Risk management& its impact on financial performance (the case of Adiss

Ababa zemen bank)

By
Mikiyas Desalegn

GAGE University College

March 2023

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Risk management& its impact on financial performance (the case of Adiss
Ababa zemen bank)

By Mikiyas Desalegn

In Partial Fulfillment of the Requirements for the Degree of

Master of Arts in Business Administration

GAGE University College

Graduate Studies

MARCH 2024

GAGE University College

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 Declaration

I hereby declare that this work entitled “Risk management& its impact on financial
performance (the case of Adiss Ababa zemen bank)”, is the outcome of my own effort and
study and that all sources of materials used for the study, to the best of my knowledge,
have been duly acknowledged. I have produced it independently except for the guidance
and suggestion of my research advisor.
This study has not been submitted for any degree in this university or any other
university. It is offered for the partial fulfillment of Degree of Masters in Business
Administration.

Declared by: Mikiyas Desalegn

Signature:
Date:

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 STATEMENT OF THE AUTHOR

First, I declare that this thesis is my original work and that all sources of the materials
used for this thesis have been dully acknowledged. The thesis has been submitted in
partial fulfillment of the requirement for M.A Degree at GAGE University College.
I seriously declared that this thesis is not submitted to any other institutions anywhere for
award of any academic degree, diploma, or certificate.

Brief quotation from this thesis is allowed without special permission provided that
accurate acknowledgement of sources is made. Request for permission for extended
quotation from or reproduction of this manuscript in whole or in part may be granted by
the Dean of GAGE University College when in his or her judgment the proposal use of
the material is in the interest of scholarship. In all other instances, however permission
must be obtained from the author.

Name of the author: Mikiyas Desalegn Signature --------------------------

Place

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 ACKNOWLEDGEMENTS

First and foremost I would like to thank the Almighty God for helping me in all the process of my study
until this time. Then I would like to thank my families for supporting me throughout the whole study.
I would like to give my deepest gratitude to my advisor Dr ASEGID for his guidance and
encouragement in preparing and finishing this proposal. I thank him for his constructive
comments and guidance.
Finally, I would like to extend my gratitude to those who provided direct and indirect support to
help me in writing my proposal.

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Table of content page

Chapter One: Introduction...............................................................................................4

1.1. Background of the Study...........................................................................................5

1.3. Statement of the Problem.........................................................................................5

1.4 Objectives of the Study...............................................................................................5

1.4.1 General Objective....................................................................................................5

1.4.2. Specific Objective...................................................................................................5

1.6 Significance of the Study............................................................................................6

Chapter Two: Review of Related Literature.....................................................................7

2.1 Theoretical Review.....................................................................................................7

Chapter 3: Research Approach and Methodology...........................................................12

3.1 Introduction................................................................................................................12

3.2 Research Approach.....................................................................................................12

3.3 Research Method........................................................................................................12

3.4 Research design...........................................................................................................13

3.5. Sample & Population..................................................................................................13

3.6 Data Type and Source..................................................................................................14

3.7 Method of Data Analysis.............................................................................................14

3.8 Controlled Variables....................................................................................................14

3.9 Empirical Model...........................................................................................................15

3.10 Model Assumptions....................................................................................................16

Reference...........................................................................................................................18
ACRONYMS

AIB: Awash International Bank S.C.

ATM: Automated Teller Machine

BLUE: Best Linear Unbiased Estimator

BOA: Bank of Abyssinia S.C

CBE: Commercial Bank of Ethiopia

ZB: ZEMEN BANK S.C

CLRM: Classical Linear Regression Model

DB: Dashen Bank S.C

DCS: Debit Cards

HP: Hypotheses

NBE: National Bank of Ethiopia

NIB: Nib International Bank S.C

OLS: Ordinary Least Square

ROA: Return on Assets

ROE: Return on Equity

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UB: United Bank S.C

WB: Wegagen Bank S.C

POS: Point of sale

Abstract
In show disdain toward of the prominent utilize of the e-banking as a conveyance channel in banks´,
there is a relatanking benefit on banks´ monetary execution. Since of this truth, this paper fills the hole.
Since, ponder is pointed to test the impact of e-banking on the productivity of ZEMEN banks amid the
period 2011-2015. The consider test comprises of six ZEMEN banks.
Percentages are utilized to test the impact on benefit; these rates are Return on Resources and Return on
Value as benefit measures. Other utilized as free factors are: ATM, Charge cards, and POS. Relapse
examination is utilized to test the impact of e-banking administrations on the Benefit .There lush on
examination appear that there is positive impact of e-banking administrations on the productivity of
ZEMEN banks terms of ROA, and ROE.
Keywords: Electronic managing an account, ROA, ROE, ATM, POS, Charge cards

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Chapter One: Introduction

1.1. Background of the Study

The last decade of the 20th century witnessed profound technological changes among which is the
advent of electronic commerce, or the exchange of products and services and payments via
telecommunication systems (Kalakota & Whinston, 1997).consequently according to Gunasekaran and
Love (1999) most industries have been influenced, in one way or another, by this promising new
technology. In addition to that according toJyotiVijet al, (2014) the new millennium has opened a
plethora of opportunities in information technology and has made tremendous impact in Banking. 4

All over the world, there is an increasing demand for the services of E -banking, while some banks have
been able meet the required needs for the introduction of E-banking in their host countries; it has not
worked so well in other places. As Emor (2002) noted, although countries like USA, Canada and other
leading European countries stand tall in this development, other success stories have also been
recorded in less developed countries like India, Malaysia, South Africa etc. despite the perceived
hampering difficulties in other less developed countries, some banks have been successful in countries
like Ghana, Nigeria, Kenya and many others. 4

While financial institutions took steps to implement e-banking services in the mid-1990s, many
consumers were hesitant to conduct monetary transactions over the web. It took widespread adoption
of electronic commerce, based on trailblazing companies such as America Online, Amazon.com and
eBay, to make the idea of paying for items online widespread. 4Despite the rapid growth and practice of
e-banking, globally, several empirical studies exist on e-banking and bank performance. However, some

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studies carried out, though offered useful guide for e-banking strategic decisions, provide empirical
mixed evidences. For example, Furst, Lang and Nolle (2000), Hasan, Maccario and Zazzara (2002), Yibin
(2003), Hasan, Zazzara and Ciciretti (2005), Hernado and Nieto (2006), De Young, Lang and Nolle (2007)
and Ciciretti, Hansan and Zazzara, (2009) reported positive impact; Delgado, Hernando and Nieto (2004)
and AL-Samadi et al. (2011) observed a negative impact while Egland et al. (1998) observed no
significant impact.

In developing countries, the lack of electronic banking infrastructure block impacts of the expected cost
effectiveness and profitability. In some developing countries, it is not available strong effects on the
profitability of electronic banking activities because of inadequate information technology infrastructure
of the branch and ATM network are limited. The case is also real for online banking activities. Internet
infrastructure based on relatively old technology blocks the achievement of expected performance of
banks in developing countries (Alam et al., 2007, Gutu 2014).The use of technology has several
advantages ranging from regulation, operational costs; accessibility of services will accrue to the
institution and customers that adopt the technology that will in turn influence the firm’s financial
performance (Nzau, 2013). The purpose of this paper will be to empirically examine the effect of e-
banking and bank performance in selected ZEMEN banks.

51.2 Statement of the Problem

It is doubtful that electronic based banking provides relatively high return, low operational cost and
increase profitability of the bank. Khrawish and Al-Sa’di (2011), Al-Samadi and Al-Wabal (2011), and
Gutu (2014) findings show that the impact on the profitability of some electronic banking is negative. Al-
Samadi and Al-Wabal (2011) determined that the impact of the negative performance of electronic
banking operations in Jordan, since, customers still depending on traditional distribution channels.

In developing countries, the lack of electronic banking infrastructure block impacts of the expected cost
effectiveness and profitability. In some developing countries, it is not available strong effects on the
profitability of electronic banking activities because of inadequate information technology infrastructure
of the branch and ATM network are limited. The case is also real for online banking activities. Internet
infrastructure based on relatively old technology blocks the achievement of expected performance of
banks in developing countries (Alam et al., 2007, Gutu 2014).

On the other hand, recent studies one banking and performance of the banks in African countries that
relatively lower level of development. For example, Abaenew et al. (2013) and Hassan et al. (2013) made
studies on Nigeria and Adua and Kingoo (2012) and Nguyen Gakur Connection (2013) made studies on
Kenya The electronic banking activities increase profitability on banks.Previous studies in Ethiopian e-
business focus on the assessment study and the correlation between e-banking and customer
satisfaction (Assefa 2013). Likewise, Gemechu (2014); Gardachew (2010) evaluated the adoption of e-
banking in the context of banks perception, in addition, one research found on the effect of e-banking
on performance (Tilahun2015) focus only ATM,debit card and POS.

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According to Adua and Kingoo (2012) there are a number of empirical studies concerning the effect of
adoption of e- banking on the performance of banks, some scholars observed positive impact, some
observed negative while other researchers have drawn mixed conclusions.

From the above paragraph clearly seen, there is mixed evidence about e-banking on banks' performance
that it becomes imperative to carry out a study in Ethiopian context whether e banking has effect on
financial performance of ZEMEN banks. It is therefore, important for bankers, bank regulators,
supervisors and researchers to understand e-banking effects the performance of banks. Hence, the
researchers' main purpose will be to fill this significant gap by providing systematic analysis of electronic
banks on the performance of Ethiopian ZEMEN banks.

1.3 Objectives of the Study

1.3.1 General Objective

The general objective of this study will be effect of e-banking and bank performance of ZEMEN banks,
focusing on its contribution on return on equity and return on asset.

1.3.2. Specific Objective

The specific objectives of the study will be:-

 To examine the effect of ATM on return on Equity of ZEMEN banks.

 To examine the effect of POS on return on Equity of ZEMEN banks.
 To examine the effect of Debit cards on return on Equity of ZEMEN banks.
 To study the effect of ATM on return on Asset of ZEMEN banks.
 To study the effect of POS on return on Asset of ZEMEN banks.
 To study the effect of Debit cards on return on Asset of ZEMEN banks.

1.4. Research Hypothesis

Based on the research objective and thorough analysis of theoretical and empirical literatures, the
researcher will attempt to address and test the following hypothesis:

 Hypothesis one: ATM has a positive relationship with return on Equity of ZEMEN banks.
 Hypothesis two: POS has a positive relationship with return on Equity of ZEMEN banks.
 Hypothesis three: Bank debt card has a positive relationship with return on Equity of ZEMEN
banks.
 Hypothesis four: ATM has a positive relationship with return on Asset of ZEMEN banks.
 Hypothesis five: POS has a positive relationship with return on Asset of ZEMEN banks.
 Hypothesis six: Bank debt card has a positive relationship with return on Asset of ZEMEN banks.

1.5. Scope and Limitation

The scope of the study will extends up to examining the effects of E-banking on Bank performance. As it
is well-known, most ZEMEN banks are started E-banking recently and if sample of population want to be

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increased then the frequency of observation will decreased. This may create difficulties to find out the
true relation between dependent variable and independent variables. In order to make generalization
from sample to population, and to increase number of observation of the study, a combination of the
maximum number sample of population (ZEMEN banks) and frequency of observation (Year of
operation) were taken into account. As a result, the researcher used 5 years data by taking sample of
6(six) ZEMEN banks that have been operating 2001 to 2015 while deposit mobilization activity in
Ethiopia is made by the entire seventeen ZEMEN banks.

1.6. Significance of the Study

The study will generate the following benefits:

 The finding of the study will be of great importance to executives of ZEMEN banks as they will
understand the effect of electronic banking on profitability of ZEMEN banks, this will assist them
in making decision on whether to adopt electronic banking or not and the expected results of
electronic banking adoption to their banks profitability.
 The study finding will enlighten the policy makers in the banking industry on the expected effect
of electronic banking on banks profitability; this will assist them in designing appropriate policy
for electronic banking adoption by ZEMEN banks.
 The study will be of great importance to future scholars and academicians as it will form basis
for future research as well as providing literature for future studies on electronic banking.

1.7. Organization of the Study

this research proposal will be organize in four chapters. Following this, Chapter two describes the review
of related literatures. Chapter three provide detail description of the methodology. Chapter four
contains data presentation, analysis and interpretation. Finally, the last chapter will concludes the total
work of the research and gives relevant recommendations based on the findings.

Chapter Two: Review of Related Literature Introduction

This chapter will reviews the existing literature on electronic banking on performance of ZEMEN banks.
In specific the chapter reviews that theoretical review where various theories on electronic banking are
reviewed, empirical review where empirical studies done on effects of electronic banking on banks
performance are reviewed.

2.1 Theoretical Review

2.1.1 Definition of E- Banking

A common definition for electronic banking comes from the Basel Committee on Banking Supervision:
“e-banking includes the provision of retail and small value banking products and services through
electronic channels as well as large vale electronic payments and other wholesale banking services
delivered electronically” (BCBS, 1998).

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Electronic banking can be defined as the deployment of banking services and products over electronic
and communication networks directly to customers (Singh & Malhotra, 2004). Vilattes (1997) defines E-
banking as a distance banking that not only handles the flow of information between customers’ “living
spaces” (e.g. homes, offices, etc.) and the physical facilities of the bank, but also deals with solicitation,
sales, distribution and access to services, all without requiring the customer and the financial institution
representative to be in the same physical place at the same time. In addition Mols (1998), electronic
banking is the automated delivery of new and traditional banking products and services directly to
customers through electronic medium. This system allows customers to access their accounts, transact
business, make enquiries and have prompt responses from banks.

E-Banking is defined as using electronic devices like internet, wireless connection networks, ATM, phone
and cell phone in banking services. These services were parts of providing currency for and economic
system for the country (Laford & Li, 2005).

The more we are going to the higher levels of E- Banking, the less manual works will be, the more
computer systematize, the more networks available, the less time restriction, and ultimately the more
secure banking system will be. Services are done by internet network that is popular for its security. On
the other hand, E- Banking is the use of communication in exchanging currency in banking system
(Godarzi & Zobaidi 1999). In other definition E- Banking is a service producer with low costs by the help
of electronic channels. These productions and services canbe: account bill, loan, deposit management,
E-payment, E-money. E- Banking is using internet and or intranet that are accessible for the people.
Definitions such as digital money, E- check, Emoney, E- signature are new phenomena that their origin
returns to E-Banking (bid abadi &alahyary 2003). Accounting, exchanging, receiving bill, and paying bill
are given to the clients a list with time order. E- Banking has a lot of benefits like increasing clients, and
decreasing bank costs. Moreover, by using E- Banking it is easy to the bank to do their services faster
and with more security. They can also increase their shareholders.

Claessens et al (2001) mention the leapfrogging opportunities e-finance provides to emerging countries.
Despite weak financial systems and structures, these countries may benefit from their access to the
latest technology when building up their financial intermediation infrastructure.

“E-finance can allow countries to establish a financial system without first building a fully functioning
financial infrastructure. Because e-finance is much cheaper, since it lowers processing costs for
providers and search and switching costs for consumers, providers can market financial services
involving smaller transactions to lower-income borrowers, even in remote areas. To further this,
government’s main role will be to enhance the enabling environment.”

It is stated that the most pressing policy issues will involve the enabling environment for efinance;
setting regulatory and other frameworks for contract enforcement, for information and privacy, and for
telecommunications, security, and public infrastructure for electronic transactions. Claessens et al
(2002) further contribute to leapfrogging advantage of emerging markets by suggesting that e-finance
can benefit financial sector development of emerging countries by lowering costs, increasing the
breadth and quality and widening access to financial services.

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2.1.2. The Concept of E-Banking

Today, an individual’s ability to pay for goods and services is simply reflected in accounting records of his
or her bank. Thus, it is important to appreciate at the outset that money as it is defined today is just
simply information, which can be electronically transmitted to facilitate economic transaction. It is this
new definition of money, which has resulted in the electronic revolution of financial institution
(Balachandher, 2001).

According to Marsh (2005) e-banking is having 24 hour access to banking operations such as through an
Automated Teller Machine (ATM) with Personal Identification Number (PIN) or making a direct deposit
into checking or saving accounts Additionally, Insely& Fleming (2000) argue that ―e-banking is a general
term for a process by which a customer may conveniently perform banking transactions electronically
without visiting a brick and mortar institution‖.

Bhattacherjee (2001) expands this definition by stating that e-banking is as an integrated system that
can provide customers flexible, convenient and inexpensive platform with integrated services of online
personal banking products including online checking and saving accounts, money market accounts,
certificate of deposit, credit cards, home equity loan, home mortgage, insurance, investment services,
portfolio management and other related financial services‖. Thus the electronic platform eliminates the
traditional way of banking whereby customers had no option than to walk to a bank to perform
transactions. It means that with e-banking the customer can conduct his/her transactions anytime,
anywhere without having to walk to a bank.

2.1.3. Type of Electronic Banking

Electronic banking consists of the following: mobile banking, internet banking, telephone banking,
electronic card etc.

2.1.4. Mobile Banking

Mobile banking involves the use of mobile phone for settlement of financial transactions. It supports
person to person transfers with immediate availability of funds for the beneficiary. Mobile payments use
the card infrastructure for movement of payment instructions as well as secure Short Message Service
(SMS) messaging for confirmation of receipt to the beneficiary. Mobile banking is meant for low value
transactions where speed of completing the transaction isa key. The services covered under this product
include account enquiry, funds transfer, recharge phones, changing of passwords and bill payment
which are offered by few institution (Sathye, 1999).

2.1.5. Internet Banking

Internet banking involves conducting banking transactions such as account enquiry printing of statement
of account; funds transfer payments for goods and services, etc. on the internet (Worldwide Web) using
electronic tools such as the computer without visiting the banking hall. E-commerce is greatly facilitated
by internet banking and is mostly used to effect payment. Internet banking also uses the electronic card
infrastructure for executing payment instructions and for final settlement of goods and service over the

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internet between the merchant and the customer currently the most common internet payments are
for consumer bills and purchase of air ticket through the websites of the merchants (Littler, 2006).

2.1.6. Telephone Banking

These are banking services which a customer of a financial institution can assess a telephone line as a
link to the financial institution’s computer center. Services rendered through telephone banking include
account balance funds transfer, change of pin, and recharge phones and bills payment (James, 2009).

2.1.7. Electronic Card

An electronic card is a physical plastic card that uniquely identifies the holder and can be used for
financial transactions on the internet. For instance, Automated Teller Machine (ATM) and Point-of Sales
(PoS) terminal are used to authorize payment to the merchant or seller (James, 2009). The various types
of electronic cards include debt, credit cards; releasable cards require visiting banks for replenishment.
Debit cards are linked to local bank accounts and offerimmediate confirmation of payment. Credit cards
can be used to link a customer to a credit lineand can also be used for accessing local and international
networks and are widely accepted in most countries. The underlying infrastructure and operational rules
are often provided by global trusted schemes (such as visa and master card) in addition to local lines
(James, 2009).

2.1.8. Automated Teller Machine (ATM)

Automated Teller Machine (ATM) is a device, which offers a range of services to users that are
authorized by using a PIN-code. From a cash ATM, user is able to make payments, withdraw money or
view account information (Myllynen, 2009).

ATMs have reduced costs per transaction to almost one-fourth as compared to almost the branches.
ATMs support a variety of transactions such as cash withdrawal, cash deposits and placement of service
requests, including the request for a new cheque book. New technology has facilitated the installation of
ATMs in shopping malls or busy commercial localities and has further reduced the transaction and
operation costs for banks (Sambamuthy et al., 2010).

The ATMs were one of the first ICT technologies to be used by banks and it has remained one of the
most successful. The ATM is a computerized telecommunication device that provides bank customers
with self-service access to their financial accounts. A prototype was first created in 1939, a modern ATM
was patented in 1966, an ATM was installed in Barclays Bank in London in 1967 and the United States
started productizing ATMs in 1968 (Bellis, 2010).

According to Koltveit et al. 2000, alternate delivery channels such as ATMs, Telephone Interactive Voice
Response systems, and online banking are mature channels, but advance in ICT permit opportunities for
enhancements even in these established technologies. Current popular alternate delivery channel
technologies include service such as short message service (SMS) banking, text alerts, bill pay,
automated clearinghouse, electronic payments, mobile banking, e-mail alerts and notifications, and

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online banking. These technologies are all relatively recent ICT enabled strategies that enhance
performance.

As stated by Morsi (1996) banks are adding ATM functions such as on line loan applications, distribution
of statements, dispensing of foreign currency, purchase of traveler’s checks, and check cashing to attract
customers.

2.1.9. Point of Sale (POS)

According to Malak (2007) cited in Ayana (2014) POS system allows consumers to pay for retail purchase
with a check card, a new name for debit card. This card looks like a credit card but with a significant
difference. The money for the purchase is transferred immediately from account to debit card holder to
the store’s account.

2.2. Empirical Literature

Previous empirical studies it is rational that whether or not e-banking system proves correct and
whether banks capture benefits of this new technology based banking will ultimately depend on their
assessment of the profitability. If banks find that with adoption of e-banking system their financial
performance improves, then there will have a positive impact on the investment in such technology
based banking services. There exist a number of empirical studies concerning the impact of adoption of
e- banking on the performance. Some scholars observed positive impact, some observed negative while
other researchers have drawn mixed conclusions.

Positive conclusions: using a sample of 72 Spanish ZEMEN banks and data over a period of 1994–2002,
Hernando and Nieto (2007) found that impact of adoption of e-banking system takes time to contribute
to performance of banks and for the sample banks authors found significant11positive impact, after
three years of adoption of e-banking system, of a transactional web site on financial profitability,
measured in terms of Return on Equity (ROE) and Return on Assets (ROA), of the banks. In the context of
Turkey, using data of 1996–2005 on thirteen banks Onay et al. (2008) examined the effects of internet
banking on the financial performance of banks. In addition to employing the approach of Hernando and
Nieto (2007), they have used specific and macroeconomic control variables in the analysis and found
that e-banking has a positive impact on banks’ ROE with a time lag of two years.

Rahman (2007) studied impact of innovative technology on the profitability of the banks operating in
Bangladesh and found that technology adopted banks experienced improved performance as they gain
maturity. The limitation of this study is that author only showed the performance changes overtime but
did not explained whether such changes are significant or not. Aduda and Kingoo (2012) established a
positive relationship between e-banking and financial performance of banks by using Pearson Product-
Moment Correlation Coefficient test. Using data of twenty seven banks over the period of 2006 to 2010,
authors found that e-banking has strong and significant marginal effects on returns on asset in the banks
operating in Kenya. Karimzadeh et al. (2014) investigated the impact of e-banking on the profitability of
a bank in Iran. By using quarterly data over the period of 2004–2012, they found that expansion of e-
banking has significant positive association to the profitability, measured in terms of ROA, of the sample

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bank. Using a sample of 10 banks’ data over the period of 2002 to 2012, Rauf and Qiang (2014)
measured the impact of e-banking on the performance of Pakistani ZEMEN banks where the
performance was measured in terms of Return on Assets, Return on equity and interest margin. Their
empirical investigation revealed that e-banking has significant positive impact on margin, ROA and ROE
of the recent adopters whereas for the early adopters significant positive impact on ROE and Margin but
slightly on ROA. On the basis of findings, they conclude that banks can consider e-banking as a cost
saving effective strategy to compete with the domestic and foreign banks given a well-managed
monitoring and control over the risks involved in. Negative conclusions: contrary to the empirical
findings of positive impact of e-banking on the performance of the banks, many researchers found
negative impact. Using a panel data of fifteen Jordanian banks for the period of 2000–2010, Al-Smadi
and Al(2012).

Al-Samadi and Al-Wabal (2011), Khrawish and Al-Sa’di (2011), Sumra et al. (2011),Hosein (2013),
Malhotra and Singh (2006, 2007, 2009), Gutu (2014) studies upon developing countries such as India,
Pakistan, Jordan and Romania. Many of these studies show that electronic banking applications
diminishing operational costs and increasing profitability performance of banks. It is necessary relatively
short time to cope with and exceed initial setup cost of internet banking and other electronic-based
activities. This situation is encouraging electronic banking activities in developing countries. However,
customer portfolio must be expanded in order to increase the bank performance (Sumra et al., 2011).

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Chapter Three: Research Approach and Methodology

3.1 Introduction

This chapter will outlines the rationale of research approach and methodology used in this study. It
includes research approach, research design, data type, research method, sampling design, unit of
analysis, variables of the study, data analysis and research model.

3.2 Research Approach

Quantitative and qualitative research programs claim different philosophical perspectives, and
correspondingly, work with different underlying assumptions. Quantitative research identifies with
positivism, which, presented by Gall, Borg, and Gall (1996), is the belief “that physical and social reality is
independent of those who observe it”. Quantitative researchers are concerned with an objective reality
that is “out there to be discovered” (Krathwohl, 1998) and the researcher is independent of that which
is being researched (Creswell, 1994). Looking at the quantitative approach, Shulman (1986) speaks of
the positivistic or etic (own point of view) perspective of the researcher as, (“an outside observer
attempting to discover a law of relationships among observable features”).

According to Creswell (2009) Quantitative research is a means for testing objective theories by
examining the relationship among variables. These variables in turn, can be measured, typically on
instruments so that numbered data can be analyzed using statistical procedures. Experimental designs
are research approach for obtaining information about causal relationship and also allowing research to
assess the correlation between one variable and another (Kothari 2004)

Considering the research problem and objective along with the philosophy of the different research
approaches, the quantitative nature of the data collected, quantitative research approach is found to be
appropriate for this study.

3.3 Research Method

This research will use quantitative panel data. According to Stephanie (2008) in experimental design,
researchers plan to measure the response variable depending on the explanatory variable. The response
variable is an outcome measure for predicting or forecasting purposes of a study. It is also called
dependent variable or predicted variable. Any variable that explains the response variable is called
explanatory variable. It is also called independent variable or predictor variable. The most important
factor in the experimental design is randomization.(John, A. Hafiz, T.A. Khan, R. and Raeside, D. (2007)
“experimental (quantitative) designs are said to be the approach for obtaining information about causal
relationships, allowing researchers to assess the correlation (relationship) between one variable and

13
another” A principal factor of such designs is that one element is manipulated by the researcher to see
whether it has any impact upon another (Robson 1993).

The purpose of this secondary data and document survey study is to test the Economic Rationale of E-
Banking, task technology fit and innovation diffusion theory with respect to the independent variables
(i.e. ATM, POS and Debit card) to dependent variables such as; ROE and ROA on financial performance of
ZEMEN banks. The subsequent discussions in this section describe the method used in investigating the
effect of e-banking ZEMEN banks performance.

3.4 Research design

According to Kothari (2008), research design is the conceptual structure within which research is
conducted, it constitutes the blueprint for the collection, measurement and analysis of data as such the
design includes an outline of what the researcher did from writing the hypothesis and its operational
implications to the final analysis of data. Bhattacherjee (2012) defined a research design, a
comprehensive plan for data collection in an empirical research project. It has also indicated the two
categories of data collection techniques used in scientific research, quantitative and qualitative design.

According to Creswell (2003), the objective to be achieved in the study is a base for determining the
research approach for the study. In case, if the problem identified is factors affecting the outcome
having numeric values, it is quantitative research.Therefore, the researcher employed quantitative
research approach to see the regression result analysis with respective empirical literatures on the
effect of e-banking on ZEMEN banks performance. This quantitative study gathered information from
the Financial Statements of the bank. The years that were considered were 2011 to 2015, solicit
information concerning the Ebanking and bank performance. A panel data is analyzed using E-Views,
econometric software version 9.

Therefore, the researcher will employe quantitative research approach to see the regression result
analysis with respective empirical literatures on the effect of e-banking on ZEMEN banks performance.
This quantitative study gathered information from the Financial Statements of the bank. The years that
were considered were 2011 to 2015, solicit information concerning the Ebanking and bank performance.
A panel data is analyzed using E-Views, econometric software version 9.14

3.5. Sample & Population

There are eighteen banks in Ethiopia, out of which, seventeen are ZEMEN banks and the other is
Development bank. Among the total eighteen banks, two of them are owned by the government and
the remaining sixteen are privately owned (Birritu 2015) Hence, The main objective of the study is to
examine the effects of E-banking services on ZEMEN banks performance in Ethiopia, the seventeen
ZEMEN banks can be treated as population of the study. In line with balanced panel data approach, to
meet the desired objective of this study and to make generalization from sample to population, the
researcher will use maximum combination of years and number of banks and achieved the maximum

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number of observations through purposive sampling technique. Thus, out of seventeen ZEMEN banks
that are registered and operated in Ethiopia, six are selected. Sampled ZEMEN banks which are early
adopter of E-banking services, ZEMEN banks, Awash International Bank, Dashen Bank, Wegagen Bank,
Nib International Bank and Zemen Bank.So the researcher will believe that the sample size is sufficient
to make sound conclusion about the population. The banks will be select based on the purposive
sampling methodology taking maximum combination of years and number of banks and achieved the
maximum number of observations. Therefore, the matrix for the frame is 5*6 that includes 30
observations.

These ZEMEN banks will be select purposively, because the use of purposive sampling enables the
researcher to generate meaningful insights that help to gain a deeper understanding of15the research
phenomena by selecting the most informative participants that is satisfactory to its specific needs.

3.6 Data Type and Source

The sources of data for this research will be secondary sources. In order to carry out any research
activity information should be gathered from proper sources. Bank specific data will be collecte from
financial statements (i.e. Balance Sheet and Profit & Loss Statement) of each selected ZEMEN banks
included in the sample and NBE. The data will be collecte from 2011 to 2015 on annual base and the
figures for the variables were on June 30th of each year under study. Consistent and reliable research
indicates that research conducted by using appropriate data collection instruments increase the
credibility and value of research findings (Koul, L 2006).

3.7. Method of Data Analysis

To achieve the objectives the study, five years (2011 to2015) panel data of six ZEMEN banks will be
used. The collected panel data are analyzed using the descriptive statistics and multiple regressions. The
analysis of the descriptive statistics, the mean, and standard deviation, maximum and minimum values
are used to analyze the trends of the data. The study used EViews version 9 software. Furthermore, a
diagnostic test has been used in order to check the validity of the model based on the assumption of the
Classical Linear Regression Model (CLRM).

3.8 Controlled Variables

In order to isolate the effects of E-banking on bank performance, it is needed to control for
other factors that are expected to have some influence on profitability. The control
variables which are expected to influence bank’s profitability included in this study are
bank size and liquidity, Although there are other variable that affect bank performance the
study focus on the below variables only:

Bank Size: The size of the bank is also included as an independent variable. As noted in
Kapur and gualu (2011) inclusion of this independent variable helps to account for size
related economies (scale economies with reduced costs, or scope economies that result in
loan and product diversification, thus providing access to markets that a small bank cannot

15
entry) and diseconomies of scale. The banks that enjoy economies of scale incur a lower
cost of gathering and processing information resulting in high financial flexibility and
ultimately high spreads (Afzal, 2011). This means bigger banks can have lower costs per
unit of income and therefore higher net interest margin. Similarly, banks with larger branch
network can penetrate deposit markets and mobilize savings at a lower cost. Size is used to
capture the fact that larger banks are better placed than smaller banks in harnessing
economies of scale in transactions to the plain effect that they will tend to enjoy a higher
level of profits. Size of the bank is being measured using yearend natural log of total assets.
Most empirical studies reviewed find size to be positively related to profitability.
Consequently, a positive relationship is expected between size and profits.
Liquid Assets: Liquidity is another factor that determines the level of bank performance.
Liquidity refers to the ability of the bank to fulfill its obligations, mainly of depositors.
According to (Dang &Uyen, 2011) adequate level of liquidity is positively related with
bank profitability. The most common financial ratios that reflect the liquidity position of a
bank according to the above author are customer deposit to total asset and total loan to
customer deposits
Liquid Asset is which can be easily converted to cash, are often associated with the lower
rate of return. Hence, high liquidity would affect profitability negatively (Guru et al.,
2000). We use the ratio of total loans to total deposits to measure liquidity (LIQ). A
negative sign is expected to this variable.

3.9 Empirical Model

Performance refers to the degree of success in attaining stated objective (Sathye, 2005).
The major objective of banks as other financial institutions is maximizing shareholders'
wealth. Following the literature, Return on Equity (ROE) and Return on Asset (ROA) is
the common measure of performance.
Data analysis was done using E-view Version 9 whereby multiple regression models was
employed. To test the effects of electronic banking on profitability of ZEMEN banks, a log
it regression model was used:
Yjt= C+αXjt +βZt + εjt--------------------------(1)

j refers to the ZEMEN banks; t refers to year; Yjt is the dependent variable and refers to the
return on equity (ROE) of bank j in a particular year t; C is the intercept; X represents the
independent variable which is Electronic Banking, whereas Z represents the other
determinants of ZEMEN banks profitability; α and β are co-efficient and εjt represent the
error term. The significance of the regression model will be determined at 95% confidence
interval and 5% level of significance. The empirical model to be used in the study to test
the effect of electronic banking on profitability of ZEMEN banks in Ethiopia is presented

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as follows:
ROE jt=C+β1POSjt+β2ATMjt+β3DCjt+β4LOGTAt+β5LIQ +εjt(2)

Where:

ROE jt: return on Equity for bank j in year t

POS jt: is the point of sale which was measured by number of POS terminal.

ATM jt: is the Automatic Teller Machine which was measured by number of
ATM.
DC jt: is the Debit card which was measured by number of Debit cards users.
LOGTA jt: is the bank size which was measured using the natural log of total Asset for
bank j in year t.
LIQjt: is the bank liquidity which was measured by using parentage of total loans to total
deposits.
ROAjt=C+β1POSjt +β2ATMjt+β3DC jt+ β4LOGTAt+β5LIQ+εjt(3)

Where:

ROA jt: return on Asset for bank ji n year t

POS jt: is the point of sale which was measured by number of POS terminal.

ATM jt: is the Automatic Teller Machine which was measured by number of
ATM. DCjt: is the Debit cards which was measured by number of Debit cards
users.
LOGTA jt: is the bank size which was measured using the natural log of total Asset for
bank j in year t.
LIQjt: is the bank liquidity which was measured by using parentage of total loans to total
deposits.

3.10 Model Assumptions

The following diagnostic tests were carried out to ensure that the data suits the basic
assumptions of classical linear regression model.

Normality: To check the normality, descriptive statistics was used. A normal distribution
is not skewed and is defined to have a coefficient of kurtosis of (Brooks, 2008). One of the

17
most commonly applied tests for normality; the Bera-Jarque formalizes these ideas by
testing whether the coefficient of Skew ness and the coefficient of excess kurtosis are zero
and three respectively. (Brooks, 2008) Also states that, if the residuals are normally
distributed, the histogram should be bell-shaped and the Bera-Jarque statistic would not be
significant at 5% significant level.

Normality is defined as the "shape of the data distribution or an individual metric variable
and its correspondence to the normal distribution, which is the benchmark for statistical
methods" (Hair et al.). Violation of normality might affect the estimation processor the
interpretation of results especially in Ordinary Least squared analysis.

Multi collinearity: There were different arguments towards the multi collinearity problem.
Multi collinearity problems exist when the correlation coefficient among variables greater
than
0.75 ( Gujarati D. N., 2004).According to Cooper & Schendlar (2003) Suggested that a
correlation above 0.8 between explanatory variables can cause multi collinearity problem.
Lastly, (Hair JF, 2006) argued that also correlation coefficient below 0.9 may not cause
serious multi collinearity problem. In contrary to this, (Kennedy, 2008) argued that as any
correlation coefficient above 0.7 could cause a serious multi collinearity problem leading
to inefficient estimation and less reliable results. A correlation matrix used to ensure the
correlation.
Hetero scedasticity According to Brooks (2008), Hetero scedasticity means that error
terms do not have a constant variance. If hetero scedasticity occur, the estimators of the
ordinary least square method are inefficient and hypothesis testing is no longer reliable or
valid as it will underestimate the variances and standard errors. There are several tests to
detect the Hetero scedasticity problem, which are Park Test, Glesjer Test, Breusch-Pagan-
Goldfrey Test, White‟s Test and Autoregressive Conditional Hetero scedasticity (ARCH)
test. In this case, this study chooses to use ARCH test to detect Hetero scedasticity.
H0:There is no Hetero scedasticity problem in the
model.
H1: There is Hetero scedasticity problem in the
model.
Decision Rule: Reject H0 if p-value greater than significance level. Otherwise, do not
reject H0. Tests for Autocorrelation: Assumption that is made of the CLRM‟s
disturbance terms is that the covariance between the error terms over time (or cross-
sectional, for that type of data) is zero. In other words, it is assumed that the errors are
uncorrelated with one another. If the errors are not UN correlated with one another, it
would be stated that they are “auto correlated” or that they are “serially correlated”. A test
of this assumption is therefore required. To test the presence of auto correlation, to test for
auto correlation the researcher apply Breusch- Godfrey Serial Correlation LM test.

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 Table3.1Summaryof variables used and their specification

Variable Measurement Legend Expected sign

Return on equity Net profit(before taxes)/equity ROE +
Return on Asset Net profit(before taxes)/to tala sset ROA +
Number of POS NPOS +
Number of ATM NATM +
Number of NDC NDC +
Size logarithm of total assets SIZE +
Liquidity Total loans/total deposit LIQ _

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