The Effects of Digital Technology Usage on Profit Efficiency of Banking Sector in Ethiopia: Stochastic Frontier Analysis Approach

Abstract

In spite of the conspicuous use of the Digital technology as a delivery channel in banks´, there is a relative dearth of empirical studies related with the effects of digital technology usage on profit efficiency of banking sector in Ethiopia by using panel data and also had a limitation in terms of scope and methodological perspective´. Because of this fact, this paper fills the gap. Since, study is aimed to test the effects of Digital Technology Usage on profit efficiency of Banking Sector in Ethiopia over the period of 2016-2020 based on resource base view (RBV). To obtain information relevant to the study, five years of panel Quantitative secondary data collected from the selected commercial banks annual financial report and NBE’s annual reports were used. In the study, all operational commercial banks in Ethiopia were taken as study population and purposive sampling method was used to select sample from the population. Accordingly, one government owned commercial bank and 6 private owned banks namely (Commercial bank of Ethiopia, Awash international bank, Dashen bank, bank of Abyssinia, United (Hibret) bank, Wegagen bank and Abay bank) were incorporated in the study. Descriptive statistics, pairwise correlations, and stochastic frontier analysis are employed to examine the effects of digital technology usage on profit efficiency of commercial banks in Ethiopia. Results of the Stochastic Frontier Approach indicated that the number of ATM machine has positive and significant impact on bank efficiency, measured in terms of return on asset as a proxy of profit and also mobile banking usage has negative effect on banks return on asset, return on equity and managerial efficiency of the selected commercial bank. The average efficiency level of profit efficiency proxy of ROA, ROE and ME of banking sector under the study period was 73.8, 99.93 and 87.55 present respectively, these suggesting that banks have potential to increase its profit by further improving its remaining inefficiency.