AMBO UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

THE EFFECT OF CORE BANKING ON FINANCIAL PERFORMANCE IN THE CASE

OF COMERCIAL BANK FOUND IN HOLETA TOWN

A THESIS PROPOSAL SUBMITTED TO AMBO UNIVERSITY DEPARTMENT OF

ACCOUNTING AND FINANCE IN PARTIAL FULFILMENTS OF THE
REQUIREMENTS FOR THE AWARD OF A MASTERS DEGREE IN ACCOUNTING
AND FINANCE.

BY:

LULU MEKONNEN

ADVISOR: GARAMU GARAMU (Ass.Professor)

AMBO, ETHIOPIA

JANUARY, 2024
 Approval sheet

Summated by:

Name: Lulu Mekonnen Signature ____________Date_____________

Approved by:

Advisor Name: Gamachis Garamu (Ass, Prof) Signature_________date________

Head of department

Name: __________________ Signature ____________date______________

Directors School of Graduate

Name: ___________________________Signature _____________date____________

 TABLE OF CONTENTS

Contents
Chapter One................................................................................................................................................3
1. Background of the study..................................................................................................................3
1.1. Statements of the problem..............................................................................................................5
1.2. Research Questions.........................................................................................................................7
1.3. Objectives of the study....................................................................................................................8
1.3.1. General objective.....................................................................................................................8
1.3.2. Specific objectives....................................................................................................................8
1.4. Significance of the study..............................................................................................................8
1.5. Scope of the Study...........................................................................................................................8
1.6. Limitation of the Study................................................................................................................8
1.7. Organization of the study................................................................................................................9
CHAPTER TWO...........................................................................................................................................10
2. REVIEW OF RELATED LITERATURE.................................................................................................10
2.1. Introduction...............................................................................................................................10
2.2. Theoretical Review........................................................................................................................10
2.2.1. IT in Banks..........................................................................................................................10
2.2.2. Meaning of core banking...................................................................................................11
2.2.3. History of core banking system in the world......................................................................11
2.2.4. The use of core banking in Ethiopia...................................................................................12
2.2.5. Core banking solution........................................................................................................12
2.2.6. Benefits of Core Banking....................................................................................................14
2.2.7. Various core Banking Services............................................................................................16
2.2.8. Plant Performance.....................................................................................................................17
2.2.9. Measuring Customer Satisfaction......................................................................................18
Chapter Three............................................................................................................................................21
3. Research Methodology......................................................................................................................21
3.1. Introduction...................................................................................................................................21
3.2. Description of study area...........................................................................................................21
3.3. Research Design.........................................................................................................................22
3.4. Research Approach........................................................................................................................22
3.5. Sampling Design............................................................................................................................22
3.7. Methods of data collection............................................................................................................23
3.8. Methods of data analysis...............................................................................................................23
3.9. Target population...........................................................................................................................23
3.10............................................................................................................................................................23
3.1. Budget Estimate.....................................................................................................................24
 LIST OF ABBREVIATIONS

LOS: Loan Originating system

CBE: Commercial Bank of Ethiopia

E.C Ethiopian calendar

ICT: information communication technology

CBS: Core Banking Solution

IT; Information technology

SOA: Service-oriented-architecture

CDM: Cheque Deposit Machines

WAN: World Area Network

ATMs: Automated Teller Machines

PIN: personal identification number

POS: Point-of-Sale
 CHAPTER ONE

1. Background of the study

Core Banking System is the software used to sustain banks, most common dealings which
include providing service loans, opening new accounts, processing cash deposit, withdrawals,
calculating interests, client relationship management actions and maintenance of records for the
banks transactions. Core banking functions differs depending on the type of banking. The
individual customer’s needs are taken care of in retail banking while inter banked transactions
are taken care of by the wholesale banking. One is not a customer of a branch but is considered
as customer of the bank. All the commercial banks have interconnectivity through a common
operating system. The interconnectivity between commercial banks are not utilized properly. If
the banks could follow a single Loan Originating system (LOS), the credit worthiness of the
consumer can be ascertained before a loan is sanctioned. In India, every bank has its own loan
originating system which results in loans being dispersed well above the credit limit. Challenges
of Core Banking systems (Dr. N.P Hariharan2015)

Profits of Core Banking depend on the business rules which can reduce time for marketing the
products. The product generation engine is capable of creating new products and services which
meet the challenges of the marketplace. Products can be promoted independently or as product
generation, there is supposed to be a single Loan Origination System (LOS) for core bank
products. LOS is developed to support banks and additional financial institution processing other
application. The employees work flow technology controls and monitors various steps in loan
processing. The digital imaging technology is able to reduce delay and inefficiencies associated
with documentation. The financial institution is able to process multiple loan types through a
single LOS. Challenges of Core Banking systems (Dr. N.P Hariharan2015)

Leading core banking system vendors are primarily manufacturers of complex software. Most of
them are not system integrators or consulting firms. The rewards for core banking system
vendors are measured by number of licenses they sell. Core banking system vendors focus on
sales and performance and they do not worry about strategic consulting implementation and
integration of services.

The bank applied core-banking technology in 2004 E.C to integrate the services delivered in its
all branch banks.
The application of this technology is believed to have many contributions to the bank. But
network failures, power interruptions, inefficient functioning and insufficient number of ATMS,
POS and Mobile Banking are the most important problems most branches of CBE that can
adversely affect the core banking service and overall customer satisfaction level? The increasing
customer expectations pressure to control cost of business operation need to exercise sound
practices are some control on business and regulatory practice are some of the main challenging
being face by bank industry today and are spending huge sums of local currency and foreign
currency in acquiring core banking applications, hardware’s and soft skills. Also they invest
money to train bank staff and maintain and retain the group of knowledge workers. The results
of studies done in this area have found considerably different out comes in this regard (Ombati
2010, Rono2012 ) studies shows that Information technology systems have a positive impact on
customer satisfaction, In Ethiopian case, Commercial Bank of Ethiopia has implemented applied
core banking information technology and core banking implementation project is highly
expensive and requires higher dedication for the accomplishment of the related objectives.
However for the case of Ethiopian in spite of banks trying to enforce the core banking services
and still faced with come challenges which need to be addressed in order to promote core
banking system. Ethiopian is faced with infrastructural deficiency such as erratic power supply
and communication link in some areas, inadequate skilled managers and requisite tools on end
users and client systems, high charge or cost for the e-payment terminals (ATMs) ( Gemechu, A.,
2012).

Financial service companies around the world are seeking to upgrade their core banking systems
to improve competitiveness, operational efficiency, and regulatory compliance. However, such
initiatives are especially challenging for most institutions. Most of today‘s core banking systems
were originally built in the 1970s and 1980s and after countless modifications and add-ons have
become so complex and convoluted that it may be difficult to fully understand them (Adamson et
al, 2003). This can make it hard for banks to comply with regulations and determine adequate
controls. Traditionally, banking has been product-centric but now products have become
commoditized. Banking is now more customer-centric and there is a new focus on customer
service, single view of the customer, and relationship-based pricing. Banks are facing increasing
competitive pressure from new entrants such as online and direct banks running on new core
banking platforms.
This is forcing traditional banks running legacy core banking applications to decide in favour of
migrating their core banking systems to new platforms. ( Negalign Mamo 2016) Core banking
could bring much intangible benefits to the banking sectors. Intangible benefits are benefits that
do not directly contribute to increase in revenue but may give goodwill and customer loyalty to
the banks.

Transforming modern banking system in the Ethiopian banking industry is very crucial for the
development of bank sector in the country. Since banks are a key for the economic development
of any country, modernizing the bank services helps banks to increase their growth and
contribute for the economic development of the country as well. Studies on the development of
modern bank services in Ethiopia is scanty and to the knowledge of the researchers no study
undertaken on the impact of financial performance core banking system. This study, therefore
aims at investigating the impact of financial performance core banking system and its challenges
and benefits that could be faced banks in Ethiopia CBE Holeta brach.

1.1. Statements of the problem

Financial performance of a company, being one of the major characteristics, defines
competitiveness, potentials of the business, economic interests of the company’s management
and reliability of present or future contractors. Therefore, financial performance analysis and
identification of their weaknesses and strengths using financial performance indicators has its
contribution to the management, shareholders, the public (customers of the bank), the regulator
(the government), the financial sector, and the economy as a whole. In a competitive financial
market, bank performance provides signal to depositors and investors whether to withdraw or
invest funds respectively from the bank. Similarly, it flashes direction to bank managers whether
to improve its deposit service or loan service or both. Regulators are also interested in the
financial health of banks for regulation purposes. Financial Performance evaluation (Abdi Deferu
2015)

The objective of financial statements is to provide information about the financial position,
performance and changes in financial position of an enterprise that is useful to a wide range of
users in making economic decisions. Owners and managers require financial statements to make
important business decisions that affect its continued operations.
Financial analysis which measure financial performance is then performed on these statements to
provide management with a more detailed understanding of the figures. Furthermore, the
rationale of financial analysis is to diagnose the information contained in financial statement so
as to judge the future earning, ability to pay interest, debt maturities, profitability and sound
dividend policy. Financial Performance evaluation (Abdi Deferu2015)

Although few studies have been made as related to financial performance analysis of banks,
such as performance comparison between the government and private banks, insurance, and
other financial institutions such analysis in the case of CBE Holeta branch still remains
unexplored. The researcher has tried to fill this lack of evidence by extending the issue to the
specific context of the company.

The bank applied core-banking technology in 2004 E.C to integrate the services delivered in its
all branch banks. The application of this technology is believed to have many contributions to the
bank.

But network failures, power interruptions, inefficient functioning and insufficient number of
ATMS, POS and Mobile Banking are the most important problems most branches of CBE that
can adversely affect the core banking service and overall customer satisfaction level? The
increasing customer expectations pressure to control cost of business operation need to exercise
sound practices are some control on business and regulatory practice are some of the main
challenging being face by bank industry today and are spending huge sums of local currency and
foreign currency in acquiring core banking applications, hardware’s and soft skills. Also they
invest money to train bank staff and maintain and retain the group of knowledge workers. The
results of studies done in this area have found considerably different out comes in this regard
(Ombati 2010, Rono2012) studies shows that Information technology systems have a positive
impact on customer satisfaction, In Ethiopian case, Commercial Bank of Ethiopia has
implemented applied core banking information technology and core banking implementation
project is highly expensive and requires higher dedication for the accomplishment of the related
objectives. However for the case of Ethiopian in spite of banks trying to enforce the core banking
services and still faced with come challenges which need to be addressed in order to promote
core banking system. Ethiopian is faced with infrastructural deficiency such as erratic power
supply and communication link in some areas, inadequate skilled managers and requisite tools on
end users and client systems, high charge or cost for the e-payment terminals (ATMs)
(Ayana,2012).

Therefore, the aim of this study is to evaluate and compare financial performance of CBE Holeta
branch, to provide some comments by observing several financial ratios, analysing trends of
various elements of financial statement of CBE past two years performance results, and to
improve its banking business. Hence, this became the basis of the study.

1.2. Research Questions

In line with the above issues discussed, this study therefore aimed to fill the gap by answering
the following research questions;

i) What are the effect of core banking systems

ii) What are benefits of core banking in financials performance of the banks
iii) What influence does the core banking system development have on the performance of
banks
iv) What are the difference of before and after implementing core banking

1.3. Objectives of the study

1.3.1. General objective
The general objective of the study is to assess the impact of core banking technology on
financial performance of commercial bank of Ethiopia

1.3.2. Specific objectives

The specific objectives of the study are as follows:
 To assess the effect of core banking on bank financial performance in commercial bank
 To assess the effect of core banking information technology system on employees
activities
 To examine the effect of core banking like ATM, mobile banking, POS machine on
financial performance of the Bank.
 1.4. Significance of the study
This study contribute to develop ground for standardized approach to core banking system,
provide an insight about the impact of implementing core banking system in the bank; and
observe the deficiencies that might be faced by the bank with regard to the core banking system
and indicated the possible implications and recommendations for them.

1.5. Scope of the Study

CBE currently has more than 1811 branches and more than 627 branches are networked
throughout the country. Frome of branches 1,811 CBE Holeta branch is the one. Also, the study
is enclosed to the impact of implementing core banking technology in CBE by considering the
two years audited financial statement year 2019/and 2021.

1.6. Limitation of the Study

This research will not cover the all core banking impact, it is only consider the impact of core
banking on financial performance of commercial bank of Ethiopia Ambo District Holeta Town
Branchs, Accordingly, the outcome of this research may not represent impact of core banking of
financial performance Ethiopia.

1.7. Organization of the study

The study encompasses in to five chapters. The first chapter is introduction part of the study and
it includes the Background of the study, Statement of the problems, Objective of the study,
Significance of the study, Delimitation of the study, and Research Methodology. The second
chapter was the Related Literature Review about the study and the third chapter included Data
Presentation Analysis and Interpretation of the study. Fourth chapter discussion of the study and
chapter five dealt with Summary of major findings, Conclusions and Recommendation of the
study.
 CHAPTER TWO
2. REVIEW OF RELATED LITERATURE

2.1. Introduction
Like any business, banks often find it hard to keep up with change. First, they need the ability to
spot it. This means tracking countless variables. Then, they need to take the right action. This can
be especially tough in today’s banking world. Change is coming at banks from many directions
(IBM, 2012). And each change can trigger many more. Delayed or inadequate responses often
make it even harder to overcome threats and capture opportunity. However, banks that reach this
stage of core system transformation can start to dynamically respond to change. They can also
sharpen those responses, reducing labor and capital costs while improving results.

2.2. Theoretical Review

2.2.1. IT In Banks
To-day, we cannot think about the success of a banking system without information and
communication technology. It has enlarged the role of banking sector in the economy. The
financial transactions and payment can now be processed quickly and easily. The banks with the
latest technology and techniques are more successful in the competitive financial market. They
have been able to generate more and more business resulting in their greater profitability ( Biju, K.
Devandhiran,D. &Srehari, R. 2012). Information Technology has marked a turning point in the
history of global banking and services with ever increasing availability of international
bandwidth and powerful workflow management. It is now possible to disaggregate any banking
process, execute the sub-processes in multiple locations around the world, and reassemble it, at
another location. Technology has opened up new markets, new products, new services and
efficient delivery channels for the banking industry. Online banking, electronics banking, mobile
banking and internet banking are just a few examples. Technological innovation not only enables
broader reach for consumer banking and financial services, but also enhances its capacity for
continued and inclusive growth (Seranmadevi&Saravanaraj 2012). It is evident that in improving
customer services, management information system and ensuring high productivity, technology
orientation has become inevitable.

In creating a viable and efficient banking system, which can respond adequately to the needs of
growing economy and tastes of customers, technology has a key role to play ( Biju, K.
Devandhiran,D. &Srehari, R.,2012). Kaur also stated that technological challenge is to identify
suitable areas of automation, selecting appropriate software and priorities the implementation on
suitable and cost effective hardware so that in ultimate analysis, gains outweigh the cost.

2.2.2. Meaning of core banking

Core means Basic hence the basic services provided by the inter-networked branches of bank is
called Core Banking´. Core Banking is normally defined as the business conducted by a banking
institution with its retail and small business customers. Many banks treat the retail customers as
their core banking customers, and have a separate line of business to manage small businesses.
Larger businesses are managed via the Corporate Banking division of the institution. Core
banking basically is depositing and lending of money. Nowadays, most banks use core banking
applications to support their operations where core stands for Centralized Online Real-time
Exchange (Israa,Sarah &Tebian, 2013). This basically means that all the bank’s branches are
throughout the world. These applications now also have the capability to address the needs of
corporate customers, providing a comprehensive banking solution. A few decades ago it used to
take at least a day for a transaction to reflect in the account because each branch had their local
servers, and the data from the server in each branch was sent in a batch to the servers in the data
centre only at the end of the day. Normal core banking functions will include deposit accounts,
loans, mortgages and payments. Banks make these services available across multiple channels
like ATMs, Internet Banking, and branches.

2.2.3. History of core banking system in the world

The first core banking solutions appeared in the 1970s in the United States. Most of them ran on
mainframe computers and were designed by the banks themselves or by third parties in
conjunction with the large US banks. Limitations to exporting these systems outside the US were
customized by top tier banks, but these efforts consistently failed. In the 1980s, we saw package
solutions coming from other parts of the world, primarily Europe, Asia and Australia. Vendors
with a different but comparable background also entered the arena, for example the private
banking solutions developed in countries such as Switzerland and Luxembourg. Because -due to
the nature of their business - these were more customer focused than the transaction- oriented,
transaction-crunching engines available before, they had natural fit with the customer centricity
that was coming increasingly into focus.
Limitations of these systems mainly had to do with the ability to handle large volumes. The
1990s saw new players emerging in India, benefiting from the opening up of the Indian
economy, the availability of English language skills, and the huge pool of highly skilled
engineers. i-flex solutions (and its legal predecessor CITIL) can be considered as the first
successful software product company from India that managed to sell outside the Indian
subcontinent few years later by Oracle(through the acquisition of i-flex solutions and Siebel and
aligning these to their technology and application strategies(Israa, Sarah&Tebian,2013).

2.2.4. The use of core banking in Ethiopia

In Ethiopia, the use of information communication technology (ICT) in banking industry is
almost a recent phenomenon and it is expanded in all over large cities. The others use of core
banking and ATM, ATM is not the same to CBE with limited services, even though the demand
is higher than the service, but still it is a promising trend. And at the same time the use of core
banking is also limited to some commercial banks of Ethiopia. According to National Bank of
Ethiopia, currently almost all banks who have acquired core banking solutions that are required
to interface with the National Bank.

2.2.5. Core banking solution

Core Banking Solution (CBS) is networking of branches, which enables Customers to operate
their accounts, and avail banking services from any branch of the Bank on CBS network,
regardless of where he maintains his account. The customer is no more the customer of a Branch.
He becomes the Bank’s Customer. Thus CBS is a step towards enhancing customer convenience
through anywhere and anytime banking. Core Banking System or Core Banking Solution is a
term that we hear very often these days .For IT and Banking folks, this doesn’t need any
explanation but for those who want to know a bit, here’s a brief overview of what it means.
Previously a bank’s core operations such as keeping a ledger of various transactions, maintaining
customer information, interest calculation of loans and deposits, adjustments to accounts on
withdrawal and deposits of funds etc. were done manually. With the advent of ICT (Information
Communication Technology), efforts were done to automate various banking processes using
software applications so as to make them simple, efficient, effortless and cost effective
(Geetha&Ramanarayanan, 2015).

Thus, the platform where ICT is used to perform the core operations of a bank, like those
mentioned above, is known as Core Banking System. Thus, Core Banking System has radically
changed the way in which banks function.

The greatest advantage of having a Core Banking System is that new features and functionalities
can be easily added to the system that customers will have a whole lot of services that they can
use. Electronic funds transfer between banks, online trading in the stock markets etc. are
examples of this, which were unheard of in banks pre Core Banking System era. Core Banking
and Run the Bank are synonymous for most part. Core Banking is the meeting point of the
largest banking services augment namely Retail and Commercial Banking, cutting edge
Information Technology and the advancing Communication Technology. It is the heart of a
modern financial service organization and is all about providing the banking customers with the
right products at the right time through the right channels 24 hours a day 7 days a week through a
multi-location, multi branch network. Core Banking Solution are banking applications on a
platform enabling a phased, strategic approach the lets people improve operations, reduce costs,
and prepare 10 for growth. Implementing a modular, component-based enterprise solution
ensures strong integration with your existing technologies (Chairlone and Ghosh, 2009). An
overall service-oriented-architecture (SOA) helps banks reduce the risk that can result from
multiple data entries and out-of-date information, increase management approval, and avoid the
potential disruption to business caused by replacing entire systems. Core Banking Solutions is
new jargon frequently used in banking circles. The advancement in technology, especially
internet and information technology has led to new ways of doing business in banking. These
technologies have cut down time, working simultaneously on different issues and increasing
efficiency. The plat form where communication technology and information technology are
merged to suit core needs of banking is known as Core Banking Solutions. Here, computer
software is developed to perform core operations of banking like recording of transactions,
passbook maintenance, to interest calculations on loans and deposits, customer records, balance
of payments and withdrawal. This software is installed at different branches of bank and then
interconnected by means of communication lines like telephones, satellite, internet etc. It allows
the user (customers) to operate account from any branch if it has installed core banking solutions.
This new platform has changed the way banks are working. Normal core banking functions will
include deposit accounts, loans, mortgages and payments.

Banks make these services available across multiple channels like ATMs, Internet banking, and
branches. Previously a bank’s core operations such as keeping a ledger of various transactions,
maintaining customer information, interest calculation of loans and deposits, adjustments to
accounts on withdrawal and deposits of funds etc. were done to automate various banking
processes using software applications so as to make them simple, efficient, effortless and cost
effective. Thus, the platform where ICT is used to perform the core operations of a bank, like
those mentioned above, is known as Core Banking System (Israa, Sarah &Tebian, 2013). In Core
Banking System, software applications record transactions, maintain customer information,
calculate interest on loans and deposits etc. The data, instead of huge ledgers, are stored in
backend databases in digital form. Now, the same software can be installed in various branches
of a bank and can interconnect through the internet or telephone lines to form a core banking
network of the bank. The advantage, a customer can operate on his account from any branch of
the bank and if the bank owns Internet Banking or ATM facilities, then the customer can operate
on his account from virtually anywhere (Rojo ,2012).

2.2.6. Benefits of Core Banking

1. Centralized Accounting

All the transactions of the bank directly impact the General Ledger and Profit and Loss Account.
This provides a real time total picture about the financial position and situation of the bank. This
helps for timely effective decision making for financial management; a very critical and dynamic
function in today’s banking (kulkarni, 2012).

2. Centralized Product Control & Monitoring

Centralization helps in better product analysis, monitoring and rollout. Aspects like interest rate
modifications, product modification and interest application can be done centrally from one
place for all the branches. Bank can quickly respond to market scenario and customer needs.
This gives competitive edge to the bank (Israa.et.al 2013).
3. Introduction of Technology

Based Services Service channels such as ATM, either on-site or off- site, can be started. Cheque
Deposit Machines (CDM) can be installed. Such machine in WAN connectivity can allow any
customer to deposit the cheque for collection at any branch (Rojo ,2012).

4. Centralized Customer Account Management

Any customer becomes the customer of the bank rather than of a branch. With unique ID /
Account Number the accounts of the customers can be viewed centrally by the bank. As such,
customer profile, details of the services availed by him and customer behaviour about business of
the bank can be well understood. Such customer view gives the bank opportunity to decide
directions for business development and marketing strategies (kulkarni, 2012).

5. Centralized Reporting

Presence of centralized data constantly live up-dated at any time ensures comprehensive report /
statement generation. This tremendously helps in decision making as well as submission to
various authorities. Operational efficiency of the bank gets increased due to quick report
generation for bank as a whole (kulkarni, 2012).

6. Centralized System Administration

Centralized system / I.T. administration enhances system security and user management. There is
reduction in man-power need and cost. Due to single point resource available IT manpower is
utilized properly (kulkarni, 2012).

7. Core banking for the Improvement of Clearing House Functions

Banker`s Clearing House is a place where interbank claims arising on account of cheques
received for collection by each bank drawn against other banks are settled. Every day, each bank
receives hundreds of cheques drawn on different banks. It would be a difficult process to present
all these cheques for payment over the counters of each bank. Today, only a very limited
numbers of cheques issued are presented for payment to the banks to obtain cash or notes in
exchange. A great majority of cheques are paid though the medium of clearing houses
(Dandapani K, 2008). So, core banking supports this facility as all branches directly connected to
the clearing house.

2.2.7. Various core Banking Services

1. Electronic money

Electronic money involves the use of internet or other networks to store or transmit money. This
type of money can be stored on smart cards or computer’s hardware. Electronic money falls into
different types as follows: electronic card, electronic wallet, electronic check, digital money, and
virtual card (Maleki&Akbari, 2010).

2. Automated Teller Machines (ATMs)

It is an electronic terminal which gives consumers the opportunity to get banking service at
almost any time. An ATM combines a computer terminal, record keeping system, and cash vault
in one unit, permitting customers to enter a financial firm`s bookkeeping system with either a
plastic card containing a personal identification number (PIN) or by punching a special code
number into a computer terminal linked to the financial firm`s computerized records 24 hours a
day. Once access is gained into the system, cash withdrawals may be made up to pre specified
limits, and deposits, balance enquiries, and bill paying may take place. (Siam, A. Z., 2006)

3. Point-of-Sale
Transfer Terminals (POS) Computer facilities in stores that permit a customer to instantly pay
for goods and services electronically by deducting the cost of each purchase directly from his or
her account are known as Point-of-Sale (POS) Terminals. The customer presents an encoded
debit card to the store clerk who inserts it into a computer terminal connected to the financial
firm`s computer system. The customer`s account is charged for the purchase and funds are
automatically transferred to the store`s deposit account. (Siam, A. Z. d, 2006)

4. Internet Banking
It is an electronic home banking system using web technology in which Bank customers are able
to conduct their business transactions with the bank through personal computers. Use of internet
to carryout financial transactions is certainly one of the most promising avenues today for linking
customers with financial service providers.

5. Automated Limited-service facilities

Even though full service branches still represent a very important channel through which
financial firms communicate with their customers, electronic facilities and systems represent the
most rapidly growing firm-customer link today. In truth, the most effective service delivery
systems in use today appear to be multichannel-combining full service branches and electronic,
limited service facilities within the same financial Plant (Siam, A. Z., 2006).

6. Mobile Banking and call centres

Mobile banking is a service that enables customers to conduct some banking services such as
account inquiry and funds transfer, by using of short text message (SMS). As more cell phones
appear and are linked technologically with the internet and with credit and debit card accounts,
the cell phone literally becomes a “Portable Bank” ( Siam, A. Z., 2006). Furthermore, by
combining cell networks with the power of the internet to convey vast amounts of information at
high speed, the cell phone and text messaging technology seem to offer the potential to promote
worldwide use of debit and credit card accounts and make purchases and payments from
anywhere on the globe (Siam, A. Z., 2006). Call centres focus is to assist their customers in
obtaining account information and carrying out transactions, avoiding walking or driving to a
branch office or ATM. Increasingly, call centres are being used not only to answer customer`s
questions, but also to cross sell services and build customer relationships (Siam, A. Z., 2006).

2.2.8. Plant Performance

Plant performance is a multidimensional construct that consists of four elements (Alam, Raza&
Akram,2011): (i) customer-focused performance, including customer satisfaction, and product or
service performance; (ii) financial and market performance, including revenue, profits, market
position, cash-to-cash cycle time, and earnings per share; (iii) human resource performance,
including employee satisfaction; and (iv) organizational effectiveness, including time to market,
level of innovation, and production and supply chain flexibility. Traditionally, firms have used
accounting measures such as earnings, return on assets or return on investment to reward
managers. Recent evidence indicates that firms are increasingly using non-financial performance
measures such as customer satisfaction and product quality in the contracting process within
firms (Jensen, M. C., 2001). The reason for the use of non-financial measures in compensation
contracts is that they provide information incremental to accounting measures in rewarding and
motivating managers. Accounting performance measures do not capture all the dimensions,
therefore non-financial performance measures may provide incremental information beyond
accounting measures (Banker and Datar,1989).

2.2.9. Empirical Review

Leyouager (2015) study the impact of e-banking in service quality and bank performance and the
study conclude that ROE is not signified influence by electronic banking.

Ombati, magutu & nyaoga (2010) concluded that direct relationship exist between technology
and service quality in banking industry. If financial institutions use technology in their working it
will result in better service quality as well as enhancing the productivity of employees.
Employees Performance Quality of work Quantity of Work Speed required accomplishing a
specific task Siam (2006) assessed the role of the electronic banking services on the profits of
Jordanian banks, and concluded that electronic banking services negatively affect bank
profitability in the short term, while they have a positive influence in the long term, since bank
investments are all with regard to infrastructures and staff’s training. Geetha & Ramanarayanan
(2013) study on the impact of Core Banking Services in SBM bank and clearly indicates that the
customers were for the CBS because of its ease of operations, instantaneous, timely response and
cost effectiveness. As CBS offers any time anywhere banking facility, customers are surely
benefitted out of it and after the introduction of CBS the operational efficiency of banks has
certainly improved. Rono (2012) The purpose of his study was to: determine factors leading to
replacement of core banking systems in commercial banks in Kenya; establish the challenges
that commercial banks in Kenya encounter in the process of core banking systems replacement;
and determine the effect of core banking systems replacement on bank performance and the
Findings also indicated that replacing core systems has a significant positive effect on financial
performance. Azebu (2007) on his paper, “Determinants of banking performance in Ethiopia”
utilized panel data, ROAA as dependent variable that operational efficiency represented by cost
to income; capital adequacy represented by equity to total asset had positive impact implies that
the more capital; higher loan risk assumption, more profit.

Christina G. Chi, Dogan Gursoy (2009) in his research Employee productivity, customer
satisfaction, and financial performance: An empirical examination he examined the relationship
between employee productivity and customer satisfaction.

They also showed the impact of both company financial growths using service profit chain
framework as the assumption. Basically, this research explores the following important
relationships: (1) the customer satisfaction and financial performance has direct relationship. (2)
There is a direct relationship between employee satisfaction and financial performance. studies
have suggested that technological IT investments carry significant long term business
implications and non-financial measures offer for clear advantages over measurement system
linking long term performance but financial evaluation systems generally focus on annual or
short term performance against accounting yardsticks because of the this the research focus on
non-financial performance effect and selected from non-financial performance measurement
tools on customer satisfaction and employee’s Productivity for the reason that of satisfaction of
customer has become most important factor for firms to financial success and many firms are
using different measures in developing monitoring and evaluating product and services as well as
the motivate and compensate their employee’s because of there is strong relationship between
profitability and market share.

2.2.10. Measuring Customer Satisfaction

Customer satisfaction can be defined as the company’s ability to fulfil business, emotional, and
psychological needs of its customers. In other word it is a summary of psychological state
resulting when the emotion surrounding disconfirmed expectations is coupled with the
consumer’s prior feeling about the consumption experience (Chavan and Ahmad, 2013).
However Kumbhar (2011) argued that a customer satisfaction is an ambiguous and abstract
concept. He continued that, actual manifestation of the state of satisfaction will vary from person
to person, product to product and service to service. It is well-researched fact that there is a
strong linkage between customer satisfaction and operational performance.
According to (Muhammad Imran Qureshi, A. R.(2013) customer satisfaction has strong influence on
the efficiency and financial performance of banks. It has great influence upon performance and
profitability of the banks. He also claimed that satisfied customers share their experiences with
other people and occupy unambiguous word of mouth (grapevine) advertisement and publication
of the banks. This positive word of mouth publication is very helpful in increasing banks
relationship and interaction with the whole community. Many literatures found that there is
strong relationship between customer satisfaction and organizations efficiencies, operational and
financial. The state of satisfaction depends on a number of factors which consolidate as
psychological, economic and physical factors. The quality of service is one of the major
determinants of the customer satisfaction (Kumbhar, 2012). Service quality can be defined as the
difference between customer expectations for services performance prior to service encounter
and their perception of the service received (Wandaogou and Jalulah, 2011). Many past studies
develop different dimension and aspects to measure service quality. According to (Wandaogou
and Jalulah,2011),(Parasuraman and his colleagues 1985 & 1988) have developed the
dimensions of service quality in their GAP and Extended GAP analysis and based on which they
developed that popular SERVQAUL model. The widely used SERVQUAL model consisted of
five dimensions that were measured using a 22-item SERVQUAL scale. The five SERVQUAL
dimensions are: Tangibles, Empathy, Assurance, Reliable, and Responsiveness: Tangibles are
the physical facilities, equipment, and appearance of personnel. Empathy refers to the caring,
individualized attention the Plant provides its customers. Assurance means knowledge and
courtesy of employees and their ability to inspire trust and confidence. Reliability is the ability to
perform the promised service dependably and accurately, and Responsiveness refers to
willingness to help customers and provide prompt service. However, due to the differences
between traditional service and electronic service, obviously SERVQUAL scale is not suitable
for measuring service quality in electronic or internet environment due to the absence of staff,
absence of traditional tangible elements, and self-service of customers (Wandaogou and Jalulah,
2011). Lancaster, G, (2005) incorporated e-services and conceptualized and constructed a
multiple-item scale (E-S-QUAL and E-RecS-QUAL models) to assess electronic service quality.
The final E-S-QUAL Scale, consisting of 22 items on four dimensions, which they labelled and
defined as follows:
1. Efficiency: The ease and speed of accessing and using the site.

2. Fulfilment: The extent to which the sites promises about order delivery and item availability
are fulfilled.

3. System availability: The correct technical functioning of the site.

4. Privacy: The degree to which the site is safe and protects customer information. The e-
recovery service quality scale (E-RecS-QUAL) consisting of 11 items on three dimensions:

1. Responsiveness: Effective handling of problems and returns through the site.

2. . Compensation: The degree to which the site compensates customers for problems.
Contact: The availability of assistance through telephone or online representative. Available
literature shows that, the customer satisfaction is measured via service quality and service quality
measured by various measurement tools and instruments developed by various researchers and
marketing consultancy organizations (Kumbhar, 2011). Accordingly, it is essential to identify
which the impact of core banking on financial performance practical commercial bank of
Ethiopian.

Conceptual Frame Work

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 and Tromp, 2009).
Based on many related literature reviews, the conceptual framework of this study is
rooted on the incorporation of core banking information technology facilitated products
and services (technology-based services and products) into banking operation and how they
effect on financial performance of in commercial bank of Ethiopia of
effect of core banking on financial performance in the case of commercial bank found in Holeta
town. This conceptual relationship core banking information technology and banks‟ performance
refers as a base for the research question, hypothesis and motivation of the study throughout the
paper. The study conceptual framework shows the relationship of core banking system financial
performance of Commercial Bank of Ethiopia and has been depicted in Figure 1
below. Figure 1 conceptualizes that of core banking system effect on financial performance
on commercial bank of Ethiopia Holet city.
 Core Banking

Financial Performance
Employee’s performance

Fig. 1 Conceptual frame work Owen sours 2023

 Chapter Three

3. Research Methodology

3.1. Introduction
Research method referred as the techniques and procedures used to obtain and examine research
data, including questionnaires, observation, interviews, and statistical and non-statistical
techniques whereas research methodology is the theory of how research should be undertaken,
including the theoretical and ethical assumptions upon which research is based and the
implications of these for the method or methods adopted (Saunders et. al., 2009).

In order to attain the objective of the study and answer the research questions the study adopted a
case study strategy. The case was conducted on commercial Bank of Ethiopia. Currently there
are one thousand eight hundred eleven (1811) commercial banks in Ethiopia www.cbe.org.et.
However, the researcher purposively selected the bank based on location, number of branch,
networking branches’ (adopting core banking) which is the platform for most technological
modernization in Holeta town branch of Holeta, Burka Harbu and Wolmera.

3.2. Description of study area

This study will be conducted in Holeta town located in Finfinne Special Zone of Oromiya
Regional State in the central highlands of Ethiopia.

It is found about 30 km west of the capital city, Finfinne, on the main road to Ambo. The
selection of the geographical area for the collection of the data to inform the analyses of the core
banking customer satisfaction and financial performance of the three branch’s. The research will
be conducted on the impact of financial performance of the bank.

3.3. Research Design

There are three approaches to conduct any research: Qualitative, Quantitative and Mixed
approaches. According to Saunders et. al. (2009) mixed method approach is the general term for
when both qualitative and quantitative data collection techniques and analysis procedures are
used in research design. In this study mixed-method approach is engaged to ensure effectiveness
of the research process as the findings of the qualitative data enhance the findings of quantitative
one and the vice versa.
This study used a case study approach. According to (Yeboah, Djan and Kwarteng, 2013) a case
study approach is particularly appropriate for individual researchers because it gives an
opportunity for one aspect of a problem to be studied in some depth within a limited time scale.

This study tried to examine the impact of core banking on financial system in commercial bank
of Ethiopia Holeta, Burka Harbu and Wolmera branch on financial performance and customer’s
satisfaction.

3.4. Research Approach

The research design employed in this study was descriptive type of research design. Descriptive
type of research design is a type of research design which directly describes the situation of some
specific process. Gorge Morales, (2014) and it was employed in this research in order to describe
core banking effect CBE Holeta city analytically.

3.5. Sampling Design

A total of number of three banks core banking users 200 customers and 100 employees of the
branch are randomly selected to participate in the study. The participants are selected using
convenient sampling technique

3.6. Types and Sources of data

There are two types of data which is usually used in researches, primary and secondary data.
Primary data does not actually be until and unless it is generated through the research process as
part of the consultancy or dissertation or project. It will often be collected through techniques
such as experimentation, interviewing, observation and surveys. On the other hand Secondary
data is information which already exists in some form or other but which was not primarily
collected, at least initially, for the purpose of the consultancy exercise at hand. In fact, secondary
data is often the start point for data collection in as much as it is the first type of data to be
collected (Lancaster, 2005).

This study used primary and secondary source of data. Regarding the primary data the
researcher distributed structured questionnaires to relevant participants. The researcher collected
secondary data from the Commercial Bank of Ethiopia in Holeta town and annual reports and
examined different articles, academic journals, useful academic books and banks reports in order
to strength the result and findings of the study as secondary data.

3.7. Methods of data collection

The required data for the research was collected by using both open ended and close
ended questionnaires.

3.8. Methods of data analysis

The collected data are tabulate, organize, analyses and interpreted to draw sound
conclusion and valid generalization. And to do these the researcher uses both qualitative
and quantitative methods of data analysis. Quantitative data analysis was used in order to
discover inherent facts and explore new facts. Qualitative data analysis was used to
provide depth and detail answers research questions through direct quotation and full
description to explore new facts or to re-interpret already known existing facts.
Data Variables were categorized and their corresponding attributes were coded, checked
and feed into computer and analyses by SPSS software version 24 and results were
interpreted against the standard statistical analytical values. The statistical techniques
used for analysis includes: descriptive (frequency, mean, mode, range, variance, standard
deviations) and inferential statistics used for analysis were chi-square, t-test, binary
logistic regression, correlations, statistical significance and confidence intervals.
Classification table and Hosmer and Lemeshow tests were applied to determine the
goodness of logit model fit.
The data collected from the field through focus group discussion, key informant
interview and personal observations are analyses using a thematic analysis approach.

3.9. Target population

Target populations of the study are employees and branch managements of the commercial bank
of in Holeta three selected branches annual reports. The researcher purposely selected customers
who have used at least one technology-based service/product of the banks and branch managers.
These groups are targeted because the research believes that they are appropriate people to
provide appropriate information and answer of the research questions.
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Appendix I

Work Plan

Research Activity Time in months of 2022.

May Jun July Aug Sep Oct
Develop research proposal
Literature Review
Develop Questions for data collection
Pilot Study
Data Collection and Entry
Data Analysis
Write up for 1st and 2nd Draft
Submission of Dissertation
Publication
 3.1. Budget Estimate
Description Unit Unit cost (ETB) Total
cost
Perdiem for interviewer 5 persons X 1days 300 1,500
Training for interviewer 5 personsX1days 250 1,250
Stationary Lump sum 2000
Transport 30 days 50 1,500
Typing service Lump sum 500
Internet 1,500
Telephone 1,500
Printing, photocopy and binding 1,200
Subtotal 10950
Contingency (10%) 1000
Total cost 22900