Rift Valley University College of Business and

Economics Department of Accounting and Bishoftu

Campus
Challenges and Opportunities of E-Banking in commercial bank of
Ethiopia :-in case of bishoftu city branches

By:-MesayRorisa

Id :- 2959

A Research Project Proposal Submitted to Partial Fulfillment of

the Requirement for the Award of Degree in Accounting &
Finance

Advisor: ChalaBeqele

June, 2020

Bishoftu, Ethiopia
Chapter One

Introduction

1.1. Background of the study…………………………………………..……………….

……….1
1.2. Problem of The statement..…………………………………….………………….
……….2
1.3. General Objective...……………………………………………….……………….
……….3
1.4. Specific Objectives .………………………………………………..……………….
………3
1.5. Research Questions ………………………………………………….……….
…………….3
1.6. Scope of Work………………………………………………………..
……………………..5
1.7. Organization of The study .……………………………………………..
…………………...5

Chapter Two Literature Review

2.1. Definition of Electronic Banking …………..……………………………………….…..

Importance of E- banking
……………………………………………………………….2.3.Benefit of E-banking from the
Banks point of View ………..…………………….…….2.4.Benefit from customers point of
View ………...………………………………..……….Economic benefit
………………………………………………………………..………..

Type of E-banking …………………………………………………………..…………....

Internet Banking …....…………………………………………..………………….

Advantages of InternetBanking ..…………..………………………………..

Telephone Banking ..…………………………………………………….……...…..

Delivery Chanales of E-Banking……………………….………………………….…….

Automated Teller Machines ATMs)…………………….……………………...…

Personal Computer service ………………………………………………………..

Electronic Fund Transfer at Point of sales (EFTPos) …………………….….……

Credit ard……………………………………………………………..…………....
Debit Card……………..……………………………………………………..…….

Characterstics of E-Banking...…………………………………………………….…..….
Challenge of E-anking……………………………………………………….………...…

E-Banking fraud...…………………………………………………..…….….…..

Security Measure to avoid E-Banking Fraud …….…………….….……….

Banking in Ethiopia …………………………….……………………………..…….…

Banking History in Ethiopia ………………………………………..………....

Review of Commercial Banking Practice in Ethiopia ……………….………..

Technology Used in the banking Sector ………………………………………

Challenge and Prospect of E-Banking …………………………………….…..

Challengs ………………………………………………………….…….

Prospects ……………………………………………………….……….

Chapter Three

Methodology

3.1. Study area…………………………….………………………………………….….

3.2. Study Designe ..………………………………………………………………………
3.3. Traget Population..………………………………………………………………………
3.4. Sampling and Sampling Technic……………………………………………….………..
3.5. Sources of Data………………………………………………………………………….
3.6. Data collection Instrument………………………………………………………………
3.7. Data Collection Procedure.………………………………………………………..…….
3.8. Data analysis....………………………………………………………………………..…
3.9. Limitations ……………………………………………………………………………...
 CHAPTER ONE

INTRODUCTION

1.1 Background to the study

The increasingly competitive environment in the financial service market has resultedin pressure
to develop and utilize alternative delivery channels. The most recently Delivery channel
introduced is online or electronic banking also known as e-banking (Daniel &Storey, 1997).
Online or electronic banking systems give everybody the Opportunity for easy access to their
banking activities. These banking activities may Include but not limited to: retrieving an account
balance, money transfers between a users accounts, from a users account to someone else
account, retrieving an account history. Some banks also allow services such as stock market
transactions, and the submission of standardized accounting payment files for bank transfers to
third parties (Claessensetal. 2002). It had been projected that more than 32 million households
globally were banking online by 2003 (Simpson, 2002). Banks and other financial institutions
have moved to e-banking in their efforts to cut costs while maintaining reliable customer service
(Kolodinsky and Hogarth, 2001).It is evident that banks and other financial institutions in
developed and developing countries are embracing e-banking. As technology evolves, different
kindsofelectronic banking systems emerge, each bringing a new dimension to the interaction
between user and bank. They include Automated Teller Machine (ATM), mobile and Internet
(online) banking, electronic funds transfer, direct bill payments and credit card (Gikandi and
Bloor, 2010; Liaoa and Cheung, 2002). The use of these facilities is on the increase. For
example, in Kenya and Singapore a recent survey indicates that there is steady increase in use of
E-banking technologies such as Automated Teller Machine (ATM), mobile and Internet (online)
banking, electronic funds transfer, direct bill payments and credit card (CBK 2008;Liaoa&
Cheung, 2002). Among these E-banking facilities, the Automated Teller Machine (ATM) is the
first well known and widely adopted system that was introduced to facilitate the access of the
user to his banking activities (Nyangosi et al. 2009; Classes et al., 2002)

In Ethiopia, Online banking is in its infant stage. Even though, the concept of online banking
implemented in Ethiopia with a single service of SMS message during late 2008, Itdoes not show
that much improvement as its age. Now a day some banks are adopting e-banking system which
is the state - of- the art. In addition, many banks are making what seem like huge investments in
technology to maintain and upgrade their infrastructure, in order not only to provide new
electronic information based services, but also to manage their risk positions and pricing. The
earliest forms of electronic and communications technologies used mainly in Ethiopian banking
offices were automation devices. However, Telephones, telex and facsimile were employed to
speed up and make more efficient the process of servicing clients.

1.2 Statement of the problem

In a relatively short period of time, the Internet has moved from an occasional tool to one of the
principal ways we communicate, entertain ourselves, and do work. And all that time we spend
online has to come at the expense of something else. One main advancement technology has
brought to us is the introduction of online banking or E banking. Traditional banking is
characterized by physical decentralization, with branches scattered around populated areas to
give customers easy geographical access (Ainin et al., 2005). E- Banking does away with the
need for most visits to the bank. However, according to Locket & Littler (1997), physical banks
assure customers that their banks has substantial resource and guarantee the security of their
savings. A study indicated that electronic banking has been available in the UK since the
early1980s.

It is not clear whether all customers want or are comfortable with electronic banking (Daniel
&Storey, 1997). Technology is changing at a rapid pace making it difficult for both the customer
and the bank to determine the best approach. Particular problems arise with trying to integrate
new channels with legacy channels. It is for these reasons that academic research is needed in
this newly emerging delivery channel (Daniel &Storey, 1997).

Similarly, in Ethiopia, most banks practicing online banking are also facing challenges such as
customer preference of the online banking facility, Very poor Connection, Trust of the people in
the moder tools, convenience of clients to utilize and adopt online banking facilities. While
numerous studies have been undertaken to examine issues in the wider context of Economic and
Financial implication online banking, problem and prospect, comprehensive research in the area
of online banking issues in the specific context of Ethiopia has been rather limited. This study
attempted to identify prospects and influencing challenges inhibiting acceptance of online
banking in Ethiopian Commercial Banks.
1.3 General Objective

The main objective of the study is to determine the Opportunities and challenges of e banking in
Ethiopia.

1.4 Specific Objectives

The specific aims of the study are:

1. To identify the major challenges for the adoption of e-banking service.

2. To find the existing opportunities for the adoption of e-banking service.
3. To explore the current practice and extent of adoption of e-bankingservice.
4. To find the benefits realized by banks in the adoption and practice ofe-banking to
complement their service delivery channels.

1.5 Research Questions

Based on the above stated objectives, the following research questions will answer:

1. What are the major challenges for the adoption of e-banking service?
2. What are the existing opportunities for the adoption of e-banking service?
3. How looks like the current practices and extent of e-banking service inEthiopia?
4. What are the benefits of adopting e-banking service from the viewpointof the bank?

1.6. Scope of work

The studies were conducted at branches of commercial banks in Bishoftu city. The bankis
selected under the assumption that it has a better application of online banking than other
commercial banks in Ethiopia. The study is involve staff from the selected bank, staffs from
bank, The study laid emphasis on Challenges and opportunities of online banking in Ethiopia.
1.8 Organization of the study

The research report is organized into five chapters: Chapter one focuses on the background of the
study, problem statement, objectives and Organization of the study. In chapter two, a range of
literatures review capture there to gather relevant information concerning online banking. In
chapter three, detail of methodologyfollow to achieve result outline. It is including the study
design, sampling,sampling technique and data analysis. Chapter four contain results and
discussion from the study supported with findings from other research works. Chapter
fivefocuses on main findings, conclusions and recommendations of the study.
 CHAPTER TWO

REVIEW OF RELATED LITRATURE

2.1 Terms and Concepts

The definition of Electronic banking (E-banking) varies amongst researchers partially because
Electronic banking refers to several types of services through which bank customers can request
information and carry out most retail banking services via computer, television or mobile phone
(Daniel, 1999; Mols; 1998; Sathye, 1999). Different authors have defined it in different ways
based on their understanding of the application of electronic banking. According to Daniel
(1999), electronic banking is electronic connection between the bank and customer in order to
prepare, manage and control financial transactions. Sathye (1999) also asserted that electronic
banking can be defined as a variety of the following platforms: (a) Internet banking (or online
banking), (b) telephone banking, (c) television-based banking, (d) mobile phone banking, and (e)
PC banking (or offline banking). In the opinion of Daniel (1999), E-banking is online banking
(or Internet banking) which allows customers to conduct financial transactions on a secure
website operated by their retail or virtual bank, credit union or building society. This implies
that E-banking is a service that allows an account holder to obtain account information and
manage certain banking transactions through a personal computer via the financial institution
web site on the internet.

For many consumers, electronic banking means 24-hour access to cash through an Automated
Teller Machine (ATM) or Direct Deposit of pay checks into checking or savings accounts (FTC,
2006). But electronic banking now involves many different types of transactions. Electronic
banking, also known as Electronic Funds Transfer (EFT), is simply the use of electronic means
to transfer funds directly from one account to another with out the physical involvement of the
bank personnel, rather than by cheque or cash. By using Electronic fund transfer an account
holder can use:

 Salary deposited directly into bank or credit union account

 Withdraw money from account through an ATM machine with a personal identification
number (PIN), at any convenience, day or night

 Settle utility bills and other regular payments

 Transfer money between accounts

 Order payment to government offices like tax and pension

 Conduct transactions at the point-of-sale, using a credit/debit card rather than cash, credit or a
personal check

 Use computer and personal finance software to coordinate t o t a lpersonal financial

management process, integrating data and activities related to income, spending, saving,
investing, recordkeeping, bill-paying and taxes, along with basic financial analysis and decision
making.

2.2 Importance of E-banking

Electronic banking systems provided easy access to banking services. The interaction between
user and bank has been substantially improved by deploying ATMs, Internet banking, and more
recently, mobile banking (Claessens et al. 2002). Electronic banking (E-banking) reduces the
transaction costs of banking for both Small and Medium Enterprises (SMEs) and banks. SMEs
need not visit banks for banking transactions, providing round the clock services (Cheng, 2006).
Customers prefers E banking for conveniences, speed, round the clock services and access to the
account from any parts of the world (Cheng, 2006). E-banking offers benefits to banks as well.
Banks can benefit from lower transaction costs as E-banking requires less paper work, less staffs
and physical branches (Cheng, 2006). E-banking leads to higher level of customers’ satisfaction
and retention (Poatoglu&Ekin, 2001). E-banking reduces loan processing time as borrowers loan
application can be viewed by loan processing and loan approval authority simultaneously (Smith
& Rupp, 2003). Typically, loan applications received at branch level and send to head office for
approval. This documents transfer to and from branch to head office consume much time and
delay loan sanction period (Riyadh et al., 2009). The benefits of E-banking identified from the
current literature are classified in two main categories - tangible and intangible.

Tangible benefits

- Increase automation process

- Transformation of traditional market chain

- Retained and expand customer base

- Reduced operational costs

- Acquisition of each market

- Increase business efficiency

Intangible benefit

- Enhance well being and education of customers

- Competitive advantage

- Convenient banking

2.3 Benefit from the Bank’s point of View

According to a survey by booz, Allen and Hamilton, an estimated cost providing the routine
business of a full service branch in USA is $1.07 per transaction, as compared to 54 cents for
telephone banking, 27 cents for ATM (Automated Teller Machine) banking and 1.5 cents for
Internet Banking(Nathan 1999;Pyun et al., 2002). In Nordea, Finland, one online transaction
costs the bank an average of just 11 cents, compared to $1 for a transaction in a brunch
(Echikson, 2001). Average payment in internet bank or via direct debit cost 4 times less than
payment in brunch. On actual cost side (cost side in the bank point of view) direct debit payment
cost 16 times less and payment in internet bank 7 times less than payment in brunch. This
indicate that E banking contribute a significant financial benefit to banks to which implement E
banking. In addition to this E banking reduce the capital expenditure and staff coust of the bank.

2.4 Benefit fromthe Customer Point ofView

The main benefit from the bank customer’s point of view is significant saving of time by the
automation of banking service processing and introduction of an easy maintenance tools for
managing customer’s money. The main advantages of E banking for corporate customers’ are

- Reduce costs in accessing and using the banking service

- Increased comfort and time serving

- Transaction can be made even after banking hour without the physical interaction of the bank
24 hours a day. This increase the productivity of both the bank and the company

- Quick and continuous access of information and corporation will have easier access to
information as, check multiple accounts at the click of a button, better cash management (Bank
Away! 2001; Gur_u, 2002).

2.5 Economic Benefit

The impact of the new economy on the entire economy growth has been studied in several
research projects. For example (Pohjola, 2002) shows that the contribution of the use of
information communication technology to growth of output in the Finnish market sector has
increased from 0.3 percent in early 1990’s to 0.7 percent in late 1990’s. Similarly, research
conducted in Estonia (Arm and Vensel, 2001), bank customers use bank office on average 1.235
times per month, and wait in queue in bank office on average for 0.134 hours. Simple calculation
shows that making payments using E banking facilities rather than in the banks office create
overall economy savings in the amount of 0.93% of GDP (average distance to nearest bank
office is 4.14 km (Arma and Vensel, 2001), which takes approximately 0.21 hours to travel.

2.6 Types of E-banking

Over the past years, two types of electronic banking services have emerged in the banking sector;
internet and telephone banking (Adriana, 2006)

2.6.1 Internet banking

Internet banking is a new age banking concept. It uses technology and brings the bank closer to
the customer. Internet banking refers to systems that enable bankcustomers to get access to their
accounts and general information on bank products and services through the use of banks
website, without the intervention or inconvenience of sending letters, faxes, original signatures
and telephone confirmations (Thulani et al, 2009). For those that have access to the internet and a
computer all you need to do is proceed to your banks website and login. From there you have
access to all of your accounts that you have at that bank. Transfer funds between your accounts
with ease. You can also use online banking to see how much money you have in your accounts
and where the money you have spent has gone.

Broadly, the levels of banking services offered through internet can be categorized in to three
types:

1. The Basic Level Service is the banks‟ websites which disseminate information on different
products and services offered to customers and members of public in general. It may receive and
reply to customers‟ queries through e-mail.

2. In the next level are Simple Transactional Websites which allows customers to submit their
instructions, applications for different services, queries on their account balances, etc, but do not
permit any fund-based transactions on their accounts.

3. The third level of Internet banking services are offered by Fully Transactional Websites
which allows the customers to operate on their accounts for transfer of funds, payment of
different bills, subscribing to other products of the bank and to transact purchase and sale of
securities.

The above forms of Internet banking services are offered by traditional banks as an additional
method of serving the customer. There are also banks that deliver banking services primarily
through Internet or other electronic delivery channels. Some of these banks are known as virtual
banks or Internet- only banks and may not have any physical presence in a country despite
offering different banking services (Adriana, 2006).

2.6.1.1 Advantages of Internet Banking

1. It removes the traditional geographical barriers as it could reach out to customers of different
countries / legal jurisdiction.

2. It has added a new dimension to different kinds of risks traditionally associated with banking,
heightening some of them and throwing new risk control challenges.

3. It poses a strategic risk of loss of business to those banks who do not respond in time, to this
new technology, being the efficient and cost effective delivery mechanism of banking services.

4. A new form of competition has emerged both from the existing players and new players of
the market who are not strictly banks.

5. Another advantage of Internet banking is that it is cost-effective. Thousands of customers can

be dealt with at once. There is no need to have too many clerks and cashiers. The administrative
work gets reduced drastically with Internet banking. Expenditures on paper slips, forms and even
bank stationery have gone down, which helps raise the profit margin of the bank by a
surprisinglylarge number.

2.6.2 Telephone Banking (Tele banking)

Tele banking (telephone banking) can be considered as a form of remote or virtual banking,
which is essentially the delivery of branch financial services via telecommunication devices
where the bank customers can perform retail bankingtransactions by dialing a touch-tone
telephone or mobile communication unit, which is connected to an automated system of the bank
by utilizing Automated Voice Response (AVR) technology (Balachandher et al., 2001). It
allows consumers to phone their financial institutions with instructions to pay certain bills or to
transfer funds between accounts (FTC, 2006).
2.7 Delivery channels of E-banking

E- Banking services are delivered through various electronic means collectively called electronic
delivery channels. Electronic Banking is really not one technology, but an attempt to merge
several different technologies. Each of these evolved in different ways, but in recent years
different groups and industries have recognized the importance of working together (Abor,
2004). The various delivering channels for E banking are discussed as follows:

2.7.1 Automated Teller Machines (ATMs)

ATM is also called 24-hour tellers are electronic terminals which give consumers the opportunity
to bank at almost any time (FTC, 2006). ATM banking is one of the earliest and widely adopted
retail E-banking services in Kenya (Nyangosi et al. 2009).

It is described as a combination of a computer terminal, record-keeping system and Cash vault in

one unit, permitting customers to enter the bank’s book keeping system with a plastic card
containing a Personal Identification Number (PIN) or by punching a special code number into
the computer terminal linked to the bank’s computerized records 24 hours a day (Rose, 1999).
To withdraw cash, make deposits or transfer funds between accounts, a consumer needs an ATM
card and a personal identification number. Once the customer login, access to transactions are
displayed on the screen. It offers several retail banking services to customers. They are mostly
located outside of banks, and are also found at airports, malls, and places far away from the
home bank of customers. They were introduced first to function as cash dispensing machines
(Abor, 2004). Some ATMs charge a usage fee for this service, with a higher fee for consumers
who do not have an account at their institution. If a fee is charged, it must be revealed on the
terminal screen or on a sign next to the screen Rose (1999). ATM services have a lot of
advantages. They include increase in productivity during banking hours if the service is available
in addition to the human tellers. They are cost-effective way of achieving higher productivity per
period of time. According to Rose (1999), an ATM transaction is an average of about 6,400 per
month compared to 4,300 for human tellers. Furthermore, it saves customers time in service
delivery as alternative to queuing in bank halls, customers can invest such time saved into other
productive activities (Abor, 2004). In addition, ATMs continue to serve customers whiles human
tellers in the banking hall have stopped work, thereby increasing productivity for the banks.

2.7.2 Personal Computer Banking Services PC-Banking is a service which allows the bank’s
customers to access information about their accounts via a proprietary network, usually with the
help of proprietary software installed on their personal computer. Once access is gained, the
customer can perform a lot of retail banking functions. The increasing awareness of the
importance of computer literacy has resulted in increasing the use of personal computers.

This certainly supports the growth of PC banking which virtually establishes a branch in the
customers’ home or office, and offers 24-hour service, seven days a week. It also has the
benefits of Telephone Banking and ATMs (Abor,2004). It offers consumers the convenience of
conducting many banking transactions electronically using a personal computer. Consumers can
view their account balances, request transfers between accounts and pay bills electronically from
home.

2.7.3 Electronic Funds Transfer at Point of Sale (EFTPoS)

An Electronic Funds Transfer at the Point of Sale is an on-line system that allows customers to
transfer funds instantaneously from their bank accounts to merchant accounts when making
purchases (at purchase points). A POS uses a debit card to activate an Electronic Fund Transfer
Process (Chorafas, 1988). Point-of-Sale Transfer Terminals allow consumers to pay for retail
purchase with a check card, a new name for debit card. This card looks like a credit card but with
a significant difference, the

money for the purchase is transferred immediately from your account to the store's account.
Increased banking productivity results from the use of EFTPoS to service customers shopping
payment requirements instead of clerical duties in handling cheques and cash withdrawals for
shopping. Furthermore, the system continues after banking hours, hence continual productivity
for the bank even after banking hours. It also saves customers time and energy in getting to bank
branches or ATMs for cash withdrawals which can be harnessed into other productive activities
(Abor, 2004). Some banks issued international cards (such as Visa, MasterCard etc.) to their
customers. Such cards can be used wherever accepted, and payment on the cards can only be
done through an ordinary domiciliary account of the cardholder, or any other account that may
be permitted. Some of these cards are credit or debit cards.

2.7.4 Credit Cards

A credit card is a small plastic card issued to users as a system of payment. It allows its holder to
buy goods and services based on the holder's promise to pay for these goods and services. The
issuer of the card creates a revolving account and grants a line of credit to the consumer (or the
user) from which the user can borrow money for payment to a merchant or as a cash advance to
the user (Mavri&Ioannou, 2006). A credit card is different from a debit card in that it does not
withdraw money from the users account after every transaction. The issuer lends money to the
consumer to be paid to the merchant. Holders of a valid credit card have the authorization to
purchase goods and services up to a predetermined amount, called a credit limit. The vendor
receives essential credit card information from the cardholder, the bank issuing the card actually
reimburses the vendor, and eventually the cardholder repays the bank through regular monthly
payments. If the entire balance is not paid in full, the credit card issuer can legally charge interest
fees on the unpaid portion.

2.7.5 Debit Cards

A debit card (also known as a bank card or cheque card) is a plastic card that provides an
alternative payment method to cash when making purchases. Functionally, it can be called an
electronic cheque, as the funds are withdrawn directly from either the bank account or from the
remaining balance

2.8 Characteristics of E-banking

E-banking includes the systems that enable bank customers to access accounts, transact business,
or obtain information on financial products and services through a public or private network,
including the Internet. Customers access E-banking services using an intelligent electronic
device, such as a Personal Computer (PC), Personal Digital Assistant (PDA), Automated Teller
Machine (ATM), telephone (Ibrahim et al 2006).

2.9 Challenges of E-banking

Banking organizations have been delivering electronic services to consumers and businesses
remotely for years. Electronic funds transfer, including small payments and corporate cash
management systems, as well as publicly accessible automated machines for currency
withdrawal and retail account management, are global fixtures.

However, the increased world-wide acceptance of the Internet as a delivery channel for banking
products and services provides new business opportunities for banks as well as service benefits
for their customers (BCBS, 2001). Notwithstanding the significant benefits of E-banking and its
capabilities, it carries risks and challenges as which are recognized and need to be managed by
banking institutions in a prudent manner. The speed of change relating to technological and
customer service innovation in E banking is unprecedented. Historically, new banking
applications were implemented over relatively long periods of time and only after in-depth
testing. Today, however, banks are experiencing competitive pressure to roll out new business
applications in very compressed time frames, often only a few months from concept to
production. This competition intensifies the management challenge to ensure that adequate
strategic assessment, risk analysis and security reviews are conducted prior to implementing new
e-banking applications (BCBS, 2001). E-banking increases banks’ dependence on
information technology, thereby increasing the technical complexity of many operational and
security issues and furthering a trend towards more partnerships, alliances and outsourcing
arrangements with third parties, many of whom are unregulated. This development has been
leading to the creation of new business models involving banks and non-bank entities, such as
Internet service providers, telecommunication companies and other technology firms (BCBS,
2001).

The Internet is ubiquitous and global by nature. It is an open network accessible from anywhere
in the world by unknown parties, with routing of messages through unknown locations and via
fast evolving wireless devices. Therefore, it significantly magnifies the importance of security
controls, customer authentication techniques, data protection, audit trail procedures, and
customer privacy standards (BCBS, 2001). Other E-banking related problems are user error, bad
internet connections, access problems and security issues. Most of these problems happen less to
outweigh its benefits.

2.9.1 E-Banking Fraud

Convenience is the key reason of why millions of people are opting out of traditional banking for
online banking. Banks also enjoy providing the option of online banking because they can save
on operating costs. Most internet banking fraud occurs in a two-step process. Firstly, the offender
must get their hands on the customer's account information, like their username and password.
Secondly, the offender will use that information to move his victim's money to another account
or withdraw it to makefraudulent purchases. For the first step, offenders often employ one of the
many popular fraud schemes to obtain personal information. These fraud schemes include, but
are not limited to: - “Over the shoulder looking” scheme: involves the offender observing his
potential victim making financial transactions and recording the personal information used in the
transaction.

- "Phishing" scheme: stems from the two words "password" and "fishing." It entails sending e-
mail spams and mail supposedly from the consumer's bank as a way to obtain the consumer's
personal information, social insurance number, andin this case their online banking username
and password (Kaleem& Ahmed, 2008).

2.9.1.1 Security Measures to Avoid E-banking Fraud

Kaleem and Ahmad (2008) argued that in undertaken E-banking transactions, customers are
always concerned about hackers and anti-social elements. Hacking enables the unethical hackers
to penetrate the accounts of online bankers, and spend their money. Availability of confidential
information which is just secured by a user name and password makes it vulnerable to such
threats. Most of the banks try to make their sites secured by implementing latest network security
software. Learn to keep your cards, documents and passwords safe, and monitor your accounts to
safeguard yourself from bank fraud committed through identity theft. Most importantly, find out
how to protect your personal information to avoid identity theft from happening to you
(BSP,2006).

E-bankers should install virus scanners and keep them and their systems up-to- date especially
PC banking. They should avoid practices that easily lead to security hazards in particular they
should not start up arbitrary executable attachments received via electronic e-mail. Users should
check fingerprints of certificates against the fingerprints that are (should be) given by the bank
on official paper documents (Claessens et al., 2002; BSP, 2006).

2.10 Banking in Ethiopia

2.10.1 Banking History in Ethiopia

A reference to the Ethiopian history reveals that the first bank in the country,Bank of Abyssinia
was founded during the regime of Emperor Menelik II in February 1905. Due to a foreign
domination of its management (mainly the British), the then Bank of Abyssinia was forced to
dissolve and in its place was established the Bank of Ethiopia in 1931 whose management was
still left to foreigners due to the then lack of skilled manpower in the country. The Bank of
Ethiopia was later replaced by the State Bank of Ethiopia soon after the war with Italy. The latter
was thefirst bank in the country fully controlled and owned by the Ethiopian government. Inthe
meantime, however, a number of foreign banks had opened their branches in the country, most of
them with an interest to have control over the nation’s economy. It was the State Bank of
Ethiopia that gave rise to the present Commercial Bank of Ethiopia (CBE) and National Bank of
Ethiopia (NBE). During the Dergue reign, CBE had remained as the only participant in the
country’s commercial banking sector.

However, following the 1991 takeover by the present government and accompanying
encouragement of private investment, a number of private banks have emerged in the country’s
financial sector. Accordingly, Monetary and Banking proclamation No.83/1994 and the
Licensing and Supervision of Banking Business No.84/1994 laid down the legal basis for
investment in the banking sector. Consequently, shortly after the proclamation the first private
bank, Awash International Bank was established in 1994. (NBE, 2009).

2.10.2 Review of Commercial Banking Practices in Ethiopia

In Ethiopia, 16 private and three state owned banks are operating til the end of Nov.2015 Despite
a rapid increase in the number of financial institutions since financial liberalization, the
Ethiopian banking system is still underdeveloped compared to the rest of the world. The use of
checks is mostly limited to government institutions, NGOs and some private businesses. The
common banking functions provided by public and private banks in Ethiopia are deposit
mobilization, credit allocation, money transfer and safe custody. Banks in Ethiopia are unable to
improve customer service, design flexible and customized products, and differentiate themselves
in a market where product features are easily cloned. Ethiopian banking is unable to come from
long way of being sleepy to a high proactive and dynamic entity. The Ethiopian banking industry
as a whole has a network of 2,502 branches (Birittu, No.120), which is the lowest compared to
the size of the country (1.1milion square) and number of population (more than 110 million) and
this shows that the number of population being served by a single branch stood at around
34,373(Birittu No. 120) With such highly scattered branch network and disintegrated working
system it is hard to ensure efficient flow of financial resources and optimize the contributions of
the entire financial system to the development processes.

According to IMF data Ethiopia lag far behind from sub- Saharan African countries in terms of
access of finance. (Birittu No.120) Product of the Ethiopian Banking sector did not fully benefit
from the current thecnology advancement. Out of ninteen fully oprating commercial banks there
are onlysix of them comence mobile banking as per the directive No FIS/01/2012. This show that
how far the banking indestry in Ethiopia backwarded in comparisen with the current world
banking indestry advancement and outlate offerings.

2.10.3 Technologies Used in the Banking Sector

Nowadays, banks can use advanced technologies and internet, networks, payment cards,
Automated Teller Machine (ATMs) and so on. This is one is of the prospects that enables banks
to increase the efficiency and productivity. The banking business has continued realizing the
advantages of the cutting-edge information and communication technology. It has become
essential to effectively implement the appropriate technology to have faster decision support and
effective data integration in the financial intermediary process and also to look for other avenues
toaugment income. Concerning the sectoral outlook, there are emerging initiatives to invest in
electronic multi-service channels and also a tendency to optimally utilize the available resources
in a consortium, which partly supports the effective implementation of the envisaged national
payment system. Additionally, the ongoing efforts of emplacing the electroniclaws focusing on
the retail banking business are expected to have a positive effect on the growth of the payment
card business. These are other opportunities for banks to expand their activities and ultimately
realize a second-generation reform in the Ethiopian financial sector (Dashen, 2009/10) In this
regard, commercial Banks are still at the early stage to implementing modern banking
technology and value-added service provision. Withstanding the prevailing long attachment of
branch-based service channel, which is perceived to lead the society to only value human
interaction, Dashen Bank are succeeding in effectively implementing both the branch-based and
impersonal banking service channels. Though the bank have gone through various challenges in
popularizing and penetrating the market through electronic delivery channels, we are now at the
level of encouraging recognition and flexibility to adopt the new habits as alternate service
channels. The bank is able to reap better returns by way of increasing non-interest income from
diversified service offerings and total solutions to the customers. (Dashen, 2009/10) Anticipating
a further reduction in the processing time and upholding service efficiency, Dashen bank
attempting to continue introducing modern banking services and further leverage our
technologies to provide the highest level of customer services and convenience, while keeping
cost of access to the minimum. The bank resolutely pursue taking unique initiatives to reach for
all relevant modern financial services and to up hold the delivery of convenience banking on a
24/7 base. Ethiopian banking system is one of the most underdeveloped compared to the rest of
the world. In Ethiopia cash is still the most dominant medium of exchange and electronic
banking is not well known, let alone used for transacting banking business. All banks in Ethiopia
are too late to move with technological advancement and they should clearly chart out the time
schedule for their integration and technological advancement. But unlike other E banking
delivery channales all most all banks has installed ATMs at convenient locations for their
cardholders. Currently, debit service only gives for Visa and master cards and clients of
respective banks can withdraw cash and can buy goods and services by using the debit card.
(Worku, 2010).To realize high quality service delivery standards, Dashen Bank has kept on
playing a leading role in the adoption of appropriate modern banking technologies. Accordingly,
the Bank has launched its mobile banking service ‘Modbirr’. The service will entitle customers
to conduct banking transactions using their mobile phones anytime, anywhere. (Dashen,
2009/10). In addition to dashen bank, Commercial bank of Ethiopia,

2.10.4 Challenges and Opportunities of E-Banking

2.10.4.1 Challenges

According to M. M. Rahman (2008) in Bangladesh despite huge demand from the business
community as well as the retail customers particularly the urban customers, electronic banking
(e-banking) is still at a budding state due mainly to a number of constraints such as
unavailability of a backbone network connecting the whole country; inadequacy of reliable and
secure information infrastructure especially telecommunication infrastructure; sluggish ICT
penetration in banking sector; insufficient legal and regulatory support for adopting e- banking
and so on. The concept of e-banking includes all types of banking activities performed through
electronic networks. It is the most recent delivery channel of banking services, which is used for
both business-to-business and business-to-customer transactions. However, in true sense, e-
banking includes activities like payment of bills and invoices, transfer of funds between
accounts, applying for a loan, payment of loan installments, sending funds to third parties via
emails or internet connections regardless of where the client is located. Leow, Hock Bee (1999)
state that the terms PC banking, online banking, Internet banking, telephone banking or mobile
banking refers to a number of ways in which customer can access their banks without having to
be physically present at the bank branch. Therefore, e-banking covers all these ways of banking
business electronically. Since e-banking offers

some smart services benefiting both banks and customers compared with traditional banking
system, it has become imperative to make necessary room for banks to flourish e- banking.
Among others, attractiveness of e-banking includes: it lowers transaction cost; provide 24- hour
services; ensure increased security and control over transactions; reduces fraud risk; performs
higher volume of transactions with less time; increases number and volume of value payment
through banks; allows remote transactions facilities that replace physical presence of a customer
in a bank branch and; increases transaction speed and accuracy. On the other hand, traditional
banking is time-consuming and more costly and therefore, e-banking is replacing traditional
banking all over the world.

In addition, an exploratory study that was conducted in Zimbabwe by ChituraTofara(2008)

indicated that incompatibility with the existing system, cost of implementation, security
concerns, lack of expertise, inadequate legislation and consumer acceptance are the major
challenges of e-banking in the countries banking industry. The same chalges may also face by
Ethiopian banking indestries toimpliment the E banking facilites. But the good thing is that the
benefite out weighted the chalenges in many parametres. Specially country like Ethiopia which
have a huge potential customers for such service copled with a fast growing economy will be the
main advantages of the banking service to offer different products with the helep of technology
to their customers.

In addition, as investigated by Alhaji Ibrahim H. (2009) using exploratory study, the following
are among the critical challenges of e-banking.

- Lack of Technological Infrastructure – the implementation of e-payment is been impeded by

unavailability of ICT infrastructure. Most rural areas where majority of small and medium scale
industries are concentrated have no access to internet facilities and ICT Equipment - Costs –
where available, the cost of ICT is a critical factor relative to per capital income. This makes the
cost of entry higher compared to developed countries.

- Regulatory and Legal Issues – inexistence of proper legal and regulatory framework. - Non-
readiness of banks and other stake holders (acceptability) – even though some have shown
impressive willingness, some banks are still not fully ready to for this new payment regime.
Resistance to changes in technology among customers and staff due to:

- Lack of awareness on the benefits of new technologies

- Fear of risk among banks

- Lack of trained personnel in key organizations and

- Tendency to be content with the existing structures People are resistant to new payment
mechanisms; - Security – w h e r e d i s c l o s u r e of p r i v a t einformation, counterfeiting and
i l l e g a l alteration ofpayment data may be rampant.

- Frequent connectivity failure in telephone lines

 Frequent power interruption

- Wide spread Problem of internate connection

2.10.4.2 Opportunities of E-Banking

According to M.s, M Rahman (2008) in Bangladesh e-banking is now a global phenomenon.

Apart from the developed countries, the developing countries are experiencing strong growth in
e-banking. The government’s emphasis on setting up ICT park, raising allocation for developing
ICT infrastructure, waiving taxes on computer peripherals and other measures including the
automation program of banking sector and competition among the scheduled banks in improving
customer services have accelerated the opportunities of e-banking.

The fact that the overall commercial banks branch in Ethiopia compared to the size of the
population and the area of the country is very minimal, it creates a good advantage to expand E
banking facilities and reach the wide spread population of the country through virtual banking
system.
 CHAPTER THREE

METHODOLOGY

This chapter discusses the processes and techniques used in carrying out the study. It also gives a
description of the respondents including information on the study population, the number of
respondents and how they were selected. It also provides an outline of research design and the
instruments for data collection. The methods adopted in the administration of the research
instrument, data collection procedure, data analysis and measures used to ensure validity of the
instrument used.

3.1 Study Area

The study will carried out in commercial Bank of Ethiopia bishoftu branches in Bishoftu city,
Thebranches were chosen because various E-banking facilities or products including ATM
services, mobile Banking, Internate Banking and the likes are available. Furthermore, they are
closer to the researcher and access to information is also easy. The banking service has different
departments which rely on the services of E-banking in a way to carry out their jobs.

3.2 Research Design

Research design is usually a plan or blue print which specifies how data relating to a given
problem should be collected and analyzed. It provides the procedural outlines for the conduct of
any investigation. In this study, the researcher adopted a qualitative study approach because it
provided in- depth information to address the objectives. In all, 22 questionnaires were
administered to the interviewees from the selected bank branches to solicit information
concerning the E-banking. Part of the information was also gathered from reports in the bank
concerning E-banking services.
An exploratory research design was considered the most suitable approach in view of the nature
of the problem being investigated. According to Zikmund (2000), exploratory research is
conducted to clarify and research a better understanding of the nature of the problem.
Consequently, it is appropriate to use when there is little prior knowledge of the problem being
researched. Saunders &Thornhill(2003) argue that exploratory research is advantageous because
it is flexible and adaptable to change.

3.3 Target Population

In research methods, population is the entire aggregation of items from which samples can be
drawn. The populations of the present study consist of office of the selected branches.

3.4 Sampling and Sampling Technique

Sixteen (16) representative respondents will interview in selected branch bank. They are from
The E banking department of respective bank including the director of the department. The
questionnaires were self-administered to the respondents. Purposive sampling technique will
used for staff in the IT department of the bank whiles simple random sampling technique was
employed for other respondents. An informal interview was also conducted withsome officers to
gather information needed for the study.

3.5 Data collection instruments

The researcher relied on primary data sources. The primary sources involved self-administered
questionnaires. The questionnaire was used because the researcher considered it to be more
convenient as respondents could answer at their convenience The questionnaire was developed
by the researcher based on the research questions and the literature. Open-ended and closed –
ended questions were used. The questionnaire began with an introductory statement, which
specified the purpose of the research as purely academic. Respondents were encouraged to be
objective in their responses since they were assured of confidentiality.

3.6. Limitations

Collection of data in Ethiopia is very difficult. Problems such as the swearing of an oath of
secrecy in the bank, indifference on the part of interviewees and respondents will limit the
objectives of the study. The absence or inaccessibility of reliable records and reports on E-
banking data for the past years also may limit the research investigation.