Assessing the Impact of Cheque Clearance Service and Its

Quality on Customer Satisfaction in Addis International

Bank Share Company
__________________________________________________________

A Thesis Proposal Submitted to the School of Graduate Studies of

CPU College in Partial Fulfillment of the Requirements for the Award
of the Degree of Master of Business Administration (MBA) in Project
Management

BY: ABIY

ADVISOR: BIRU DESTA (Ph.D. Candidate)

CPU COLLEGE
SCHOOL OF GRADUATE STUDIES
MBA PROGRAM

SEPTEMBER, 2022

ADDIS ABABA, ETHIOPIA

 CERTIFICATE

This is to certify that the thesis entitles “The Effect of Credit Risk Management on Financial
Performance of Abay Bank S.C.”, submitted to CPU College for the award of the Degree of
Master of Business Administration (MBA) in Project Management and is a record of Bonafede

research work carried out by Mr. Behailu Missa, under our guidance and supervision. Therefore,
we hereby declare that no part of this thesis has been submitted to any other university or
institutions for the award of any degree or diploma.

Main Adviser’s Name Date Signature

______________________ __________________ _____________________

i
 DECLARATION

I hereby declare that this thesis entitled “The Effect of Credit Risk Management on Financial
Performance in the case of Abay Bank Share Company”, has been carried out by me under the
guidance and supervision of Biru Desta (Ph.D. Candidate).

The thesis is original and has not been submitted for the award of any degree or diploma to any
university or institutions.

Researcher’s Name Date Signature

_________________________ _________________ ___________________

ii
 ACKNOWLEDGEMENT

First and foremost, I would like to thank Almighty GOD for giving me the strength, knowledge,
ability and opportunity to undertake this research study successfully. Without his blessings, this
achievement would not have been possible. Next, I would like to express my deepest gratitude
and appreciation to my advisor Biru Desta (PhD Candidate) for his devotion in rendering me
professional advice constant encouragement, effective guidance and constructive comments in
making this research work. Secondly, I would like to extend my gratitude to my beloved Family
and friends who have supported me from the beginning to the end of this research work. My
thanks also go to the Branch Managers, Branch business managers and credit department
supervision of the Bank who took their time to provide details.

iii
 ABSTRACT

This study aimed at examining the impact of credit risk management on the financial
performance of Abay Bank S.C. The study used secondary data for eight credit processing
Branches which stayed in the facility more than ten years among all branches of the bank which
is functional at the moment in the Bank. The Data to do the analysis will be obtained from bank’s
annual report, National bank report. In this study correlation and multiple regressions analysis
will be done with random effect model and E-Views 9 software will be used for the regression of
the panel data. Random effect panel regression will be used for the data of eight credit
processing Branches for the sample covered the period from 2014 to 2022.Return on Asset and
Return on Equity were dependent variables while non-performing loan, and loan loss provision
ratio have taken as an independent variable.

Key words: non-performing loans, financial performance, Commercial Banks, Ethiopia

iv
 Table of Content

CERTIFICATE..................................................................................................................................................i
DECLARATION..............................................................................................................................................ii
ACKNOWLEDGEMENT.................................................................................................................................iii
ABSTRACT...................................................................................................................................................iv
LIST OF TABLE............................................................................................................................................vii
LIST OF FIGURES.........................................................................................................................................vii
LIST OF ACRONYMS....................................................................................................................................vii
CHAPTER ONE: INTRODUCTION...................................................................................................................1
1.1. Background of the study..............................................................................................................1
1.2. Statement of the Problem...........................................................................................................3
1.3. Research questions......................................................................................................................4
1.4. Objective of the research.............................................................................................................5
1.4.1. General objective.................................................................................................................5
1.4.2. Specific Objectives...............................................................................................................5
1.5. Significance of the study..............................................................................................................6
1.6. Scope of the Study.......................................................................................................................7
1.7. Limitations of the study...............................................................................................................7
1. Lack of previous research studies on the topic is the main limitation of the study.....................7
2. Time constraints..........................................................................................................................7
1.8. Organization of the study............................................................................................................7
2. CHAPTER TWO: LITERATURE REVIEW..................................................................................................8
2.1. Automated cheque clearing system............................................................................................8
2.2. Operational definition of a cheque............................................................................................10
2.3. Essential elements of a cheque..................................................................................................11
2.4. Service quality and customer satisfaction..................................................................................12
2.4.1. Definition of Service...........................................................................................................12
2.4.2. Characteristics of Service...................................................................................................13
2.4.3. Service Quality...................................................................................................................14
2.4.4. Dimensions of Service Quality...........................................................................................16
2.4.5. Customer Satisfaction........................................................................................................19
2.5. Conceptual framework..............................................................................................................20
3. CHAPTER THREE: INTRODUCTION.....................................................................................................22

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 3.1. Research method.......................................................................................................................22
3.2. Research Approach....................................................................................................................22
3.3. Study area..................................................................................................................................23
3.4. Sampling method and sample size.............................................................................................23
3.5. Data collection and analysis.......................................................................................................24
3.6. Validity of the Questionnaires...................................................................................................25
3.7. Reliability of the Questionnaires................................................................................................25
3.7 Cost Budget and Time Schedule................................................................................................27
3.9.1 Cost Budget........................................................................................................................27
3.9.2 Time Schedule (Budget).....................................................................................................27
REFERENCE................................................................................................................................................28

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 LIST OF TABLE

Table 3.1 Description of the variables used in the regression model……………………….…34

Table 3.2. Time Table………………………………………………………………………….35

Table 3.3. Time period (in month), 2022 G.C…………………………………………………35

LIST OF FIGURES

Figure: 2.1. Figure 2.1. The conceptual framework of the study………………………………18

vii
 LIST OF ACRONYMS

CLRM Classical Linear Regression Model

IMF International Monetary Fund

LLTR Loan Loss to Total Loan Ratio

LPTLA Loan Provision to Total Loan and Advance

NBE National Bank of Ethiopia

NPL Non-Performing Loan

NPLLP Non-Performing Loan to Loan Provision

NPLTLA Non-Performing Loan to Total Loan and Advance

OLS Ordinary Least Square

ROA Return on Asset

ROE Return on Equity

TL Total Loan

TLATD Total Loan and Advance to Total Deposit

viii
 CHAPTER ONE: INTRODUCTION

1.1. Background of the study

Cheque clearance is the movement of cheque from the bank in which it was deposited to the
bank in which it will be drawn, and the movement of its face amount in the opposite direction.
This process being called clearing cycle, normally results in a credit to the account at the bank of
deposit and an equivalent debit to the account at the bank in which it was drawn (Money
magazine's April 2007).
Automated cheque clearing was originally designed in 1972 as an electronic alternative to the
paper check system. Rather than using paper to provide the necessary information for banks to
complete a transaction, firms may deliver payment information by computer. This information
includes the account to be debited, the account to be credited, and the amount of money to be
paid. The account information consists of the drawee bank, a bank identification code, and the
individual account to be either credited or debited (NED C. HILL, 1986). One of the most rapidly
growing technologies in the cash management industry is the Automated clearing House ("ACH")
system. The ACH system is the electronic equivalent to the paper check processing system. The
primary benefits of the system, for banks and their customers, result from reducing the processing
time and costs associated with manual paper check clearing systems. Although other types of
electronic funds transfer devices are more common, the ACH system is experiencing the fastest
growth rate ( J.D. Candidate, 1994).Cheques are type of bill of exchange and were developed as a
way to make payments without the need to carry around large amounts of gold and silver. Paper
money also evolved from bills of exchange, and is similar to cheques in that they were originally
a written order to pay the given amount to whoever had it in their possession (the "bearer")
( Harley 1975).An Automated cheque clearing system (ACCS) offers institutions and individuals
alternative ornontraditional clearing methods through which banking services can be delivered
more conveniently and economically to clients without diminishing the existing service
levels(Cavalluzzo, 2002; Jresat, 2007).The demands of new payment and clearing methods
coupled with regulatory changes in bankingindustry forcing clearing operations to move away
from the traditional paper clearing stream toelectronic data based and even
1
electronic image exchange based route for quicker clearing andresultant accelerated deposits and
returns (Calisir and Gumussoy, 2008; Agarwal et al, 2009).
In the face of rapid expansion of electronic payment systems throughout the world, the Ethiopian
financial sector cannot remain an exception in expanding the use of the system (Garedachew,
2010).
The national bank of Ethiopia (NBE) which has a regulatory and supervisory role on the financial
sector of the country, launched the Ethiopian automate transfer system (EATS), which integrates
Automated clearing house (ACH) and the real time gross settlement (RTGS) Systems on may
27,2011. The ACH, which is currently implemented in all bank branches in and around Addis
Ababa, required centralized online real time electronic core banking of participating commercial
banks.
EATS is centrally managed and administrated by the national bank of Ethiopia. Participating
commercial Banks use the ACH to clear cheques collated by their branches in and around Addis
Ababa. Currently there are 3 public, 2 microfinance institutes, 25 private commercial banks which
present the cheques cleared through ACH in Addis Ababa clearing office (AACO).
Addis international bank S.C (AdIB) is one of the participating private commercial bank in
AACO. AdIB bank receives its license from the national bank of Ethiopia (NBE) on January31,
2011 and started operation on May 30, 2011. AdIB have 120 branches throughout the country out
of which 67 of them are located in Addis Ababa. The bank operates the cheque clearing system
of those 67 branches located in Addis Ababa through Addis Ababa clearing office (AACO). This
proposed research paper specifically focuses on demand deposit account holders of the banks’
braches which participate in the AACO.SERVQAL dimensions of service quality research model
was used to determine the level of customer satisfaction towards ECCS by collecting data from
selected 260 demand deposit account holders of branches of Addis international bank S.C located
in Addis Ababa city.
By implementing ordered logistic regression model the study aims to address, the relationship
between ECC service quality dimensions and customer satisfaction in AdIB S.C , dominant
service quality dimension that has strong relation with customer satisfaction in the bank and
demographic factors that determines the level of satisfaction of cheque clearance service users.

2
 1.2. Statement of the Problem

Electronic clearing is defined as information exchange process (which includes data, images and
checks symbols) by electronic means through electronic clearing unit at and determination of net
balances resulting from this process at a specific time (Association of Banks in Jordan, 2009). The
cheque clearing system differs from county to country. Cheques can be cleared through the banking
institutions controlling body of the county like the national bank of Ethiopia in Ethiopian case or it
can be performed through clearing agents like most Europe and American countries do.
In Ethiopia currently the chque clearing service is performed only through the national bank of
Ethiopia (NBE). Recently NBE has strived to cop up with recent state of the art of technology,
which is very dynamic and costly, to make the cheque clearing system of the county up to the
standard. Understanding end users level of satisfaction regarding the existing cheque clearing
system is very crucial for the NBE for further decision makings. Nowadays in most countries
apply electronic cheque clearing system. A cheque deposited today will be cleared the same day
in T1 time bases without any time delay. If it delays more than the time specified by the banks
hold policy, the amount of the cheque is credited to the customer’s account prior to the clearance
of the cheque to safeguard the interest of the customer.

Despite the implementation of electronic cheque clearing system by NBE, Contrary to the
interest of the customer the cheque clearing service performed through Addis Ababa
clearinghouse (AACH) takes a minimum of three days. If the cheques bounce for various reasons
the clearing process may take more than a week. However no commercial bank in Ethiopia has a
hold policy.
Services provided by Ethiopian commercial banks including the cheque clearing service are
nearly identical; they can only distinguish themselves on the basis of price and quality.
Therefore, customer satisfaction is potentially an effective tool that banks can use to gain a
strategic advantage and survive in today’s ever-increasing banking competitive environment
(Kebede and Eshetu, 2012).So, in order to enhance the quality of this service to the level of
customer’s expectation, and to win the stiff competition among commercial banks, a better
understanding of the service and its impact on customer satisfaction is critical. With our having
this insight it is very difficult to attract new depositors and retain the existing customers. However
despite the importance of the cheque clearing service in bringing customer satisfaction there is
3
no study available in the area. Accordingly, this study aims to bridge the gap by
examining customer satisfaction level regarding the cheque clearing service in case of Addis
International Bank S.C.
Check clearance services have become a common method for processing and clearing checks, but
the quality of these services has not been thoroughly evaluated. Despite the widespread use of
check clearance services, there is limited understanding of the impact of quality on customer
satisfaction with these services. This is a significant concern as poor quality check clearance
services can lead to dissatisfaction among customers and negatively impact their overall
experience.
This study aims to address this gap in knowledge by assessing the level of quality in check
clearance services and its impact on customer satisfaction among customers using these services.
The findings from this study will provide valuable insights into the quality of check clearance
services and how it affects customer satisfaction. This information can be used by service
providers to improve the quality of their services and enhance customer satisfaction.
Additionally, the results of this study will also provide valuable information for customers who
use check clearance services. By understanding the impact of quality on customer satisfaction,
customers can make informed decisions about which check clearance services to use and expect a
higher level of quality. Ultimately, this study will contribute to the overall improvement of check
clearance services and the satisfaction of customers who use these services.
1.3. Research questions

To answer this research question, the following sub-questions will be addressed:

1. What changes have occurred as a result of the implementation of ECC?
2. How pleased are customers with AdIB's use of ECC services?
3. How satisfied are customers with the service quality at AdIB?
4. What is the level of customer satisfaction at the AdIB?
5. What should be done to improve the services at AdIB?

By answering these sub-questions, this study will provide a comprehensive understanding of the
relationship between the quality of cheque clearance services and customer satisfaction. The
findings of this study will have important implications for service providers, customers, and other
stakeholders in the cheque clearance industry. Service providers will be able to use the results of
4
this study to improve the quality of their services and enhance customer satisfaction.
Customers will be able to make informed decisions about which cheque clearance services to use
and expect a higher level of quality. The results of this study will also contribute to the overall
improvement of cheque clearance services and the satisfaction of customers who use these
services.

1.4. Objective of the research

1.4.1. General objective

To assess the Impact of cheque clearance service quality in customer satisfaction at Addis
International Bank S.C.

1.4.2. Specific Objectives

The specific objectives of the proposed study are:-

A. To assess the changes that comes after the application of ECC service
B. To investigate the impact of ECC on customer satisfaction of the bank.
C. To identify the impact of ECC service quality on customer satisfaction of the bank.
D. To analyze the level of customer satisfaction level in AdIB.
E. To provide some recommendations for the bank.
.

1.5. Significance of the study

Clearing and settlement system used to facilitate movement of financial instruments with in and
out of the county. It has a significant role to the overall wellbeing of a countries economy. In
Ethiopia clearing and settlement service is organized and rendered by NBE. Cheque clearing is
one of the clearing and settlement services delivered by NBE. Currently the national bank of
Ethiopia has doing a lot to modernize the system to the expected standard. Ethiopian automated
5
transfer system (EATS) participant banks use this same platform to render cheque clearing service
to their customers. There is a stiff computation among commercial banks in Ethiopia to attract
new and retain existing customers among them. This homogeneity of the ECCS led banks to
emphasize on service quality.
Therefore, this study is greatly important to the banks and NBE to assess the current application
of the cheque clearing service and the level of customer satisfaction of ECCS users. Moreover, the
study will have the following significances:
• Suggest possible solutions for the stated research problems that can help decision

makings

• Deliver an organized document that briefly states the clearing system of the county used
for further reference.

• Identifying and documenting the perception of customers towards the new automated
cheque clearing system.

• Identifies issues related to the application of Electronic cheque clearance and service
quality and thus provide feedback to managers.

• Add value to the existing knowledge related to the cheque clearing service and customer
satisfaction in the banking industry.

• Result of this research project can be used as a base for further studies in the area.

6
 1.6. Scope of the Study

Geographical Scope/ Coverage: it is limited only in Addis Ababa and the study population or a
participant of this research was Addis International Bank S.C Head office Finance Branch and
Check Clearance service giving Branch (Main Branch) which is found in Addis Ababa.

Thematic / Conceptual Scope / Coverage: In terms of dimensions to be considered, the study will
be examined ECC as a Five-dimensional construct and its impact on Customer Satisfaction. Other
elements or underpinnings measurements of ECC service that has less important dimensions will
be excluded from this study.

Methodological Scope/ Coverage: Based on the study of three research designs and the purpose
of this research, the Descriptive study is the most suitable for the topic.

Timeline Scope: The study expected to take a four consecutive months to reach with the
finding/result for further refer time schedule end of chapter three (3.9.2).

1.7. Limitations of the study

1.7.1. Lack of previous research studies on the topic is the main limitation of the study

1.7.2. Time constraints

1.8. Organization of the study

The paper consists five chapters. The first chapter deals with the introduction part that consists of
background of the study, statements of the problem, objectives of the study, significances of the
study, scope of the study and limitation of the study. Chapter 2 contains a review of the related
literature. The research design and methodology is presented in chapter 3. In chapter four, the
results and findings of the study is discussed. Finally, the last chapter deals with the summary of
conclusions and recommendations that is forwarded both by the respondents and by researcher
based on the result obtained.

7
 2. CHAPTER TWO: LITERATURE REVIEW

2.1. Automated cheque clearing system.

The cheque clearing is an operational arrangement or system which enables cheques to be

exchanged in bulk and settled between banks or branches in order to transfer funds from one
customer’s account to another. Settlement is effected on the net difference between cheques
exchanged (i.e. sent to and received from the other banks) rather than on the gross value of the
cheques, transaction by transaction. The ‘clearing cycle’ results in a credit to the account of the
beneficiary at the bank of deposit, and an equivalent debit to the account of the payer at the bank
on which the cheque was drawn ( Cheque and Credit Clearing Company, 2011).

The ACC is the state-of-the-art interbank cheque clearing solution that has replaced the manual
cheque clearing solution in Ethiopia. ACC is an image-based, cost-effective, cheque clearing and
settlement solution, where the original paper cheques are transferred to scanned images in order to
be presented electronically through the secured communication channels from the member
bank in which they are deposited to the member on which they are drawn resulting in a faster
access to funds, lower transportation expenses and increased cheque trust (Jae & Michael,
2001).An ACCS offers institutions alternative or nontraditional clearing methods through which
banking services can be delivered more conveniently and economically to clients without
diminishing the existing service levels (Cavalluzzo, 2002; Jresat, 2007).

Automated clearing system is a new horizon in the financial infrastructure development initiative
in Ethiopia. Automated systems not only speed up the cheque clearing process but also a
directive for automation in banking and financial system in the country. The demands of new
payment and clearing methods in banking industry are forcing clearing operations to move away
from the traditional paper clearing stream to electronic data based and even electronic image
exchange based route for quicker clearing and resultant accelerated deposits and returns (Calisir
and Gumussoy, 2008; Agarwal et al, 2009). Motivated by this development, the national bank of
Ethiopia (NBE), the organization responsible for developing the rules and regulations regarding
automated cheque clearing transactions, adopted Ethiopian automated transfer system (EATS) in
may,2011 by replacing the previous manual cheque clearing system with Scanned image and data-
8
based information exchange system where back and front side soft copies of the cheques and
their detail information’s are exchanged in encrypted form between the participating banks
through a secured communication link.

EATS is centrally managed by NBE and have participants like commercial banks, ministry of
finance (MOFED), Ethiopian revenues and customs authority (ERCA) and clearing houses like
Ethiopian commodity exchange (ECX). Ethiopian automated transfer system (EATS) consists of
Montran’s ATS application and interfaces between NBE accounting system, General ledger
(GL), interface between EATS and core-banking system of commercial banks and interface
between participating government and clearing offices like Ethiopian commodity exchange
(ECX).

Ethiopian automated transfer system (EATS) is a nationwide electronic funds transfer (EFT)
system that provides for the inter-bank clearing of credit and debit transactions and for the
exchange of information among participating financial institutions. The purpose of EATS is to
exchange (clear and settle) electronic transactions. The EATS is a secure, private electronic
payment transfer system that connects all financial institutions of a country. Direct pay check
deposits is an example of electronic fund transfer that are processed through this network.
Utilizing EATS payments is cheaper and faster than processing paper checks through the
traditional paper based manual clearing system, both B2B (bank-to-bank) and B2C (bank to
consumer).
EATS is the maiden initiative for electronic (credit and debit) transfer of funds. This network
facilitates the transmission of funds between the banks electronically, which makes it faster and
efficient means of inter-bank clearing over the existing paper based system. EATS supports
automated cheque clearing through ACH. ACH is a nationwide electronic funds transfer (EFT)
system that provides for the inter-bank clearing of credit and debit transactions and for the
exchange of information among participating financial institutions. The purpose of ACH is to
exchange (clear and settle) electronic transactions. ACH is a secure, private electronic payment
transfer system that connects all Banks of a country. Direct pay check deposits is an example of
electronic fund transfer that are processed through this network. Utilizing ACH payments is
cheaper and faster than processing paper checks, both B2B (bank-to-bank) and B2C (bank-to
9
consumer).
Currently ACH is functional only in Addis Ababa. Branches of all commercial banks of the
country located in and around Addis Ababa the Addis Aababa clearing house (AACH) to clear
their cheques automatically. The Automated cheque clearing done through AACH is finalized by
exchanging the physical cheques cleared electronically by each bank representatives in Addis
Ababa clearing office
(AACO) located in the premises of NBE.
2.2. Operational definition of a cheque

"Cheque is an instrument in writing containing an unconditional order, addressed to a banker, sign

by the person who has deposited money with the banker, requiring him to pay on demand a
certain sum of money only to or to the order of certain person or to the bearer of instrument."
Cheques are type of bill of exchange and were developed as a way to make payments without the
need to carry around large amounts of gold and silver. Paper money also evolved from bills of
exchange, and is similar to cheques in that they were originally a written order to pay the given
amount to whoever had it in their possession (the "bearer")( Harley 1975).
The cheque has its origins in the ancient banking system, in which customers would issue orders
to their bankers to pay money to identified payees. Over the past 350 years the cheque has
evolved from a basic ‘bill of exchange’ to the form we know today
(http://www.chequeandcredit.co.uk/).
The cheque was one of the first payment methods with the first known cheque dating back to the
13th century when in Venice the bill of exchange invented cheques as a way to decrease the
amounts of gold and silver transferred. This invention was adopted in France and in the 14 th
century ( Prof. Patrick Olivier august 2011).
Cheques are important because they provide alternative means of holding cash for the cash
owner. A person cannot hold money in the amount of millions. It would be too unsafe to carry or
travel with having money in bulk amount, in that case cheques provide easier and safer medium
to hold cash.

10
A person holding cheque can cash his amount by going to the bank and can get its money. The
money transactions become quite easier with cheques because of which most of the organizations
and entities prefer to have cheques rather than cash in hand. Moreover transfer of money from
one individual to another individual becomes quite easier with the usage of cheques (Bankhawk
Report, 2008-2011).
2.3. Essential elements of a cheque

For a cheque to be legally accepted, the following features have to be included:-

The word of negotiability-“order” or “bearer”

Expresses or implied the phrase “pay to the order of” imparts negotiability to the cheque and
makes it an unconditional promise to pay up on demand. The single word “pay” if used, makes
such a cheque not negotiable, i.e. payable only to the person named as a payee.
Name of payee- persons in all favors the cheque is drawn and cheques are sometimes

made out payable to self, currency, bearer, or, cash, which makes them payable to bearer.

Amount payable in figures

Amount payable in written words.
Name and location of drawer bank.
Signature of drawer or maker in the case of some corporations, the signature and
countersignatures of designated officers are necessary. The signature is the final touch

without which the cheque is values.

Endorsement:- the cheque should be endorsed as drawn, either in bank or a special or

other endorsement.
Cheque should not be dated a head or post dated and should be presented promptly.

Banks usually refuse to honor cheques more than six months old, since cheques are not presented
within a reasonable time after they are drawn there arises a presumption of irregularity, however,
the date is not an essential element of a cheque and an undated cheque is valid. The amount
written in words should agree with the amount written in figure; when there is a discrepancy
between the two, the amount denoted by the word is the sum payable.

11
A bank is usually responsible to its customer for paying raised or altered cheque using a number
of mechanisms. A bank is not required to make partial payment on a cheque whenever the drawer
has insufficient fund to his or her credit to make payment in full (Peter Newman .Murray Milgate
John Eatwell,1992).
Cheques may be classified according to methods of collection in to five groups.

1- Cheques drawn on the bank in which they are deposited for credit or cashed over the paying
teller’s window, known as own cheques, self cheques, or home debits.
2- Cheques drawn on the bank in the same city and which will be paid through the clearing
house, known as clearing house cheques;
3- Cheques drawn on banks, corporations and individuals in the same city which are not
members of the clearing house and which must be presented for payment either through the city
collection department of the clearing house or directly by messengers;
4- Cheque drawn on banks located at various out-of-town points which must be collected
through the federal reserve clearing system or through correspondents or other collecting agents,
known as out-of-town-cheques, or, transit cheques, or, foreign cheques;
5- Cheques drawn on or issued by a bank located in a foreign country.

2.4. Service quality and customer satisfaction

2.4.1. Definition of Service

Service is defined in different ways by many writers. For instance (kottler; 2003:128) defined
Service as “any activity or benefit that one party can offer to another that is essentially intangible
and does not result in the ownership of anything. Its production may or may not be tied to a
physical product”. According to Phillip Kotler et al (1999), service is any activity or benefit
that one party can offer to another that is essentially intangible and may not result in the
ownership of anything. Cannon (1998), viewed services as those separately identified, essentially

12
intangible activities which provide want satisfaction and which are not necessarily tied to the sales
of a product oranother service. Any intangible actions that are performed by person or machines
or both tocreate good perception within users called service. Although services are performed by
service providers and consumer together its quality results in perception and value assessment by
the customer (Rao; 2007).
Service can also be defined as a set of benefits delivered from a service provider to the service
consumer. The service firm provides benefits (due to competency, skills, knowledge and
experience etc) to the customers for the sake of reward (fee, salary, wages, etc).

2.4.2. Characteristics of Service

Service has four major characteristics that greatly affect the design of marketing programs for it
(Kottler et al ;1999). These characteristics are as following:
Intangibility: A service is intangible and cannot be seen, tasted, felt, heard or smelled
before it is bought. For example, a person receiving a haircut cannot see the result before
purchase.
Inseparability: Services are produced and consumed at the same time. For instance, as it is
in car hiring. The person rendering the service becomes part of the service as how he does
it affect the quality of the service.
Heterogeneity of Variability: Services are highly variable as they depend on who
provides them and when and where they are provided. For examples, although branches of
a particular bank may be selling and delivering the same service, the quality may not be
uniform or homogenous from branch to branch
Perishables or Fluctuating Demand: Services are highly perishable since they cannot be
stored. For example, hours when cashiers are idle at the bank cannot be used to expand
service on a busy day when long queues are formed.

13
 2.4.3. Service Quality

Service quality is a multilevel and multidimensional concept, which varies in meanings among
researchers (Cronin et al., 2000). Quality is an ability of any product to meet customers'
expectations and requirements. It is a set of features, characteristics or attributes that are required
or expected by the customers. There are several studies that found a relationship between the
service quality offered by and its consequences as satisfaction level among customers.

Quality is challenging to define; it is a subjective concept, like beauty. Everyone has a different
definition based on their personal experiences. Crosby (1987) defined quality as “Conformance
to requirements”. This definition implies that organizations must establish requirements and
specifications. Once these specifications are established, the quality goal of the various functions
of an organization is to comply strictly with them. Quality is “Fitness for use” (Juran ,1982).
Service quality and customer satisfaction became core issues for the successful survival of any
service organization. Service quality is considered very important indicator towards customer
satisfaction (Spreng and Machoy, 1996). Service quality got popularity among professionals and
academia due to increased competition. It contributes a lot to gain competitive advantage to
maintain long-term relationship with customers (Zeithmal et al. 2000). Gronroos (1982)
identified three dimensions of service quality as technical quality (actual outcome of the service);
functional quality (service delivery process by interaction between service provider and service
recipient); and corporate image (perception of customers about service organization). Similarly, in
another study three dimensions of service quality are identified i.e. physical quality; corporate
quality and interactive quality (Lehthinen and Lehthinen, 1982). Both studies reflect almost the
same characteristics of the service quality.

There are two perspectives regarding service quality i.e. one is American and other is Europeans.
European researchers concentrate on functional and technical aspects of services having a keen
analysis of organization's image (Gronroos, 1982, 1984; Lehthinen and Lehthinen, 1982). They
focus on three dimensions of service quality to measure the performance of any product by
considering functional quality, technical quality and corporate image. Service quality is defined as
a discrepancy between expected and perceived service. It is said that service quality is the
14
outcome of customers' comparison between expectations and performance (Gronroos, 1982). The
Americans' perspective is concentration on functional quality to measure the performance of
services (Parasuraman et al. 1985, 1988, 1991; Kang and James, 2004). Rendering quality
service implies meeting the requirements to customer expectations regularly (Lewis and Booms ,
1983). Service quality is defined as “the degree and direction of discrepancy between consumer’s
perceptions and expectations in terms of different but relatively important dimensions of the
service quality, which can affect their future purchasing behavior.’’ (Parasuraman, et al, 1985)
This definition clearly shows that service quality is what customers’ assess through their
expectations and perceptions of a service experience. Customers’ perceptions of service quality
result from a comparison of their before-service expectations with their actual service
experience. Service quality is founded on a comparison between what the customer feels should
be offered and what is provided (Parasuraman et al., 1985). Quality evaluations derive from the
service process as well as the service outcome. As stated by (Gronroos, 1982) there are two types
of service quality these are technical quality and functional quality. Technical quality is what the
customer is actually receiving from the service (outcome) while Functional quality is the manner
in which the service is delivered (process).

Since customers are the “sole judge of service quality”, an organization can build strong
reputation for quality service when it can constantly meet customer service expectations. (Berry
et. Al (1990). Service quality is “more difficult for consumers and organizations to evaluate than
product quality; this is due to a lack of tangible evidence associated with the service” (Hong and
Goo, 2004). In the past decades, researchers (Carman 1990; Garvin 1983; Parasuraman et al,
1985, 1988) have defined and measured service quality by examining the attributes of service
quality, while others (Bitner and Hubbert 1994; Iacobucci, Grayson, and Ostrom, 1994; Oliver,
1993;Oliver and DeSarbo, 1988; Parasuraman, Zeithaml, and Berry, 1994) focused on the
application in services to conceptualize the relationship between service quality and customer
satisfaction.Therefore, a combination of the service quality and customer satisfaction literature
has formed the foundation of service quality theory (Clemes et al., 2007; Parasuraman et al.,
1985).

15
 2.4.4. Dimensions of Service Quality

There is an ongoing discussion about the service quality and its dimensions among scholars. But
there is a lack of consensus in the literature about the uniform dimensions among researchers. It
may be due to demographics, cultural, religious, geographical or other attributes that vary
fromone country to another (Walker, 1990). Gronroos (1996) explored six factors of service
quality: attitude and behaviour; skills and professionalism; accessibility and flexibility; reliability
and trustworthiness; recovery; reputation and credibility. Johnston (1997) identified 18
dimensions of service quality to measure theperformance of service industries: aesthetic,
availability, attentiveness, access, care, cleanliness,comfort, commitment, communication,
competence, courtesy, friendliness, flexibility, functionality, integrity, reliability, responsiveness
and security.
Parasuraman et al. (1985) investigated the different service industries and explored 10
dimensions of service quality i.e. tangibility, responsiveness, reliability, courtesy, access,
credibility, communication, competence, understanding, and security. They continued their
research to purify the dimensions of service quality and developed a widely used research
instrument called SERVQUAL. It is equally applicable in different service industries including
banking industry. They refined these dimensions and summed up into five dimensions like
reliability, responsiveness, tangibility, assurance and empathy (Pararsuraman et al. 1988).

Parasuraman et al. (1985, 1988, 1991) tested research instrument in different industries like
banking, insurance and telephone repair industry. The reliability and validity coefficients of
SERVQUAL were very high and increased its acceptability all over the world. It is also widely
used by the researchers to assess the service quality in the banking sector. The dimensions of
service quality are frequently studies by the researchers according to their own local
environment, cultural and socioeconomic conditions. There are numerous studies that identified a
number of dimensions due to lack of global dimensions. Parasuraman et al., (1988, 1991)
developed SERVQUAL instrument to measure the dimensions of service quality that is frequently
used by researchers.
16
 It consists of 22 items that are compiled into five dimensions: tangibility; reliability;
responsiveness; assurance and empathy. This are the service quality dimensions used in this
research to investigate the satisfaction level of cheque clearance service users in the study area.

These are Reliability, Tangibles, Responsiveness, Assurance, and Empathy.

 Reliability

Reliability is the ability to perform services dependably and accurately in a consistent manner. It
contains five elements to assess the accuracy and credibility of bank services. This dimension of
service quality evaluates the promises of banks and its execution from customers' point of view.
Reliability is very important determinant of product quality besides good personal service, staff
attitude, knowledge and skills (Walker, 1990). Berry and Parasuraman (1991) reported that
reliable service is the outcome of the continuous improvement. Similarly in another study, it is
found that service reliability is the service “core” to most customers. So managers should use
every opportunity to build a “do-it-right-first” attitude (Berry et al., 1990). Reliability is largely
concerned with the service outcome while others related to the service process.

 Tangibility

This dimension shows the physical aspects of the services as physical facilities, appearance of
personnel and tools used for the provision of services. It is more concerned with aesthetic part of
the banks. It is found that customers prefer tangible dimension of service quality in UAE banking
industry (Jabnoun and Al-Tamimi, 2003). Zineldin (2005) studied the product/service quality and
customer relationship factors in Sweden. It is found that a bank can create customer relationships
by delivering added tangible and intangible elements of the core products. Strong competitive
positions are the outcome of product/service quality and differentiation.

 Responsiveness

This dimension reflects the willingness or readiness of employees to deliver quick services to
customers. Customers are very keen to employees' behavior in services industry especially in the
banking industry. It was reported that customers are very sensitive to employees' working
17
environment in service organizations (Brown and Mitchell, 1993). The correct match between
staff skills and customers' expectation ends in better service quality towards customers. Service
recovery and problem solving have been recognized as important parts of services quality (Nelson
and Chan, 2005). Tahir and Abu Bakar (2007) investigated service quality and customer
satisfaction of commercial banks by using SERVQUAL in Malaysia. They found that
responsiveness is rated as the most important dimension of service quality. It found that accurate
communication, proper service delivery and effective conflict handling results into overall
customer satisfaction regarding bank services in Malaysia (Nelson, 2006). Moller (2007) in his
research assessed customer expectations based on service quality factors for retail banks across
ten countries in Africa. Specifically, the objectives were to determine whether Cross-national
differences in customer service expectations existed in the African retail banking sector, to
identify relative importance of key service dimensions in African retail banking and to determine
whether or not those service expectations were constant over time. Results from the study led to
suggest that core dimensions such as responsiveness (driven by staff efficiency and shorter
queues) and reliability (performing dependably and accurately) were more important while
relational issues surrounding assurance and empathy were of less importance.
 Assurance

This dimension indicates the employees' knowledge, courtesy and their ability to convey trust
and confidence. Service quality is also linked to the customer satisfaction as how employees use
their knowledge & courtesy and their ability to incorporate trust and confidence. Parasuraman
etal. (1988) reported assurance as an essential dimension of service quality after reliability and
responsiveness towards satisfaction. It is found that a bank can create customer satisfaction by
ensuring trustworthy behavior and reflection of genuine commitments to service provision
(Nelson and Chan, 2005). Arasli et al. (2005) identified that assurance dimension of service
quality has the strongest impact on customer satisfaction that leads to positive word of mouth
outcome. In another study, overall customer satisfaction was examined in reference to
relationship quality in retail banking sector of Malaysia. The results indicated that trust and
commitment are important factors for customer satisfaction regarding relationship quality
(Nelson, 2006).
 Empathy

18
This dimension shows the magnitude of caring and individual attention given to customers. In
the banking sector customer care and individual attention is indispensable for the better
performance due to stiff competition. Bank customers considered empathy as an important
dimension of service quality (Jabnoun and Al-Tamimi, 2003). It is suggested that employees'
commitment to deliver quality services, skillfully handling of conflicts and efficient delivery of
services resulted in satisfied customers for long term benefits (Nelson and Chan, 2005).

2.4.5. Customer Satisfaction

Most researchers agree that satisfaction is an attitude or evaluation that is formed by the customer
by comparing what they expect to receive to their subjective perceptions of the performance they
actually get (Oliver, 1980). Different authors give different definition regarding customer
satisfaction. Some of them are:- According to Kotler (2000), satisfaction is a person’s feeling of
pleasure or disappointment resulting from comparing a product’s perceived performance (or
outcome) in relation to his or her expectation. Gaither (1994) defines customer satisfaction as the
determination of customer requirements and demonstrated success in meeting them. Kotler (2006)
again defined customer satisfaction by giving details on the attributes of a highly satisfied
customer. According to him, a highly satisfied customer stays loyal, longer, and buys more as the
company introduces new products and upgrades existing products; talks favorably about the
company and its products, pays less attention to competing brands and is less sensitive to price,
offers service or product ideas to the company and costs less to serve him than new customers
because transactions are routine. There are a number of customer satisfaction theories in the
literature such as contrast theory, dissonance theory, and equity theory, research shows that
expectation-disconfirmation paradigm has received much empirical attention (Parasuraman et
al., 1988). However, other empirical findings demonstrate that customer satisfaction can also be
measured through product or service performance (Anderson and Sullivan, 1993; Churchill and
Surprenant, 1982) or an outcome of service quality (Anderson et al., 1994).An area that has
received considerable debate in customer satisfaction literature is whether customer satisfaction
should be defined as an outcome or a process. Many early definitions conceptualized satisfaction
as a process which is currently the dominant view held by most scholars (Oliver, 1980,
Parasuraman et al., 1988). The process perspective presupposes that customer satisfaction is a
19
feeling of satisfaction that results from the process of comparing perceived performance and one
or more predictive standards, such as expectations or desires (Khalifa& Liu, 2002).

This perspective is grounded in the expectancy disconfirmation theory proposed by Richard

Oliver (Oliver, 1980). The customer is satisfied if the performance of product/service is equal to
his/her expectations and he/she is dissatisfied if the product/service performance is perceived to
be below his/her expectation (negative disconfirmation). If expectation exceeds perceived
performance, the customer is highly satisfied. Recent studies have found that satisfaction as an
outcome or end result during the process of the consumption of a service; it is viewed as a post-
purchase experience (Vavra, 1997). This view has its roots in motivation theories that postulate
that people are driven by the desire to satisfy their needs (Maslow, 1954) or that their behavior is
directed at the achievement of relevant goals (Vroom, 1964). In this way satisfaction is perceived
as a goal to be achieved and can be described as consumer fulfillment response (Rust & Oliver,
1994). Investigating all these theories and providing an extensive review of the customer
satisfaction is well beyond the scope of this study, instead this study concentrates on attributes of
customer satisfaction directly related to Banks cheque clearance service. In banking services,
satisfaction is usually conceptualized as a multidimensional construct (Manrai, L.A., Manrai,
A.K., 2007). The list of bank service attributes used for the measurement of satisfaction
comprises elements like: appearance of the facility, attitude and behavior of staff, decor and
atmosphere, business hours, interest rate, waiting time. For the propose of this study banks
customer satisfaction ingredients are incorporated with the standard SERVQAL elements.

20
 2.5. Conceptual framework

RELIABLITY

ASSURANCE

RESPONSIVENESS CHEQUE CLEARANCE

EMPATHY

TANGIBLE

Own source (conceptualized from theoretical framework of the research)

This conceptual framework depicts that the indicator variables reliability, Assurance,
responsiveness, empathy and tangibles have influence the level of customers satisfaction
indirectly by contributing their influence on the attributes of cheque clearance quality dimensions
like the amount of time a cheque spent to clear, the amount of information a customer have about
a cheque and the reasons a cheque could bounce and the amount of time the bank takes to inform
the customer when a cheque bounces.

21
 3. CHAPTER THREE: RESEARCH METHODOLOGY

3.1. Introduction

Research methodology is simply the systematic way in which the researcher will attempt to find
the answers to the research questions. It refers to the overall approach of the research process,
from the theoretical foundation to the collection and analysis of the data (Vavra, 1997).Thus,
under this particular chapter, the research methodologies that the researcher was used in order to
collect information from target respondents, analyze it and its interpretation was briefly
discussed.
3.2. Research method

This study was conducted with aim of assessing the automated cheque clearing system of AdIB
and its effect on the satisfaction of bank customers. The research adopted both descriptive and
explanatory research design. Descriptive research involves describing a problem, context or a
situation. This is a feature of exploratory research as well of course; however descriptive type

22
questions are more structured, and more reliant on prior ideas and methods. We would more
usually describing what was happening in terms of pre existing analytical categories, or relaying
on other ideas in some way (Gashaw Girma,2011). As described by Suryabrata, (2003)
descriptive method is a method that describes the study systematically, factually and accurately
utilizing facts, behaviors and relationship between the phenomenon being studied. It is a
descriptive research because the demographic characteristics of respondents were described by
Computing their frequency, and mean as well as the determinants of customer retention items
was described through mean score and grand mean. Besides it also an explanatory since the
researcher has explained the relationship between the cheque clearance service quality and
customers satisfaction.
3.3. Research Approach

In order to answer the problem statement and pertaining research objectives carefully, the
research implemented quantitative research approach so as to gain an insight into consumer’s
perceived cheque clearance service quality offered by Addis international Bank S.C with respect
to five dimensions of SERVQUAL scale. The SERVQUAL framework models are used to
analyze the customers perceived service with respective to electronic cheque clearance service
attributes as indicator of the perceived service quality and satisfaction. This research approach
was implemented by different researchers like: - Kassahun Gugssa,(1997), Abebe e(2013),
Naeem, H., Akram, A., & Saif, M. I. (2009). The SERVQUAL scale were modified to fit the
specific context of the cheque clearing service by generating additional quality related measures
or items other than the ones already included in the SERVQUAL instrument to develop a more
appropriate scale for measuring cheque clearing service quality. In this paper the five dimensions
of SERVQAL and their respective attributes of the model are expressed using a five point Likert
scale in the following manner: 1= Strongly disagree , 2= Disagree , 3= Neutral 4= Agree and 5=
Strongly agree.
In order to meet the objectives set up to analyze the effect of the independent variables
(reliability, assurance, responsiveness, empathy, tangibles and cheque clearing service quality) on
the dependent variable customers satisfaction on this study Ordinal logistic regression model and
testes related are employed as a general methodology.

23
 3.4. Study area

This study was intended to analyze the electronic cheque clearance system implemented in Addis
international bank S.C. Since the cheque clearance service of Ethiopia is implemented in
branches of commercial banks located in Addis Ababa, it is especially targeted on 27 branches of
Addis international bank S.C located in Addis Aaba city.

3.5. Sampling method and sample size

The populations of this study was all customers of Addis international bank S.C who have
demand deposit account in branches of the bank located in Addis Ababa. The study used
convenience sampling method to select the sample from the available population. Convenience
sampling method is selected because it is actually impossible to carry on a probability sampling
because there is no point in time during which all customers are available due to different
reasons and it is not possible to contact everyone who may be sampled. The bank have 120
branches through out the county. From this 67 of them are located in Addis Ababa. Those Addis
based branches are participants in the cheque clearing system operated under AACH. There are
3,630 demand deposit account holders in those 67 branches of the bank located in Addis Ababa.
Therefore total number of population of the study was 3,630. This study selects a sample which
is a subset of the total sample population based on a formula provided by Taro (Yemane 1976).
n= N
Thus 1+N* (e) 2
Where :- n= sample size

N= the total number of customers at the four selected branches who use one or more electronic
product or service
e= the acceptable sampling error. The acceptable sampling error in this case was 6 per cent (error
margin 0.05). Therefore 95 per cent confidence level was assumed. Accordingly a sample size of
260 was chosen conveniently from the total population of 3,630 customers of the selected
branches. The research will select customers from 67 branches of the bank which is located in
24
Addis Ababa.

3.6. Data collection and analysis

The research used both qualitative and quantitative data from both primary and secondary data
sources. The qualitative data was focused on people’s experiences, their feelings and aspirations.
The questionnaire was designed on various variables that were expected to measure the impact of
the electronic cheque clearing system on customer satisfaction. The questionnaire was consists of
two parts. The first part consists of demographic characteristics of respondents and the second
part includes different questions concerning their agreement and attitude to the impact of
electronic cheque clearing system on customer satisfaction attributes. To make the questionnaire
more clear for the target respondents five point Likert scale ranging from strongly agree=5 to
strongly disagree =1 was used to measure the determinants of customer satisfaction towards
cheque clearing system. To check the reliability of the questioners, Cronbach's alpha coefficient
test was used. The data received from the respondents was analyzed by implementing ordered
logistic regression with help of statistical software program: statistical package for social
sciences (SPSS). For the analysis of the five dimensions of the service quality and each
respective attribute, a descriptive statistics of the mean difference will be used and reliability,
Goodness of fit and parallel line tests was conducted with 5% level of significance or a 95%
confidence interval.

25
 3.7. Validity of the Questionnaires

Validity is a measure of whether an instrument actually measures what it intends to

measure. Validity refers to whether an instrument measures what it was designed to measure;
Hair et al. (2007) defined the validity as “the degree to which a measure accurately represents
what issupposed to”. Validity is concerned with how well the concepts are defined by the
measure(s). Italso refers to the extent to which an empirical measure adequately reflects the
real meaning of the concept under consideration. However, an instrument cannot measure the
attribute of interest if it is unpredictable, inconsistent, and inaccurate. Leary(2004) mentioned
about four types of validity: Internal validity, External validity, construct validity, and
Statistical conclusion validity. In this paper, the researcher tried to address the construct
validity through defining clearly the construct of interest and develop valid measures that
materialize defined constructs. Moreover, addresses through the review of literature and
adapting instruments used in previous research.Statistical Conclusion Validity: It examines
the extent to which conclusions derived using a statistical procedure is valid. Because
qualitative research designs do not employ statistical test, statistical conclusion validity is not
applicable. Since this specific study is quantitative it is worthy full to consider the issue of
statistical conclusion validity. This type of validity is addressed through selection of the right
statistical method used for hypotheses testing. Therefore, the appropriate statistical testing is
independent T-test and ordinal logistic regression given that all of the independent and
dependent variables of the study have been measured in ordinal scale is carefully selected
by researcher so that it realized the statistical conclusion validity.
3.8. Reliability of the Questionnaires

A second consideration next to validity is reliability, which is the ability of the measure to
produce the same results under the same conditions. To be valid the instrument must first be
reliable. To evaluate reliability it is better to test the same group of people twice: a reliable
instrument will produce similar scores at both points in time (test–retest reliability). Reliability
can be defined as the extents to which a variable or a set of variables is consistent in what it is
intended to measure (Hair et al; 2007). To ensure the inner consistency of the present
instrument, it was used the cronbach’s alpha coefficient. Developed by Lee Cronbach in 1951,
the cronbach’s alpha coefficient is a statistical tool that evaluates the confidentiality through
the inner consistency of a questionnaire. For the utilization of this coefficient, it is a

26
requirement that all the items of an instrument use the same measurement scale. The
cronbach’s alpha is obtained by the variance of individual components and by the variance of
the components sum of each evaluated, aiming to investigate the possible relations between
the items.

27
 3.9. Cost Budget and Time Schedule

3.9.1. Cost Budget

Table 3.2. Time Table

UNIT COST
NO ITEM QUANTITY TOTAL COST
(in birr)
FOR STATIONARY
1
MATERIALS
✓ 3 pad 95 285.00
PAPER
✓ 5 18 90.00
PEN
✓ 3 12 36.00
PENCIL
2 SECRETARY 54 15 810.00
TRANSPORTATION
3 20 15 300.00
COST
MISCELLANEOUS
4 950 2 1,900.00
EXPENSES
TOTAL COST 3,421.00

3.9.2. Time Schedule (Budget)

The study doesn’t mean it will complete within day driven with specific weeks as it involves
researcher’s activity level. The study will be able to clearly planning allocated little time for
each activity that will be ruder taken. The following work plan is designed for successful
completion of this study within available time.

Table 3.3. Time period (in month), 2022 G.C

NO ACTVITY JUN JUL AUG SEP OCT NOV
1 Title collection ✓
2 Literature finding ✓
3 Proposal dev.t ✓
5 Proposal submission ✓
4 Data collection ✓
6 Data analysis ✓
7 Report writing ✓
8 Paper submission ✓
9 Presentation ✓

28
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