Feysel Abdo

The Impact of Financial Innovation on Financial
and Operational Performance of Commercial

Banks in Ethiopia
By:
Feysel Abdo Reshid
Addis Ababa University,

College of Business and Economics,
Master of Business Administration
May, 2020
Addis Ababa, Ethiopia
The Impact of Financial Innovation on Financial
and Operational Performance of Commercial
Banks in Ethiopia
Advisor
Dr. Abebe Y.
A thesis submitted to Addis Ababa University, College of Business and Economics, Master of
Business Administration Program in partial fulfillment of the requirements for the Degree of
Masters of Business Administration in Finance.
May, 2020
ii
Declaration
I, Feysel Abdo, hereby declare that the thesis work entitled “The Impact of Financial
Innovation on Financial and Operational Performance of Commercial Banks in Ethiopia”
submitted by me for the award of the Degree of Master of Business Administration in Finance at
Addis Ababa University, is original work and it hasn’t been presented for the award of any other
Degree, Diploma, Fellowship or other similar titles of any other university or institution.
Name: Feysel Abdo . Advisor’s Name Dr. Abebe Y.
Signature: _____________ Signature: _______________
Date: _________________ Date: ___________________
May, 2020
iii
Certification
Addis Ababa University
School Of Graduate Studies
MBA Program
This is to certify that the thesis prepared by Feysel Abdo, entitled: “The Impact of Financial
Innovation on Financial and Operational Performance of Commercial Banks in Ethiopia”
and submitted in partial fulfillment of the requirements for the Degree of Masters of Business
Administration in Finance complies with the regulations of the university and meets the accepted
standard with respect to originality and quality.
Approved by:
Internal Examiner Alem Hagos (PHD) Signature ______________ Date ______________
External Examiner Zinegnaw Abiy (PHD) Signature _____________ Date _______________
Adviser Abebe Yitayew (PHD) Signature _____________ Date _______________
iv
ACKNOWLEDGEMENT
In the name of Allah, the Most Gracious and the Most Merciful, Alhamdulillah, all praises to
Allah for the strengths and His blessing in completing this study. I am deeply indebted to many
people for their contributions in diverse ways towards the successful completion of this thesis.
First of all, I pay my gratitude to my advisor, Dr. Abebe Yitayew, for his valuable suggestions
and corrections to accomplish my research work. More so, I would to express my special
gratitude to Mr. Osman Umer, Mr. Wondimagegn Bizuyehu, and Mr. Yakob Tilahun, for giving
me professional advice, valuable comments and support in due course of this journey. I am also
really grateful to all selected commercial bank managers and employees who took their precious
time to fill the questionnaires needed for this work. Finally, I thank all those who have helped me
directly or indirectly in the successful completion of my research.
v
Abstract
The purpose of this study was to examine the impact of financial innovation on financial and
operational performance of commercial banks in Ethiopia. This research, studied innovations in
the area of mobile banking, internet banking and automated teller machines. These innovations
were studied in relation to their effect on commercial banks’ financial and operational
performance. An explanatory design was used while a questionnaire was used to gather primary
data. The study conducted a census of all 17 commercial banks instead of adopting a sampling
methodology. The study sample in terms of the respondents covered purposively selected senior
managers and senior officers in head office and a sample of 220 was administered with the
questionnaire and a 77.7% response rate was achieved. The data collected was analyzed with
the aid of descriptive statistical techniques such as frequencies, percentages and mean score.
More so, multiple linear regressions were used to establish the relationship between study
variables and to test the hypotheses using Statistical Package of Social Sciences Version 22. Key
findings from the study confirmed that, financial innovations influence performance of
commercial banks in Ethiopia positively. The adoption of innovations by commercial banks has a
higher potential of improving operational performance than financial performance. Financial
innovation has positive, strong and significant effect on operational performance. Each type of
bank innovation (mobile, internet and ATM banking) significantly and positively influenced bank
operational performance. On the other hand, financial innovation had showed positive but weak
relationship with financial performance. Mobile banking has a positive and statistically
significant effect on the financial performance of commercial banks; whereas internet and ATM
banking had positive but insignificant effect on the financial performance of commercial bank.
Some of positive but insignificant impact of variables (internet and ATM banking) on financial
performance may be due to an early stage, slow and low level of adoption of financial innovation
in Ethiopia banking industry. Based on the findings of the study, it can be concluded that bank
innovations influence performance of commercial banks in Ethiopia positively. Thus, the study
recommend commercial banks in Ethiopia should invest and engage in financial innovation and
exert more on awareness creation about financial innovation in order to boost their performance
and to compete in ever changing financial system.
Key Words: Financial innovation; Operational Performance, Financial Performance,

Commercial banks; Mobile banking, Internet banking and Automated Teller machines (ATM).
vi
List of Tables
Table 3.1 Study Population…………………………………………………………………...….31

Table 3.2: Sample Size …………………………………...……………………………………..32
Table 4.1: Response Rate ..............................................................................................................39
Table 4.2 General Information of the respondent….……………..……………………………...40
Table 4.3 Descriptive statistics for effect of MB on financial performance ………………….....42
‘Table 4.4 Descriptive statistics for eeffect of IB on financial performance ……………………43
Table 4.5 Descriptive statistics for effect of ATM on financial performance ………………......45
Table 4.6 Descriptive statistics for financial performance of bank……………………………...46
Table 4.7 Descriptive statistics for Effect of MB on operational performance……………….....48
Table 4.8 Descriptive statistics for effect of IB on operational performance………….…..........49
Table 4.9 Descriptive statistics for effect of ATM on operational performance……..................50
Table 4.10 Descriptive statistics for operational performance of bank’…………………….…..52
Table 4.11: Summary of Respondents Mean Scores…………………………………………….53
Table 12: Summary of residual statistics………………………………………………………...55
Table 4.13: Multicollinearity test for the Study Variables………………………………………56
Table 4.14: Breusch-Pagan for Heteroscedasticity ……………………………………………...56
Table 4.15: Durbin-Watson Test for Autocorrelation …………………………………………...57
Table 4.16: Shapiro-Wilk W test for normal data ……………………………………………….58
Table 4.17: Pearson Correlation Bank Innovations and financial performance ………………...60
Table 4.18: Pearson Correlation Bank Innovations and operational performance ……………...61
Table 4.19: Model Summary for financial innovation and financial performance ……………..62
Table 4.20: ANOVA for financial innovation and financial performance ……………….……..63
Table 4.21: Coefficients for financial innovation and financial performance …………….…….63
Table 4.22: Model Summary for financial innovation and operational performance …………..64
Table 4.23: ANOVA for financial innovation and operational performance ………….….…….65
Table 4.24: Coefficients for financial innovation and operational performance ………..………65
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List of figure
Figure 2.1 Conceptual Framework………………………………………………………………28
Figure 4.1: A Studentized residual scatter plot dependent variables ……………...…………….57
Figure 4.2: Normal P-P Plot of residual for dependent variables ……………………………….59
viii
List of appendices
Appendix I: Research Questionnaire…………………………………………………………...92
Appendix II: Sample size - Departmental Management staff per Bank…………………...…...97
Appendix III: List of commercial banks in Ethiopia…………………..……………………….98
Appendix IV: Time frame………………………………………………………………………99
Appendix V: Budget description……………………………………………………………….99
ix
Abbreviations and Acronyms
ANOVA Analysis of Variance

ATM Automated Teller Machine
CBE Commercial Bank of Ethiopia
E-banking Electronic banking
EU European Union
FP Financial Performance
GPFI Global Partnership for Financial Inclusion
GSMA Global System for Mobile Communication Association
IB Internet Banking
ICT Information Communication Technology
IT Information Technology
MB Mobile Banking
MFI Micro Finance Institution
NBE National Bank of Ethiopia
NIM Net Interest Margin
OLS Ordinary Least Square
OP Operational Performance
PIN Personal Identification Number
POS Points of Sale
ROA Return on Asset
ROE Return on Equity
ROI Return on Investment
TTF Task Technology Fit
US United States
VIF Variance Inflation Factor
x
Table of Contents
Declaration ..................................................................................................................................... iii
Abstract .......................................................................................................................................... vi
List of Tables ................................................................................................................................ vii
List of figure ................................................................................................................................ viii
List of appendices .......................................................................................................................... ix
Abbreviations and Acronyms ......................................................................................................... x
Chapter one ..................................................................................................................................... 1
Introduction ..................................................................................................................................... 1
1.1 Background of the study ........................................................................................................... 1
1.2 Statement of the problem .......................................................................................................... 4
1.3 Objectives of study ................................................................................................................... 6
“1.3.1 General objective ................................................................................................................. 6
1.3.2 Specific objectives ................................................................................................................. 6
1.4 Research Hypothesis ................................................................................................................. 7
1.5 Significance of Study” .............................................................................................................. 7
1.6 Scope of the Study .................................................................................................................... 8
1.7 Limitation of study.................................................................................................................... 8
1.8 Organization of the study .......................................................................................................... 8
Chapter Two.................................................................................................................................. 10
Literature review ........................................................................................................................... 10
2.1 Theoretical Framework ........................................................................................................... 10
2.1.1. Schumpeter Theory of Innovation ...................................................................................... 10
2.1.2. Constraint-induced financial innovation theory.................................................................. 11
2.1.3. Transaction cost innovation theory ..................................................................................... 12
2.1.4. Task-technology fit (TTF) theory ....................................................................................... 13
2.1.5. Rogers Innovation Diffusion Theory .................................................................................. 14
2.2 Financial Innovation ............................................................................................................... 14
2.2.1 Mobile Banking ................................................................................................................... 16
2.2.2 Internet Banking................................................................................................................... 17
2.2.3 Automated Teller Machine (ATM) ...................................................................................... 17
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2.3 Bank Performance ................................................................................................................... 18
2.3.1 Financial (profitability) measure.......................................................................................... 19
2.3.2 Non-financial measures (operational performance)............................................................. 20
2.4 Empirical Review.................................................................................................................... 20
2.4.1 Empirical studies on developed and emerging market countries......................................... 21
2.4.2 Empirical studies in Sub-Saharan Africa countries ............................................................. 23
2.4.3 Empirical studies in Ethiopia ............................................................................................... 24
2.5. Summary and gap in literature ............................................................................................... 26
2.6 Conceptual Framework ........................................................................................................... 27
Chapter three ................................................................................................................................. 29
Research methodology and design................................................................................................ 29
3.1 Introduction ............................................................................................................................. 29
3.2 Research design ...................................................................................................................... 29
3.3 Target Population .................................................................................................................... 30
3.5 Sample Size and Sampling Procedure .................................................................................... 31
3.6 Data Collection Instrument ..................................................................................................... 33
3.7 Data Collection Procedure ...................................................................................................... 34
3.8 Pilot Test ................................................................................................................................. 35
3.9 Instrument Reliability and Validity ........................................................................................ 35
3.9.1 Instrument Validity .............................................................................................................. 35
3.9.2 Instrument reliability ............................................................................................................ 36
3.9 Data Processing and Analyzing .............................................................................................. 37
3.10 Statistical Model ................................................................................................................... 37
Chapter four .................................................................................................................................. 39
Research findings and discussion ................................................................................................. 39
4.1 Introduction ............................................................................................................................. 39
4.2 Response Rate ......................................................................................................................... 39
4.3 General information of sample ............................................................................................... 39
4.4 Descriptive analysis of study variables .................................................................................. 41
4.4.1 financial innovation and financial performance of bank ..................................................... 41
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4.4.1.1 Mobile banking and financial performance of bank ..................................................................... 41
4.4.1.2 Internet banking and financial performance of bank ..................................................................... 42
4.4.1.3 ATM banking and financial performance of bank........................................................................... 44
4.4.1.4 Descriptive statistics on banks financial performance ................................................................... 45
4.4.2. financial innovation and operational performance of bank ................................................ 47
4.4.2.1 Mobile banking and operational performance of bank .................................................................. 47
4.4.2.2 Internet banking and operational performance of bank ................................................................ 48
4.4.2. ATM banking and operational performance of bank ....................................................................... 49
4.4.2.4 Descriptive statistics on banks operational performance .............................................................. 51
4.4.3 Summary of respondents mean scores ................................................................................ 52
4.5 Assumptions/diagnostic test for multiple linear regressions .................................................. 53
4.5.1 Assumption one: Assumption on Sample size ..................................................................... 53
4.5.2. Assumption two: Outlier, leverage and influential points .................................................. 54
4.5.3 Assumption three: Multicollinearity .................................................................................... 55
4.5.4 Assumption four: Homoscedasticity .................................................................................... 56
4.5.5 Assumption five: Linearity .................................................................................................. 56
4.5.6 Assumption six: Autocorrelation ......................................................................................... 57
4.5.7 Assumption six: Normality .................................................................................................. 57
4.5.7.1 Shapiro-Wilk Test ............................................................................................................................ 58
4.5.7.2 Normal P-P Plots ............................................................................................................................. 58
4.6 Inferential Statistical Analysis ................................................................................................ 59
4.6.1 Correlation Results............................................................................................................... 59
4.6.1.1 Correlations –Bank Innovations and financial performance .......................................................... 60
4.6.1.2 Correlations –Bank Innovations and financial performance .......................................................... 60
4.6.2 Analysis of Regression Results........................................................................................... 61
4.6.2.1 Regression analysis - financial innovation & financial performance .............................................. 61
4.6.2.2 Regression analysis - financial innovation & operational performance ......................................... 63
4.7 Hypothesis test ........................................................................................................................ 65
4.8 Chapter Summary ................................................................................................................... 72
Chapter five ................................................................................................................................... 73
Summary, conclusions and recommendations .............................................................................. 73
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5.1 Introduction ............................................................................................................................. 73
5.2 Summary of Findings .............................................................................................................. 73
5.2.1 Effect of mobile banking on financial performance of commercial banks .......................... 74
5.2. 2 Effect of internet banking on financial performance of commercial banks........................ 74
5.2. 3 Effect of ATM banking on financial performance of commercial banks ........................... 74
5.2. 4 Effect of mobile banking on operational performance of banks......................................... 75
5.2.5 Effect of internet banking on operational performance of banks ........................................ 75
5.2.6 Effect of ATM banking on operational performance of commercial banks ........................ 75
5.3 Conclusion .............................................................................................................................. 76
5.4 Recommendation .................................................................................................................... 76
5.5 Area Further Research ............................................................................................................ 78
Reference ...................................................................................................................................... 80
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CHAPTER ONE
INTRODUCTION
1.1 Background of the study
The world today has undergone tremendous changes and innovation is on the front position and
an important phenomenon in any sector of modern economy. Innovation permits firms to
implement a novel and better process of performing their operations. According to Lawrence
(2010), innovation is terrific development by firms in approaching with innovative products or
the application of new operation or processes in production. It is characterized by the
development of new ideas, products or new processes used to craft new, quality and convenience
services and products by organizations (Kumar et al, 2011).
The financial industry is one of the sectors that have witnessed growing interest in adoption of
continuous innovations that are made in order to match the ever-changing market place. In the
financial service industry, innovation is viewed as the creation and popularization of new or
improved technologies, financial instruments, institutions and markets which smooth the
progress of access to information, trading and means of payment (Sloan, 2003). According to
Nofie (2011), innovation in the financial sector is the coming of a latest or better product and
process that lower the cost of producing existing financial services or transaction. Broadly
speaking, financial innovation is the way of producing and then popularizing new financial
instruments as well as new financial technologies, institutions and markets (SatyaSekhar, 2018).
A well-developed financial sector is vital importance to facilitate access to financial information

with minimal costs, reduction of transaction costs, fair investment decision, technological
innovation and growth stability (Qamruzzaman, & Jianguo, 2019). Financial innovation tends to
accelerate the financial development by allowing risk minimization and investment
diversifications and thus plays a crucial role in economic growth (Desai & Low, 1987).
According to Schumpeter (1928), the financial innovation is crucially important for economic
growth but the impact of financial innovation on economy be given little attention in empirical
study. However, in recent period financial innovation and its potential impact has attracted
immense interest among researchers and inspires further investigation by considering the various
aspect of the economy such as the economic growth (Bara & Mudzingiri 2016; Bara et al. 2016;
1
and Qamruzzaman & Wei 2017, 2018b, 2018c & 2019), on firms performance (Valverde et al.
2016; and Muthinja & Chipeta 2018) and on banking sector growth (Kamau & Oluoch, 2016;
and Chipeta & Moses, 2018), and many more.
Currently, financial innovations are used by financial institution as redoubtable strategic

instruments to outperform the competition and have turn into crucial means for the bank to
improve its efficiency and to get better its performance on the market (Batiz-Lazo and
Woldesenbet, 2006). It seems obvious that financial innovation not only helps the bank to reduce
costs, but also give a range of new opportunities and prospects that will help banks to improve
their performance in several ways (Sujud & Hashem, 2017). Aduda & Kingoo (2012), points out
that commercial banks used financial innovation to support them compete in financial markets
and as a result it can get better their performance and keep up their success in market. In
particular, decreasing the cost alone does not give a competitive advantage and the center of
attention has shift to the profitability and revenue growth. From these facts, analysis devoted to
the major effects of financial innovation on the performance of commercial banks seems to be of
great relevance.
When we see our country context, financial system in Ethiopia is very much behind in the
implementation of financial innovations compared to the rest of world and even Sub-Saharan
region (Mengistu, 2018). Despite moderate effort undertaken by banks to offer financial products
to attract clients and offer novel financial service, financial innovation has a long way to go in
Ethiopia because the country was listed the last second for financial inclusion and innovation
from 26 politically, geographically and economically same countries (GPFI, 2016). According to
Global System for Mobile Communication Association (GSMA) 2017 report, Ethiopia is an
outlier among its peers when it comes to access to and usage of digital financial Service. For
example, in 2018 Ethiopia’s had 0.46 ATMs per 100,000 adults, in contrast with Kenya had 9.2
ATMs per 100,000 adults, (World Bank, 2018). Similarly, mobile money account penetration in
Ethiopia is also very low. According to GSMA 2017 report, only 0.3% of adults had a mobile
money account, compared to 73% in Kenya, 31% in Rwanda and 22% for the region average in
2017. Likewise, almost all (98%) adults in Ethiopia pay utility bills with cash, compared to 12%
of people in Kenya and 59% in the region as a whole (GSMA, 2017).
2
Different reasons may be attributable to laissez-faire attitude of commercial banks in Ethiopia
toward the development of new financial innovations (Mengistu, 2018). Firstly, the payback
period for the initial capital outlay may be longer and unacceptable to management and
shareholders. Secondly, the lack of ‘analog complements’ to digital financial service – such as
regulation, skills and institutions – could be another factors. Thirdly, these innovations may not
have a positive correlation with banks performance in terms of profitability and efficiency. It is
reasonable that whether banks get advantages and capture benefits of this new innovative
technology based banking will eventually depend on their assessment of the performance. Thus,
analysis devoted to the major effects of financial innovation on the performance of commercial
banks in Ethiopia seems to be of great relevance.
Despite the fact that Ethiopian financial system is very much behind in the implementation of
financial innovations compared to the rest of world, the Ethiopian financial sector cannot remain
an exception in expanding the use of the system (Gardachew, 2010). The emergence of new
technologies, products, processes, markets and competition puts demand on any commercial
bank in Ethiopia to employ skills and technology necessary to remain competitive (Solomon,
2016). NBE annual report (2017/18) also stressed that the importance of implementation of
financial inclusion strategy which has leads to improving the use of electronic money and new
financial products. The banking sector is championing digital banking with mobile technology
and offered digital banking products such as Hello Cash, M-Birr, CEB-Birr, Amole and other
user interfaces digital banking product in multiple languages, offline capabilities, and
multilingual customer service centers. The prominent innovations in banking and financial
industry in Ethiopia include the emergence of ATM, mobile banking, internet banking, card
banking, agency banking, free advisory services and others (Rukiya, 2018). Accordingly, the
questions relates to whether the emergence of such types of financial innovative channels
represented positive change and are affecting the financial and operational performance of the
banks will have greater importance. Thus, the study therefore seeks to examining to what extents
the adoption of financial innovation affect performance of commercial banks in Ethiopia.
3
1.2 Statement of the problem
In present day economy, innovation has become a key contributor to productivity and economic
performance, not only for manufacturers but also for the service industries, most notably
financial service (Victor, 2015). The fast-changing competitive environment, rapid changing
consumption patterns, globalization, regulation, economic changes, privatization and the likes,
insist that commercial banks to run effectively and efficiently by constantly engaging in financial
innovations (Auta, 2010). As such financial innovation has already revolutionized the financial
industry and has brought new products and processes and far-reaching organizational and
institutional changes (Frame, et al., 2002). Akamavi (2005) also notes that innovation in the
financial services sector has led to recent fundamental changes including; deregulation,
increasing competition, higher cost of developing new products and the rapid pace of
technological innovation, more demanding customers and consolidation of corporations.
Despite the fact that it is indisputable that financial innovation is essential in rising financial
inclusion and deepening, there are still debates about how and to what extents the adoption of
financial innovation improves bank performance (Mabrouk and Mamoghli, 2010; Solomon,
(2016). According to Mabrouk and Mamoghli (2010), the influence of financial innovation on
banks performance is still misunderstood for two main reasons. First, there is low level of
understanding about the determinants of adoption of financial technological innovation.
Secondly, the influence of financial innovations on banks performance remained inadequately
studied. Similarly, Chimwemwe & Moses (2018) stressed that studies which have tried to link
financial innovations to firm performance have created a bypass around empirical approaches.
The contention of this situation is that for the most part of the findings are largely anecdotal,
owing to variance the operating environment and the level of adoption.
More so, the global financial crisis from 2007 to 2009 has stimulated renewed widespread
discussions about the "bright" and "dark" sides of financial innovation (Thorsten, 2013). The
customary innovation-growth view advocates that financial innovations support to facilitate risk
sharing, reduce operational costs, improve efficiency of the market, and ultimately improve
economic growth. On the contrary to this, the rising innovation-fragility view, has categorized
financial innovations as the root cause of 2008 Global Financial Crisis, by engineering securities
4
perceived to be safe but exposed to neglected risks, by leading to an unprecedented credit
expansion fueling a boom-bust cycle in housing prices, and by helping banks and investment
banks design structured products to exploit investors’ misunderstandings of financial markets
and exploit regulatory arbitrage possibilities (Thorsten, 2013).
Even though there is broad descriptive literature that discusses recent financial innovations, the
previous studies are in disagreement in their findings and produced mixed results regarding the
effect of financial innovations on banks’ financial performance (Catherine & Herick, 2016).
Some scholars observed positive impact, some observed negative while other researchers have
drawn mixed conclusions. Scholars (Batiz and Woldesenbet (2006); Hernando and Nieto (2007);
Mwania and Muganda (2011); Aduda and Kingoo (2012); Karimzadeh et al. (2014); Cherotich,
et, al (2015); Sujud and Hashem (2017) in their studies concluded that financial innovation had
significant contribution to bank performance. On the other hands, studies by Malhotra and Singh,
(2010); Francesca and Claeys (2010); Al-Smadi and Al Wabel (2011), Mugane & Ondigo
(2016); found that financial innovations had least, insignificant or negative impact on bank
performance. There are also a research studies that found mixed result (Abaenewe et al. (2013);
Onay et al. (2013); Nkem and Akujinma, (2017). It could be seen from previous empirical
literatures that the impact of financial innovation on the performance of banks provides mixed
evidences and thus inconclusive. It is at the center of such mixed finding and conclusion that
motivated and calls for the need to carry out a study.
In Ethiopia, although many researchers have studied in the field of electronic banking, from
survey of relevant literature, it was evident that very few studies have been found to empirically
investigate the impacts of financial innovation on the performance of commercial banks. Girma
(2016) conducted a research about the impact of Information Communication Technology (ICT)
on the performance of Ethiopian commercial banks. Solomon (2016), Tilahun (2016) and Rukiya
(2018) are conducted a study to examine the impact of electronic banking on financial
performance of commercial banks in Ethiopia. However, these studies in the area of financial
innovations have not been done in a comprehensive approach on Ethiopia. It came out strongly
that there was of lack of comprehensive analysis of multiple innovations as the previous
literature indicated that only financial product innovations have been considered. The previous
5
studies concentrated only on variables of electronic banking concerning product innovations like
ATM, POS and Debit card, while this study examine financial innovation in wider perspective
(process and organizational innovation) and as such additional important variables that were
omitted by previous studies like mobile and internet banking are included. More than that, as far
as the researcher assessment is concerned, the previous studies focused only on assessing the
impact of financial innovation on financial performance/profitability of bank/ and as such Return
on Asset (ROA) was used as the only dependent variable to measure the banks performance.
However, this study is unique in sense that it makes investigation of impact of financial
innovation on both financial and non-financial/operational/ performance measures of banks. The
study therefore aimed to fill this gap in the literature by examining to what extents the adoption
of financial innovation affect financial and operational performance of commercial banks in
Ethiopia in more inclusive manner.
1.3 Objectives of study

“1.3.1 General objective
The general objective of this study was to investigate the effect of financial innovations on
financial and operational performance of commercial banks in Ethiopia.
1.3.2 Specific objectives

The specific objectives of this study were:-
To examine the effect of mobile banking on financial performance/profitability/ of
commercial banks in Ethiopia.
To assess the extent to which internet banking affects financial performance
/profitability/ of commercial banks in Ethiopia.
To inspect the influence of ATM banking on financial performance /profitability/ of
To find out the effect of mobile banking on operational performance of commercial
banks in Ethiopia.
To establish the effect of internet banking on operational performance of commercial
banks in Ethiopia.
6
To investigate the extent to which ATM banking affects operational performance of
1.4 Research Hypothesis

In order to address the above objectives, the following hypotheses to determine the impacts of
financial innovation on performance of Ethiopian commercial banks were tested.
Hypothesis 1: Mobile banking has positive and significant effect on financial

performance of commercial banks in Ethiopia.
Hypothesis 2: Internet banking has positive and significant effect on financial
Hypothesis 3: ATM banking has positive and significant effect on financial performance
of commercial banks in Ethiopia.
Hypothesis 4: Mobile banking has positive and significant effect on operational
Hypothesis 5: Internet banking has positive and significant effect on operational
Hypothesis 6: ATM banking has positive and significant effect on operational
1.5 Significance of Study”

The study becomes significant in view of the current development and trend in global financial
sector where technology culture is in style and various governments are embarking on financial
innovative and reformative progression. The study assesses the nexus between financial
innovation and performance of commercial banks in Ethiopia. This may improves knowledge on
the concept of financial innovation and provide more empirical findings on the link between
financial innovation and performance. This becomes vital in view of the government
involvement and concern in financial inclusion and deepening; more so the level of resources
commitment by banks to boost financial innovation and enhance their competitive advantage.
The study may also relevant for various stakeholders including researchers, practitioners and
policy makers. This study can also be used as a basis of further researches.
7
1.6 Scope of the Study
The conceptual scope of this study concerned on the effects of financial innovations on
performance of commercial banks in Ethiopia. The study covered all commercial banks that
were in operation by close of business on 31st of June 2019 as they appeared in the website of
National Bank of Ethiopia. The area of concentration was Addis Ababa, where the head offices
of all commercial banks of Ethiopia are located and which is also the hub of commercial and
business activities in Ethiopia. But the result of the study can be relevant to the whole nation.
Senior bank managers and senior officers that were currently employed in the head offices were
sampled for their views and opinion on effect of financial innovations on performance of
commercial banks. The types of financial innovations that were investigated in this study were;
mobile banking, internet banking and ATM banking. The performances of commercial banks
were measured with profitability and operational performance.
1.7 Limitation of study

Even though the study was designed to enable the researcher collect accurate and reliable data
that can be used to make some inferences, it was however not free from limitations. The study
only encompassed the view and opinion of senior managers and senior officers in head office in
Addis Ababa. Though the study targeted all commercial banks currently under operation, data
were collected from samples drawn from the bank head office in Addis Ababa. Thus those
commercial banks outside head office in Addis Ababa and other financial regulatory agencies
like National Bank of Ethiopia are omitted in this study as finances and distances are the limiting
factors that inhibit collecting the data from all the commercial banks across the country.
1.8 Organization of the study

The study was organized into five chapters. Chapter one discussed the introduction part. It
contains the background to the research study, presents the statement of problem, objectives and
research hypotheses. Also, the chapter has the significance, scope, and limitations of the study.
Chapter two contains theoretical review, empirical review of previous studies and conceptual
framework of study. Chapter three outlines the research methodology adopted in this study.
Chapter four discusses about the data analysis and interpretation of the outputs. Chapter five
8
outlines the summary of the finding, conclusions, recommendations and further research
suggestions.
9
Chapter Two
LITERATURE REVIEW
2.1 Theoretical Framework
Theories give a general explanation and rationalization to events. Hence a researcher should be
familiar with those theories relevant to his area of research (Kombo & Tromp, 2009). Muiruri &
Ngari (2014), note that a theoretical framework guides research, assist in identification of the
variables to be measured, and determining what statistical relationships to look for in the context
of the problems under study. Hence, the theoretical review of literature helps the researcher to
detect clearly the variables of the study; assists in the selection of applicable research design; and
provide a general framework for data analysis. Several theories have been designed by different
scholars to explain financial innovation. These includes; Schumpeter Theory of Innovation,
Transaction Cost Theory, Constraint-induced Financial Innovation Theory, Task Technology Fit
Theory, Circumvention-Innovation Theory, and Rogers' Diffusion Innovation Theory among
others.
2.1.1. Schumpeter Theory of Innovation

According to Schumpeter (1928), entrepreneurs, who could be independent inventors, have
abilities of expanding the opportunity for new profits with their innovations. Nevertheless,
Schumpeter idealized that before the economy reached at equilibrium, a new set of innovations,
conceptualized by Schumpeter (1934) as “Kondratiev cycles”, would emerge to begin the
business cycle over again. Accordingly, Schumpeter (1934) puts it that innovations are always
happening in the industry and at any instance of time, there is something new being innovated in
the economy and for this reason, institutions needs to be cognizant of them and the financial
sector is not exempted from this. It is due to this fact that there are a variety of innovations that
commercial banks adopt and implement in order to boost up their financial performance.
Accordingly, Schumpeter (1934), innovation is not merely coming up with innovative ideas; it is
the process of increasing their practical use. In other words, innovation is defined as terrific
development by firms in approaching with innovative products or the application of new
operation or processes in production (Lawrence, 2010). Financial innovations are crucial tool for
strategic transformation of commercial banks because they enable banks to coup up with changes
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that are presented by the environment. Schumpeter (1939) categorized it into two major
dimensions: product and service innovations. Product innovations consist of the creation of a
new good or entirely new product, which more sufficiently satisfy existing or previously satisfied
needs. Process innovation encompasses the adoption of a new or considerably improved
operation or production.
Schumpeter’s contentions have been support by Porter (1992) assertion that innovation is very
crucial for securing a country’s competitive advantage and long-run economic growth.
According to Porter (1992), to compete successfully in international trade; a nation’s businesses
must constantly innovate and improve and upgrade their competitive advantages. For ensuring
continues innovation and upgrading, it is important to make sustained investment in physical as
well as intangible assets. Financial institutions and markets make significant tasks in mobilizing
savings, monitoring fund movements, facilitating transactions, evaluating projects, and managing
risk. From this theory, financial innovation by banks is a strategic choice to boost up
performance, enhance relevance and competition (Akinyele, 2016). Therefore banks must be
continually responding to the need of the customers and consistently meet society’s evolving
need. This means banks must be watchful of what customers need, be aware of what they want
and also innovate as appropriate, at a gain.
2.1.2. Constraint-induced financial innovation theory

Constraint-induced financial innovation theory was developed by American economist Silber
(1983). This theory point out that the central reason adoption of financial technological
innovation is to improve its financial position or to maximize profit of commercial banks which
work in market with more constraints have the utmost incentive of accepting and implementing
financial innovation that support in bust up their financial performance as it reduce transaction
cost (Lerner, 2006).
According to Sibler (1983), the banking sector is firmly regulated and thus has restrictions
towards innovations and thus may limit innovations. The existence of these limitations is resulted
in to twofold effect: reduced the banks’ ability to venture into new innovations and also may
lessen the efficiency of the banking institutions. It is because of this fact that commercial banks
will always frequently act to keep them off through financial innovation. Silber (1983) argued
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that financial innovation occurs to remove or lessen the constraints imposed on firms. Firms
facing imperfections like regulation and entry barriers have the greatest incentive to innovate and
boost profits because of the high shadow costs of such constraints. Lerner (2006) found that
more highly leveraged firms are less innovative. He also reports that less profitable firms are
significantly more innovative.
The theory thus is important in that it help shed light on the reasons that make banks venture into
financial innovations. More so, commercial banks in Ethiopia are strictly regulated by the
national banks of Ethiopia and may not be free to adopt all financial innovations without the
express approval of the regulator. Financial innovations have been noted as per the theory to be a
move to bust up the profits or the financial position of the financial institutions.
2.1.3. Transaction cost innovation theory

The transaction cost innovation theory was developed by Hicks and Niehans in 1983, and the
theory stated that the main motive for embracing financial innovation in firm is the reduction of
transaction cost. According to the theory, transaction costs play an essential role with respect to
innovation and innovation is the response of the advance in technology which caused the
transaction cost to reduce. In this case, the theory clarifies its connection to other feature of
business development, that the main rationale of financial innovation in financial organization is
profit maximization. According to Hick and Niehans (1983), the reduction of transaction cost
could inspiring financial innovation and they also believes that money related innovations
decreases the costs involved in making transactions.
The theory explained from another perspective that the radical motive of financial innovation is
the firms’ purpose of earning/increasing shareholders’ wealth or benefits. Transaction costs
Innovation theory is also relevant in different context. For example, the application of Internet-
connected Information Technology (IT) can significantly trim down a firm’s transaction costs as
it facilitate efficient coordination, management and use of information. Mobile or Internet-
connected IT may further lower transaction costs as it offer also virtual access to the firm’s
internal database and other relevant sources of information.
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Efficiency in transaction cost theory is conceptualized as Pareto efficiency where governance
modes are evaluated based up on to their ability to smooth the progress of transactions until the
point at which it is impossible to make one party better off without making the other party worse
off (Jones, 1998). The theory declared that the firm, in many instance, provides a comparatively
more efficient system of organizing relative to the market for the reason that optimization of
transaction costs or overall value. Thus, transaction cost theory is about efficiency and views
business organization as being predominantly concerned with the relative efficiency of
optimizing on transaction costs. This theory is therefore significant to this study as it will help
the researcher in articulating the relationship between financial innovations and performance of
commercial banks in Ethiopia with respect to improving efficiency of operation as the result of
reducing transaction cost.
2.1.4. Task-technology fit (TTF) theory

Task technology fit theory was pioneered by Dishaw and Strong in 1999, advocated that new
technological innovations is more likely to be adopted by if it has positively influences the
performance of the users and be used if the capabilities of the information technology match the
tasks that the user must perform (Goodhue & Thompson, 1995). Goodhue and Thompson (1995)
developed a measure of task-technology fit that consists of 8 factors that can be used to presume
if the technology fits the task at hand. The factors include compatibility, quality, systems
reliability authorization, production timeliness and, eases of use/training, and relationship with
users. Since the initial work, the theory is applied in the describing of a variety of context of a
diverse range of information systems including electronic commerce systems and combined with
as an extension of other models related to Information System (IS) outcomes such as the
technology acceptance model (Gebauer & Shaw, 2004).
The theory of task-technology fit plays a crucial role in influencing individual impact and
performance in the use of information systems. According to Dishaw & Strong (1999), in order
to have a positive impact on performance, an information system must be utilized and fit the task
that is supported. User assessments based on task-technology fit have been effective measures of
information systems success and statistical significance has been found of a positive relationship
between task-technology fit and information system success measures, such as impact on
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individual performance Goodhue & Thompson (1995) and on group performance (Zigurs et.al,
1999).
2.1.5. Rogers Innovation Diffusion Theory

Rogers' Diffusion of Innovation Theory wants to describe how innovations or new ideas are
adopted, and this theory suggests that there are five attributes of an innovation that influence
adoption: relative advantage, complexity, compatibility observability, and trialability (Rogers,
1995). Relative advantage is the extent that an innovation is perceived as being better than the
idea it surpasses. Rogers' theory advocates that innovations that have a clear, definite advantage
over the former method will be more easily adopted and implemented. Existing research
evidence also shows that if a potential user realizes that there is no relative advantage in using
the innovation, it will not be adopted and implemented (Greenhalgh et al, 2004). Complexity is
the extent that an innovation is perceived as being difficult to understand and use. Compatibility
is the extent that an innovation fits with the prevailing standards and values, past experiences,
and needs of potential adopters. Existing research evidence also shows that the more compatible
the innovation is the better the chance of adoption (Greenhalgh et al, 2004). Trialability is the
extent that an innovation may be experimented with on a limited basis. For the reason that new
innovations entail investing time, energy and resources, innovations that can be tried before
being fully implemented are more readily adopted. Finally, observability is the extent that results
of an innovation are noticeable to the adopters. If there are observable positive outcomes from
the implementation of the innovation then the innovation is more adoptable.
2.2 Financial Innovation

Financial innovation is the delivery channel for banking services. It is the act of crafting and then
popularizes new financial instruments as well as new financial technologies, institutions, and
markets (Lemo, 2005). It may be viewed as several types of services through which bank
customers can ask for information and carry out most retail banking services via computer
(Idowu, 2013). Broadly speaking, financial innovation is the way of producing and then
popularizing new financial instruments as well as new financial technologies, institutions and
markets (Frame & White, 2009)
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According to Victor (2015), financial innovations, unlike industrial innovations, do not refer to
completely new products and for the most part, their base originates from financial instruments
or institutions that are already in existence. Stiglitz (2010) point out that modern financial
vehicles are often produced by removing certain existing product features or by toting up a
number of new features to them. According to Tarczynski and Zwolankowski (1999), financial
market products and instrument innovation have a number of characteristics, including (1)
flexibility (e.g. introduction of secondary markets, liquidity in capital and foreign exchange
markets, adjustable rate instruments), (2) fortification against changeability of market parameters
(e.g. exchange rates, interest rates, etc) such as in standardized (e.g. futures) and non-
standardized (e.g. OTC options) hedging contracts, and (3) higher combination of different
instruments (e.g. exotic options).
Successful innovators are capable of capturing advantage of the new environment to grow up at a
more rapid pace than their competitors (Peat, 2009). According to Frame and White (2009), for
financial innovation to be successful, it will have to make improved and enhanced investment
environment for market participants (customers and investors) and should lead to a further
adequate accomplishment of the expectations and financial objectives of market participants
compared to traditional forms of investment. Financial institutions engage in innovation to gain
the following benefits: reduced transaction costs, reduced agency costs, increased risk sharing
opportunities, avoidance of regulations and taxes, increased liquidity, capturing temporary
profits and changing prices (Allen & Gale, 1994).
In many advanced economies, innovation has become a key contributor to productivity and
economic performance, not only for manufacturers but also for the service industries, most
notably financial services. Financial innovation makes important contributions to economic
growth and to the stability of financial systems and it led to a revolution in the way the bank
undertaken the business. Lerner and Tufano (2011) showed the evidence that Chinese
commercial banks have moved from the conventional business operation mode of the wholesale
credit operations to the retail mode as result of technological innovation. In India, Pooja and
Singh (2009) point out that compared to the non- internet banks, internet banks had provided
superior quality products, relatively more profitable, and more efficient. In Jordan, electronic
15
banking services produced more satisfied customers and better long term cost savings strategies
(Siam, 2006). The importance financial innovation has increased in Ghana banks as it has altered
the way banks serve their clients more conveniently (Joshua, 2010).
As noted by Frame and White (2002), there are three types of financial innovations; product,
process and institutional. Product innovation is the introduction of a good or service that is new
or considerably improved concerning its character or intended uses (Ignazio, 2007). Process
innovations is the introduction of new business operation or processes leading to improved
efficiency, reduce in unit costs of production, and deliver novel or considerably superior
products (Frame & White, 2002). Examples include on-line securities trading and Internet
banking. Institutional innovation covers launching new institutions or organizational structures
or the implementation of new methodologies in the organization's business practices within
institutions where the production process is held (Ignazio, 2007). Internet-only banking is a
principal model of this type of innovation. In Ethiopian context the most widely accepted and
adopted form of financial innovation includes, Mobile, Internet and ATM banking. Therefore,
the financial innovations that are used in the study are; Internet banking, Mobile banking and
ATM.
2.2.1 Mobile Banking

With rapid advance of internet technologies and diffusion of mobile phones, mobile banking has
gained attention as a viable option in delivering financial services. Recent innovations in
telecommunications have enabled the launch of mobile banking as a new access method for
banking services; whereby a customer interacts with a bank via mobile phone (Barnes & Corbitt
2003). Mobile banking is defined by Tiwari, Buse & Herstatt (2006) as any transaction
(including the transfer of right or ownership to use goods and services) which is started and/or
completed by using mobile access to computer networks with the assistance of an electronic
gadget. Mobile banking is terms used in carrying out banking transactions through mobile gadget
such as a mobile phone (Anyasi & Otubu, 2009). It is concerned with the provision of bank-
related financial services with the assistance of mobile telecommunication devices.
The services of mobile banking can be used to raise proficiency and help business develop
through efficient, cheap and reliable money service support system that lessen the need for cash
16
transaction and the associated risks (Anyasi & Otuba, 2009). It provides the benefits of banking
services such as being able to save and borrow in a cost-efficient and secure way. The services
include opening bank accounts, viewing account balances, making cash transfers between
accounts, or paying bills via a mobile device.
2.2.2 Internet Banking

Internet banking refers to platform that allow bank customers to get access to their accounts
through the use of banks website, without the intervention or inconvenience of sending letters,
faxes, original signatures and telephone confirmations (Sathye, 2009). It is the use of internet and
telecommunication networks to deliver a wide range of value added products and services to
bank customers. Using internet banking, registered customers are able to log on to the bank’s
website and carry out banking dealings on their accounts. It is also referred to as online banking.
To date, the rapid spread of Internet banking all over the world its acceptance as an extremely
cost effective and efficient delivery channel of banking services as compared to other existing
channels (Zarei, et al., 2008). The development of Internet banking has transformed the
distribution channel structure in bank sector (Giannakoudi, 1999). Banking through internet has
emerged as a strategic resource for achieving higher efficiency, control of operations and
reduction of cost by replacing paper based and labor intensive methods with automated processes
thus leading to higher productivity and financial performance (Malhotra, 2009). The modern
internet banking methods are new to the Ethiopian banking sector, and all banks in Ethiopia are
too late to move with technological advancement and they should clearly chart out the time plan
for their integration and technological advancement (Gardachew, 2010).
2.2.3 Automated Teller Machine (ATM)

Automated Teller Machine (ATM) is the first well known machines to provide electronic access
to customers. With the advent of ATM, banks are able to serve customers outside the banking
hall. ATM system is system that links banks and other financial organizations to retail banking
customers for numerous types of routine banking transactions (Dossantos and Peffers, 1993).
These include inquiries, deposits, cash withdrawals, cash transfers and payments. It does all
through an access to personal identification number (PIN), and a plastic that contains magnetic
chip which the customers identified through (Mwatsika, 2014).
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Literature shows that ATM banking has received customer preference to become the second
most popular channel for accessing banking products/services behind branch banking (Charles,
2016). ATM is the most dominant innovation channel among those banks which are currently
providing the service in Ethiopia (Mattewos, 2016). ATMs enable bank customers to have 24
hour access to banking services and it is convenient and easy to use (Charles, 2016).
2.3 Bank Performance

In this study, researchers made an attempt to empirically investigate the impact of financial
innovation on bank performance in the context of commercial banks operating in Ethiopia. Thus
dependent variable of the study was bank performance. Performance is the ability of an
organization to cope with all four systemic processes (inputs, outputs, transformations, and
feedback effects) relative to accomplish its goals (Damanpour & Arvind, 2011). External parties
normally evaluate a firm s ability based on its performance. This implies why performance is like
a mirror to a firm. According to Richard et al (2009), performance contains the actual output or
results of an organization as measured against its intended outputs (or goals and objectives). It
may be viewed as the efficiency and productivity of the business in the context of the market
where it operates. It is subject to how efficiently a firm uses its assets from its principal role of
conducting business and its subsequent generation of revenues (Omondi & Muturi, 2013).
Performance is the outcomes achieved in meeting internal and external goals of a firm (Liao et
al., 2010).
According to Alam et al (2011), performance is a multidimensional construct that consists of

four elements that includes financial and market performance, customer-focused performance,
human resource performance, and product or service performance. Financial and market
performance indicators includes, revenue, profits, earnings per share, market position, and the
like. A customer-focused performance indicator includes customer satisfaction, and human
resource performance indicators, including employee satisfaction. According to Richard et al.
(2009) organizational performance includes three specific areas of firm outcomes: financial
performance (profits, return on assets, return on investment, etc.); product market performance
(sales, market share, etc.); and shareholder return (total shareholder return, economic value
added, etc.). Santos and Brito (2012) offered a firm performance measurement model based on
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subjective indicators. This model contains six dimensions: growth, profitability, employee
satisfaction, customer satisfaction, social performance, and environmental performance.
Different firms are implemented different methods of measuring their performance based on
their organizational objectives as a basis. This performance indicator may be measured in
financial and non-financial terms (Bergin-Seers & Jago, 2007). Majority of firms, however,
choose to use financial indicators to measure their performance (Beccalli, 2007). According to
Omondi & Muturi, 2013, financial performance is the application of financial indicators to
measure the extent of objective accomplishment, contribution to support of the bank with
investment opportunities. It evaluates of how sound a company can employ assets from its
primary mode of business and generate revenues (Heremans, 2007). Simpson & Kohers (2012)
point out a few of the financial measures to include revenue, profit margins, sales growth, return
on equity, return on assets, net interest income, stock prices, Operating Expenses/Operating
Incomes, liquidity ratio and capital adequacy.
Generally, firm performance measures can play key function in instigating and adopting
financial innovations through incentive for improving performance and measurements to
evaluate progress toward this goal (Omondi & Muturi, 2013). Nonetheless, financial factors are
not the only indicator for measuring firm performance. It needs to combine with nonfinancial
measurement in order to adjust to the changes of internal and external environments. The most of
previous studies adopted only financial indicators to measuring firm performance, but it is not
enough, so it must use non-financial indicators through an integrated approach (Hansen &
Wernerfelt, 1989). According to Bergin-Seers and Jago (2007) recommended to use a combine
financial and non-financial indicators. After reviewing previous studies, the study adopted
operational definition for measuring firm performance as the sum of financial (profitability) and
non-financial measures (operational performance) that assess organization's performance.
2.3.1 Financial (profitability) measure

According to Heremans (2007) financial measures refer to the extent to which the organization
performs in relative profitability and return on investment. A firm financial performance is
reflected in the amount of success as regards to its output in terms of return on investment, return
on assets, annual profit, total income, payback period, value added among others (Simpson &
19
Kohers, 2012). Return on Asset (ROA) and Return on Equity (ROE) are the two most commonly
used techniques of measuring firm financial performance. ROA is a ratio of income to its total
asset and it measures the ability of the bank management to generate income by employing firm
assets at their disposal. ROE is a financial ratio that refers to what the shareholders look in return
for their investment and how much profit a business earned compared to the total amount of
shareholder equity invested (Heremans, 2007)
2.3.2 Non-financial measures (operational performance)

Non-financial measures refer to the extent to which the organization performs in relative quality
and speed delivery of service and satisfaction to clients (Uzkurt et al., 2013). It is mainly
measured through operational performance. Operational performance is a process of assessing
progress toward achieving predetermined goals, including information on the efficiency with
which resources are transformed into outputs both goods and services whose quality depend on
delivery and satisfaction to clients (Muthami, 2015). Operational performance of service delivery
comprises three critical performance factors (quality, cost, and speed) that are usually present in
a service delivery system (Tseng et al., 2008). Consistent quality, dependability of delivery, and
prompt delivery (speed) are critical operations performance factors in service delivery systems
(Kumar, et al., 2011) and reflects more directly to the efficiency and effectiveness of the
operations within the firm (Gizaw, 2016). These categories of performance reflect competencies
in specific areas of supply chain including cost, quality, and conveniences.
2.4 Empirical Review

Even though there were lots of empirical studies concerning the effects of implementation of
financial innovative technology on the performance of bank, the existing literatures provides
mixed evidences and reached to inconclusive results. Most study observed positive impact and
other found negative impact, while some other observed mixed impact. This section reviews
literature from previous research regarding the effect of financial innovations on the performance
of commercial banks.
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2.4.1 Empirical studies on developed and emerging market countries
There are plenty of empirical studies in developed and emerging market countries concerning the
impact of financial innovation on the bank performance. Most of the previous study found
empirical findings of positive impact of financial innovation on the performance of the banks.
In Spain, Hernando and Nieto (2007) conducted study to determine the relationship between
internet banking channels and performance of Spain Retail Banking and they found out that the
impact of adoption financial innovative in a form of internet delivery channel takes time to
contribute to performance of banks. They found that after three years of adoption of digital
banking in form of internet banking channels there exists significant positive impact on the
performance measured in terms of ROA and Return on Equity (ROE), of the sample bank.
Similarly, Rauf and Qiang (2014) undertook a study to examine the effect of electronic banking
on the performance of Pakistani commercial banks. They found electronic banking has
significant positive impact on interest margin, ROA and ROE of the recent adopters whereas for
the early adopters significant positive impact on ROE and interest margin but slightly on ROA.
In addition to the above studies, there are also other studies conducted by various authors that
found positive impact. Karimzadeh et al. (2014) undertook study to investigate the effects of
electronic banking expansion on profitability of a commercial bank in Iran and they found that
expansion of electronic banking has significant positive association to the profitability, measured
in terms of ROA, of the sample bank. Roberts and Amit (2003) conducted study to determine the
relationship between innovation and the emergence of differentiated competitive positions in
Australian Retail Banking and they found out that financial innovative activities have
significantly impact on current financial performance of banks. Similarly, De Young et al. (2007)
found out that the adoption of internet banking improved community bank profitability, for the
most part through increased revenues from deposit service charges. Besides, Rahman (2007)
undertook study to determine the impact of innovative technology on the profitability of the
banks operating in Bangladesh and found that banks that adopt innovative technology are
experienced improved performance as they gain maturity. Likewise, Lerner and Tufano (2011)
found that financial innovations like venture capital, mutual fund, exchange traded funds, equity
funds and securitization lead the way to financial deepening and growth.
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Contrary to the empirical findings of positive impact of financial innovation on the performance
of the banks, there are researchers that found negative impact. In Jordan context, Al-Smadi and
Al Wabel (2011) undertook a study to examine the influence of electronic banking channels on
the performance of Jordanian banks. In their study, they used a panel data of 15 Jordanian banks
for the period of 2000–2010. They found significant negative impact of electronic banking on
financial performance of banks.
In India context, Malhotra and Singh (2010) conducted a study to examine the effect of financial
innovations specifically internet banking on performance of India commercial banks. In their
study, they used a panel data of 82 scheduled commercial banks for the period of 1998 – 2007.
The result indicated that there is no significant association between adoption of internet banking
by banks and their performance. The reasons of lower profitability of these banks were pointed
out to be higher cost of operations, including fixed cost and labour cost. Likewise, Francesca and
Claeys (2010) studied the determinants of banking groups' strategic choices with respect to the
offer of on-line services. In their study, they used a panel data of the 60 largest European Union
banking groups for the period 1995-2005. They concluded that Internet banks fall short of
forming synergies with other banking activities and so financial innovations in the form of
internet banking does not improve banks financial performance.
There were researchers that found mixed result. In Nigeria context, Oyerinde (2011) undertook a
study to examine the effect of electronic banking on performance of Nigerian bank. He found
that electronic banking has significant positive impact on the banks performance measured in
terms of Return on Assets (ROA) and Net Interest Margin (NIM). However, the study found no
impact on ROE. Similarly, Onay and Ozsoz (2013) undertook a study to measure the effect of
electronic banking on bank performance in Turkey by using panel data over the period of 1990 –
2008 of eighteen retail banks and they found that Internet banking adoption is positively
associated with the level of profits, deposits and loans per branch. On the contrary, the study also
found that implementation of internet banking services has a negative effect on bank profitability
after 2 years of adoption. According to the authors, the reasons for such negative impact are
internet banking increases competition and results in lower interest income. Likewise, Sadr
(2013) undertook a cross country study on four banks of selected Asian countries by using a fully
22
modified OLS and the author empirically found that internet banking has contributed to improve
ROE with a time lag of three years while a negative impact is observed for one year lagged.
2.4.2 Empirical studies in Sub-Saharan Africa countries

The financial industry in Sub-Saharan African countries is moderately strengthened due to
financial innovations in various payment methods, such as the use of automated teller machines,
mobile banking, and electronic banking. This technological progress has increased competition
in the banking sector as the numbers of institutions have grown. Empirical studies have also
existed in Sub-Saharan African countries concerning the effect of financial innovation on the
bank performance.
The majority of these studies have found a positive relationship between financial innovation and
bank performance. In the Kenyan context, Kimingi (2010) undertook a research to examine the
effect of technological innovations on the financial performance of the Kenyan commercial
banks and he found that the adoption of technological innovations by banks had improved
financial performance of Kenyan commercial banks through profits increment, increased bank
sales, and improvement on return on equity. Similarly, Okiro & Ndungu, (2013) found that
financial innovation has a positive and significant impact on the profitability of Kenyan
commercial banks.
In the same way in Nigerian context, Jegede (2014) undertook a study to determine the effect of
ATM on the performance of Nigerian banks based on a questionnaire that served 125 employees
of the five chosen banks in Lagos State. The result of the study showed that the adoption of
ATM terminals have averagely improved the performance of Nigerian banks. Gbalam et al.
(2017) aimed to determine the impact of electronic banking on profitability of commercial banks
in Nigeria. Four E-banking channels (automatic teller machines, electronic mobile banking,
internet banking transactions, and point of sales services) were identified and regress against the
profit before tax of commercial banks operating in Nigeria between 2006 and 2014. The results
revealed that the over impact of electronic banking on the profitability of commercial banks was
significant; whereas, the impact of the individual channels was varied.
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In the Ghanaian context, Paul et al. (2015) aimed to conduct a research to examine the impacts of
financial innovations on the profitability of Fidelity Bank in Ghana by using annual financial
data for the period of five years 2009 – 2013. They concluded that growth in the adoption of
financial innovations, eventually leads to an increase in the profitability of a bank in Ghana.
Similarly, Mensah (2016) undertook a study to determine the effects of Information
Communication Technology (ICT) on the performance of twenty selected rural banks in Ghana
by using annual financial data for the period from 2011 to 2014 and the results revealed that ICT
has a significant impact on the performance of the rural banks. The results further revealed that
investment in ICT has little effect on the performance of the rural banks. Thus, as opposed to
investing in new ICT facilities, the rural banks can use their existing capacities by altering the
financial innovative products and services they provide to their customers and this will have
more impact on their performance than making new investment taking into consideration
competition from the rural banking industry.
There are also a research studies that found mixed result. In Nigera context, Abaenewe et al.
(2013) aimed to conduct a research to examine the relationship between the adoption of
electronic banking and the profitability of Nigerian banks. The result of the study revealed that
that the adoption of electronic banking had showed significantly and positively relationship with
the returns on equity (ROE) of Nigerian banks. On the same study, they also found that the
adoption of electronic banking by commercial banks has not significantly improved the returns
on assets (ROA) of Nigerian banks. In the same token, Nkem and Akujinma, (2017) aimed to
conduct a research to examine impact of financial innovation on efficiency of Nigerian
commercial bank and they found an inverse relationship between bank efficiency ratios and
transaction value on automated teller machines and point of service and the value of transactions.
However, a significantly positive relationship between the variables was observed while the
relationship between bank efficiency and mobile and internet banking was tested.
2.4.3 Empirical studies in Ethiopia

In Ethiopia, although many researches have been studied in the field of electronic banking, very
little research has been done to understand the impact of financial innovation on bank
performance. Like mixed and inconclusive empirical evidence from emerging and developing
24
market context, also in Ethiopia, there are mixed empirical findings of impact of financial
innovation on the performance of the banks.
Girma (2016) conducted a research to examine the impact of ICT on the performance of
Ethiopian banking industry using secondary data over the period 2010 – 2014. The research had
taken five variables namely, the amount of investment on ICT, ATM, POS, as an independent
variable to represent electronic banking whereas number of branch and GDP were used as
controlling variable and profit before tax and Return on Asset (ROA) are used as dependent
variable to measure profitability. The finding of the study showed that the amount of investment
on Information Communication Technology, Automated Teller Machine, Point of Sale terminal
have no statistically significant effect on ROA on commercial banks in Ethiopia. Rather, result
revealed that investment on the POS, ICT and number of branches have negative effect on ROA
Besides, Solomon (2016) undertook a study to determine the role of electronic banking on
financial performance of commercial banks in Ethiopia by using panel data nine commercial
banks for the period from 2013 to 2015. For measuring bank financial performance the study
used Return on Asset (ROA) as dependent variable and value or price of transaction of ATM,
value or price of transaction of POS, debit card, number of automated teller machine terminals,
number of point of sale terminal were used as independent/explanatory variable while market
share was used as a control variable. The result of the study revealed that increased number of
ATM, POS and market share had a positive role on the financial performance of commercial
banks. However, the number of debit card had negative role on the financial performance of
commercial banks.
Similarly, Tilahun (2016) aimed to conduct a research to determine the impact electronic
banking on financial performance of commercial banks in Ethiopia. In this study the researcher
used secondary data of financial information for the period from 2013 to 2015 from 10
commercial banks in Ethiopia. The research had taken three variables namely, number of ATM,
number of POS and number of Debit cardholders as an independent variable to represent
electronic banking while profit before tax and ROA are used as dependent variable to measure
25
profitability. Finally the finding of the study revealed that electronic banking had statistically
significant impact on ROA and profitability of commercial banks of Ethiopia.
Similarly, Rukiya (2018) aimed to conduct a research to examine the effect of financial
innovation of performance of commercial banks in Ethiopia by using secondary data of nine
commercial banks for the periods from 2015 to 2017. For measuring bank financial performance
the study used Return on Asset (ROA) as dependent variable and number of mobile banking
users, number of automated teller machine terminals, number of new saving accounts, number of
point of sale terminal, debit cardholders were used as independent/explanatory variable while
managerial efficiency was used as a control variable. The finding of study shows that increased
number of mobile banking users and number of new saving accounts had a positive effect on the
financial performance of commercial banks by reducing transaction cost and mobilizing deposit.
However, numbers of ATM terminals have a negative and significant effect on financial
performance of commercial banks due to high initial investment as compared to income
generated. Number of point of sale terminals and number of debit cardholders are insignificant to
profitability of Ethiopia. In addition, management efficiency shows a negative relation that was
indication of management was not cost effective in commercial banks of Ethiopia. This is
however contradictory to Solomon (2016) finding that increased number of ATM, and POS had
a positive role on the financial performance of commercial banks.
2.5. Summary and gap in literature

It could be seen from the above explained empirical literatures that the impact of financial
innovation on the performance of banks provides mixed evidences and inconclusive. Thus it is
important to consider that research on financial innovation and its effect on banks performance
are relatively in the beginning stages and have no or inadequate systematic evidence with
globally accepted results. Therefore, it brings an open ground for the researchers, academicians,
bankers, regulators and supervisors to know empirically the impact of financial innovation on the
performance of banks.
Furthermore, from the reviewed relevant literature, it was evident that very few studies have
been found to empirically examine the effects of financial innovation on the performance of
banks in Ethiopia. More than that, research in the area of financial innovations has not been done
26
in a comprehensive approach on Ethiopia. It came out strongly that there was of lack of
comprehensive analysis of multiple innovations as the previous literature indicated that only a
few financial product innovations have been considered. The previous studies concentrated only
on a few variables of electronic banking concerning product innovations like ATM, POS and
Debit card, while this study examine financial innovation in more wider perspective (process and
organizational innovation) and as such covers additional important variables that were omitted
by previous studies like mobile banking and internet banking. More than that, the previous
studies focused only on assessing the impact of financial innovation on financial
performance/profitability of bank/ and as such Return on Asset (ROA) was used as the only
dependent variable to measure the banks performance. However, this study is unique in sense
that it makes investigation of impact of financial innovation on both financial and non-
financial/operational/ performance measures of banks.
More importantly, the analytical tools used in most previous studies looked at each variable
individually. That is why this study used multiple regressions analysis because of their ability to
combine and test multiple independent and multiple dependent variables simultaneously. This
work considered all these gaps and study the implication multiple innovations factors- Mobile
banking, Internet banking, and Automated Teller Machine (ATM) on financial and operational
performance mainly based upon primary data. This makes the study more comprehensive. The
study therefore aims to fill this gap in the literature by studying the relationship between
financial innovation and performance of commercial banks in Ethiopia in terms of a wide-
ranging variables and more inclusive manner.
2.6 Conceptual Framework

A conceptual framework is a set of broad ideas and principles taken from relevant fields of
enquiry and used to structure a subsequent presentation (Kombo & Tromp, 2009). It is a research
instrument that helps a researcher to develop awareness and understanding of the situation under
inquiry and to communicate it. Unlike theory, a concept is an abstract or overall impression
inferred or deduced from specific instance. From the theoretical and empirical literature reviews,
the following conceptual framework of the study is developed by the researcher.
27
In this framework, financial innovation is independent variable and bank performance is
dependent variable. The independent variable financial innovation is operationalized through:
mobile banking, internet banking and ATM banking while the dependent variable bank
performance is operationalized through; profitability and operational performance.
Figure 2.1 Conceptual Framework
Financial Innovation Bank Performance

(Independent variable) (dependent variable)
Mobile banking Profitability (ROA, total

income, total profit,)
Internet Banking
Operational performance
ATM Banking
(speed, quality, cost of
service)
Source: Compiled by the researcher
28
CHAPTER THREE
RESEARCH METHODOLOGY AND DESIGN
3.1 Introduction
In this chapter, the researcher describes the procedures to ensure a methodical and well-informed
investigation, focusing on sampling procedure, data collection and analysis methods. Data
collection instruments and procedures are discussed as well as the target population and
sampling procedures. Research methodology is described as method of illuminating scientific
procedures in a way suitable for the purpose. It is the general standard which direct the
description of the methods applied in conducting the research study, how to and what analysis to
be done to the data so collected (Akinyele, 2016). These are realized in address research methods
used for the study, the data collection and how the field work for the study was conducted.
3.2 Research design

Newing (2011) defined research design as the arrangement of conditions for collection and
analysis of data in a way that intend to combine importance to the research purpose with
economy in procedure. Kothari (2004) further emphasizes that research design assist the smooth
performance that carrying out the various research operations, thus enabling the exercise as
efficient as possible, comprehending utmost outcome with minimum resources. Thus a research
design is the arrangement or the blue-print of research that direct the procedure of research from
the formulation of the research questions and hypothesis to reporting the findings that seeks to
meet the purpose of the study (Kombo & Tromp, 2009).
The choice of research design depends on objectives that the researchers want to achieve
(Newing, 2011). The primary aim of this study was to examine the impact of financial
innovation on financial and operational performance commercial banks in Ethiopia. To achieve
this objective, explanatory research design was used. Even though the study begins with the
description about each type of financial innovation and performance of commercial banks, the
ultimate goal of the study is to test if the relationship exists and how the financial innovation
could impact on operational and financial performance of commercial banks in Ethiopia. Hence,
explanatory research design enabled the researcher to examine the effect of financial innovation
on operational and financial performances of commercial banks in Ethiopia.
29
3.3 Target Population
In this study, there were two types of population. There were the target population and study
population. Target population of survey is the entire set of units for which the survey data are
used to make inferences (Smyth, 2004). It is the population that a researcher wants to generalize
the results of the study. The target population of the study consisted of all commercial banks in
operation in Ethiopia at June 30, 2019 as they appear in the National Bank of Ethiopia database.
The lists of commercial banks are displayed in appendix III.
The study population can be defined as the entire collection of cases or units about which the
researcher wishes to draw conclusions (Castilo, 2009). The study population, which is also
known as accessible population, is the population that is derived from the target population for
the smooth condition of the research in specific term. It is from the study population that
researchers draw the sample. According to Smyth (2004), the geographic characteristics of the
target and study population need to be delineated, as well as, types of units being included.
Accordingly, the study population for this study was target at two units. The first unit was target
at institutional level where the study considered the head offices of all commercial banks in
operation in Ethiopia at 30 June, 2019. The study chose the head offices mainly because of the
fact that these are where the bulk of transactions and decisions on financial innovation process
are normally concluded or performed. Issues relating to innovation products and services are
normally directed from the head office of all the banks. More so, for the smooth conditioning of
conducting research the study geographically delineated at head office in Addis Ababa.
The second unit of study population was target at departmental and staff level with in institution
where the study targeted only selected relevant head office departments and their senior
managers and senior officers who are responsible for policies related to financial innovation and
have higher level of appreciation on how innovations influence financial performance. The main
reason for choosing senior managers and senior officers was because they have firsthand and
sufficient knowledge about financial innovation better than other employees. They are also
responsible for managing performance of their units through the departmental budgets and action
plans. More so, only senior managers and senior officers of relevant departments (ICT, Research
& Development, Operation, Marketing and finance) were considered. These departments were
30
selected mainly because they are relatively better understandings on how innovations influence
performance of bank. The unit of observation was five senior managers or senior officers in these
departments. In order to represent respondents from various teams or divisions within each
department in sample selection, the study targeted five senior management or senior officers
from each relevant department. Thus the study population targeted for this research was 425
drawn from all 17 commercial banks. Relevant head office departments and their senior
managers and senior employees who were responsible for policies on their respective banks
financial innovation products and services were captured in the sampling frame.
Table 3.1 study Population

Categories Study population
ICT/Information system 85
Research and Development 85
Marketing 85
Operation 85
Finance 85
Total study population 425
3.5 Sample Size and Sampling Procedure

Lavrakas (2008) explains a sample in a survey research as a subset of elements drawn from a
larger population. Obviously such a sample should be typically identical with the population thus
provide adequate representation. If a sample is not precise and inadequate both in characteristic
and size, it may lead to rejection of false null hypothesis, wrong result and therefore a waste of
resources (Gerstman, 2003). Likewise a study that collects too much data is wasteful. Therefore
it is essential to establish adequate sample size before going on data collection for a study. In
recognition of this fact, model to determine sample size as developed by Yamane (1968) was
used for this purpose. The Taro Yamane’s formula applied for determining sample size when the
population size is finite and homogenous and when the original sample collected is more than
5% of the population size, and all these conditions are fulfilled hence applying it to determine a
sample size. Using this formula for the population size of 425, the sample size would be 206.
Below is the mathematical illustration for Taro Yamane method.
31
That is n= N/1+ N (e)² Where: n is the sample size, N is the population size and e is the error of
sampling. For this study the error of sampling is set at 0.05.
N = 425/1+ 425(0.05)²
= 2 55/1.64 = 206 respondents
We can see from the result above that the sample size was 206 from the total study population of
425 to maintain a 95% confident interval. In order make important adjustments for unresponsive
questionnaires and to make the finding all-embracing, the respondents were enlarged to 220.
Table 3.2: Sample Size

Categories of respondent Study population Sample
ICT or Information System 85 66
Research and Development 85 55
Operation 85 33
Marketing 85 33
Finance 85 33
Total 425 220
The study conducted a census of 17 commercial banks instead of adopting a sampling

methodology. This was justified on the basis that the numbers of banks are few and all banks
currently in operation are involved in various forms of financial innovation products and service.
Since all operating banks (17) were captured, a combination purposive and quota sampling
methods were used to select respondent and distribute the questionnaires. The respondents were
grouped into five categories: ICT, operations, Research & Development, Marketing and Finance
department. These departments were purposively selected because of relevance of the
strata/departments for the research inquiry. The quota sampling is used for selection and
distribution of samples among various department/subgroups. The main reason why researchers
choose quota samples is that it allows the researchers to sample a subgroup that is of great
interest to the study. More quotas are assigned for those departments that have relatively more
relevance for the research inquiry. As the research was concerned about financial innovation
which is more concerned with ICT and Research & Development department more sample size
were allocated for these departments. Thus 30% and 25% of total sample were allocated for ICT
32
and Research & Development department respectively. For the remaining each three department
(operation, marketing and finance) 15% of total sample was allocated for each.
The selection and distribution of samples among various banks were based on total capital base
of each bank which was also used to determine their market share percentage according to NBE
report (NBE, 2018). In essence market share percentage was used to distribute sample selection
and questionnaire distribution within the target department of each bank. For determine the
sample size the market share of customers amongst the banks in Ethiopia is distributed into four
groups: A=7%, B=5%, C=3% and D=2%. This was computed based National Bank of Ethiopia
2017/18 report on total capital base of each bank and little adjustment was made for the purpose
of computing the sample size. Within each of the department of target bank, the respondents
were purposively selected based on their level of management position, seniority and
division/team on which they represent. For the information to be important and valid for research
inquiry, the targeted sources of information were senior managers and senior officers’ staffs who
had been in the banking industry for a minimum of three years so that they have substantial
information on the topic of study. The sample size and strata is displayed in appendix II.
3.6 Data Collection Instrument

For this study both primary and secondary sources of data were used. Kothari (2004) describes
primary data as those which are collected a fresh and for the first time and thus happen to be
original in character. Dawson (2009) states that secondary research data involves the data
collected using information from studies that other researchers have made of a subject. Both sets
of data are used in this study.
The study utilized questionnaire as major instrument for collecting primary data. Schwab (2005)
defined questionnaire as measuring instruments that ask individuals to answer a set of questions
or respond to a set of statement. A questionnaire is research instrument that is used in data
collection when dealing with a large sample (Kombo, et a1.2002). A questionnaire is preferred
because of its convenience and ease of administration. Kothari (2004) stated that questionnaires
have various advantages, like; it is free from the bias of the interviewer; it is low cost even when
the universe is large and is widely spread geographically; respondents have adequate time to give
well thought out answers; respondents who are not easily approachable can also be reached
33
conveniently; large samples can be made use of and thus the results can be made more
dependable and reliable. In view of the advantages and the need to gather more information,
questionnaires were administered to senior managers and senior officers and to solicit their views
concerning the effect of bank innovations on performance of commercial banks. Sample copy of
questionnaire is provided in appendix I.
Both structured close and open ended questionnaire was administered for primary data
collection. However, the study largely used closed-ended questions. This is due to the fact that
closed-ended questions are often good for surveys, because one can get higher response rates.
Beside, answers to closed-ended questions can easily be coded and analyzed makes them
particularly useful when trying to prove the statistical significance of a survey’s results. Some
open ended questions were also included to obtain qualitative data from specified respondents
soliciting their hidden insights into the intricate relationship between financial innovation and
performance of banks. In this study many questions begin with a series of closed questions, with
boxes to tick the chosen option, these were at times mingled with a section of open ended
questions for more detailed response.
The questionnaire was carefully designed and tested with a few members of the population for
further improvements. Each item was cautiously created so as to collect the target information,
address research objectives and tied into the overall research problem. The questionnaire was
structured into 3 sections. Section A of the questionnaire was about general information of the
respondents. Section B of the questionnaire measured the independent variables i.e. financial
innovation (mobile, internet and ATM mobile banking). Section C was the last section of the
questionnaire and it measured the dependent variables i.e. bank performance. Overall there were
forty eight (51) questions (most in Likert scale format), in each set of questionnaires which were
concisely designed in such a way that they would be easily comprehended and responded to.
3.7 Data Collection Procedure

Primary data was collected through the administration of questionnaires to senior managers and
employees. Five (5) trained data collectors were engaged; on average of one for three banks to
assist in the administration and collection of the questionnaires. These field data collectors were
also served as a liaison officer in case of problems during the period their exercise at field. The
34
entry points to the banks were through the human resource and ICT departments. Organization’s
and staffs’ permissions to do this were sought and approval received. The researcher also worked
in collaboration with trusted internal informants in each of the banks, and supported with letter of
introduction from the University.
3.8 Pilot Test

For primary data, a pilot test was carried out before the main data collection, in order to fix the
validity and reliability of the questionnaire, vagueness and clarity of items. Babble (2002),
indicated that pilot testing is a trial run of procedure and instruments that someone plans to use in
undertaking a research. The purpose is to get feedback on the clarity, simplicity and adequacy of
the questions in collecting the target information. The rule of the thumb suggests that 5% to 10%
of the target sample should constitute the pilot test (Cooper & Schilder, 2011). The pilot test
therefore was performed using fifteen (15) management staff in the headquarters of selected
banks and due care were given to exclude these piloted respondents from the main study. The
pilot test sample was within the recommendation. The response of the pilot administration of the
questionnaire was used to improve the content values of the questions used in the main
administration. In addition, result of pilot questionnaires was used to make validity and
reliability test.
3.9 Instrument Reliability and Validity

There is always more than one way to measure any variable, a researcher has to attempt to
construct the best measure or measures for each variable. Considering this, data were first
analyzed to ensure instrument quality. Reliability and validity are the major criteria used to
evaluate measurement. Reliability was used to ensure consistence of data whereas validity was
used to test the accuracy of the measurement process.
3.9.1 Instrument Validity

Validity refers to the extent to which the scores from a measure represent the variable they are
intended (Gakure, 2010). It is the extent to which the scores from a measure signify the variable
they are intended to. Weber (1990) indicated that in order to draw valid inference from a test, it
is important that the classification procedure be reliable and consistent. As errors are likely to
35
occur, whether intentionally or not, therefore every measurement result should include
measurement error to ensure the validity of such measurement.
Content validity measures the extent to which a test acts to measure a concept analysis of the
items so as to confirm adequate coverage of the scope of the study by the measuring instrument
(Oyerinde, 2011). In order to ascertain the relevance of each question to variables being
measured and to ensure that the content of the instrument provide answers to the objectives of
the study and the formulated hypotheses, content validity of the pilot questionnaire was tested.
This was done by experts in the field and then necessary corrections were made on the
instrument. The items used in the questionnaire were assessed by three academicians from
different universities in addition to one expert from USA; all of them have sufficient knowledge
and experiences in the field of business administration. Many modifications were applied to the
original questionnaire based on their comments and suggestions. Most open ended questions
were not adequately answered and the researcher dropped most them from the instrument during
the main data collection.
3.9.2 Instrument reliability

In addition, reliability test was carried out in order to ensure the consistency of the instruments
used in main administration. The reliability is consistency of the measurement; that is, to what
extent a measuring device will produce the same results when applied multiple times to the same
person under similar conditions (Gakure & Ngumi, 2010). The most straightforward method of
testing reliability is to replicate; either by asking the same questions to the same respondents at
different times and evaluating the degree of correlation, or by asking the same question in
different ways at different points in the questionnaire (Johnson & Turner, 2003).
The study was employed Cronbachs’ alpha to assess reliability of the questionnaire. Cronbachs’
co-efficient alpha is the most common way of measuring internal consistency. Cronbachs’
coefficient (alpha) may range between 0 to 1, with 0 indicating an instrument full of errors and 1
indicating total absence of error. The closer Cronbach’s alpha coefficient is to 1, the higher the
internal consistency reliability (Oyerinde, 2011). A reliability coefficient (alpha) of 0.70 is
considered acceptable, reliable and recommended for new questionnaire. Reliability was tested by
use of fifteen questionnaires which were piloted with randomly selected bank managers who were not
36
included in the final study sample. The reliability of the questionnaire was tested using the
Cronbach’s alpha correlation coefficient with the aid of Statistical Package for Social Sciences
(SPSS) software. After applying the Cronbach’s coefficient alpha test, an overall alpha
coefficient of 0.64 was reached. After improving the tool, a reliability test was redone achieving
Alpha coefficient of 0.9. Based on these recommendations, all variables in the study
questionnaire were concluded to have adequate internal consistency and were reliable for the
study and their results could be used to generalize on population characteristics.
3.9 Data Processing and Analyzing

In this study, the primary data was collected from distributed questionnaire. Once the
questionnaires are gathered, the next step is to edit, clean, encode and look for errors in the data.
This was the question of data processing. Data processing is a series of actions or steps
performed on data to verify, organize, transform, integrate, and extract data in an appropriate
output form for subsequent use. In recognition of this fact, therefore, the data processing of
collected questionnaires was rigorously done. This helped in compressing and arranging the data
into small sets for easy examination and analysis.
Next, the collected and processed primary data from the questionnaire are analyzed by
descriptive statistics, and multiple linear regression analysis. Descriptive statistics such as mean
scores, percentages, frequency distribution and standard deviations were computed to describe
the characteristics of the variables of interest in the study. Besides, inferential statistics such as
multiple linear regression analysis was used to test the hypothesized relationships and to
determine the relative importance of each independent variable in explaining the variation
financial performance of commercial banks in Ethiopia.
3.10 Statistical Model

Regression analysis is a statistical tool for the investigation of relationships between variables.
Regression analysis is also important for quantifying the impact of various simultaneous
variables upon a single dependent variable. Multiple linear regression models were used to assess
whether financial performance was a function of the variables indicated on the specific
objectives. In order to address the objectives of research inquires; the study used the following
regression equations to test the significance of the study hypotheses:
37
The first generic objective of the study was to examine if financial innovations influence
financial performance or profitability of commercial banks in Ethiopia. The following multiple
linear regression equation was used to examine the effect of financial innovations on financial
performance of commercial banks in Ethiopia
Y= β0 +β1X1 + β2X2 + β3X3 + e

Where Y represent Bank financial performance, while X1, X2, X3 represent the independent
variables mobile banking, internet banking, and ATM banking respectively. β0 is the constant,
while β1, β2 and β3 represent corresponding coefficients or parameters for the respective
independent variables to be estimated and e represent the error term that captures all relevant
variables not included in the model.
The second generic objective was to establish whether bank innovations affect operational
performance of commercial banks in Ethiopia. The following multiple linear regression equation
was used to determine the effect of bank innovations on operational performance of commercial
banks in Ethiopia
Y= β0 +β1X1 + β2X2 + β3X3 + e

In the above model Y represent bank operational performance, while X1, X2, X3 represent the
independent variables mobile banking, internet banking and ATM banking respectively. β0 is
the intercept, while β1, β2 and β3 represent corresponding coefficients or parameters for the
respective independent variables to be estimated and e represent the error term which represents
residual or disturbance factors.
38
CHAPTER FOUR
RESEARCH FINDINGS AND DISCUSSION
4.1 Introduction
This chapter deals with organization, analysis and presentation of data collected from
respondents using questionnaires. The data collected was analyzed and interpreted in line with
the objective of the study which was; to determine impact of financial innovation (mobile
banking, internet banking and ATM banking) on the performance of commercial banks in
Ethiopia. It gives the empirical findings and results following the application of these variables
using the techniques indicated in the third chapter.
4.2 Response Rate

The researcher distributed two hundred and twenty questionnaires (220). Out of these only one
hundred and seventy-one questionnaires (171) were completed and returned. This represents a
response rate of 77.7% and none response rate of 22.3%. According to Mugenda and Mugenda
(2003), a response rate of 50% is considered good and response rate greater than 70% is
considered to be very good. The 77% response rate is thus considered a very good representative
of respondents to provide enough information for analysis and to derive conclusions.
Table 4.1: Response Rate

Response rate Sample size Percentage (%)
Returned questionnaires 171 77.7

Un-returned questionnaires 48 22.3
Total 220 100
4.3 General information of sample

This section assesses general information of respondents. Respondents were asked about their
gender, age, level of education attained, work experience and their working department. This
information is not necessarily important for addressing research objectives but they provided
important information that helps the researcher to determine the ability of the respondent to
contribute meaningfully to the investigation.
39
From table 4.2 show that 87.1% were males while 12.9% were females. This is suggesting that
the male are taking the domination in higher management position. The age distribution was 2
respondents (1.2%) below 25 years, 80 respondents (46.8%) were age between 26 - 40 years, 78
respondents (45.6%) were age between 41-55 years and 11 respondents (6.4%) were above 55
years. Regarding the educational qualification, 73 (42.7%) having first Degree, 96 (56.1%)
having second Degree and the rest 2 (1.2%) have PHD. Concerning the duration of respondent in
current organization, just about half of the respondents stayed for more than 10 years, while only
2.3% of them have stayed in current organization for more than 20 years. The proportion of
department was around 27% of respondents from ICT department, 20.5% from Research &
Development, 18.1% from Marketing 18.1% Finance and the rest 16.4% from Operation
department. Overall summary of the general information of respondent can be seen from below
table.
Table 4.2 General Information of the respondent

Main factor Factor level Frequency Percentage
Male 149 87.1
Gender
Female 22 12.9
Below 25 2 1.2
26-40 years 80 46.8
Age
41-55 years 78 45.6
Over 55years 11 6.4
Degree 73 42.7
Educational
qualification
MA/MSC 96 56.1
PHD 2 1.2
Under 5 years 31 18.1
5 -10 years 81 47.4
Work Experience in
10-14 years 38 22.2
current organization
15-19 years 17 9.9
20 years and above 4 2.3
ICT 46 26.9
Research & development 35 20.5
Department Operation 28 16.4
Finance 31 18.1
Marketing 31 18.1
Total Total 171 100
40
4.4 Descriptive analysis of study variables
Descriptive statistics were used to explain the basic features of the data that was collected from
the field. They present simple summaries about the sample and the measures together with
simple graphic illustrations. This section discusses the descriptive statistics of the study variables
on the effect of financial innovation on performance of commercial banks in Ethiopia.
4.4.1 financial innovation and financial performance of bank

The first generic objective of the study was to determine the effect that bank innovations have on
financial performance of commercial banks in Ethiopia. The objective was assessed by use of
statements where the respondents indicated their degree of agreement with the statements.
4.4.1.1 Mobile banking and financial performance of bank

The first objective of the study sought to determine the influence of mobile banking on financial
performance of commercial banks in Ethiopia. In order to do that the statements depicting the
effect of mobile banking on financial performance were presented to respondents and the
summary of the findings are presented in table 4.3. The results are presented in terms of
percentages, mean scores and standard deviations. The result showed that 58.5% of the
respondents agreed that mobile banking has improved the level profitability for the bank, while
29.8% remained neutral, 8.2% disagreed, and 2.9% strongly agreed. Mean response was 3.55 on
a 5 point scale. Question was also asked on whether mobile banking has expanded the income
generating potential of the bank. The result showed that around two-third (66.1%) of respondents
agreed, while 12.3% strongly agreed, and 15.2% remained neutral. The mean score was 3.84.
Question was asked on whether income from mobile banking has high margin hence contributing
positively to bank annual profit. The finding showed that 36.3% were disagreed, and 31.6%
indifferent while 31% agreed. Mean response was 2.92. On whether mobile banking could
recover the initial investments within three years, 40.4% of respondent agreed, and 31.6%
disagreed while 25.7% neutral. The mean score for the responses was 2.87 which is an indication
of less agreement that investment in mobile banking has a payback period of less than 3 years.
On whether investment in mobile banking is in mostly motivated by profits to the bank, 38% of
respondent disagreed, and 31 % agreed while 26.3% were neutral. The mean response was 2.98.
41
Table 4.3 the effect of mobile banking on financial performance
Strongly Strongly
Disagree Neutral Agree
Indicators disagree
(%) (%)
agree Mean STD
(%)
(%) (%)
1 2 3 4 5
Mobile banking has improved the level 0.6 8.2 29.8 58.5 2.9 3.55 0.71
profitability for the bank.
MB has expanded the income generating 0.6 5.8 15.2 66.1 12.3 3.84 0.73
potential of the bank.

Income from MB has high margin hence 1.2 36.3 31.6 31 0 2.92 0.84
contributing positively to bank annual profit.
MB investments have payback period of less 2.3 40.4 25.7 31.6 0 2.87 0.89
than 3 years, hence good return on assets
Investment in MB is in mostly motivated by 1.2 38 26.3 31 3.5 2.98 0.93
profits to the bank.
Average 3.23 0.82

Reliability Cronbach’s alpha 0.864
The mean score of responses regarding the effect of mobile banking on financial performance
was 3.23 on a 5 point scale. The mean score was greater than 3 which would mean there was
relatively moderate agreement on the nature of influence that mobile banking have on bank
profitability. The average over all standard deviation of 0.82 infers that 68% of the responses
were spread within one standard deviation of the overall mean.
4.4.1.2 Internet banking and financial performance of bank
The second objective of the study sought to assess the effect of internet banking on financial
performance commercial banks in Ethiopia. To do this, the statements on the effect of internet
banking on bank financial performance were presented and the summary of the finding are
presented in table 4.4. When question were asked whether internet banking has improved the
level profitability for the bank, 46.8% of the respondents were neutral and 33.9% agreed, while
17.5 disagreed. Mean response was 3.2. Respondents were also asked whether use of internet
services has added to more profitable business avenues to the bank. In response to this question,
49.7% of those surveyed remained neutral and 26.3% agreed, while 22.8% disagreed. Mean
42
response was 3.04 which is an indication of indifferent on statement that use of internet services
has added to more profitable business avenues to the bank.
On whether income from internet banking has high margin hence contributing positively to bank
annual profit, 40.4% of respondents disagreed, while 32.7% agreed and 25.1% remained
undecided. Mean response was 2.91 which indicated less agreement on the preposition that
income from internet banking has high margin hence contributing positively to bank annual
profit. On whether internet banking could recover the initial investments within three years,
42.1% of respondent disagreed, while 29.2% neutral and 27.5% agreed. The mean score was
2.83 which is an indication of less agreement on the preposition that investment in internet
banking has a payback period of less than 3 years. Similarly, 45.6% of the respondents were
disagreed on preposition that investment in internet banking is mostly inspired by profits the
bank will make, while 28.1% of respondents agreed, another 25.1% remained neutral. Mean
response was 2.8 which indicated less agreement on the statement that investment in internet
banking are mostly motivated by profits. The deduction from this is that there are other most
important factors rather than profit that motivated the bank to invest more in internet banking.
Table 4.4 the effect of internet banking on financial performance

Strongly Strongly
Indicators disagree
(%) (%)
agree Mean STD
(%)
(%) (%)
1 2 3 4 5
Internet banking has improved the level 0 17.5 46.8 33.9 1.8 3.2 0.74
Use of internet services has added to more
0.6 22.8 49.7 26.3 0.6 3.04 0.74
profitable business avenues to the bank.
Income from IB has high margin hence 1.2 40.4 25.1 32.7 0.6 2.91 0.89
contributing positively to bank annual profit
IB investments have payback Period of less 1.2 42.1 29.2 27.5 0 2.83 0.85
than 3 years hence good return on asset
Profitability of the bank mostly motivated
1.2 45.6 25.1 28.1 0 2.8 0.86
investment in internet banking.
Average 2.96 0.76

43
The mean score of responses regarding the effect of internet banking on financial performance
was 2.96 on a 5 point scale. The mean score was very close to 3.00 which would mean there was
indifference on the nature of influence that internet banking have on bank profitability. This may
an indication of weak effect of internet banking on bank financial performance. The average
standard deviation of 0.76 infers that a spread of within one standard deviation from the mean.
4.4.1.3 ATM banking and financial performance of bank

The third objective of the study was to determine the effect of ATM banking on financial
performance of commercial banks in Ethiopia. The statements depicting how ATM banking
affects bank financial performance were presented to respondents and the summary of the
findings are presented in table 4.5. When respondents were asked whether ATM banking service
has improved the level profitability for the bank, 45% of those surveyed disagreed, while 31%
agreed and 21.1% remained neutral. The mean score was 2.85. On whether ATM banking has
expanded the income generating potential of the bank, 32.7% of respondent are agreed, while
33.3% disagreed and 30.4% remained neutral. The mean score was 2.97 which show there was
indifference on the nature of influence that ATM banking has on bank income.
On whether income from ATM has high margin hence contributing positively to bank annual
profit, 36.3% of respondent are agreed, while 29.8% disagreed and 29.8% remained neutral. The
mean score for the responses was 3.02. On whether ATMs could recover the initial investments
within three years, 39.8% of respondent disagreed, 30.4% agreed and 25.1% indifferent. The
mean score for the responses was 2.93. Moreover, 42.1% of those surveyed disagreed that
investment in ATMs by banks was driven by profits, while 31% were agreed and 24% remained
neutral. The mean score was 2.88. This indicates that there was less agreement that investing in
ATMs is highly driven by profitability in the commercial banks.
The overall mean score of responses regarding the effect of ATM banking on financial
performance was 2.93 on a 5 point scale. The mean score was close to 3.00 which would mean
there was not taking sides on the nature of influence that ATM banking have on bank
profitability. This is might an indication of weak influence of ATM banking on bank financial
performance. The average standard deviation was 0.92 meaning that at least 68% of the
responses were spread within one standard deviation of the mean.
44
Table 4.5 the effect of ATM banking on financial performance
Strongly Strongly
Indicators disagree
(%) (%)
agree Mean STD
(%)
(%) (%)
1 2 3 4 5
ATM banking service has significantly
1.8 45 21.1 31 1.2 2.85 0.93
improved the level profitability for the bank.
The use of ATM has improved the level of 2.3 33.3 30.4 32.7 1.2 2.97 0.89
deposits for the bank
ATM has low maintenance costs leading to 0 36.3 29.8 29.8 4.1 3.02 0.91
high profitability over its economic lifetime
ATM investments have payback Period of
1.8 39.8 25.1 30.4 2.9 2.93 0.94
less than 3 years hence Good return on assets
Investing in ATMs is highly driven by
1.8 42.1 24 31 1.2 2.88 0.92
profitability in the commercial banks.
Average 2.93 0.92

4.4.1.4 Descriptive statistics on banks financial performance

The respondents were also asked to rate their opinion regarding financial performance of their
bank for the last five years. The summary of their response to specific questions as revealed by
the findings will be as presented in table 4.6. The finding revealed that 76% of respondents
reported that the amount of their bank net income has greatly increased over the last five years.
While 17.5% indicated the bank net income has increased in moderate extent. The mean score
was 3.85 confirm that net income of most banks has increased over the time. Regarding the bank
annual revenue, 76% indicated that their bank annual revenue has been increasing in great extent,
while about 21.6% reported that their bank net income has been increased moderately. The
average score was 3.8, indicating that the annual revenue of most banks has been increased over
the time. When the participants were asked to rate to what extent the performance of their bank
return on assets had improved, over half (57.9) of those surveyed reported that their bank return
on assets has been greatly improved over time. The average response was 3.55 indicating that
banks return on assets is improved in between moderate and great extent.
45
Of the 171 respondents who completed the questionnaire, 63.7% indicated that their bank market
share has been moderately increased, whereas 34.5% indicated that the bank market share has
been greatly increased. The mean response was 3.32. When participants were asked about non-
interest income of bank, 52% of respondents indicated that non-interest income of bank has been
moderately grown over a time, while 46.2% reported that non-interest income has been greatly
growing over the last five years. The mean response was 3.46. When the participants were asked
to rate to what level the efficiency ratio of the bank had improving over a time, 52% of those
surveyed reported bank efficiency ratio has been improved at great extent, whereas 45.6%
reported that their bank efficiency ratio has been moderately improved. The average response
was 3.51 indicate that for majority of bank efficiency ratio has been moderately improved.
Table 4.6 Respondents opinion on financial performance of commercial bank

Very
No Little Moderat Great
great
Indicators extent extent e extent extent
extent
Mean STD
(%) (%) (%) (%)
(%)
1 2 3 4 5
Amount of bank Net Income has
0 1.2 17.5 76 5.3 3.85 0.5
increased over the last five years.
Bank annual revenue has increased over
0 0.6 21.6 76 2.3 3.8 0.47
the last five years.
The bank return on assets has improved
0 1.2 40.4 57.9 0.6 3.55 0.53
over the last five years.
The bank market share has increased
0.6 1.2 63.7 34.5 0 3.32 0.52
Amount of non-interest income of bank
0 1.2 52 46.2 0.6 3.46 0.53
has grown over a time.
The bank efficiency ratio has improved
0 1.8 45.6 52 0.6 3.51 0.55
Average 3.58 0.6
The overall mean score for general bank staffs’ opinion on bank financial performance was 3.58
on a 5 point scale. This would an indication that the financial performance for majority of the
banks have greatly improved over the last five years. The average standard deviation was 0.6
meaning that at least 68% of the responses were spread within one standard deviation of the
mean.
46
4.4.2. financial innovation and operational performance of bank
The second generic objective of the study was to determine the effect that bank innovations have
on operational performance of commercial banks in Ethiopia. The objective was verified from
respondents by use of likert scaled statements on a questionnaire.
4.4.2.1 Mobile banking and operational performance of bank

The fourth specific objective of the study was to determine the effect that mobile banking has on
operational performance of commercial banks in Ethiopia. In order to do that statements
depicting the effect of mobile banking on operational performance were presented to respondents
and the summary of the findings are presented in table 4.7. When respondents were asked
whether mobile banking has enables to make quick and easy transaction leading to high speed of
delivery, 56.6% of respondent agreed and 25.1% strongly agreed, while 17% remained neutral
and only 3% simply disagreed. Mean response was 4.04 confirming that mobile banking has
enables to make quick and easy transaction. On whether mobile banking has provides consumers
with a convenient method of conducting bank business, 61.4% agreed and 20.5% strongly
agreed, while 16.4% remained neutral. Mean score was 4.01.
Respondents were asked whether the use of mobile banking has led to improvement of bank cost
efficiency. Findings from table 4.7 showed that 68.4% agreed and 18.7% strongly agreed, while
11.7% were neutral. Mean response was 3.99. It was agreed by 67.8% and strongly agreed by
18.7% that using mobile banking has improved quality of financial services, while 11.7% were
neutral and only 1.8% disagreed. Mean response was 4.04 indicating that using mobile banking
has improved quality of financial services delivery. On whether mobile banking has led to the
improvement of bank overall operational efficiency, 64.9% agreed and 12.3% strongly agreed on
it. Only 17.5 % were undecided and 5.3% disagreed. Mean score was 3.84 indicating there was
more agreement that mobile banking has led to the improvement of bank operational efficiency.
The overall mean score of responses regarding the effect of mobile banking on operational
there was more agreement on the influence that mobile banking has on bank operational
performance. The average standard deviation was 0.65 meaning that at least 68% of the
47
Table 4.7 Effect of mobile banking on operational performance
Strongly Strongly
Indicators disagree
(%) (%)
agree Mean STD
(%)
(%) (%)
1 2 3 4 5
Mobile banking enables to make quick
and easy transaction leading to high 0 2.3 17 56.6 25.1 4.04 0.72
speed of delivery.
MB provides consumers with convenient
0 1.8 16.4 61.4 20.5 4.01 0.66
method of conducting bank business.
Mobile banking has improved quality of
0 1.8 11.7 67.8 18.7 4.04 0.61
financial services delivery.
Mobile banking has led to improvement
0 0.6 15.2 68.4 15.8 3.99 0.58
of bank cost efficiency.
MB has led to the improvement of bank
overall operational efficiency. 0 5.3 17.5 64.9 12.3 3.84 0.7
Average 3.98 0.65

4.4.2.2 Internet banking and operational performance of bank

The fifth objective of the study sought to assess the effect of internet banking on operational
performance of commercial banks in Ethiopia. To do this, the statements that show the influence
of internet banking on operational performance of bank were presented and the summary of the
finding are presented in table 4.8. On whether the use of internet banking enables to make quick
and easy transaction leading to high speed of delivery, 71.3% of those surveyed agreed and 8.8%
strongly agreed, while 15.2% remained neutral but only less 5% disagreed. Mean response was
3.84. It was agreed by 71.3% and strongly agreed by 15.2% of the respondents that internet
banking has provides consumers with a convenient method of conducting bank business, while
11.1% were neutral and only 2.3% disagreed. Mean response was 3.99 indicating that internet
banking provides consumers with a convenient method of conducting bank business.
When respondents were also asked whether internet banking has improved quality financial
services delivery, 66.7% of respondents agreed and 20.5% strongly agreed on it, while only
10.5% were neutral. Mean response was 4.05 confirming that internet banking has improved
quality financial services of commercial banks in Ethiopia. Question was also asked on whether
48
the use of internet banking has led to the improvement of bank cost efficiency. The result
showed that around three-fourth (74.3%) respondents agreed and 16.4% strongly agreed on it.
Only 10.5% were undecided and 2.3% disagreed. Mean response was 4.03 indicating that the use
of internet banking has led to the improvement on bank cost efficiency. On whether internet
banking has led to the improvement of bank operational efficiency, 71.3% of respondents agreed,
and 16.4% strongly agreed but only 10.5% were undecided. Mean response was 4.02 indicating
that internet banking has led to the improvement of bank overall operational efficiency.
Table 4.8 the effect of internet banking on operational performance

Strongly Strongly
Indicators disagree
(%) (%)
agree Mean STD
(%)
(%) (%)
1 2 3 4 5
IB enables to make quick and easy
0 4.7 15.2 71.3 8.8 3.84 0.64
transaction leading to high speed of delivery
IB provides consumers with a convenient
0 2.3 11.1 71.3 15.2 3.99 0.59
Using IB has improved quality financial
0 2.3 10.5 66.7 20.5 4.05 0.64
services delivery
The use of IB has positive effect on bank
0 0.6 10.5 74.3 14.6 4.03 0.53
cost efficiency
IB has led to the improvement of bank
0 2..3 9.9 71.3 16.4 4.02 0.56
overall operational efficiency.
Average 3.99 0.59
The overall mean score of responses regarding the effect of internet banking on operational
there was more agreement on the influence that internet banking has on bank operational
performance. The average over all standard deviation of 0.56 infers that 68% of the responses
were spread within one standard deviation of the overall mean.
4.4.2. ATM banking and operational performance of bank

The six objective of the study was to determine the effect of ATM banking on operational
performance of commercial banks in Ethiopia. The statements depicting the influence of ATM
banking on bank operation were presented to respondents and the summary of the findings are
49
presented in table 4.9. On whether ATM enables to make quick and easy transaction leading to
high speed of delivery, 67.8% agreed, and 17% strongly agreed, while 14% remained neutral.
The mean response was 4.01 which indicate that ATM has improved speed of financial service
delivery. More so, it was agreed by 56.7% and strongly agreed by 31% of the respondents that
ATM provides consumers with a convenient method of conducting bank business, while 11.1%
were neutral but only 1.2% disagreed. The mean response was 4.18 which indicate that ATM
provides consumers with a convenient method of conducting bank transaction.
Table 4.9 the effect of ATM banking on operational performance

Strongly Strongly
Indicators disagree
(%) (%)
agree Mean STD
(%)
(%) (%)
1 2 3 4 5
ATM enables to make quick and easy
0 1.2 14 67.8 17 4.01 0.56
ATM provides consumers with a convenient
method of conducting bank business. 0 1.2 11.1 56.7 31 4.18 0.66
Using ATM banking has improved quality

0 1.2 20.5 44.4 33.9 4.11 0.76
financial services delivery
ATM installation has positive effect on bank 0 1.2 11.1 53.8 33.3 4.19 0.69
cost efficiency
ATM banking has led to improvement 0 1.2 12.9 56.1 29.8 4.15 0.67
of bank operational efficiency
Average 4.13 0.67
In addition, question was also asked about the effect of ATMs on bank financial service quality
and cost efficiency. It was agreed by 44.4% and strongly agreed by 33.9% of the respondents
that using ATM banking has improved quality financial services delivery, while 20.2% were
neutral. The mean response was 4.11 which mean there was more agreement on the nature of
influence that ATM banking have on quality of financial services delivery. There were 53.5% of
respondents who agreed and 33.3% respondents who strongly agree that ATM installation has
led to the improvement of bank cost efficiency while 11.1% remained neutral. The mean
response was 4.19 which indicate there was more agreement that ATM machines were capable
50
of influencing the reduction of the operational costs of bank. On whether ATM banking has led
to the improvement of bank overall operational efficiency, 56.1% of the respondents agreed and
29.8% strongly agreed, while 12.9% remained neutral. The mean score was 4.15 implying that
ATM banking has led to the improvement of bank overall operational efficiency.
The overall mean score of responses regarding the effect of ATM banking on operational
performance was 4.13 on a 5 point scale. It would mean there was more agreement that ATM
machines are capable of influencing bank operational performance. The average over all
standard deviation of 0.67 infers that a spread of within one standard deviation from the mean.
4.4.2.4 Descriptive statistics on banks operational performance

The respondents were also asked to rate their opinion concerning operational performance of
their bank for the last five years. The summary of their responses to specific questions, as
revealed by the results, will be presented in table 4.10. The finding revealed that 66.7.1% of the
participants reported that the numbers of customers have been greatly increasing over the years,
whereas 28.7% indicated their customers are increased only to the moderate extent. Regarding
the reputation and brand image of the bank, 53.8% of the participants indicated the reputation
and brand image of their bank has been improving in great extent over the last five years. While
39.8% reported that the reputation and brand image of their bank has moderately improved. The
average score was 3.61 on a 5 point scale. Regarding bank product and service quality, 60.8% of
those surveyed reported that their bank product and service quality has greatly improved.
Whereas 32.7% reported that their bank product and service quality has only moderately
improved over the year. The average response was 3.7 on a 5 point scale.
Of the 171 respondents who completed the questionnaire, 53.2% indicated that the satisfactions
of customers have improved in great extent over the years, whereas 35.1% reported that the
satisfactions of customers have improved in moderate extent. The mean response was 3.6 on a 5
point scale. Regarding question on flexibility of products and service provision, 66.1% of
respondents indicated that products and service provision has improved in great extent, while
19.3% reported that their bank products and service provision has improved in moderate extent.
The mean response was 4.03. Besides, 59.1% of those surveyed reported the ranges of financial
products and services have increased at great extent. Whereas 26.9% reported that the ranges of
51
financial products and services have increased at very great extent. The average response was
4.12 indicating that ranges of financial products and services have greatly diversified over a time.
Table 4.10 Respondents opinion on operational performance of commercial bank

No Little Moderate Great Very
Indicators extent extent extent extent great Mean STD
(%) (%) (%) (%) extent
1 2 3 4 5
The numbers of customers have been
0 1.8 28.7 66.7 2.9 3.71 0.55
increasing over the years.
The reputation and brand image of our
0.6 1.2 39.8 53.8 4.7 3.61 0.63
bank has improved.
The bank product and service quality has
0 1.2 32.7 60.8 5.3 3.7 0.58
improved over the year.
The satisfactions of customers have
1.2 4.1 35.1 53.2 6.4 3.6 0.72
improved over the years.
Flexibility of products and service
0.6 0.6 13.5 66.1 19.3 4.03 0.64
provision has improved over a time.
There has been increase in range of
financial products and services. 0 1.2 12.9 59.1 26.9 4.12 0.66
Average 3.8 0.63

The overall mean score of responses regarding general bank staffs’ opinion for their bank
operational performance for the last five years was 3.8 on a 5 point scale. This would an
indication that the operational performance for most of the banks have greatly improved over the
last five years. The average standard deviation was 0.63 meaning that at least 68% of the
4.4.3 Summary of respondents mean scores

The table 4.11 demonstrates the summary of mean scores for each type of financial innovation.
The results indicated that mobile banking had the highest positive influence on bank financial
performance with mean score of 3.23 followed by internet banking and ATM banking with mean
scores of 2.96 and 2.93 respectively. The result also demonstrated that ATM banking had the
highest positive influence on bank operational performance with mean score of 4.13 followed by
internet banking and mobile banking with mean score of 3.99 and 3.98, respectively.
52
Table 4.11 also demonstrates the summary of overall mean scores of financial innovation. The
results indicated that financial innovations had relatively higher positive influence on bank
operational performance. The overall mean score of responses regarding the effect of financial
innovation on operational performance was 4.03 on a 5 point scale. It would mean there was
more agreement on the nature of influence that financial innovations have on bank operational
performance. On the other hand, the overall mean score of responses regarding the effect of
financial innovation on financial performance was 3.04 on a 5 point scale. The mean score was
close to 3.00 which would mean there was indifference on the nature of influence that financial
innovation have on bank profitability. This is might an indication of relatively weak influence of
financial innovation on bank financial performance.
Table 4.11: Summary of Respondents Mean Scores

Type of Innovation Financial Performance Operational performance
Mobile Banking 3.23 3.98

Internet banking 2. 96 3.99
ATM banking 2.93 4.13
overall Mean score 3.04 4.03
4.5 Assumptions/diagnostic test for multiple linear regressions

Multiple linear regressions are based on the assumptions of Ordinary Least Square (OLS). When
one decides to analyze data by means of multiple regressions, part of the process involves
checking to make sure that the data need to analyze can in fact be analyzed using multiple
regression. One could do this for the reason that it is only appropriate to use multiple regressions
if the data "passes" those assumptions that are required for multiple regressions to give a valid
result. So in the following section necessary diagnostic tests were carried out on the variables.
4.5.1 Assumption one: Assumption on Sample size

The first assumption of multiple linear regressions is about the sample size which assumes that
for each predicative/independent variable at least twenty cases is needed. In this study there are
three predicative variables and for these variables at least sixty cases are needed. Regarding the
53
sample size, this study is 171 cases which are far above the minimum threshold sixty cases,
hence fulfilled the assumption of sample size.
4.5.2. Assumption two: Outlier, leverage and influential points

The second assumption of multiple regressions is that in order to make valid inference on
multiple linear regressions, there should be no significant outliers, high leverage points or highly
influential points. According to Rousseeuw, et al, (1990), outliers, leverage and influential points
are observations in data set that are in some way unusual and can change the output that
statistical software produces and reduce the predictive accuracy of results as well as the
statistical significance (Wilcox, 2001). Accordingly, before using a multiple regression analysis,
it is essential to detect possible outliers, high leverage points and highly influential points.
According to Wilcox (2001), an outlier is a data point whose response y does not follow the
general trend of the rest of the data. Standardized residual (sometimes referred to as studentized
residual) is the value that quantifies the size of the residuals in the standard deviation units and
so they can be easily used to identify outliers. It is in principle more correct to use the term
"outlier" for an observation with a Standardized residual (studentized residual) value of greater than 3
in absolute value (Rousseeuw, et. al, 1990). The standardized residual values for all cases of the
dependent variable financial performance range from -2.624 to 2.359 and, for operational
performance ranged from -2.478 to 2.826 indicating that the dataset is free of outliers.
According to Wilcox (2001), a data point has high leverage if it has "extreme predictor x values."
The great thing about leverages is that they can help to identify x values that are extreme and
therefore potentially influential on regression analysis (Rousseeuw, et. al, 1990). As stated by
Wilcox (2001), common rule of thumb is to flag any observation whose leverage value, hii,
is more than 3 times larger than the mean leverage value (3(k+1)/n). Based on this formula, in
this study, any observation with a leverage value of greater than 0.0702 is considered a high
leverage point. The finding from table 4.12 shows that a leverage value for financial performance
ranges from 0.01 to 0.054 and for operational performance ranges from 0.000 to 0.068, which are
less than cut-off point 0.0702. Thereby all cases were therefore subject to further analysis.
54
According to Wilcox (2001), data point is influential if it “unduly influences any part of a
regression analysis, such as the predicted responses, the estimated slope coefficients, or the
hypothesis test results.” Cook's distance is a measure of how much the residual of all records
would change if a particular record were excluded from the calculation of the model coefficients
(Rousseeuw, et. al, 1990). As stated by Wilcox (2001), a common rule of thumb is that a cook’s
distance greater than one should be given scrutiny and perhaps removed. The finding from table
4.12 revealed that a cook's distance for a variable financial performance range from 0 to 0.094
and for operational performance ranges from 0 to 0.079 and, which is less than cut-off point 1.
This suggests that no data point unduly influences the estimated regression function. Summaries
of residual statistics are presented in table 4.12.
Table 12: Summary of residual statistics

Indicators Financial performance Operational performance
N
Minimum Maximum Minimum Maximum
Std. Residual -2.624 2.359 -2.478 2.826 171
Stud. Residual -2.635 2.433 -2.486 2.879 171
Cook's Distance .000 .094 .000 .079 171
Centered Leverage Value .001 .054 .000 .068 171
4.5.3 Assumption three: Multicollinearity

Multicollinearity occurs when there are two or more independent variables that are highly
correlated with each other. This leads to complications with understanding which independent
variable contributes to the variance explained in the dependent variable, as well as technical
issues in calculating a multiple regression model (Simon, 2004). Variance Inflation Factor (VIF)
is a method used to test for multicollinearity among study variables. Variance Inflation Factor
was checked for indication of multicollinearity where their numerical values were all well below
the cut-off value of 10 suggested by Neter, Kutner, Wasserman and Nachtsheim (1996). Based
on this rule of the thumb, there was no collinearity among the independent variables.
55
Table 4.13: Multicollinearity test for the Study Variables
Financial performance Operational performance
Variables
No. of Items Tolerance VIF No. of Items Tolerance VIF
Mobile Banking 5 0.956 1.046 5 0.713 1.403
Internet Banking 5 0.976 1.024 5 0.767 1.303
ATM Banking 5 0.961 1.040 5 0.741 1.350
4.5.4 Assumption four: Homoscedasticity

Homoscedasticity in a study usually happens when the variance of residuals (error term) would
be same for all predicated (Tabachnic & Fidell, 2007). On the other hand, heteroscedasticity in a
study usually happens when the variance of the errors vary across observation (Long & Ervin,
2000). There are different ways for checking whether the variances of error term are the same
across observation. The most commonly used methods is Breusch-Pagan test which was used to
test the null hypothesis that the error variances are all equal versus the alternative that the error
variances are a multiplicative function of one or more variables. Breusch-Pagan tests the null
hypothesis that heteroscedasticity is not present. If sig-value is less than 0.05, reject the null
hypothesis. A large chi-square value greater than 9.22 is an indication of the existence of
heteroscedasticity (Sazali, et al., 2010). In this study, the sig-value for fitted values of financial
performance was 0.7716 and for operational performance was 0.5426 and sig-values of in both
cases indicating that heteroscedasticity was not a concern.
Table 4.14: Breusch-Pagan for Heteroscedasticity

H0 Variables Chi 2(1) Prob > Chi2
Constant variance Fitted values of financial performance 0.08 0.7716
Constant variance Fitted values of operational performance 0.37 0.5426
4.5.5 Assumption five: Linearity

The linearity assumption of multiple regression analysis assumes that there must be a linear
relationship between the dependent variable and each of independent variables, as well as the
dependent variable and the independent variables collectively (Asghar & Saleh, 2012). The most
commonly used way of checking linearity is creating scatter plots and then visually inspecting
these scatter plots to check for linearity. If the figure not has an obvious pattern and the point is
evenly distributed above and below zero on the X-axis, and to the left and right of zero on the Y-
56
axis, it is an indication of linearity. The figures below show scatter-plot of studentized residual
against linearly predictive value. The figures have a horizontal band of points indicating the
linear relationship.
Figure 4.2: a Studentized residual scatter plot dependent variables
4.5.6 Assumption six: Autocorrelation

The assumption of autocorrelation (serial correlation) is a key assumption in multiple regressions
which assume that the error terms are independent of each other. This is however especially
relevant with time series data where the data are sequenced by time. The most commonly used
methods to determine whether there is autocorrelation, that is where there is a linear correlation
between the error terms for one observation, is Durbin-Watson test. According to Cochrane,
(1997), if a value of d is within the range 1.5 and 2.5 means there is no autocorrelation.
Therefore the result proved that there is no auto correlation as shown in table 4.15 below.
Table 4.15: Durbin-Watson Test for Autocorrelation

Test Dependent variable Value
Durbin-Watson Financial performance 1.831
Durbin-Watson Operational performance 1.764
4.5.7 Assumption six: Normality

The other assumption of multiple regressions is normality which assumes that residuals (errors)
are approximately normally distributed. In order to make valid inferences from regression
57
analysis, the residuals of the regression should follow normal distribution. A simple way to
check this assumption is to test for one sample Shapiro-Wilk test, then plot normal P-P or Q.Q
for the dependent variable to confirm the obtained result (Asghar & Saleh, 2012).
4.5.7.1 Shapiro-Wilk Test

Shapiro-Wilk test is the most commonly used method of test for normality. It has been found to
be the most powerful test in most situations (Richardson & Smith, 1993). It is mostly used for
evaluating the assumption of univariate normality by taking the observed cumulative distribution
of scores and comparing them to the theoretical cumulative distribution for a normally
distributed variable. The null and alternative hypotheses were stated as follows:
Ho: The data is not normally distributed

H1: The data is normally distributed
The rule of thumb is that if the p -value is less than 0.05, H0 is rejected and H1 is not reject, and
if the p-value is greater than 0.05, Ho is not rejected and H1 is reject. As shown from table
below, the tests results for financial performance has a p-value of 0.12307 and operational
performance has the p-value = 0.19054, which are greater than the cut point 0.05, confirming
that the standardized residuals was significantly normally distributed (Asghar & Saleh, 2012).
Table 4.16: Shapiro-Wilk W test for normal data

Variable Observation W V Z Prob>z
Financial performance 171 0.98724 1.662 1.160 0.12307
Operational performance 171 0.98873 1.468 0.876 0.19054
4.5.7.2 Normal P-P Plots

This is a graphical procedure that plots the cumulative probabilities (values range from 0 to 1) on
the X-axis and the expected probabilities given the normal curve on the Y-axis. If the sample
were exactly normally distributed, the points would lie on a straight diagonal line. The diagram
below shows Normal P-P Plots for the dependent variables (operational & financial
performance) in which the points would lie on a straight line confirming the data was normally
distributed.
58
Figure 4.3: Normal P-P Plot of residual for dependent variables
4.6 Inferential Statistical Analysis

This section describes the inferential statistical analysis that was derived from the collected data
and models. The study sought to test the relationship between financial innovations and the bank
performance. This was done through correlation and regression analysis. It starts with results of
the correlation and then proceeds to results of the multiple linear regression models.
4.6.1 Correlation Results

The study conducted correlation analysis to test the strength of relationship or association
between the research variables from the primary data. Correlation is the measure of the
relationship or association between two continuous numeric variables (Kothari, 2004).
Correlation analysis results present a correlation coefficient which measures the linear
relationship or association between two variables (Crossman et al., 2013). A Pearson correlation
was run to establish how the variables were related to each other. The value of correlation
coefficient ranges between -1 and +1. A correlation coefficient of +1 indicates that two variables
are perfectly related in a positive linear. A correlation of -1 indicates that two variables are
negatively linearly related and a correlation coefficient of 0 indicates that there is no linear
relationship between two variables.
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4.6.1.1 Correlations –Bank Innovations and financial performance
The findings of the study are presented in table 4.17. The results show that mobile banking was
positively correlated to financial performance with a Pearson’s Correlation Coefficient of r =
0.251 and at level of significance of 0.001, was statistically significant as the p-value is less than
0.01. This relationship was weak. The results also revealed that there is a positive relationship
between internet banking and financial performance with a Pearson’s Correlation Coefficient of r
= 0.167. The test is significant at 0.029 that was statistically significant as the p-value is less than
0.05. This is also a relatively weak relationship. The result of the study also show that there was
a positive correlation between ATM banking and financial performance with a Pearson’s
Correlation Coefficient of r = 0.124 and at level of significance of 0.106, was not statistically
significant even at the p-value is 0.10. This was a relatively very weak correlation.
Table 4.17: Pearson Correlation Bank Innovations and financial performance

Mobile Internet ATM Financial
banking banking Banking Performance
*
Pearson Correlation 1 .129 .178 .251**
Mobile banking
Sig. (2-tailed) .093 .020 .001
Pearson Correlation .129 1 .106 .167*
Internet banking
Sig. (2-tailed) .093 .166 .029
Pearson Correlation .178* .106 1 .124
ATM banking
Sig. (2-tailed) .020 .166 .106
Financial Pearson Correlation .251** .167* .124 1
Performance Sig. (2-tailed) .001 .029 .106
*. Correlation is significant at the 0.05 level (2-tailed). **. Correlation is significant at the 0.01 level (2-tailed).
4.6.1.2 Correlations –Bank Innovations and financial performance
The findings of the study as presented in table 4.18, ATM and operational performance are
positively related with a Pearson’s Correlation Coefficient of r = 0.541 and at level of
significance of 0.000. This relationship was quite strong. The results also show that mobile
banking was positively correlated to operational performance with a Pearson’s Correlation
Coefficient of r = 0.474 and at level of significance of 0.000. This relationship was also
moderately strong. The findings of the study further show that there was a positive relationship
between internet banking and operational performance with a Pearson’s Correlation Coefficient
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of r = 0.412 and at level of significance of 0.000. This indicates any of the financial innovation
had positive correlation with banks operational performance and the relationship is quite strong.
Table 4.18: Pearson Correlation Bank Innovations and operational performance

Mobile Internet ATM Operational
banking banking banking performance
Pearson Correlation 1 .431** .462** .474**
Mobile banking
Sig. (2-tailed) .000 .000 .000
** **
Internet Pearson Correlation .431 1 .392 .412**
banking Sig. (2-tailed) .000 .000 .000
** **
Pearson Correlation .462 .392 1 .541**
ATM banking
Sig. (2-tailed) .000 .000 .000
** ** **
Operational Pearson Correlation .474 .412 .541 1
performance Sig. (2-tailed) .000 .000 .000
**. Correlation is significant at the 0.01 level (2-tailed).
4.6.2 Analysis of Regression Results

The study sought to test the relationship between financial innovations and the bank
performance. This was done through regression analysis. The independent variable financial
innovation is operationalized through: mobile banking, internet banking and ATM banking,
while the dependent variable bank performance is operationalized through; financial and
operational performance. The study adopted operational definition for measuring bank
performance as the sum of financial (profitability) and non-financial measures (operational
performance) measures. Thus study sought to determine the effect of financial innovation
(mobile banking internet banking, and ATM banking) on each of the dependent variable
(financial and operational performance) separately. Thus, a separate regression analysis were
undertaken to determine the effect of financial innovation on operational performance on one
hand and its effect on financial performance on other hand.
4.6.2.1 Regression analysis - financial innovation & financial performance

The first generic objective of study was to determining the effect of financial innovation on bank
financial performance. To do this multiple linear regression is used to estimate the effect of
mobile, internet, and ATM banking on financial performance commercial banks in Ethiopia.
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I. The Multiple Coefficient of Determination R²
Coefficient of determination explains the percentage of variation in the dependent variable
(financial performance of commercial banks) that is explained by all the three independent
variables (mobile, internet and ATM banking). The table 4.19 below preset the model summary.
Table 4.19: Model Summary for financial innovation and bank financial performance
Model R R Square Adjusted R Square Std. Error of the Estimate
a
1 .293 .086 .070 2.11658
a. Predictors: (Constant), mobile banking, internet banking, ATM banking,
The result shows that the three independent variables (mobile, internet and ATM banking) that
were studied, explain only 7% of the financial performance as represented by the R² value. This
means the adoption of mobile, internet and ATM banking together explains only 7% of the
variation or change of bank financial performance. The remaining 93% of the variability in the
bank financial performance is explained by other variables which are not included in the model
II. ANOVA Interpretation

The result in ANOVA table shows that the sum of squares of the regression is 70.426 at 3
degrees of freedom and a mean square of 23.475. The residual sum of squares is 748.147 with
167 degrees of freedom and mean square value of 4.480. The Total sum of squares is 818.573
with 170 degrees of freedom. The test for the joint significant which is given by the F statistic is
5.240 and it is statistically significant at 5 percent. This imply that the independent variables,
that is, mobile, internet and ATM banking, considered were relevant in explaining the financial
performance among commercial banks in Ethiopia.
Table 4.20: ANOVAa for financial innovation and bank financial performance
Model Sum of Squares Df Mean Square F Sig.
Regression 70.426 3 23.475 5.240 .002b
1 Residual 748.147 167 4.480
Total 818.573 170
a. Dependent Variable: financial performance
b. Predictors: (Constant), mobile banking, Internet banking, ATM banking,
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III. Regression Coefficients
The findings in table 4.21 show the coefficients of the regression. According to the findings, only
mobile banking is significant in predicting the financial performance of the banks. Mobile
banking has positive and significant effect on bank financial performance with a beta value of
0.145 and t value of 2.925 which is significant at 5%. Internet banking has also positive but
insignificant effect on bank financial performance with a beta value of 0.086 and t value of 1.745
which is only significant at 10%. ATM banking has also positive but insignificant effect on
financial performance with a beta value of 0.037) and t value of 0.938 which is also insignificant.
Table 4.21: Coefficientsa for financial innovation and bank financial performance
Standardized
Unstandardized Coefficients Coefficients
Model T Sig.
B Std. Error Beta
(Constant) 17.373 1.084 16.024 .000
Mobile banking .145 .050 .221 2.925 .004
1
Internet banking .086 .049 .131 1.745 .083
ATM banking .037 .039 .071 .938 .349
a. Dependent Variable: financial performance
When these beta coefficients are substituted in the equation, the model becomes
Y = 17.373 + 0.145MB + 0.086IB + 0.037ATM

Where: Y is the financial performance of the commercial banks in Ethiopia, MB is the adoption
of Mobile banking, IB is the adoption of Internet banking and ATM is the adoption of ATM
banking. This means that holding other factors constant one unit increase in mobile banking
result in 0.145 unit increases in the bank financial performance, one unit increase in internet
banking result in 0.086 unit increase in the bank financial performance and one unit increase in
ATM banking result in 0.037 unit increase in the bank financial performance.
4.6.2.2 Regression analysis - financial innovation & operational performance

The second generic objective of study was to determining the effect of financial innovation on
bank operational performance. To estimate the effect of each predicator variable, that is, mobile,
internet and ATM banking on operational performance commercial banks in Ethiopia, Ordinary
Least Square method was used and the results are presented in the following section.
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I. The Multiple Coefficient of Determination (R²)
Coefficient of determination (R²) explain the degree to which changes in the dependent variable
can be explained by the change in the independent variables or the percentage of variation in the
dependent variable (operational performance) that is explained by all the three independent
variables (mobile, internet and ATM banking). The table 4.22 below preset the model summary.
Table 4.22: Model Summary for financial innovation and operational performance
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .615a . 378 .367 2.24856
a. Predictors: (Constant), ATM, Internet, mobile
The result shows that the three independent variables (mobile, internet and ATM banking)
explain 36.7% of the operational performance as represented by the R² value. This therefore
means the adoption of mobile, internet and ATM banking together explains about 36.7% of the
variation of bank operational performance. The remaining 63.3% of the changes was explained
by other variables which are not included in the model.
II. ANOVA Interpretation

The result in ANOVA table 4.23 shows that the sum of squares of the regression is 512.816 at 3
degrees of freedom and a mean square of 170.939. The residual sum of squares is 884.354 with
167 degrees of freedom and mean square value of 5.056. The results also indicates that the
overall models was a good fit since the value of F-statistic was found to be 33.809 and the p-
values was found to be 0.000 which is less than the critical value of 0.01. This imply that the
independent variable variables, that is, mobile, internet and ATM banking, considered were
relevant in explaining the operational performance among commercial banks in Ethiopia.
Table 4.23: ANOVAa for financial innovation and bank operational performance
Model Sum of Squares Df Mean Square F Sig.
Regression 512.816 3 170.939 33.809 .000b
1 Residual 844.354 167 5.056
Total 1357.170 170
a. Dependent Variable: operational performance
b. Predictors: (Constant), ATM banking, Internet banking, mobile banking
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III. Regression Coefficients
According to the findings, all predicator variables are significant in predicting the operational
performance of the banks. Mobile banking has positive and significant effect on bank operational
performance with a beta value (beta =.248) and a t value of 3.787 which is significant at 0.000.
Internet banking has also positive and significant effect on bank operational performance with a
beta value (beta =.200) and a t value of 2.426 which is significant at 0.002. Similarly, ATM
banking has also positive and significant effect on bank operational performance with a beta
value (beta =.357) and a t value of 5.183 which is also significant at 0.000.
Table 4.24: Coefficientsa for financial innovation and bank operational performance
Model Unstandardized Standardized T Sig.
Coefficients Coefficients
B Std. Error Beta
(Constant) 6.463 1.707 3.787 .000
Mobile banking .248 .078 .231 3.196 .002
1
Internet banking .200 .083 .169 2.426 .016
ATM banking .357 .069 .368 5.183 .000
a. Dependent Variable: Bank operational performance
When these beta coefficients are substituted in the equation, the model becomes
Y = 6.463 + 0.248MB + 0.2IB + 0.357ATM
Where: Y is the operational performance of the commercial banks in Ethiopia, MB is the
adoption of Mobile banking, IB is the adoption of Internet banking and ATM is the adoption of
ATM banking. This means that holding other factor constant one unit increase in mobile banking
result in 0.248 unit increases in the bank operational performance, one unit increase in internet
banking result in 0.2 unit increase in the bank operational performance and one unit increase in
ATM banking result in 0.357 unit increase in the bank operational performance.
4.7 Hypothesis test

The study used multiple linear regression analysis to determine the statistical relationship
between the independent and dependent variables. All the six null hypotheses as stated in chapter
one of this study were tested using multiple linear regression models.
65
Hypothesis 1: Mobile Banking has positive and significant effect on profitability/financial
Conclusion: Failed to reject the formulated hypothesis since as show on table 4.21 above the
regression coefficient for of mobile banking is 0.145 and its P value is 0.04 which is significant
at 5%. It indicate that where other explanatory variables remain constant the adoption of mobile
banking by bank have a positive influence on bank financial performance and implies that when
a bank adoption of mobile banking increase by 1 unit, the bank financial performance will
increase by 0.145 unit and statistically significant at 5%.
This result is consistence with many studies which have conducted in different countries context.
In Kenyan context the studies undertake by Misati et al (2010), found that mobile banking had
expanded the range and variety of services that a bank could offer to its customers and hence
expanded incomes sources for banks. In the same token, Kamau and Oluoch (2016) also point
out that mobile banking positively influenced the financial performance of commercial banks in
Kenya. Similarly, Porteus (2006) affirms that in Uganda mobile banking has increased access to
banking services and consequently income and profits for the banks. In Ethiopian context, Rukia
(2018) also found that mobile banking had positively and significantly influence on Return on
Asset (ROA). On the other hand, the study conducted in Lebanon by Sujud and Hashim (2017)
found that mobile banking do not have any significant impact on the return on assets (ROA) of
Lebanese commercial banks which is contradict to this finding.
The positive and significant effect of mobile banking on financial performance of commercial
banks in Ethiopia could be attributed to different reasons. Firstly, currently in Ethiopia the
penetration mobile banking is steadily increasing as it provides an alternative service delivery
channel for banks which is both accessible and affordable to many customers. The easiness and
speed with which customers can transact on mobile phones has made mobile banking very
fashionable to both the banks and the customers. Secondly, transaction made by mobile banking
in Ethiopia are mostly related with the transfer of balance from one account to another account,
make payment to beneficiary and look in to activity summary transaction, that may not
significant impact on customer deposit. Thirdly, mobile banking has moderately increased in
range and diversification of financial products and services that banks offer to their customers
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which in turn expanded income sources of bank. Banks have arranged to make collaborations
with different institution which have increased the kind and number of transactions that banks
and customers can perform on the mobile phone and as a result creating more opportunities for
income generation for banks.
Hypothesis 2: Internet Banking has positive and significant effect on profitability/financial

Conclusion: reject the formulated hypothesis since as show on table 4.21 above even if the
regression coefficient for of internet banking is positive (0.086), its P value is 0.083 is not
significant at 5%. However, it indicate that where other explanatory variables remain constant
the adoption of internet banking by bank have a positive influence on bank financial performance
and implies that when a bank adoption of internet banking increase by 1 unit, the bank financial
performance will increase by 0.0.086 unit and statistically significant at 10%.
This result is consistence with many studies which have undertaken with different countries. In
the studies which undertake in India by Malhotra and Singh (2010), it is revealed that experience
in offering of internet banking and the profitability does not have any significant association.
Similar findings were shown in a study conducted on EU 60 largest banking groups over the
period 1995-2005 by Francesca and Claeys (2010) and it is found that internet banks fall short of
forming synergies with other banking activities and so financial innovations in the form of
internet banking does not improve banks financial performance. Likewise, according to Arisa
and Muturi (2015), internet banking has a very small impact on financial performance of
commercial banks in Kenya. However, in the study by De Young et al. (2007) concluded that
adoption of internet banking improved community bank profitability, for the most part through
increased revenues from deposit service charges.
The insignificant association between internet banking and financial performance of commercial
banks in Ethiopia could be attributed to the fact that the modern internet banking is a new
technology to the Ethiopian commercial banking sector. All banks in Ethiopia are too late to
move with technological advancement and customers are not awareness about the use and
benefits of internet banking technology. More so, currently in Ethiopia internet banking function
is a complement not a substitute for traditional distribution channels such as bank’s branch. The
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findings also show that Ethiopian commercial banks do not invest in internet banking with a sole
objective of getting higher incomes and profitability from the service. Many banks in Ethiopia
also do not charge or offered at a minimum charge the access fees on a customer account through
the internet and thus making it available as a platform for banks to offer their services. Charging
bank customers for accessing their accounts through the internet will amount to a double charge
by both the bank and the internet service providers. Rather internet banking in Ethiopia is
primarily used as a compliment of other service delivery channels so as to create convenience
and a value-add to the customers.
Hypothesis 3: ATM Banking has positive and significant effect on profitability/financial

Conclusion: Reject the formulated hypothesis since as show on table 4.21 above though the
regression coefficient for ATM banking is positive (0.037), it is not statistically significant. It
indicate that where other explanatory variables remain constant the use of ATM machine by
bank have a positive influence on bank financial performance and implies that when a bank
installation ATM machine increase by 1 unit, the bank operational performance will increase by
0.055 unit and it is statistically insignificant.
The findings of this research agree with the study conducted in Jordanian banks by Al-Asmadi
and Al-Wabel (2011) and on their study they concluded that ATM has positive but insignificant
relationship with bank performances. Similar finding was also found in Pakistan context where
Asif (2011) conducted a study during the period 2007 – 2012. Based on the results of their study
they concluded that ATM may not have any meaningful impact on profitability. In the same
token, in Nigerian context, Jegede (2014) aimed to assess the impact of ATM on the
performance of five Nigerian banks and the result of the study showed that the adoption of ATM
terminals have not significantly improved the financial performance of Nigerian banks.
Likewise, the study conducted in South Sudan by Makur (2014) found that the number of daily
transactions using ATM showed positive but very weak relationship with the financial
performance of the commercial banks. On the contrary to this finding, the study made by Rukiya
(2018) in Ethiopian context found that there was a negative and significant relationship between
ATM and financial performance of commercial banks in Ethiopia.
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The insignificant association between ATM and financial performance of commercial banks in
Ethiopia could be linked to the reality that, ATMs are not capable of generating enough profit for
commercial banks because of its high initial cost of installation and high maintenance and
service cost throughout its life time. More so, currently customers in Ethiopia used ATM only
for withdrawing the money which in turn may negatively affect the customer deposit amount.
Nevertheless, currently almost all commercial banks in Ethiopian are installing more ATM
terminals across the country and use core banking to their ATM terminals in order to increase
access to financial service and improve their convenience to their customers. ATM machines are
now located at non-traditional locations like at supermarkets, universities and colleges, indicative
of the importance that banks attach to ATM machines in reaching and maintaining customers.
Hypothesis 4: Mobile Banking has positive and significant effect on operational

regression coefficient for of mobile banking is 0.248 and its P value is 0.002. It indicate that
where other explanatory variables remain constant the adoption of mobile banking by bank have
a positive influence on bank operational performance and implies that when a bank adoption of
mobile banking increase by 1 unit, the bank operational performance will increase by 0.248 unit
and statistically significant at 1%.
the study which undertake in Kenya by Misati et al (2010), it is revealed that mobile banking had
reduction of operational cost that a bank incurred and hence improved operational efficiency for
banks. Similarly, Ndung’u (2011) concurs that in Kenya mobile banking has revolutionalised the
money transfer business and has created further innovations that have lowered the transaction
costs for both the banks and customers.
The positive and significant effect of mobile banking on operational performance of commercial
banks in Ethiopia could be attributed to different reasons. The major reasons for these could be:
first, currently in Ethiopia the penetration mobile banking is increasing as it provides an
alternative service delivery channel for banks which is both accessible and affordable to many
customers. Secondly, mobile banking proved to be quick, reliable and convenient services and
69
provide the benefits of added customer service, which makes it a marketing tool that helps banks
in attracting and retaining customers. Thirdly, by using mobile banking the customers can easily
access their account at any time without going to the bank physically; this in turn reduce
transaction cost including time and money incurred by both the commercial bank and customer.
Hypothesis 5: Internet Banking has positive and significant effect on operational

Conclusion: Failed to reject the formulated hypothesis since as show on table 4.24 above, the
regression coefficient for internet banking is 0.2 and its P value is 0.016. It indicate that where
other explanatory variables remain constant the adoption of internet banking by bank have a
positive influence on bank operational performance and implies that when a bank adoption of
internet banking increase by 1 unit, the bank operational performance will increase by 0.2 unit
These findings are supported by findings on internet banking and bank profitability by Chang
and Dutta (2012) ), in their a study conducted in Pakistan assert that internet based banking led to
cost reduction, saved time, improved accuracy, improved reliability and quality of services and
hence likely to improved bank’s operation efficiency. In the same token, in Nigeria Ibrahim et al
(2019) found that internet banking has statistical significant impact on operational efficiency of
bank in Nigeria. Malhotra et al (2009) in the study on the impact of internet banking on bank
performance and risk found out that on average internet banks are more operationally efficient.
Simpson (2002) point out that internet banking is motivated mainly by the prospects of operating
costs minimization. Haq (2005) also concluded that use of internet banking has improved the
ability to achieve economies of scale in minimizing asymmetry of information between savers
and borrowers and that the unit costs of internet banking fall more rapidly than those of
traditional banks as output increases as a result of balance sheet growth.
In Ethiopia, internet banking is primarily used as an alternative of other service delivery channels
in order to create convenience to the customers. This has led to reduction and control of banks’
operational costs and hence better operation leading to improved operational performance.
Internet has been used generally by commercial banks to promote their services and product
through their corporate websites. It is also used as a conveyance channel for delivering internet
70
banking services. This demonstrates that the internet has presented as avenue for banks to
promote their product and services and to attract new customers thereby more business leading to
higher performance.
Hypothesis 6: ATM Banking has positive and significant effect on operational performance
regression coefficient for of internet banking is 0.357 and its P value is 0.000. It indicate that
where other explanatory variables remain constant the use of ATM machine by bank have a
positive influence on bank operational performance and implies that when a bank adoption of
ATM banking increase by 1 unit, the bank operational performance will increase by 0.357 unit
the study which undertakes in Kenya by Obuba (2013) it is revealed that ATM usage has a
positive and significant relationship with operational performance. Similar result was found in
Nigeria by Agboola (2006) and it was found that the increase in the adoption of ATMs had a
positive impact on a bank’s image. In the same token the study by Hasan et.al. (2009), which
was conducted across the European Union, showed that ATMs increased bank cost efficiency.
Other similar result were found by Frei, Harker and Hunter (1997) who point out that banks were
using ATMs to change customer behavior by migrating them away from high cost delivery
systems. In same token, Akram and Allam (2010) undertaken a study in Jordan and found that
use of information technology which is embodied in ATMs improved the matrix of operational
performance.
In Ethiopia ATMs are capable of improving operational performance for commercial banks due
to the convenience they offer to bank customers. Banks in Ethiopia have been marketing
themselves by showcasing their ATM network across the country with an objective to attract
more customers and eventually contribute to bank profits. On many circumstance banks
demonstrate the extent of ATM network as a means of attracting mostly the retail customers. It
is also common to see banks advertising in their annual reports on the number of ATMs and even
the capabilities of the ATMs in order to produce customer appeal.
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4.8 Chapter Summary
This chapter has presented descriptive data analysis using frequency tables, percentages, mean,
graphs, correlation analysis and multiple linear regressions. Different statistical tests were also
analyzed to test assumptions in the chapter. The profiles of respondent were presented at the
beginning of the chapter followed by responses from each variable section of the questionnaire.
The descriptive and reliability analysis of primary data showed that a high reliability was
attained by questionnaire instrument with a reliability coefficients ranging from 0.799 to 0.91 as
shown previously. These figures fall within the acceptable levels of data reliability and
consistency. Descriptive statics of the dependent and independent variables from primary data
collection was analyzed. Multiple linear regression were used to test the hypotheses, tests of
significance using t- tests has indicated varying level of significance amongst the independent
variables as well as when combined, against the dependent variable.
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CHAPTER FIVE
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
5.1 Introduction
In this chapter, the summary of findings, conclusions and recommendations of the study were
discussed. The purpose of the study was to in examine the effect of bank innovations on
performance of commercial banks in Ethiopia. The bank innovations studied were; Automated
Teller Machines (ATMs), mobile banking and internet banking. Bank performance indicators
studied were; operational and financial performance. The presentation in the section followed
was prepared around specific objectives and research hypotheses.
5.2 Summary of Findings

The study was conducted with an aim of examining the effects of financial innovations on
performance of commercial banks. Before the actual final data collection, a pilot study was
conducted where the content validity and reliability of the questionnaires were tested. The
reliability analysis of primary data showed that a high reliability was attained by questionnaire
instrument with acceptable range of reliability coefficients. The study sample had 220
questionnaires distributed and 171 were duly completed and returned for analysis. This
represented a response rate of 77.7% which according to Oloyo (2001) is very good response
rate. To maintain the data validity and robustness of the regressed result of the research, the most
critical regression diagnostic tests consisting of outliers, leverage and influential points,
Normality, linearity, Multicollinearity, Heteroscedasticity and Autocorrelation were tested. Then,
multiple linear regression were used to test the hypotheses, and tests of significance using t- tests
has indicated varying level of significance amongst the independent variables as well as when
combined, against the dependent variable.
Evidence from previous studies on whether bank innovations influence bank performance
showed that there were mixed results based on the operating environment and the level of
adoption. In Ethiopia slow adoption of financial innovation in banking practice is moderately
changing for the better. The findings of the study revealed that the combined effect of bank
innovations influenced bank performance positively. These findings were both supported by the
frequencies of the responses from the respondents which were presented in the form of
73
percentages, mean score and regression result. The study found that bank innovations had
relatively higher positive influence on bank operational performance. The overall mean score of
responses regarding the effect of financial innovation on operational performance was 4.03 on a
5 point scale. It would mean there was more agreement on the nature of influence that financial
innovations have on bank operational performance. On the other hand, the overall mean score of
responses regarding the effect of financial innovation on financial performance was 3.04 on a 5
point scale. This would mean there was indifference on the nature of influence that financial
innovation have on bank profitability. The findings of the study also revealed that each type of
bank innovation influenced bank performance positively. The results indicated that ATM
banking had the highest positive influence on bank operational performance with mean score of
4.13 followed by internet banking and mobile banking with mean score of 3.99 and 3.98
respectively The result also demonstrated that mobile banking had the highest positive influence
on bank financial performance with mean score of 3.23 followed by internet banking and ATM
banking with mean scores of 2.96 and 2.93 respectively.
5.2.1 Effect of mobile banking on financial performance of commercial banks

The first objective of the study sought to investigate the effect of mobile banking on financial
performance of commercial banks in Ethiopia and the result showed that variations in financial
performance can be explained by mobile banking. This finding is supported by regression results
which showed mobile banking has positive and significant influence on financial performance of
commercial banks in Ethiopia and therefore the alternate hypothesis was accepted.
5.2. 2 Effect of internet banking on financial performance of commercial banks

The second objective of the study sought to establish the effect of internet banking on financial
performance of commercial banks in Ethiopia. Results revealed that internet banking had
positive but insignificant effect on the financial performance of commercial banks in Ethiopia.
This is supported by the test for significance which shows that the effect was statistically not
significant and hence rejects the formulated hypothesis.
5.2. 3 Effect of ATM banking on financial performance of commercial banks

The third objective of the study sought to assess the effect of ATM banking on financial
performance of commercial banks in Ethiopia. The findings revealed that ATM banking had
74
positive but insignificant effect on the financial performance of commercial banks in Ethiopia.
This is supported by the test for significance which shows that the effect was statistically not
significant and hence rejects the formulated hypothesis.
5.2. 4 Effect of mobile banking on operational performance of banks

The fourth objective of the study sought to examine the effect of mobile banking on operational
performance of commercial banks in Ethiopia. The findings revealed that mobile banking have a
positive and significant effect on the operational performance of commercial banks in Ethiopia.
This finding is supported by the coefficient of determination which shows that the variations in
banks operational performance are explained by mobile banking. The influence of mobile
banking on operational performance of bank is also statistically significant and hence the
alternate hypothesis was accepted.
5.2.5 Effect of internet banking on operational performance of banks

The fifth objective of the study sought to establish the effect of internet banking on operational
performance of commercial banks in Ethiopia. Results revealed that internet banking had
positive effect on the operational performance of commercial banks in Ethiopia. This is
supported by the coefficient of determination which shows that internet banking describe the
variations operational performance of commercial banks in Ethiopia. The test for significance
showed that the effect was statistically significant and hence alternate hypothesis was accepted.
5.2.6 Effect of ATM banking on operational performance of commercial banks

The six objective of the study was to establish the effect of ATM banking on operational
performance of commercial banks in Ethiopia. The results showed that ATM banking has a
positive and significant influence on operational performance of commercial banks in Ethiopia.
The analysis produced a coefficient of determination which showed the variations in operational
performance which is explained by ATM banking. The significance test showed that effect of
ATM banking on bank operational performance was statistically significant and hence the
alternative hypothesis was accepted.
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5.3 Conclusion
Based on the findings of the study, it can be concluded that bank innovations influence
performance of commercial banks in Ethiopia positively. The adoption of innovations by
commercial banks has a higher potential of improving operational performance than financial
performance. Financial innovation has positive, strong and significant effect on operational
performance. But financial innovation has positive, but relatively weak effect on financial
performance. Some of positive but insignificant impact of variables (internet and ATM banking)
on financial performance is may be due to an early stage and low level of adoption of financial
innovation in Ethiopia commercial banking industry.
5.4 Recommendation
The commercial banks are a key and essential sector in the economy, because of the big roles
they play in the financial system. A country is only as strong as its financial system. Their
dynamism and versatility therefore becomes a must in a developing economy like Ethiopia such
that they are capable of boost up the local commerce and be essential and competitive in global
financial order. Accordingly, adoption and implementation of financial innovation turn out to be
a fundamental issue; its acceptance, development, process, and support must be constantly
monitored and upgraded. This study therefore makes several recommendations to stakeholders in
the financial sector like the government, policy makers as well as the commercial banks.
From these research findings: on mobile banking, the study found positive and significant effect
on both operational and financial performance of bank. Thus, commercial banks in Ethiopia
should invest more in mobile banking and employ modern mobile banking technologies in order
to boost their performance and to compete in ever changing financial system. The study also
found that mobile money account penetration in Ethiopia is also very low. Thus commercial
bank managers should properly adopt strategy that will encourage businessmen and general
public in using innovative mobile banking delivery channels which will improve effectiveness
and efficiency of the banking sector. Banks should develop effective strategies for customers to
shift from traditional to mobile banking as they are able to control their costs much better as
compared to investment physical branches. More so, the use of mobile banking should be
widened in intensity of use. This means customers should have more freedom and frequency in
76
accessing the services provided by commercial banks through mobile banking. Banks should has
done a lot regarding the number of accounts being opened using mobile devices, widening the
segments of the clients that have access to financial services and the percentage of customers
using mobile banking vis-à-vis traditional banking. The study also recommends commercial
banks to work more on mobile banking to use it as an instrument of income diversification tools.
Banks should diversification and increased in range of financial products and services that they
offer to their customers which in turn expanded income sources of bank. The commercial banks
are advised to ensure product range extension, product improvement, product repositioning and
new product introduction to enable the banks to be more productive, grow faster, invest more
and earn more profit. Banks should arranged to make collaborations with different institution
which have increased the kind and number of transactions that banks and customers can perform
on the mobile phone and as a result creating more opportunities for income generation for banks.
On Internet banking, though the study found positive and significant effect on operational
performance, their impact is insignificant on financial performance. The insignificant association
between internet banking and financial performance of commercial banks in Ethiopia could be
attributed to the fact that the modern internet banking is a new technology to the Ethiopian
commercial banking sector. All banks in Ethiopia are too late to move with technological
advancement and customers are not awareness about the use and benefits of internet banking
technology. Thus banks should create awareness and promotion of the new technology of
internet banking to the customers and increase its facilities of banking to the customers. Banks
should make internet banking services more useful and usable. This means they should focus on
the full functionality of their systems to response efficiently to the different banking needs of
users. They could achieve this by increasing the customers' awareness of the usefulness of using
Internet banking services s through advertising. Banks should concentrate on their corporate
websites to make it more user-friendly since customers should perceive it as easy to use. They
can also educate how to use internet banking services to customers. Banks must be careful about
their charges of internet banking and the way they transfer costs to customers. Banks should look
at and reduce chances of double charging their customers under various disguise. Commercial
banks should also take necessary action to decrease the fraudulent risk associated with internet
baking that ultimately increases customer trust in using these modes of payments. Possibility of
77
collaboration with government and private security agents could be considered on ICT fraud
prevention and detection but more importantly internal control system must be strengthened.
Government should also improve ICT infrastructure because Internet banking services cannot be
used unless there is good and reliable internet connection.
On ATM banking, the insignificant impacts of variable on financial performance may due to its
high initial cost of installation and high maintenance and service cost throughout its life.
Commercial banks should take necessary action to bring down the service and maintenance costs
and possibly looks into areas of operation and collaboration within themselves in the interest of
stepping up commonly use ATM machines. More so, banks can consider venturing into
provision of maintenances service providers, a move to reduce service and maintenance costs,
and fast track service delivery. Management should also conduct frequent education on all the
services the ATM can offer to customers
The study further recommends that the government should ensure existence of stable conducive
business environment and provide constant availability of developmental infrastructures like
telecommunication facilities. More so, the government should provide incentives for research
and development and offer a support to researcher and scientists who would continue to invest
their time and skills in discovering more bank innovations. It is recommended that the
government also follow a strategy to offer incentives for technology transfer from more
developed economies so as to encourage the adoption of world class innovations. More so,
government should enhance diffusion and adoption of innovation through consumer education
programs and promote increased use of innovations in the banking sector. The bank also should
take the initiative to develop an effective research and development center to get innovative ideas
to capture the competitive market.
5.5 Area Further Research

The study focused on the effect of financial innovation on bank performance empirical evidence
of commercial banks of Ethiopia. Thus, it serves as a useful reference for future research
especially relating to the banking sector. The study was confined to the banking sector and the
results aren’t able to generalization to other sectors. Hence, it is recommended that similar
studies should be done in other financial services sectors of the economy in order to have a
78
comprehensive view of impact of financial innovation and examinations of firm performance.
The study also suggests that further studies should include a qualitative analysis of the
relationship between financial innovation and performance of banks. Such a study would involve
interview of key informants in the banking sector and would provide hidden insights into the
intricate relationship between financial innovation and performance of banks.
79
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90
APPENDIX I
RESEARCH QUESTIONNAIRE
Please your assistance in completing the questionnaire attached on the impact of financial
innovation on performance of commercial banks in Ethiopia will be highly appreciated. This
questionnaire is required to assist in determining the objectives of the study. Any information
provided will be used for academic purpose only and will be treated in strict confidence. Just put
a tick (√) or cross mark (x) in the appropriate box as you deem fit. Thank you for agreeing to
participate in this academic study.
SECTION A: GENERAL INFORMATION
INSTRUCTION: Please put a tick (√) or cross mark (x) against any response that applies
to you.
1. Name of the Bank (Optional) ............................................................
2. Gender: Male [ ] Female [ ]
3. Age: 15-25years [ ] 26-40 years [ ] 41-55 years [ ] Over 55years [ ]
4. Educational Qualification: Diploma [ ] Degree [ ] MA/MC [ ] PHD [ ]
5. How long have been working or dealing with this organization?

Under 5 years [ ] 5 -10 years [ ], 10-14 years [ ],
15-19 years [ ], 20 years and above [ ],
6. Department (tick as appropriate)

ICT [ ], Operation [ ] Finance [ ]
Marketing [ ] Research and Development [ ],
91
Section B: Effect of financial innovations on financial performance of bank
Section B1: This section has statements regarding the effect of Mobile Banking (MB) on
financial performance of the bank. Tick (✔) any option that represents your answer.
Strongly Strongly
Disagree Neutral agree
NO. Statements disagree disagree
1 2 3 4 5
7. Mobile banking has improved the level
8. Mobile banking has expanded the income
generating potential of the bank.
9. Income from MB has high margin hence
10. MB investments have payback period of less
than 3 years, hence good return on assets.
11. Investment in MB is in mostly motivated by
profits to the bank.
12. In your own word, how do you express the impact of mobile baking on the financial
performance of commercial banks in Ethiopia?
----------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
Section B II: This section has statements regarding the effect of Internet Banking (IB) on
financial performance of the bank. Tick (✔) any option that represents your answer.
Strongly Strongly
NO. Statements disagree agree
1 2 3 4 5
13. Internet banking has improved the level
14 Use of internet services has added to more
profitable business avenues to the bank.
15.. Income from IB has high margin hence
contributing positively to bank annual profit
14. IB investments have payback Period of less
than 3 years hence good return on asset
15. Profitability of the bank mostly motivated
investment in IB.
16. In your own word, how do you express the impact of internet baking on the financial
----------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
92
Section B3 I: This section has statements regarding the effect of ATM banking on financial
performance of the bank. Tick (✔) any option that represents your answer.
Strongly Strongly
NO. Statements disagree disagree
1 2 3 4 5
17. ATM banking has improved the level
18. ATM banking has expanded the income
generating potential of the bank.
19. Income from ATM has high margin hence
20. ATM investments have payback Period of
less than 3 years hence Good return on assets
21. Investing in ATMs is highly driven by
profitability in the commercial banks.
22. In your own word, how do you express the impact of ATM baking on the financial
----------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
Section C: Effect of financial innovations on operational performance of bank
Section C1: This section has statements regarding the effect of Mobile Banking (MB) on
operational performance of the bank. Tick (✔) any option that represents your answer.
Strongly Strongly
NO. Disagree Neutral agree
Statements disagree disagree
1 2 3 4 5
23. MB enables to make quick and easy
transaction leading to high speed of delivery.
24. MB provides consumers with a convenient
25.. Using mobile banking has improved quality
26. The use of mobile banking has positive
effect on bank cost efficiency
27. MB has led to the improvement of bank
28. In your own word, how do you express the impact of mobile baking on the operational
----------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
93
Section C II: This section has statements regarding the impact of Internet Banking (IB) on
Strongly Strongly
1 2 3 4 5
28. IB enables to make quick and easy transaction
leading to high speed of delivery
29. IB provides consumers with a convenient
30. Using internet banking has improved quality
31. The use of Internet banking has positive
effect on bank cost efficiency
32. IB has led to the improvement of bank
33. In your own word, how do you express the impact of internet baking on the operational
----------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
Section C3 III: This section has statements regarding the impact of ATM banking on
Strongly Strongly
1 2 3 4 5
34. ATM enables to make quick and easy
35. ATM provides consumers with a convenient
36. Using ATM banking has improved quality
37. ATM installation has positive effect on bank
cost efficiency
38. ATM banking has led to the improvement
of bank overall operational efficiency
39. In your own word, how do you express the impact of ATM baking on the operational
----------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
94
SECTION C: PERFORMANCE MEASURE
SECTION C I: - PROFITABILITY/FINANCIAL PERFORMANCE MEASURE
Please tick (✔) or cross mark (x) the level of measurements related to financial perspective of
performance of your bank for last five year.
No little Moderate great Very great
NO. Statements extent extent extent extent extent
1 2 3 4 5
Amount of bank Net Income has been
40.
increasing over the last five years.
Bank annual revenue has been increasing
41.
over the years.
Your bank return on assets has improved
42.
over time.
The bank market share has increased
43.
over time.
Amount of non-interest income of bank
44.
is growing over a time.
The bank efficiency ratio has improved
45.
over a time.
SECTION C II: - NON-FINANCIAL /OPERATIONAL PERFORMANCE MEASURE

Please tick (✔) or cross mark (x) on the level of success related to operational/non-financial
perspective of performance of your bank for last five year.
NO No little Moderate great Very great

. Statements extent extent extent extent extent
1 2 3 4 5
46. The customers have been increasing
over the years.
47. The reputation and brand image of our
bank has improved.
48. The bank product and service quality
has improved over the year.
49. The satisfaction of customers have
improved over the years
50. Flexibility of products and service
provision has improved over a time.
51. There has been increase in range of
financial products and services.
95
APENDIX II
Sample size - Departmental Management staff per Bank
marketing
Operation
Market
finance
NO Bank Name Total
R&D
Share
ICT
1. Commercial Bank of Ethiopia S.C. 7 (A) 5 5 5 5 5 25
2. Awash International Bank 5 (B) 5 4 3 3 3 18
3. Dashen Bank S.C. 5 (B) 5 4 3 3 3 18
4. Abyssinia Bank S.C. 5 (B) 5 4 3 3 2 17

5. Wegagen Bank S.C. 5 (B) 5 4 2 2 2 15
6. Nib International Bank S.C. 5 (B) 4 4 2 2 2 14
7. United Bank S.C. 5 (B) 4 4 2 2 2 14
8. Oromia International Bank S.C. 3 (C) 4 3 2 2 2 13
9. Cooperative Bank of Oromia S.C. 3 (C) 4 3 2 2 2 13
10. Berhan International Bank S.C. 3 (C) 4 3 2 2 2 13
11. Buna International Bank S.C. 3 (C) 3 3 1 1 2 10
12. Abay Bank S.C. 3 (C) 3 3 1 1 1 10
13. Zemen Bank S.C. 3 (C) 3 3 1 1 1 10
14. Lion International Bank S.C. 3 (D) 3 2 1 1 1 8
15. Enat Bank S.C. 2 (D) 3 2 1 1 1 8
16. Addis International Bank S.C. 2 (D) 3 2 1 1 1 8
17. Debub Global Bank S.C. 2 (D) 3 2 1 1 1 8
Total sample population 66 55 33 33 33 220
96
APENDIX III
LIST OF COMMERIAL BANKS IN ETHIOPIA
NO Bank Name Year of establishment
1. Abay Bank S.C. 2010
2. Addis International Bank S.C. 2011
3. Awash International Bank 1994
4. Bank Abyssinia Bank S.C. 1996
5. Berhan International Bank S.C. 2010
6. Buna International Bank S.C. 2009
7. Commercial Bank of Ethiopia S.C. 1963
8. Cooperative Bank of Oromia S.C. 2005
9. Dashen Bank S.C. 2003
10. Debub Global Bank S.C. 2012
11. Enat Bank S.C. 2013
12. Lion International Bank S.C. 2006
13. Nib International Bank S.C. 1999
14. Oromia International Bank S.C. 2008
15. United Bank S.C. 1998

16. Wegagen Bank S.C. 1997
17. Zemen Bank S.C. 2009
97
APPENDIX IV: TIME FRAME
March June Aug. Nov.
N April May July Sept. Oct. Dec. Jan.
Activities 2019
o. 2019 2019 2019 2019 2019 2019 2020
2019 2019 2019
1. Proposal
Writing
2. Proposal
Correction and
finalization
3. Developing
questionnaires
& make pilot
test
4. Field data
collection
5. Data processing,
analysis &
Report writing
6. Report
finalization,
presentation and
submissions of
final report.
APPENDIX VI: BUDGET DESCRIPTION

No. Cost categories Budget in Birr
1. Stationary (Photocopying and binding) 3,000
2. Transportation 4,800
3. Fee for Piloting and Field Data collector 16,000
5. Other expenses (miscellaneous 3,000

Total 25,000
98

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The Impact of Financial Innovation on Financial

and Operational Performance of Commercial

Addis Ababa University,

Name: Feysel Abdo . Advisor’s Name Dr. Abebe Y.

Signature: _____________ Signature: _______________

Date: _________________ Date: ___________________

Addis Ababa University

School Of Graduate Studies

Internal Examiner Alem Hagos (PHD) Signature ______________ Date ______________

External Examiner Zinegnaw Abiy (PHD) Signature _____________ Date _______________

Adviser Abebe Yitayew (PHD) Signature _____________ Date _______________

Key Words: Financial innovation; Operational Performance, Financial Performance,

Table 3.1 Study Population…………………………………………………………………...….31

Figure 2.1 Conceptual Framework………………………………………………………………28

Figure 4.1: A Studentized residual scatter plot dependent variables ……………...…………….57

Appendix I: Research Questionnaire…………………………………………………………...92

Appendix II: Sample size - Departmental Management staff per Bank…………………...…...97

Appendix III: List of commercial banks in Ethiopia…………………..……………………….98

Appendix IV: Time frame………………………………………………………………………99

Appendix V: Budget description……………………………………………………………….99

ANOVA Analysis of Variance

A well-developed financial sector is vital importance to facilitate access to financial information

Currently, financial innovations are used by financial institution as redoubtable strategic

1.3 Objectives of study

1.3.2 Specific objectives

1.4 Research Hypothesis

Hypothesis 1: Mobile banking has positive and significant effect on financial

1.5 Significance of Study”

1.7 Limitation of study

1.8 Organization of the study

2.1.1. Schumpeter Theory of Innovation

2.1.2. Constraint-induced financial innovation theory

2.1.3. Transaction cost innovation theory

2.1.4. Task-technology fit (TTF) theory

2.1.5. Rogers Innovation Diffusion Theory

2.2 Financial Innovation

2.2.1 Mobile Banking

2.2.2 Internet Banking

2.2.3 Automated Teller Machine (ATM)

2.3 Bank Performance

According to Alam et al (2011), performance is a multidimensional construct that consists of

2.3.1 Financial (profitability) measure

2.3.2 Non-financial measures (operational performance)

2.4 Empirical Review

2.4.2 Empirical studies in Sub-Saharan Africa countries

2.4.3 Empirical studies in Ethiopia

2.5. Summary and gap in literature

2.6 Conceptual Framework

Figure 2.1 Conceptual Framework

Financial Innovation Bank Performance

Mobile banking Profitability (ROA, total

Source: Compiled by the researcher

3.2 Research design

Table 3.1 study Population

3.5 Sample Size and Sampling Procedure

Table 3.2: Sample Size

The study conducted a census of 17 commercial banks instead of adopting a sampling

3.6 Data Collection Instrument

3.7 Data Collection Procedure

Signature: _ Signature: ___

Date: _ Date: ___

Internal Examiner Alem Hagos (PHD) Signature Date

External Examiner Zinegnaw Abiy (PHD) Signature _ Date ___

Adviser Abebe Yitayew (PHD) Signature _ Date ___