increase accessibility
to funds, traceability of transactions, and security. By doing so, they also deter fraud and
corruption.

Moreover, Olanrewaju (2014) found that the adoption of digitalization in commercial banking and
the financial sector across Africa has significant cost-saving potential and creates fresh revenue
streams. Recent trends in digitalization have unlocked huge potential for organizations pursuing
operational excellence. These organizations leverage digital solutions not only for cost savings but
also for automation and digitization, integrating these solutions into their operational excellence
frameworks (BCG, 2018)

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 CHAPTER THREE

3. RESEARCH DESIGN & METHODOLOGY

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

3.1 Research Design And Approach

The study aimed to examine the impact of digitalization on the profitability of selected commercial
banks in Ethiopia. To achieve this objective, a quantitative research method was used. Descriptive
types of research design have been employed. Descriptive survey research design is suitable since the
research is designed to construct a picture for the readers about observed effects of digitalization and
trends in the performance of the banks in relation to profitability, service quality, operational
excellence, employee productivity, financial performance, and market competitiveness due to the
implementation of digital banking services.

3.2 Target Population

The study's target population is the employees of the selected branch.. Due to the availability of
relevant data, the researcher selected one bank for this study.

 Commercial Bank of Ethiopia

The researcher also considered the total number of 5 selected bank branches located in Addis Ababa
as the target population for this specific study.

23
3.3 Data Type And Sources

This study utilizes both primary and secondary data to achieve its objectives. Primary data was
collected through structured questionnaires and interviews with key stakeholders, including bank
managers and IT staff. These data sources provides firsthand insights into the implementation and
impact of digital banking services. Secondary data was gathered from published reports, academic
journals, financial statements of banks, and industry publications, offering a comprehensive view of
trends, challenges, and opportunities in digital banking.

3.4 Data Collection Instruments

The study employs multiple data collection instruments to ensure a comprehensive understanding of
the research objectives. Structured questionnaires used to gather quantitative data from bank
employees, focusing on their experiences and perceptions of digital banking services. Interviews
with IT specialists provides qualitative insights into the operational and strategic aspects of digital
banking.These instruments are designed to complement each other, ensuring the collection of diverse
and reliable data.

3.5 Sampling Techniques

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

Purposive or judgmental sampling is used when the researcher’s prior knowledge and judgment
indicate that it will best suit the study’s goals and provide the best information (Etikan, 2016). To
recruit participants for this study, the researcher used a purposive sampling strategy.

24
3.6 Sample Size Determination

To maintain feasibility and align with the research objectives, five branches from this pool. From
these branches, 20 responses were collected through distributed questionnaires, providing a
representative sample for analysis. This sample size, though small relative to the total number of
branches, was deemed sufficient to gain preliminary insights into the impact of digital banking
innovations on profitability.

3.7 Method Of Data Analysis And Presentation

The collected data will be analyzed using both quantitative and qualitative methods to provide a
comprehensive understanding of the impact of digital banking. Quantitative data from questionnaires
will be processed using statistical analysis tools. Descriptive statistics will be employed to
summarize the data.

25
`

CHAPTER FOUR

4. DATA ANALYSIS, RESULTS AND INTERPRETATION

The purpose of this chapter is to present and analyze the data collected through a survey to
determine the impact of digital banking on the profitability of commercial bank of Ethiopia.
Descriptive statistics will first be applied to summarize the data. The data for this analysis was
collected from 30 distributed questionnaires, with 20 returned and used for analysis.

4.1 Profile of Respondents

This part examines a descriptive study of the respondents' personal profiles as selected bank
workers. The educational qualifications and current professional position assumed are all included
in the personal profile.

Table 1: Respondents Profile

Category Sub-Category Frequency Percentage (%)

Educational Background High School Diploma 3 15%

Bachelor's Degree 10 50%

Master's Degree 6 30%

Other (e.g., certifications) 1 5%

Professional Position Customer Service Officer 7 35%

Branch Manager 5 25%

Operations Staff 6 30%

IT Specialist 2 10%

Age Group 21–30 Years 8 40%

31–40 Years 9 45%

41–50 Years 3 15%

Years of Experience 0–5 Years 10 50%

6–10 Years 6 30%

11–15 Years 3 15%

16+ Years 1 5%

26
`

The respondent profile, as outlined in the table, provides valuable insights into the educational
background and professional positions of participants. The analysis of these factors reveals the
following trends:

Educational Background

1. Bachelor's Degree Holders (65%): A majority of respondents have a bachelor's

degree, reflecting the high educational qualifications of employees in the banking
sector. This indicates a workforce capable of understanding and adapting to digital
banking innovations.

2. Master's Degree Holders (25%): A significant portion of respondents hold advanced

degrees, suggesting the presence of highly skilled professionals who can contribute
to strategic decision-making and effective implementation of digital banking
initiatives.

3. Diploma Holders (10%): A smaller segment consists of diploma holders, which

likely represents staff involved in operational roles.

Professional Positions

1. Customer Service Officers (50%): Half of the respondents work in customer-facing

roles, highlighting their firsthand experience with the implementation and impact of
digital banking on customer interactions and service delivery.

2. Branch Managers (25%): A quarter of the respondents hold managerial positions,

offering insights into the strategic and operational outcomes of digital innovations at
the branch level.

3. IT Staff (15%): IT personnel provide critical technical perspectives on the

effectiveness and challenges of digital banking platforms.

4. Other Roles (10%): The remaining respondents occupy various support roles,
indicating a diverse set of experiences that contribute to the overall understanding of
digital banking’s impact.

27
`

Age Distribution

1. 25-34 Years (40%): The largest age group consists of young professionals, who are
typically more adaptable to technological advancements like digital banking. This age
group likely represents the majority of operational staff and mid-level professionals.

2. 35-44 Years (35%): This group includes experienced professionals with substantial
industry knowledge, balancing innovation with practical banking practices.

3. 45-54 Years (15%): These respondents are likely senior employees or managers,
contributing strategic insights into the adoption and integration of digital banking
technologies.

4. 55+ Years (10%): The smallest segment, this group may face challenges adapting to
rapid technological changes but brings valuable institutional knowledge and experience.

Years of Experience:

1. 1-5 Years (30%): A significant portion of respondents are relatively new to the
banking sector, likely bringing fresh perspectives and enthusiasm for digital innovations.
2. 6-10 Years (40%): This group forms the majority, combining practical experience with
adaptability to new systems. They are key drivers in implementing and sustaining digital
banking initiatives.
3. 11-20 Years (20%): Employees in this range bring seasoned expertise, offering
insights into the evolution of banking practices and the integration of digital solutions
over time.
4. 20+ Years (10%): The smallest group consists of highly experienced professionals
who provide strategic oversight and contribute to long-term planning and policy
development.

4.2 Descriptive Analysis of Key Performance Parameters in Digital Banking

This section presents the descriptive analysis of key factors influencing the adoption of digital
banking and, consequently, the profitability of banks in Ethiopia. The analysis provides a summary
of the data collected from the 20 respondents to identify the overall trends and patterns in these five
aspects.

28
`

4.2.1 Operational Excellence

Operational excellence in banking refers to the efficiency with which banks deliver their services,
encompassing processes, innovation, technology integration, and cost management. The analysis of
operational excellence provides insights into how well banks are performing in streamlining their
operations.

Table 2: Descriptive Statistics for Operational Excellence

Question Response Number of Percentage

Type Responses

Digital banking improves operational Strongly Agree 9 45%

processes

Agree 7 35%

Neutral 3 15%

Disagree 1 5%

Automation reduces transaction time Strongly Agree 11 55%

Agree 6 30%

Neutral 2 10%

Disagree 1 5%

Real-time updates improve efficiency Strongly Agree 10 50%

Agree 6 30%

Neutral 3 15%

Disagree 1 5%

29
`

Digital systems reduce operational errors Strongly Agree 12 60%

Agree 5 25%

Neutral 2 10%

Disagree 1 5%

The results show that 80% of respondents agree or strongly agree that digital banking innovations
have significantly enhanced operational excellence. This demonstrates improvements in process
efficiency, error reduction, and overall operational reliability within the banking system. Only 5%
disagree, highlighting minimal operational challenges or inefficiencies that need attention.

4.2.2 Service Quality

Service quality, which includes factors like reliability, responsiveness, and customer experience, is
essential for maintaining customer satisfaction and loyalty. The survey responses regarding service
quality provide insights into how well the bank perform in delivering quality services to their
customers.

Table 3:Descriptive Statistics for Service Quality

Question Response Number of Percentage

Type Responses

Digital banking enhances customer service Strongly 12 60%

Agree

Agree 5 25%

Neutral 3 15%

Accessibility of digital platforms Very Easy 8 40%

Easy 7 35%

Neutral 3 15%

Difficult 2 10%

30
`

Digital banking improves complaint resolution Strongly 11 55%

Agree

Agree 6 30%

Neutral 2 10%

Disagree 1 5%

Digital tools improve personalization Strongly 9 45%

Agree

Agree 7 35%

Neutral 3 15%

Disagree 1 5%

A notable 85% of respondents agree or strongly agree that digital banking has improved service
quality by providing convenient, faster, and reliable services to customers. This indicates that
digital tools have positively impacted customer satisfaction and experience. However, 10% remain
neutral, suggesting that there may be gaps in service delivery or areas for further improvement,
such as addressing customer complaints or ensuring platform reliability.

4.2.3 Employee Productivity

Employee Productivity focuses on assessing how digital banking tools and processes influence the
efficiency, effectiveness, and satisfaction of employees in delivering banking services.

This section presents a detailed analysis of the survey results related to Employee Productivity

31
`

Table 4:Descriptive Statistics for Employee Productivity

Question Response Categories Frequency Percentage

"Has digital Yes 14 70%

banking reduced
your workload?"
No 6 30%

"Do you feel more Strongly Agree/Agree 16 80%

efficient using
digital tools?" Neutral 2 10%

Disagree/Strongly Disagree 2 10%

The table indicates that 80% of respondents agree or strongly agree that digital banking innovations
have positively impacted employee productivity. This result highlights that streamlined workflows,
reduced manual tasks, and enhanced efficiency from digital platforms contribute significantly to
employee performance. Only 5% disagree, suggesting minimal resistance or challenges faced by
staff in adapting to digital tools.

4.2.4 Financial Performance

Financial Performance examines the impact of digital banking on revenue generation, cost
reduction, and profitability metrics. This section presents a detailed analysis of the survey results
related to Financial Performance.

32
`

Table 5:Descriptive Statistics for Financial Performance

Response
Question Frequency Percentage
Categories

"Has digital banking Yes 15 75%

increased fee-based
revenue?" No 5 25%

"Has operational cost Yes 17 85%

reduced due to digital

services?" No 3 15%

A significant 80% of respondents agree or strongly agree that digital banking has improved
financial performance, underscoring its role in reducing operational costs, increasing revenue from
digital transactions, and improving overall profitability. However, 10% of respondents are neutral,
indicating potential areas where digital banking benefits may not yet be fully realized or
communicated effectively.

33
`

CHAPTER FIVE

5. Conclusion and Recommendation

This chapter synthesizes the key findings of the study, presenting conclusions that align with the
research objectives. It further provides actionable recommendations for stakeholders and highlights
potential areas for future research.

5.1 Conclusion

The study examined the influence of digital banking innovations on the profitability of selected
banks in Addis Ababa, focusing on the Commercial Bank of Ethiopia. Findings revealed that
digital banking technologies significantly enhance employee productivity, financial performance,
and market competitiveness. These innovations streamline internal processes, reduce operational
costs, and increase customer satisfaction, thereby improving overall profitability.

Employee productivity was found to improve due to enhanced tools and systems that support faster
and more accurate service delivery. Financial performance benefited from reduced reliance on
physical branches, better cost efficiency, and increased revenue streams from digital transactions.
Additionally, digital banking bolstered market competitiveness by offering 24/7 access to banking
services and tailored customer experiences, positioning these banks as leaders in the local financial
sector.

In conclusion, digital banking has emerged as a transformative force for Ethiopian banks, enabling
them to achieve strategic goals and align with the national digital strategy. However, challenges
such as technological infrastructure gaps, employee skill mismatches, and limited customer
awareness must be addressed to fully realize the potential of these innovations.

5.2 Recommendation

Based on the findings, the following recommendations are proposed:

 Enhance Digital Banking Infrastructure

Banks should invest in advanced and scalable IT infrastructure to ensure seamless digital
banking services.

 Focus on Customer-Centric Services

Continuous improvement of user-friendly platforms and tailored services will enhance

customer satisfaction and loyalty.

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 Staff Training and Development

Regular training programs should be implemented to equip employees with the skills to
manage and promote digital banking technologies effectively.

 Regular Performance Evaluations

Monitoring the impact of digital innovations on profitability will help in fine-tuning strategies
for maximum efficiency.

 Enhance Customer Awareness

Banks should actively educate customers about the benefits and usage of online and mobile
banking services. This can include targeted campaigns, training sessions, and simplified
onboarding processes.

 Introduce Commission-Based Models for Online Services

Banks could explore commission structures for internet and mobile banking transactions,
similar to ATM services, to offset operational costs.

 Strengthen Customer Support for Digital Services

Banks should establish robust support mechanisms, including call centers and digital customer
service teams, to address common issues like failed transactions or disputes.

 Ensure ATM Reliability and Accessibility

Regular maintenance, expansion of ATM networks, and improved customer service channels
for ATM-related issues can further enhance user satisfaction.

 Periodic Reviews of Digital Services

Banks should conduct regular assessments of their digital platforms to identify and address
pain points, improve service reliability, and ensure alignment with user needs.

5.3 Limitation and Area for Future Research

This study faced several limitations:

 Nascent Stage of Digitalization

Digital banking in Ethiopia is still in its infancy, limiting the scope of observable impacts,
especially for services like mobile banking.

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 External Factors
The ongoing implementation of Ethiopia's national digital strategy and telecom sector
reforms (e.g., Ethio Telecom's Tele-Birr service) may significantly influence future
outcomes.

Future studies could expand on this research by exploring:

 The long-term impact of digital banking innovations on customer retention and loyalty.

 A comparative analysis of digital banking adoption across other regions in Ethiopia.

 The role of government policies in accelerating digital banking advancements in the

Ethiopian banking sector.

This research provides a foundation for understanding digitalization's current and potential impacts
on Ethiopia’s banking sector, highlighting opportunities and challenges that can shape future
strategies.

36
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Appendix
Section 1: Respondent Profile

 What is your age?

a. Below 25
b. 25–35
c. 36–45
d. Above 45
 What is your educational background?
a. High School
b. Diploma
c. Bachelor’s Degree
d. Master’s Degree
e. PhD
 What is your current professional position?
a. Junior Staff
b. Middle Management
c. Senior Management
 How many years of experience do you have in the banking industry?
a. Less than 5 years
b. 5–10 years
c. 11–15 years
d. More than 15 years

Section 2: Operational Excellence

1. Digital banking innovations have improved internal process efficiency in your branch.

Strongly Agree, Agree, Neutral, Disagree, Strongly Disagree

2. Digital tools have minimized errors in daily operations.

Strongly Agree, Agree, Neutral, Disagree, Strongly Disagree

3. The implementation of digital banking has significantly reduced operational costs.

Strongly Agree, Agree, Neutral, Disagree, Strongly Disagree

41
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4. Automated processes have increased the overall productivity of employees.

Strongly Agree, Agree, Neutral, Disagree, Strongly Disagree

Section 3: Service Quality

1. Digital banking services have enhanced customer satisfaction.

Strongly Agree, Agree, Neutral, Disagree, Strongly Disagree

2. Online and mobile platforms provide reliable services for customers.

Strongly Agree, Agree, Neutral, Disagree, Strongly Disagree

3. Customers find digital banking services easy to use and navigate.

Strongly Agree, Agree, Neutral, Disagree, Strongly Disagree

4. Digital banking has reduced the average time customers spend on transactions.

Strongly Agree, Agree, Neutral, Disagree, Strongly Disagree

Section 4: Employee Productivity

1. Digital tools have enhanced employee performance by reducing repetitive tasks.

Strongly Agree, Agree, Neutral, Disagree, Strongly Disagree

2. Employees are more motivated to work with advanced digital systems.

Strongly Agree, Agree, Neutral, Disagree, Strongly Disagree

3. Digitalization has simplified employee roles, allowing them to focus on higher-value

tasks.

Strongly Agree, Agree, Neutral, Disagree, Strongly Disagree

4. Staff collaboration has improved due to integrated digital systems.

Strongly Agree, Agree, Neutral, Disagree, Strongly Disagree

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Section 5: Financial Performance

1. Digital banking has led to increased revenue generation for the branch.

Strongly Agree, Agree, Neutral, Disagree, Strongly Disagree

2. The cost of maintaining physical branches has reduced with digital adoption.

Strongly Agree, Agree, Neutral, Disagree, Strongly Disagree

3. Profitability has improved due to better operational and service efficiencies.

Strongly Agree, Agree, Neutral, Disagree, Strongly Disagree

4. Online transaction fees have become a consistent source of income.

Strongly Agree, Agree, Neutral, Disagree, Strongly Disagree

43