The effect of ATMs expansion on cost efficiency of banks

By April 8, 2019 Commerce

The effect of ATMs expansion on cost efficiency of banks: the case of commercial bank pf Ethiopia

1.1.Back ground of the study
1.2 Statement of the Problem
1.3 Research Questions
1.4. General Objective
1.4.2 Specific Objectives
1.5 Significance of the Study
1.6 Scope of the Study
1.7 Organization of the Study

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1.1. Background of the study
All banking services, such as electronic payments, loans, deposits, or securities have become heavily dependable on information and telecommunication technology (ICT). This is the main reason why banks are the biggest users of modern technology equipment. Due to the complexity of banking services, every opportunity to speed up their performance or to make them more accessible for customers is very well welcomed by banks (Jegede, 2014).

Of the numerous technological changes in banking, two stand out as having a large impact on operating costs. These are the expanded use of ATMs to supplement and replace expensive branch offices in delivering an important subset of depositor services and the concurrent substitution of lower cost electronic payments for paper-based transactions. Both of these newer banking technologies intensively use computers and telecommunication facilities and have benefited from cost reductions and efficiency improvements in these important inputs (David B., Rafael L. and Santiago C. Valverde. 2004).
The banking industry in Ethiopia is investing greatly in information and communication technology (ICT) given the highly information sensitive nature of the industry which is in line with the global trend. The state owned financial giant, commercial bank of Ethiopia (CBE), total assets will soon climb to a half trillion birr. The bank disclosed in its annual performance for the 2016/17 financial year that has registered massive progresses in every aspect of the banking activity ( The performance of E-payment (ATM, mobile banking, internet banking) with other strategic targets of the bank have contributed a great deal to the fulfillment of the targets set in the banks five year (2015-2020) strategy ( Generally the bank reaches 1,222 branches, 15.9 million account holders, 3.7 million card holders (2.7 million active), and 1.4 million in-active mobile banking users, 25,683 active internet banking users, 6,883 POS terminals and 1,501 ATMs (CBE, 2017/18).

According to CBEs’ (2016/17 annual report), for the financial year 2016/17 CBE deployed 612 ATMs and reached total of 1,501. The deployment of these ATMs together with other initiatives in the coming year are expected to add momentum to the fulfillment of the bank’s strategic objectives. Therefor this study motivated by this growing investment in ATMs by CBE without any definite study on the effects of these investments especially in terms of ATM expansion and cost efficiency.
1.2. Statement of the problem
The achievements, goals, profit and attainment of banking sector depends largely on the proper management and technology such as ATM adoption in the banking activities. It’s upon this basis that the level of efficiency, effectiveness and performance of banking sector and other organization is measured (Jegede, 2014). Although every banking operation requires some technology applications, researcher vary on the subject of the relationship between the level of employed automated teller machines, and the value of the banking efficiency increase. All researchers agree on the importance of ATMs for the further developments of the banking industry, but some of them have found lack of proportionality between the increased in the scale of technology utilization and the increase in banks profitability (Thakor, ; Olazabal, 2002; cited on Jegede, 2014).

Different researches have provided empirical evidence of positive and statistically significant relation between ICT investment and some measures of business performance. According to Chin, s. et. al., (2008) banks invest in ICT constantly to achieve cost saving and enhance customers satisfaction and Automated teller machine (ATM) has become a major indicator of ICT investment by banks. Also automation replaces labor and improves the traditional labor transaction process. With the introduction of automatic equipment, the advantages of automation such as reduction in labor errors and saving in processing time will increase efficiency of banks and improve service quality. Moreover, installing more ATMs will reduce the amount of work on branches relatively. In this way, the labor force of branches can be redistributed and redeployed more efficiently than before (Chin, s. et. al., 2008). They offer considerable benefits to both banks and their depositors, because of the cost of a single transaction performed at an ATM is potentially less than a cost of transaction conducted from a teller, as ATMs are capable of handling more transactions per unit of time than tellers (Laderman, 1990).
A study by cared out by Jonathan, (2013) aimed to analyze the effect of the intensity of ATMs deployment on the cost efficiency of banks in Nigeria. The specific objectives were to ascertain the determinants of ATMs deployment and to evaluate the effect of ATMs deployment on the cost efficiency of Nigerian banks. The results showed that bank size, salary level and value of ATM transactions were key determinants of ATMs adoption by banks in Nigeria and the result also revealed that the intensity of ATMs deployment made positive contribution to the cost efficiency of Nigerian banks.
Automated teller machine (ATM) banking is the second popular access channel to banking services behind branch banking in Ethiopia which offers competitive advantage in the homogenous market of retail banking products and services (Getachew, 2010). With the coming of ATMs, the banks were of the view that ATM banking would save time and money as it was expected to reduce congestion in the banks as clients would not be in a hurry to beat the closing time for the banking business and hence spend more productivity time at their working places instead of spending long hours in queues. The banks were also of the view that this service would improve customer relations, reduce employee overtime hours and improve profitability in the long run due to reduction in costs as a result of a reduction in the number of bank tellers and also as a result of bank charges from the provision of the ATM service (ibid). However, CBE employees reached 33,706 as of June, 2017 from 15,639 at June, 2013; 1,235 branches and 1,589 ATMs as of January, 2018.
Despite the bank effort to improve access for its customers by increasing the number of machines, ATM users are still feeling the brunt of the consequence of unreliable service and customers are also facing problem of disproportional ATM concentration (Fortune Vol 14. No 700). Despite huge investment and Bank’s effort to improve access for its customers by increasing the number of ATMs, there are also a number of instances when customers would prefer to use bank premises to get service even when ATMs are operational and no customers are in sight using the ATMs. There is a general outcry from bank customers that the quality of ATM banking service has not been up to their expectations (Gezahegn, 2015). The effects of ATM expansion on the cost efficiency of banking institutions haven’t been without some challenges. However, there have been near lack of empirical research efforts on the effect of ATM expansion on the cost efficiency of the service providers in Ethiopia. Using CBE as case study the researcher argued there has been growing investment by the banks on the E-payment products without any definite study on the impact of this investment especially in terms of ATM deployment and cost efficiency in Ethiopia. There for this study hopes to fill this gap by analyzing the effects of the deployment of ATMs on the cost efficiency of CBE. By doing so this study will be conducted to answer the following questions;
What are the determinants of ATM deployment in the case of CBE
What are the effects of ATM deployment on the cost to income ratio of CBE
What are the effects of ATM deployment on the asset management ratio of CBE
1.3. Objective of the research
1.3.1. General Objective
The aim of this study is to measure the effect of the intensity of ATMs deployment on the cost efficiency of CBE.

1.3.2. Specific Objectives
To find out the determinants of ATM deployment in case of CBE
To evaluate the effect of ATM deployment on the cost efficiency of CBE
1.4. Significance of the Study
This study by measuring the effect of ATMs on the cost efficiency of banks, will provide more convincing evidence to understand the returns of ICT investment in the banking industry. Also the findings from this study will provide useful information for banks, ATM firms and researchers to understand better the relationship between ATM investment and firms cost efficiency. It would therefore assist bank management in ICT investment decision making.

1.5. Scope of the Study
This study was restricted to the city of Addis Ababa which has large concentration of ATM and focusing on CBE with reasonable number of card holder and to fairly represent the card holder population in the city.
1.6. Organization of the Thesis
The study’s report will be organized in to five chapters. The first chapter’s deal with background of the study, background of the organization, statement of the problem, objective of the study, significance of the study and scope of the study. The second chapter will elaborate review of related literature that the researcher will utilized in support of the study. The third chapter will discussed about research methodology and design. Then, analysis of data will be made on chapter four and finally, conclusions and recommendations which were given to the company will be the last chapter of this study.

Chin – S Ou, Shin -Yuan Hung, David C. Yen and Fang – Chun Liu. 2008. Can Automated Teller Machine Investment Improve Bank Cost Efficiency?: Proceeding Of The Third Workshop On Knowledge Economy And Electronic Commerce, 97-103.

David B. Humphrey, Rafael Lopez Del Paso and Santiago Carbo Valverde. 2004. Electronic Payments and ATMs: Changing Technology and Cost Efficiency in Banking. SUERF Colloquium October 14-16, 2004, in Madrid, Spain
Getachew Worku . 2010. Electronic banking in Ethiopia-practices, opportunities and challenges. Journal of internet banking and commerce.Gezahegn Bacha. 2015. “Assessment of customer Satisfaction with ATM banking: Empirical evidence from Selected Commercial Banks in Ethiopia “. ADDIS ABABA UNIVERSITY
Jegede C.A. 2014. “Effects of Automated Teller Machine on the Performance of Nigerian Banks.” American Journal of Applied Mathematics and Statistics 2, no. 1 (2014): 40-46. doi: 10.12691/ajams-2-1-7.

Jonathan oyerinde, 2013. The Impact of Automatic Teller Machines On The Cost Efficiency of Nigeria. Journal of Internet Banking and Commerce, December 2013, vol. 18, no.3 (
Laderman, E. S.1990. The Public Policy Implications of State Laws Pertaining to Automated Teller Machines. Federal Reserve Bank of San Francisco Economic Review, 1(2), 43-58.

Thakor, A. V and Olazabal, N. 2002. Banking: The IT Paradox. McKinsey Quarterly 1(1): 45 51.


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