EFFECT OF E-BANKING ON PROFITABILITY OF CBE: THE CASE OF

YIRGALEM BRANCH

HAWASSA UNIVERSITY
COLLEGE OF BUSINESS AND ECONOMICS

DEPARTEMENT OF ACCOUNTING AND FINACE

PREPARED BY: AMANUEL ASNAKEW

ID NO: 0255/12

SUBMITED TO MSR DILAYEHU

UNIVERSITY

HAWASSA, ETHIOPIA
Table of Contents

ACRONYMS………………….
…………………………………..........................................................................i
CHAPTER ONE...................................................................................................................................................1
1. INTRODUCTION................................................................................................................................................1
1.1. Background of the Study...............................................................................................................................1
1.2. Statement of the Problem..............................................................................................................................2
1.4. Objectives of the study..................................................................................................................................3
1.4.1. General objective........................................................................................................................................3
1.4.2. Specific objectives......................................................................................................................................3
1.5. Hypothesis of the study.................................................................................................................................3
1.6. Significance of the Study...............................................................................................................................4
1.7. Scope of the study......................................................................................................................................... 4
1.8. Organization of the Research Paper..............................................................................................................4
CHAPTER TWO..................................................................................................................................................5
2. LITERATURE REVIEW.................................................................................................................................5
2.1. Introduction...................................................................................................................................................5
2.2. Theoretical Review........................................................................................................................................5
2.2.1. Forms of Electronic Banking......................................................................................................................6
2.2.2. Technology Acceptance Model..................................................................................................................7
2.2.3. Theory of Planned Behavior.......................................................................................................................7
2.2.4. Social Construction Theory........................................................................................................................8
2.3. Conceptual Framework.................................................................................................................................9
2.3.1. Effects of Electronic Banking on Profitability............................................................................................9
2.4. Determinants of Profitability of Commercial Banks...................................................................................11
2.4.1. Income......................................................................................................................................................11
2.4.2. Loan quality..............................................................................................................................................11
2.4.3 Deposits.....................................................................................................................................................11
2.4.5 Liquidity ratio............................................................................................................................................12
2.4.6. Taxation....................................................................................................................................................12
2.5. Empirical Review........................................................................................................................................13
2.6. Summary of Literature Review...................................................................................................................17
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CHAPTER THREE............................................................................................................................................18
3. RESEARCH METHODOLOGY...................................................................................................................18
3.1. Introduction.................................................................................................................................................18
3.2. Research Design..........................................................................................................................................18
3.3. Population....................................................................................................................................................18
3.4. Data Collection............................................................................................................................................19
3. 5. Methods of Data Analysis..............................................................................................................................

3.6. Time schedule.................................................................................................................21

3.7.Budget
schedule..................................................................................................................................22

Reference................................................................................................................................23

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 ACRONYMS
ATM Automated Telling Machine

ATT Attitude

B2C Business to Customer

CBE Commercial Bank of Ethiopia

E-banking Electronic banking

E-commerce Electronic commerce

EFT Electronic Fund Transfer

IB Internet Banking

ICT Information and Communication Technology

IT Information technology

IVR Interactive Voice Response

MB Mobil Banking

NBE National Bank of Ethiopia

NIAT Net income after taxes

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 CHAPTER ONE
1. INTRODUCTION
1.1. Background of the Study
The growing and widespread development of information technology and the expansion of the
scope of its application to the money markets and banking, as a profitable industry, will not been
an exception and competition to attract customer and gain their consent forced the Competitors
to work more on their service Systems. So the banks will be investing more on providing on the
customers with the new Technologies through e banking, PC banking, mobile banking, ATM,
electronic funds transfer, account to account transfer, paying bills online, online statements,
credit cards and etc. Electronic commerce can be seen as a consequence of such competition
(Asgharian, 2009).

Now in most developed countries, banks have provided online banking services to their
customers via the Internet and the customers, without the need to be present at the bank, do most
of their bank affairs by entering the bank website using their special password. The rapidly
growing information and communication technology is knocking the front-door of every
organization in the world, where Ethiopian banks will never be exceptional. In Ethiopia however,
cash is still the most dominant medium of exchange, and electronic payment systems are at an
embryonic stage (Gardachew, 2009).

The appearance of electronic 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. Electronic banking facilities provided by most Ethiopian Banks are very basic.
However, e-banking facilities provided are at par with those in the region. As suggested by
Classens, Glaessner and Klingebiet (2002), developing countries in General have an advantage
as they can learn from the experience of advanced economies.

Commercial Bank of Ethiopia (CBE), being the pioneer in introducing ATM based payment
system; it currently is implementing various e-banking services to improve its operational
efficiency and profitability. The bank has more than 1065 ATM machines spread throughout the
country and more than 1 million customers who use debit cards actively and the number of
mobile and Internet Banking users also reached more than 1,400,000.00 as of september,30
2023. Moreover, more than birr 12 billion will be transacted using the various e-banking

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channels during the first quarter of the fiscal year i.e. July 01, 2023 to September 30 2023 (CBE
report, 2023).

However, the bank is facing many challenges in implementing these services such as
poorly developed telecommunication infrastructure, lack of suitable e-commerce legal
framework high hates of illiteracy, high investments, and others. therefore, it is important to
study effectiveness of investing on e-banking products on the ultimate goal of minimizing
costs, increasing customer satisfaction, enhancing service to constituents, and improving the
operational efficiency which would affect the profitability of the bank.

1.2. Statement of the Problem

Information Communication Technology (ICT) plays an important role in the development of
Banking industry (Amoako, 2012).according to Kaleem and Ahmad (2008), increasing
competition among banks and from non-bank financial institutions also raises concerns as to why
some people adopt one distributional channel and others do not, and that identifying the factors
that may influence this decision is vital for service providers.

E-banking in Ethiopia has emerged as a strategic resource for achieving higher efficiency,
control of operations and reduction of cost by replacing paper based and labour intensive
methods with automated processes thus leading to higher productivity and profitability (Ayana,
2012). While to date researchers have produced little evidence regarding these potential
changes. The fact that e-banking is fast gaining acceptance in Ethiopia banking sector does not
assuredly signify improved bank performance nor will conspicuous use of Internet as a delivery
channel make it economically viable, productive or profitable.

Undeniably the largest state-owned bank CBE is the pioneer in introducing e-banking service in
Ethiopia during 2001. Moreover, CBE has had Visa membership since November 14,
2005.While due to lack of appropriate infrastructure, it failed to reap the fruit of its membership
in early periods (Gardachew, 2009). The bank has borne considerable costs for implementing
e-banking infrastructure, for the training of its employees and creating the environment
which will increase the service quality, image, brand value and goodwill expecting to cover
these implementation costs in short run and even to achieve profits. Hence it becomes important

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to investigate the effectiveness of these investments on achieving the desired goal of profit
maximization.

1.3. Basic Research Questions

The study is tailored to answer the following research questions formulated on the Problems.

 To what will be extending adopt of electronic banking affect profitability of Commercial Bank of Ethiopia?
 What will be the effect of these services on service quality of the bank?

 How much e-banking system implementation has affected business efficiency of the Bank?

 Can be e-banking have significant effect on customer change after the Implementations?

1.4. Objectives of the study

1.4.1. General objective

The general objective of the study will be examining the effect of e-banking on profitability of
Commercial bank of Ethiopia.

1.4.2. Specific objectives

The specific objectives are;

• How to be extending adopt electronic banking affect profitability of Commercial Bank of

Ethiopia.
• How to be examining the effect of e-banking on service quality of CBE.
• How to investigate the effect of implementing e-banking on business efficiency of the
Bank?
• How to explore whether implementation of e-banking by CBE has significant effect on
attracting customers to the bank.

1.5. Hypothesis of the study

• H0: The implementation of e-banking by CBE affects its profitability positively.
• H0: E-banking will affect commercial bank of Ethiopia to achieve better service quality.
• H0: CBE achieved boosts in its income and minimized its costs due to implementation of
e-banking services.

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 • 4) H0: An Implementation of e-banking service by CBE has helped the bank to attract
more customers.

1.6. Significance of the Study

Commercial Bank of Ethiopia plays a catalytic role in the economic progress and development of
the country. The study will be aimed at examining the impact of electronic banking on the profit
of the bank. It is significant due to the proliferation of the bank and to investigate the
effectiveness of investments on technologies on the bank on its profitability and in making future
decision adopt more advance and up-date technologies. The finding of the study will be of great
importance to managements of CBE to investigate impact of implementation of E-banking
services on early planned objectives. The study will be important for policy makers and
regulatory bodies in assessing the legal frameworks affect implementation and objectives of the
services. In addition, the study will be believed to have an immense contribution by laying the
ground for future researches to be conducted on these recent phenomena.

1.7. Scope of the study

The study will be limiting to only one bank which is CBE’s selected branches in Yirgalem and
the questioners only develop for employees and managers of the institution while external
stake holders doesn't ’t include such as customer feedback for e-banking.

1.8. Organization of the Research Paper

The study will be organized in to the five chapters: The first chapter is introductory which
consists of general background, statement of the research problem, basic research questions,
objectives of the study, definition, significance of the study, and limitation of study, scope of the
study. The second chapter provided summary of related literature Review of theoretical and
empirical studies in the study of e banking and its effect in profitability. Chapter three is the
Methodology part; which contained design of the report, subjects/participants of the study,
sources of data collection, and methods of data analysis. Chapter four is devoted to Results
and Discussion; which summarize the results/findings of the Study and/or discuss the findings.
Finally, chapter five has summarized the findings from the Results discussed under chapter four;
conclude the study and forward relevant recommendations

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 CHAPTER TWO
2. LITERATURE REVIEW
2.1. Introduction

This chapter reviews the existing literature on the effect of electronic banking on profitability of
commercial banks. In specific the chapter reviews that theoretical review where various theories
on electronic banking are reviewed, empirical review where empirical studies will be done on
effects of electronic banking on banks profitability will review, the concept of electronic banking
and last but not the least the summary of the literature review which summarize the existing gaps
on the literature.

2.2. Theoretical Review

In most research papers relating to this study the profitability is measured in the form of
ratios which are normally reported by commercial banks in their annual reports. Devinaga
Rasiah (2010) claims that the use profitability ratios are not influence by changes in price levels.
And it is said to be the most appropriate way of measuring profitability as one make use of time
series analysis. This is because the real value of profits cannot be affected by the varying
inflation rates. According to Devinaga Rasiah (2010) for one to realise how well a bank is
performing it is much more useful to consider return on assets (ROA) and return on equity
(ROE); Bourke (1989) and Molyneux and Thornton (1992).

Return on assets (ROA) is the ratio of Net Income After Taxes (NIAT) divided by Total
Assets. The ROA signifies managerial efficiency in other words it depicts how effective and
efficient the management of banks has been as they seek to transform assets into earnings. The
higher ratio is an indication of higher performance of the banks. It is a useful tool for comparing
profitability of one bank with other or even the whole commercial banking system.
Moreover, the ROA is said to measure the rate of return on the bank’s shareholders equity and
it is calculated by dividing banks net income after taxes by total equity capital which includes
common and preferred stock, surplus, undivided profits, and capital reserves; Bourke (1989), and
Molyneux and Thornton (1992).

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This measure of profitability gives an indication of what the banks earns on the shareholders’
investment; Devinaga Rasiah (2010). According to Anthony Karkrah and Ameyaw (2010) many
researchers have presented ROA as an appropriate measure of bank profitability. Among them
are Rivard and Thomas (1997) who argued that bank profitability is best measured by
ROA However, Hassan and Bashir (2003) also claims that as ROA tend to be lower for financial
intermediaries, most banks heavily utilized financial leverage to increase their ROA to
competitive levels.

This study seeks to establish the effects of electronic banking on profitability of commercial
banks in Ethiopia. The study is based on the following theories the technology acceptance model,
theory of planned behaviour and Financial Performance Theories.

2.2.1. Forms of Electronic Banking

Most banks offer to their customers the following E-Banking products and services:

Automated Teller Machines: An automated teller machine or automatic teller machine (ATM) is
an electronic computerized telecommunications device that allows a financial institution's
customers to directly use a secure method of communication to access their bank accounts, order
or make cash withdrawals (or cash advances using a credit card) and check their account
balances without the need for a human bank teller.

Telephone Banking: is a service provided by a bank of other financial institution, that enable
customers to perform a range of financial transactions over the telephone call, without the need
to visit a bank branch or automated teller machine. Most financial institutions have restrictions
on which accounts may be accessed through telephone banking, as well as a limit on the amount
that can be transacted.

Smart Cards: A smart card usually contains an embedded 8-bit microprocessor (a kind of
computer chip). The microprocessor is under a contact pad on one side of the card. Think of the
microprocessor as replacing the usual magnetic stripe present on a credit card or debit card.

Electronic Funds Transfer (EFT) System: is a system of transferring money from one bank
account directly to another without any paper money changing hands.

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SMS Banking: SMS banking uses short text messages sent through the client’s mobile phone.
SMS text messages can be used for both passive and active operations similarly as with classic
telephone banking.

Internet Banking: Internet banking refers to systems that enable bank customers to get access to
their accounts and general information on bank products and services through the use of bank’s
website, without the intervention or inconvenience of sending letters, faxes, original signatures
and telephone confirmations (Dube et al., 2009)

Tele banking: By dialing the given Tele banking number through a landline or a mobile from
anywhere, the customer can access his account and by following the user-friendly menu, entire
banking can be done through Interactive Voice Response (IVR) system.

2.2.2. Technology Acceptance Model

To understand, predict and explain why people accept or reject information systems; researchers
have developed and used various models to understand the acceptance of users of the
information systems. The technology acceptance model (TAM) that was introduced by Davis;
Bagozzi, and Warshaw (1989) is one of the most cited models that researchers used to study
underlying factors that motivate users to accept and adopt a new information system (Al Shibly,
2011).

The primary goal of TAM is to provide an explanation of factors affecting computer applications'
acceptance in general. In addition, this model helps researchers and practitioners to identify why
a particular system is unacceptable (Davis, 1989). Davis suggested that using an information
system is directly determined by the behavioral intention to use it, which is in turn influenced by
the users' attitudes toward using the system and the perceived usefulness of the system. Attitude
and perceived usefulness are also affected by the perceived ease of use. Technology acceptance
model is used to explain how banks adopt electronic banking.

2.2.3. Theory of Planned Behavior

The theory of planned behavior (TPB) suggested that human behavior is determined by intention
to perform the behavior, which is affected jointly by attitude toward behavior, subjective norm
and perceived behavioral control (Ajzen, 1991, 2002). Attitude (ATT) is the general feeling of

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people about the desirability or undesirability of a specific behavior. Subjective norm (SN)
expresses the perceived organizational or social pressure of a person who intends to perform a
particular behavior. Perceived behavioral control (PBC) reflects a person's perception of the ease
or difficulty of implementing a particular behavior.

The ability of TBP in providing a useful theoretical framework for understanding and predicting
the acceptance of new information systems is demonstrated (Ajzen, 2002). Armitage and Conner
(2001) analysed previous studies using the TBP in a meta-analysis study. The major conclusion
was support for the efficacy of the TPB and the suggestion that more work on new variables is
needed to increase the predictability of the model. The theory of planned behavior is used in this
study to explain how electronic banking is adopted.

2.2.4. Social Construction Theory

Another theory relevant for the analyzing electronic banking and perhaps the most relevant is
Trevor Pinch and Wiebe Bijker’s social construction of technology theory. This theory argues
that technology does not determine how people receive and use mobile technology but that
people determine how and in what ways technology is used. The theory posits that the use of a
technology cannot be understood without understanding how it is socially integrated within
society. Within different social contexts, technology can take different meanings and adoption
depends on how society views the technology.

Under this theory, the adoption of a technology is not only due to its technical superiority but due
to social factors as well. In the context of this study, mobile phone technology and specifically
mobile phone financial services having been driven by both business factors and social networks
related to business and family. The decomposition theories of planned behavior not only keep the
theory of planned behavior principles but also add important value of the original theory, as it
adds a bigger number of beliefs and constructs to the models Vankatesh and Davis and Morris
(2007). The theory of planned behavior is used in this study to explain how electronic banking is
adopted and how it influence profitability of commercial banks.

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2.3. Conceptual Framework

2.3.1. Effects of Electronic Banking on Profitability

According to Nathan (1999), electronic banking services have provided numerous benefits
for both banks and customers. The first benefit for the banks offering electronic banking
service is better branding and better response to the market. Those banks that would offer such
service would be perceived as leaders in technology implementation. As a result, they would
enjoy a better brand image. The other benefits are possible to measure in monetary terms. The
main goal of every company is to maximise profits for its owner and other stakeholders.
According to Allen and Hamilton (2002), an estimated cost of providing the routine
business of a full service branch in USA is $1.07 per transaction, as compared to 54 cents for
telephone banking, 27 cents for ATM banking and 1.5 cent for Internet banking. On the other
hand, the advantages for the customers are significant time saving and reduced costs in
accessing and using the various banking products and service, increased comfort and
convenience (Pyun, Scruggs and Nam, 2002).

Internet Banking provides clear advantages to both the financial institutions and the
customers. From the banks’ perspective, Internet Banking has very low cost transactions,
compared to human teller banking.

According to The Fourth International Conference on Electronic Business (ICEB2004) /

Beijing, e-banking reduces the following expenses (Wright and Ralson, 2002):

Banks can reduce customer service staff as customers use more self-service functions;

There is less cheque processing costs due to an increase in electronic payments.;

Costs of paper and mail distribution are reduced as bank statements and disclosures are presented
online;

There is less data entry as applications are completed and processed online by customers.

On the other hand, according to KPMG (1998), bank’s revenue increases from Internet Banking
due to:
Increased account sales;

• Wider market reach;

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 • New fee-based income;
• New market opportunities;

• Improved customer satisfaction.

For consumers, Internet banking provides convenience, lower service charges, more accessible
information about bank accounts, and an attractive option for busy people since it saves
time to go to the bank branches and gives 24 hours access (Lee and Lee, 2000). All the
benefits of B2C e-commerce such as 24*7 bank service, convenience, access from anywhere,
one stop shop and easy access to information also apply to Internet banking (Singh, 2004).

The benefits of E-banking are manifold and are to be seen from the point of view of
the banks themselves, customers and even the regulators (Sergeant, 2000). Sergeant is of the
view that for banks, E-banking brings different and arguably lower barriers to entry;
opportunities for significant cost reduction; the capacity to rapidly reengineer business
processes; and greater opportunities to sell cross border. For customers, the potential benefits
are: more choice; greater competition and better value for money; more information; better
tools to manage and compare information and faster service.

Electronic banking (E-banking) enables customers to do their banking 24 hours a day, 7 days a
week. E-banking customers are able to check their account balances, pay bills, apply for a loan,
trade securities, and conduct other financial transactions.
E-banking can be divided into five major categories:

• Internet banking,

• Telephone banking,

• TV-based banking,

• Mobile phone banking, and

• PC were banking.

Technological innovations in recent decades have made the move towards E-banking possible.
The increasing competition for customers in banking and need to decrease cost of providing
banking services has led banks to integrate these changes.

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2.4. Determinants of Profitability of Commercial Banks
According to Husni (2011) the determinants of banks profitability are normally consisting of
factors which affect the revenue and the cost of the banks. Some studies classified them into two
categories namely the financial statement variables and non-financial variables. The financial
statement variables include factors that are directly related to the bank’s balance sheet and
income statement. Whiles, the non-financial statement variables include factors like the number
of branches of a particular bank, location and size of the bank etc; (Haron and Sudin, 2004).

2.4.1. Income

Rasiah (2010) presented that banks generate income mostly on their assets and the assets could
be termed as income and non-income generating. With regards to commercial banks income
Rasiah (2010) classified it into two, namely interest and non-interest income. The interest
income consist of rates charge on loans, overdraft and trade finance which the banks offers to
customers. Whereas, the non-interest income is consisting of fees, commissions, brokerage
charges and returns on investments in subsidiaries and securities. According to Vong et al.
(2009), the major source of banks revenue is interest income. It contributes about 80% of
commercial banks earnings. The other source of banks revenue includes dividends and gains
from dealing in the securities market.

2.4.2. Loan quality

As it has been mentioned above, one of the major roles of banks is to offer loans to borrowers
and loans serve as one of the ultimate source of earnings for commercial banks. In other words
loans represent one of the highest yielding assets on banks’ balances sheet. It is obvious that the
more banks offer loans the more it does generate revenue and more profit; Abreu and Mendes
(2000).But then banks have to be courteous in offering more loans because as they offer more
loans to customers they expose themselves to liquidity and default risks which impacts
negatively on banks’ profits and survival (Rasiah, 2010).

2.4.3 Deposits

Banks are said to be heavily dependent on the funds mainly provided by the public as deposits to
finance the loans being offered to the customers. There is a general notion that deposits are the

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cheapest sources of funds for banks and so to this extent deposits have positive impact on banks
profitability if the demand for bank loans is very high. That is, the more deposits commercial
bank is able accumulate the greater is its capacity to offer more loans and make profits; Devinaga
Rasiah (2010). However, one should be aware that if banks loans are not high in demand, having
more deposits could decrease earnings and may result in low profit for the banks. This is because
deposits like Fixed, Time or Term deposits attract high interest from the banks to the depositors,
Devinaga Rasiah (2010). Investigation done by Husni (2011) on the determinants commercial
banks performance in Jordan disclosed that there is significant positive relationship between
ROA and Total liability to total Assets. To capture deposits in the model (Vong et al., 2009)
presented the effect of deposits (DETA) on profitability as deposits to total assets ratio.
2.4.4 Capital ratio

Devinaga (2010) and Vong et al. (2009) included capital ratio (EQTA or CTRA) as a variable in
their study of determinants of banks profitability and performance because capital also serve as a
source of funds along with deposits and borrowings. They argue that capital structure which
includes shareholders’ funds, reserves and retained profit affect the profitability of commercial
banks because of its effect on leverage and risk. They documented that, commercial banks assets
could be also financed by either capital or debt.

2.4.5 Liquidity ratio

According to Devinaga Rasiah (2010) commercial banks are required by regulators to hold a
certain level of liquidity assets. And the reason behind this regulation is to make sure that the
commercial banks always possess enough liquidity in order to be able to deal with bank runs. He
further argue that a bank assume the status of highly liquid only if it has been able to accumulate
enough cash and have in possession other liquid assets as well as having the ability to raise funds
quickly from other sources to be able to meet its payment obligation and other financial
commitments on time.

2.4.6. Taxation

Vong et al. (2009) defined the tax variable (TOPB) in their study as taxes over operating profit
before tax. This study treated it as separate variable others like Devinaga Rasiah (2010) added it
to the expense variable but whatever way one sees it, one still cannot ignore its impact on the

12
profitability of banks. Vong et al. (2009) argues that if a positive relationship exists between the
tax variable and the profitability, it indicate that the bank is able to pass the tax cost on to its
Customers by increasing the fees and the interest spread. Moreover, they further stressed that
findings of Demirguc-Kunt and Huizinga (1999), Bashir (2000) and Jiang et al. (2003) indicated
a positive relationship existing between the tax variable and profitability.

2.5. Empirical Review

England et al. (1998) was the first important study, which estimated the number of US banks
offering electronic banking and analyzed the structure and performance characteristics of these
banks. It found no evidence of major differences in the performance of the group of banks
offering electronic banking activities compared to those that do not offer such services in terms
of profitability, efficiency or credit quality. However, transactional electronic banks differed
from other banks primarily by size.

In contrast to the results of England et al. (1998), Furst et al. (2000a, 2000b, 2002a and 2002b)
found that banks in all size categories offering electronic banking were generally more profitable
and tended to rely less heavily on traditional banking activities in comparison to non- electronic
banks. An exception to the superior performance of electronic banks was the de novo (new
startups) Internet banks, which were less profitable and less efficient than non-Internet de novos.
The authors concluded that Internet banking was too small a factor to have affected banks’
profitability. Sullivan (2000) found that click and mortar banks in the 10th Federal Reserve
District incurred somewhat higher operating expenses but offset these expenses with somewhat
higher fee income. On average, this study found no systematic evidence that banks were either
helped or harmed by offering the Internet delivery channel. Similar to the results of Furst et al.
(2000a, 2000b, 2002a and 2002b), this study also found that de novo click and mortar banks
performed significantly worse than de novo brick and mortar banks.

Using information drawn from banks in Italy, Hasan et al. (2002) found that the Internet banking
institutions were performing significantly better than the non- Internet groups. Additionally, the
risk variables associated with the Internet group continued to be lower relative to the non-
Internet group. The asset-liability variables revealed that on average the banks in this Internet
group were larger and had significantly higher trading and investment activities and less

13
dependent on retail deposits (both demand and saving deposits) relative to the non-Internet
group. The only category where the Internet group showed a lower performance was the
noninterest expense category. It found a significant and positive link between offering of Internet
banking activities and banks’ profitability and a negative but marginally significant association
between the adoption of Internet banking and bank risk levels particularly due to increased
diversification.

Hernando and Nieto (2005) examined the performance of multichannel banks in Spain between
1994 and 2002. The study found higher profitability for multichannel banks through increased
commission income, increased brokerage fees and (eventual) reductions in staffing levels and
concluded that the Internet channel was a complement to physical banking channels. In contrast
to earlier studies, the multichannel banks in Spain relied more on typical banking business
(lending, deposit taking and securities trading). The adoption of the Internet as a delivery channel
had a positive impact on banks’ profitability after one and a half years of adoption. It was
explained by the lower overhead expenses and in particular, staff and IT costs after the same
period.

Sathye (2005) investigated the impact of the introduction of transactional Internet banking on
performance and risk profile of major credit unions in Australia. Similar to the results of Sullivan
(2000), the Internet banking variable didn't ’t show a significant association with the
performance as well as with operating risk variable. Thus, Internet banking didn't ’t prove to be a
performance enhancing tool in the context of major credit unions in Australia. It neither reduced
nor enhanced risk profile. DeYoung (2001a, 2001b, 2001c and 2005) analyzed systematically
the financial performance of pure-play Internet banks in U.S. The study found relatively lower
profits at the Internet only institutions than the branching banks, caused in part by high labour
costs, low fee based revenues and difficulty in generating deposit funding. However, consistent
with the standard Internet banking model, the results indicated that Internet-only banks tended to
grow faster than traditional branching banks. Internet-only banks have access to deeper scale
economies than branching banks and because of this; they are likely to become more financially
competitive over time as they grow larger. Delgado et al. (2004 and 2006) found similar results
for Internet-only banks in the EU. Nevertheless, the magnitude of technology based scale

14
economies found in Delgado et al. (2004 and 2006) was substantially larger than that estimated
by DeYoung studies.

Mahotra and Singh (2007) examined the impact of Internet banking on banks’ performance and
risk in India. The study examined a comprehensive set of 10 measures of financial performance
that made it possible for the authors to critically look into bank performance. By developing a
deeper understanding of these phenomena, the researchers drew more insightful inferences about
the impact of the Internet on banking on business strategies, production processes and financial
performance. The results of the study revealed that on average, Internet banks are more
profitable than non-Internet banks and are operating with lower cost as compared to non-Internet
banks, thus, representing the efficiency of the Internet banks.

Njuru (2007) did a study on the challenges in implementing electronic banking strategy by
commercial banks in Ethiopia. The objective of the study was establishing the challenges
inhibiting electronic banking implementation and how banks are responding to these challenges.
The targets of the study were the commercial banks in Ethiopia. This study gives a brief
overview of the academic literature on the challenges and the responses that organizations
employ in strategy implementation and the extent of electronic business use.

Malhotra (2009) did a study on the Impact of Internet Banking on Bank Performance and Risk:
The Indian Experience. Particularly, it seeks to examine the impact of Internet banking on banks’
performance and risk. Using information drawn from the survey of 85 scheduled commercial
bank’s websites, during the period of June 2007, the results show that nearly 57 percent of the
Indian commercial banks are providing transactional Internet banking services. The univariate
analysis indicates that Internet banks are larger banks and have better operating efficiency ratios
and profitability as compared to non-Internet banks. Internet banks rely more heavily on core
deposits for funding than non-Internet banks do. However, the multiple regression results reveal
that the profitability and offering of Internet banking does not have any significant association,
on the other hand, Internet banking has a significant and negative association with risk profile of
the banks.

Khrawish and Al-sadi (2011) made an attempt to assess the impact of e-banking on banks
profitability for the banking sector in Jordan during the period (2000-2009). Their study found

15
that for banks that do not apply the e-banking services through the Internet, have no significant
effect on the Return on Equity (ROE) and the margin of the sample, but significant in terms of
Return on Assets (ROA). For banks that apply the electronic banking services for less than 2
years, there is no significant effect of these services on the return on assets and the return on
equity but was founded to be significant on margin. For banks that apply the electronic banking
services, there is no significant effect of these services on banks profitability after 2 years of
applying it for the tested sample during the period 2000-2009.

Oginni, Mohammed, El-maude and Abam (2013), did a study on e-banking and bank
performance:
evidence from Nigeria. The study examined the impact of electronic banking on banks’
performance in Nigeria. Panel data comprised annual audited financial statements of eight banks
that have adopted e-) and retained their brand name banking between 2000 and 2010 as well as
macroeconomic control variables were employed to investigate the impact of e-banking on return
on asset (ROA), return on equity (ROE) and net interest margin (NIM). Result from pooled OLS
estimations indicate that e-banking begins to contribute positively to bank performance in terms
of ROA and NIM with a time lag of two years while a negative impact was observed in the first
year of adoption. It was recommended that investment decision on electronic banking should be
rational so as to justify cost and revenue implications on bank performance.

Ongare (2013), did a study on the effect of electronic banking on the financial performance of
commercial banks in Ethiopia, the study sought to establish whether there exists a relationship
between the dependent variable, for example, performance measured by profit after tax and the
independent variables consisting of number of ATMS, number of debits and credit cards issued
to customers, number of point of sales terminals and the usage levels of Mobile banking, Internet
banking and Electronic funds transfer, as components of e-banking. The study used secondary
data which was collected from the annual report of commercial banks and Central Bank of
Ethiopia. The study used both descriptive and inferential statistics in analyzing the data. The
findings of the study were that e-banking has a strong and significant effect on the profitability of
commercial banks in the Ethiopia banking industry. Thus, there exists positive relationship
between e-banking and bank performance.

16
Maiyo (2013), condiucted a study on the effect of electronic banking on financial performance of
commercial banks in Ethiopia. The main objective of the study was to establish the effect of
electronic banking on financial performance of commercial banks in Ethiopia. The specific
objectives were to determine the extent of e-banking adoption and the effect of this adoption on
financial performance of commercial banks in Ethiopia. The study adopted a descriptive research
design. Primary data was collected through data collection form that was developed and sent to
the respondents of commercial banks.

2.6. Summary of Literature Review

The evidence of the impact of the adoption of Internet as a delivery channel on financial
performance wii mixe at both sides. Nevertheless, the latest studies seem to find a positive
relationship with profitability. It can be argued that as the intensity and experience in the usage
of Internet increases, the financial performance of multichannel banks is likely to improve. The
number of banks offering financial services over the Internet is increasing rapidly in Ethiopia. By
using transactional websites customers can check account balances, transfer funds, pay/ receive
bills, apply for loans, and perform a variety of other financial transactions without leaving their
home or place of business. In other markets internet-only banks have struggled for profitability.
These difficulties contrast with relatively recent predictions that they will come to dominate
traditional branching banks, (Cheruiyot, 2010).

According to the standard Internet based bank business model, low overhead expenses and
access to larger geographic markets shall allow Internet based banks to offer better prices
(higher deposit rates, lower loan rates) than branching banks, grow faster than branching banks,
and still earn normal profits. However, in practice the number of physical branch locations is
growing, not shrinking, (Cheruiyot, 2010). In Ethiopia context, many publications throw light
over the importance of Internet banking and also its prospects for the Ethiopian banking industry.
However these studies don’t depict an empirical relationship between banks’ profitability and
electronic banking. The purpose of this paper is to study the same correlation applicable in
Ethiopia context.

17
 CHAPTER THREE

3. RESEARCH METHODOLOGY
3.1. Introduction
The chapter will present the research design, population of the study, sample size, data sources
and methods of data analysis.

3.2. Research Design

Descriptive Research design research suggests linkages between variables by observing existing
phenomena and then searching back through available data in order to try to identify plausible
relationships. It will concern with determining cause and effect relationship and to understand
which variable is dependent and which is independent. This research design will the best in
explaining if two variables are related or if they vary. This wil be establish by use of enough
information and data for testing cause and effect relationship. It aim to determine the effects of
budgeting performance and the empirical evidences that help answer the research objective.

3.3. Population
The population for this study was commercial banks of Ethiopia. There are a total of 43 sample
selection in Yirgalem branch of Commercial Banks of Ethiopia which will form the target
population for this study. As explain that the target population shall have some observable
characteristics, to which the researcher intends to generalize the results of the study. A sample
survey will be used. The sample a period of 4 years between years 2022 to 2026.

18
Undertaking a census survey, many a times, is not possible. Sometimes it is possible to obtain
sufficiently accurate results by studying only a part of total population. In sampling, however,
the samples selected should be as representative of the total population as possible in order to
produce a miniature cross-section. The study of all individual members of a population.

3.4. Data Collection

The bank’s financial statements; return on assets, revenue generated from ATM's, POS and
electronic banking, mobile banking and the natural log of total Secondary data from financial
statements of commercial banks of Ethiopia will collect using data collection forms. The study is
being collect secondary data for the for 4 years from 2022 to 2026, on the bank profitability and
electronic banking. The data obtained from deposits for the banks.

3.5. Methods of Data Analysis

Descriptive analysis was used to analyze effectiveness of e-banking on profitability by using
qualitatively and quantitatively (descriptive statistics). Qualitative analysis is multi-method in
focus, involving an interpretive, naturalistic approach to its subject matter. The qualitative
approach enables respondents to be intensively engaged in responding to the questions geared
towards the objectives of the study (Kumar, 2005). This design is suitable to find out the
prevalence of the situation or the phenomena as it stands at the time of the study.

Furthermore, it describes patterns and general trends in a data set. By applying descriptive
statistics, one can compare and contrast different categories of the sample units with respect to
the desired characteristics. The descriptive statistics was used in this study include tabular
analysis, mean, standard deviation, percentages and frequency of occurrence.

3.7 Time schedule

No Activity Months

19
 O Nov Dec Jan Feb Mar April May
ct

1 Topic selection 

2 preparation of research 

proposal

3 Recommendation of 

comments to first draft of the

proposal

4 Typing of final proposal 

5 Submission of proposal 

6 Data collection 

7 Data analysis 

3.8 Budget schedule

Item Quantity Unit cost Total cost

(Birr)

Transpiration

20
 40

Typist 150

Equipment

Printing 150 1birr 150

Paper 2 reams 120 240

Pen 10 5.00 50

Flash 1 200 200

Binding 7 15 105

Miscellaneous expense 200

Total 1110

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Journal of Internet Banking and Commerce, 15, 2-9.

Gefen, D. and ad Straub, D. W. (2004). E-Commerce and the importance of social presence:
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Larpsiri, R., Rotchanakitumnuai, S., Chaisrakeo, S., and Speece, M. (2002). The impact of
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Olatokun, W. M., and Igbinedion, L.J (2009). The Adoption of Automatic Teller Machines in
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Polatoglu, V. N., and Ekin, S. (2001). An empirical investigation of the Turkish consumer’s
acceptance of Internet banking services. International Journal of Bank Marketing, 19, 157-65.
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