Evaluating the Effects of core banking
system in commercial bank of Ethiopia
case :Bahir Dar branches
Group Members
Tesfaye Belay
Melaku Semachew
Alemayehu Takele
Tsigemariam Bihonegn
Yalemtesfa Bahiru
Advisor; Teramaje
Chapter one: Introduction
1.1 Background of the study
The Ethiopian financial sector is dominated by the banking sector. Banks are the
important component of any financial system. They play important role of channelizing the
savings of surplus sectors to deficit sectors. The Commercial Bank of Ethiopia (CBE) is the
largest commercial bank in Ethiopia As of June 2014, it had about 242.72 billion Birr in assets
and held approximately 63.5% of deposits and about 38% of all bank loans in the country
The efficiency and competitiveness of banking system defines the strength of any economy.
Ethiopian economy is not an exception to this and banking system in Ethiopia also plays a vital
role in the process of economic growth and development. Any change in this sector through
technology has a sweeping impact on any country. The developments in information collection,
storage, processing and transmission technologies have influenced all aspects of the banking
activity. Furthermore, the stiff competition has forced banks to set up and put into effect all
necessary decision support technological systems. This enables them to dynamically plan new
locations, evaluate their performance, forecast customers attitude to new offered products and
services, estimate clients switching behavior, and finally provide marketing support to their
geographically separate branches.
In September 12, 2013 Polaris Financial Technology Limited, an Indian financial solutions
provider, is set to complete installing a $3.4 million Centralized, Online, Real-time, Electronic
(CORE) banking solution at the National Bank of Ethiopia (NBE) . The new core banking
system of the National Bank of Ethiopia was implemented and provided a wide range of
banking operations and services and will bring it at par with its more advance counterparts. The
Polaris Quantum core banking system(CBS) includes Core Banking (Automated Teller
Machines (ATMs),Telephone Banking, Internet Banking ,Branch Networking) , Trade Finance,
General Ledger, Treasury and Enterprise Reconciliation. So how the implementation of this new
core banking system affects the commercial banks of Ethiopia in Bahir Dar branches.
1.2 Statement of the problem
A core banking system is a integrated system of maintaining accounts for a bank across all its
products and /or locations. Then a customer is a customer of a 'bank' and not of a branch. In
technical words, CBS can be defined as a back-end banking system that processes daily
transactions and posts updates to accounts and other financial records. Core banking systems
typically include account, loan and credit processing capabilities, interfaces to general-ledger
systems, and reporting tools.
CBS is typically centrally managed software application that covers all the branches of the bank.
The transactions could be recorded real time or through batch processing into the Central
accounting system of the bank.
As with many industries, technology has changed everything. Perhaps no business has been more
affected by the growth of computers and telecommunications than banking.( Banking Systems,
2nd Edition ,2010 ). Not only have accounting, auditing, and examining functions been taken
over by fast and efficient technology, funds transfer, record keeping, and financial analyses have
become instantaneous because of the powerful tools now available. Technology's changes are
not limited to bankers either. Consumers' relationships with their banks have changed also.
Research done on by Kabiru I. D and Abdullahi S. R in Nigeria banking industry shows that The
use information technology in the banking industry has led to the timely and accurate
preparations of reports, as customers have limitless access to banking service through the aid of
internet banking and ATM machines .it reduced queue and long hours waiting at the bank. The
availability of online system makes it easy for inter bank branch communication.
impact of information technology components had a positive effect on efficiency of banks.
(Mojtaba R. S. and Liu Z. Y.,2014 ). And by increasing of optimal investment in application
software section and also outsourcing of information technology services, operational costs in
banks reduced and services have been provided to the customers through multi-channels with
lower costs and speed. using ICT in their business environment as a strategic tool to gain
competitive advantages. In discriminate increase of investment in information technology
will not necessarily lead to increase of efficiency. There are many researches are available in
abroad which provide a conclusive results .But in Ethiopia there is no available studies were
conducted and thus we are interested to conduct study on the area.
1.3 Objectives of the study
1.3.1 General objective:
The overall aim of this study is to understand the effects of information communication
technology (ICT) specifically core banking system in commercial bank of Ethiopia in Bahir Dar
branches.
1.3.2 Specific objectives:
Specifically, the study will also seek to:
Identify the effects of core banking system in service quality
To describes the role of the system in customer satisfaction
To identify factors that affects the performance of core banking system
To identify customer compliance in core banking system
1.4 Research Question
Why customers compline in the core banking system
Why the core banking system solve customer compliance.
What are contribution of the core banking system in service quality.
1.5 Significance of the research
Even the number of branches and different competent banks increases , still there is compliance
in commercial banks of Ethiopia in Bahir Dar branches .Therefore the need of this study to asses
customer compliance and service quality in CBE. The study is important
That will give appropriate feedbacks for concerned managers, banks employees.
In additional the finding and recommendations of the study are expected to serve
as organize data for future studies
Finally, since the study is the first of its kind in commercial bank of Ethiopia, the
researcher is enthusiastic that it serves as initial step to pave the way for those who want
to make further studies on the issue.
1.6 Delimitations and Limitations
The scope of the study will delimit in commercial banks of Ethiopia only in Bahir Dar branches .The
customer of the banks, employees and managers will the researcher target population .The subject of the
study will be customer compliance in core banking system and contribution of core banking system in
service quality. For some research questions it is possible to collect data from an entire population as it is
of a manageable size. In this research the researchers use sampling to collect data so in addition to cost
and time sampling another limitation of the research.
1.7 Definition of Terms
1.8 Organization of the Study
This paper is organized in four chapters. The first Chapter deals with background of the study,
statement of the problem, significance of the study limitation of the study and definition of the
key terms used in the study. The second chapter devoted to the presentation of the review
of related literature. The third chapter is concerned with the methodology and procedures
employed to collect and analyze the data.
Chapter two: Literature review
2. Theoretical frame work
2 .1 Meaning of core banking system
With technology advancement particularly in Tele Communication and Wireless Communication it
became possible to send data from one computer to another computer. Taking advantage of this it was
thought fit to connect branch computers to a single computer at data center and have all transactions of all
branches recorded live at one place. This concept is CORE BANKING. In simple way it is doing all
banking operations of Branches and Head Office by connecting to a central computer kept at data center.
In mere computerized functions each branch has its own computer and branch functions are thus
automated on that computer. This is called as Total Branch Automation (TBA). Back up of each branch
is kept at Head Office on tapes, CD etc. Consolidation of data from different branches is done at Head
Office at a decided periodicity
2.2 History of core banking system
The first core banking systems appeared in the 1970s and was mainly developed in-house and ran on
mainframes. Package-based solutions started to appear in the 1980s but were limited in their ability to
handle large volumes. In the 1990s, new players entered into this space with package offerings that were
more open, fixable, and customer-centric. The core banking solutions developed in the last decade have
focused on convergence of digital channels along with increase in scalability and flexibility. Today core
banking system enhancing the mobility for the customer and internal bank staff, and on achieving realtime channel processing and multi-channel integration capabilities.
Fig 2.1 Evolution of core banking system
2.3 core banking in Ethiopia
The appearance of E-banking in Ethiopia goes back to the late 2001, when the largest
state owned, commercial bank of Ethiopia (CBE) introduced ATM to deliver service to
the local users. In addition to eight ATM Located in Addis Ababa, CBE has had Visa
membership since November 14, 2005. But, due to lack of appropriate infrastructure it failed
to reap the fruit of its membership. Despite being the pioneer in introducing ATM based
payment system and acquired visa membership, CBE Lagged behind Dashen bank, which
worked aggressively to maintain its lead in E-payment system
Harnessing its leadership with advanced banking technology, Dashen Bank signed an
agreement with iVery, a South African E-payment technology company, for the introduction
of mobile commerce in April 21, 2009. According to the agreement, iVery Payment
Technologies has licensed its Gateway and MiCard E-payment processing solution to
Dashen Bank.
By the end of 2008 Wegagen Bank has signed an agreement with Technology Associates
(TA), a Kenyan based information technology (IT) firm, for the development of the solutions
for the payment system and installation of a network of ATMs on December 30, 2008
Zemen Bank, the only Ethiopian bank anchored in the idea of single branch banking,
by launching full-blown internet banking, a service which is new to Ethiopian banking
industry in the year 2010. The bank tested the venture through its first phase of the
online service, and now it is already started the full-fledged version, which enable
customers to make online money transfer freely. Previously, the online banking service,
delivered by the bank, only gave access to bank statements and exchange rate information.
The national bank of Ethiopia (NBE) award a core banking solution project to an Indian
financial technology firm, Polaris Financial technology limited by October 2012.The project
was completed at the end of 2013 and fully implemented by 2014.
2.4 Benefits of core banking
Centralized Accounting:-All the transactions of the bank directly impact the General Ledger and
Profit and Loss Account. This provides a real time total picture about the financial position and situation
of the bank and helps for timely effective decision making for financial management.
Centralized Product Control & Monitoring:- Aspects like interest rate modifications, product
modification and interest application can be done centrally from one place for all the branches
Introduction of Technology Based Services:-Service channels such as Automated Teller
Machines( ATM), mobile banking , Electronic Funds Transfer at Point of Sale were started.
Centralized Customer Account Management:- Any customer becomes the customer of the bank rather
than of a branch. With unique ID / Account Number the accounts of the customers can be viewed
centrally by the bank.
Centralized System Administration:- Centralized system / I. T. administration enhances system security
and user management.
2.5 Threats and Risks of Core Banking
Total dependency on technology
Any failure on technical ground can halt the working with uncertainty about restoring normalcy
Stoppage of work has adverse effect on banks image and reputation
Technical person/s leaving the bank poses serious problem
If not mitigated by generating profit out of benefits of core banking the recurring costs are heavy
2.2 Empirical frame work
In the early twenty-rst century, the Indian banking system is in the midst of a technological revolution.
Public and private banks have both realized that technology alone could enable them to trim costs,
achieve efciency and survive in a highly competitive environment (Meenakshi R. and Sweta C. 2004).
As a result, public sector banks (PSBs) have launched voluntary retirement schemes in an effort to bring
down their wage costs. The focus on retail banking and other fee-based services such as guarantees and
commissions on drafts, derivatives, and gold banking ,etc., is expected to improve protability. Yet, PSBs
have still to cover a lot of ground with respect to implementation of technology in all their branches.
Indian PSBs possess some unique advantages over their competition. But it is their use of technology that
will enable PSBs to build on their many strengths. Being late bloomers in the technology adoption arena,
PSBs are not saddled with legacy systems, suggesting that prompt implementation of technology can
place these banks at the forefront of technological change. PSBs also have a vast network of branches
within rural and semi-urban India and can effectively employ technology to tap into under-served markets
with signicant social returns.
Research done by Elnaz E.(2011),identifies that, financial factors have the least effect on core banking
system implementation main obstacles and challenges in performing and reforming core banking are
Vendor capabilities and credentials
Dependence on legacy/vendor applications and impact on envisioned technology architecture
Banks business goals and alignment to leverage the new technology
Many companies contribute their knowledge to make a core-banking implementation project a success.
The three main contributors are the bank itself, the implementation partner, and the software vendor
according to Klaus H. and Marcel H. (2009). A concrete implementation project requires banking knowhow, IT know-how, and the knowledge how to use IT as an enabler of the business processes.
Consequently, bank employees and consultants have to work together as one large team. The project
success depends heavily on the success of their know-how exchange.
The technologically laggard Cooperative banks should realize that the economic class and age
composition of their customers is already not favorable. It would obviously be difficult for laggard
cooperative banks to attract new young customers if they do not increase their investments on IT in
right direction with cautious approach(MUNIRAJA S. and Dr. B.SUDHIR(2012)). It is now high time
for the decision makers in cooperative banks to realize the need to enlarge the base of
computerization and see that the real benefits are delivered at all the levels, customers and
stakeholders of the bank. The decision makers have to work out a definitive time frame for
technological advancement in their respective banks with complete involvement in monitoring,
controlling and evaluating the progress with set parameters.
Additionally LUCA C. and GIORGIO G.(2007) concludes that Firms lagging behind in the adoption of
IT are likely to be less efficient just because they use obsolete production plans(. As long as the diffusion
of a new technology gains momentum we should observe the closing up of the efficiency gap. Firms that
move over time from lower to higher efficiency levels add to industry TFP growth. We find that frontier
shifts are strongly correlated with IT capital accumulation. Banks adopting IT capital intensive techniques
are also close in average to the best practice of the banking industry, implying ceteris paribus a higher
level of efficiency. On the whole, we estimate that the average TFP growth associated with IT investment
falls in a range between of 1.3% and 1.8% a year.
Globally banking sectors spend an average of 4.7 percent to 9.4 percent of operating income on IT
compared to insurance and airlines those who spend 3.3 and 2.6 percent of income, respectively.(Sai
G.,Gaurav J.,Gaurav K. and Jessican .2012).Asian banking IT benchmark study, however finds that IT
expenditure alone do not always cooperate with superior performance and 66 percent of banks with
higher than average IT spending relative to income generated lacks results with revenue growth 0.4
percent points lower than the industry and a cost income(C/I) ratio 2.5 percentage points higher. By
contrast, 23 percent of the 44 banks surveyed outperformed the market on both revenue growth (up 10.9
percentage points) and C/I ratio (down 4.6 percentage points) while spending 29 percent less on IT than
other banks in our study. These out performing banks are more likely to view IT as a strategic enabler and
their investment mirror this outlook.
Adoption of ICT has influenced the content and quality of banking operations( Akinlolu A.(2007)). The
adoption enhanced convenient business hour, facilitates prompt and fair attention, enhances faster
services, and makes Home and Office Banking available to customers. . Investment in information and
communication technology should form an important component in the overall strategy of banking
operators to ensure effective performance. It is imperative for bank management to intensify investment
in ICT products to facilitate speed, convenience, and accurate services, or otherwise lose out to their
competitors.
The electronic banking has made banking transaction to be easier by bringing services closer to its
customers hence improving banking industry performance (Josiah A. and Nancy K.(2012). E banking has
strong and significance marginal effects on returns on asset in the Kenyan banking industry. Thus, there
exists positive relationship between e-banking and bank performance. The adoption of electronic
banking has enhanced Kenyan banking industry by making it more productive and effective; Electronic
Banking also has a strong positive relationship on the overall banking performance by making workers
performance more effective and efficiency; The adoption of electronic banking has enhanced the fortune
of the Kenyan commercial banks.
Chapter three: Research Methodology
The purpose of this study is to evaluate the effects of core banking system in the efficiency ,service
quality, customer satisfaction and compliance in core banking system . The four purposes of this chapter
are to (1) describe the research methodology of this study, (2) explain the sample selection, (3) describe
the procedure used in designing the instrument and collecting the data, and (4) provide an explanation of
the statistical procedures used to analyze the data.
3.1 Methodology
This study will use a descriptive design. A descriptive study attempts to describe systematically a
situation, problem, phenomenon, service , or provides information about, say, the living conditions of a
community, or describes attitudes towards an issue.(Ranjit, K.(2014 ).research methodology (3rded)
London: SAGE Publications Ltd. For example, it may attempt to describe the types of service provided
by an organization, the administrative structure of an organization, the living conditions people in the
outback, the needs of a community, what it means to go through a divorce, how a child feels living in a
house with domestic violence, or the attitudes of employees towards management. The main purpose of
such studies is to describe what is prevalent with respect to the issue/problem under study
Descriptive research, such as that undertaken using attitude and opinion questionnaires and
questionnaires of organizational practices, will enable you to identify and describe the variability in
different phenomena.( Mark, S., Philip, L., and Adrian, T.(2009) Research Methods for Business
Students. London: Pearson Education Limited). Moreover there are distinct advantages in using a
questionnaire over an interview methodology. Questionnaires are less expensive and easier to administer
than personal interviews; they lend themselves to group administration; and, they allow confidentiality to
be assured. For these reasons, the researcher chose a descriptive research methodology and designed a
questionnaire to assess the effects of core banking system in service quality, customer satisfaction
,efficiency of the organization and compliance in core banking.
3.2 Participants
Employee , managers ,IT technician and customers will participate in this study. Participants will be
drawn from all branches of commercial banks of Ethiopia in the Bahir-Dar city. No sampling is require
for managers and IT technician since their number is small. For populations of less than50 cases Henry
(1990) advises against probability sampling. He argues that you should collect data on the entire
population as the influence of a single extreme case on subsequent statistical analyses is more
pronounced than for larger samples(p. 214). Employees and customers are large in number so we use
simple random sampling. Random sampling is the best single way to obtain representative sample. No
technique, not even random sampling, guarantees a representative sample, but the probability is higher for
this procedure than for any other.
3.3 Measurements/Instruments
The main instrument for data collection for this research will be questionnaires .questionnaires will be
develop managers, employees, IT technician and employee. Closed ended questionnaires will be
preparing for customers and employee and semi closed ended questionnaires for managers and IT
technicians. The questionnaires will be prepare in Amharic.
The variable of the study are service quality ,customer satisfaction ,customer compliance and
performance. To measure these variables the researcher will use summated rating(Likert) scale.
3.4 Data collection Methods
In order to achieve a high return rate and ensure quality of data, the questionnaires will be distribute in
different ways. Employees will fill the questionnaires in their favorable time and returns in the request
time. The customer will request to complete the questionnaires and return it to the researcher as soon as
possible .After two days days the questionnaires will be collects from employee. Non respondent
questionnaires will be replace by other respondents. The researcher will inform, participation in the study
is entirely in voluntary , the purpose of the study, how to complete and the completion time just before
the questionnaires are distributed .
3.5 Methods of Data Analysis
The data analysis will consist of
the examining the questionnaires correctness and completeness
coding and identifying incomplete questionnaires
replacing incomplete questionnaires and
perform analysis of descriptive response according to the frequency distribution and
descriptive statics frequency .
Frequency table and descriptive statics will construct to display the result in accordance with the response
of managers ,employee ,IT technical and customers .
