2022 
The Growth Effect of Disruptive Technology in Ethiopia: With a
Case Study of Digitalization in the Financial Sector

Alemayehu Geda 
Addis Abeba University 
4/30/2022 
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The Growth Effect of Disruptive Technology in Ethiopia: With a

Case Study of Digitalization in the Financial Sector

(African Economic Research (AERC) Collaborative Research on “Trans Regional Research

on Private Sector Development, Digitalization & Disruptive Technologies”, Nairobi)

Alemayehu Geda1
Department of Economics
Addis Abeba University

Abstract
Focusing on digitalization as a major disruptive technology in Ethiopia, this study found that digitalization
is at a very low level of development in Ethiopia, by regional standard. Yet, a 10 present rate of digital
penetration (digitalization) is found to increate GDP growth by 0.5 present – this being as high as 0.8 percent
in the service sector. Digitalization in the financial sector is growing very fast but is still the lowest by
regional standard. Major challenges for this are found to be the stifling regulatory environment and weak
support from the central bank, the telecommunication infrastructure (though significantly improved lately)
and the low level of digital literacy both at national level and within the financial sector. Low priority for IT
investment from the board of directors of banks so that Banks’ pay high dividend, failure of Bank executives
to take risk and creatively use the IT capacity in the country, the difficult of measuring the impact of
digitalization for use in board and executive decision making and coordination failure in collectively
acquiring some digital technologies from global vendors at national level are some of the challenges identified
in the sector. Based on these findings the study derived various policy implications that includes
strengthening the regulator body and improving its working modality, acquisition of some digital technology
at national level and improving the digital infrastructure, cost and reliability, among others.
Key Words: Disruptive technology, digitalization, financial sector, Ethiopia, Africa.

I. Introduction

Ethiopia has witnessed excellent economic growth in the last decade and half. However,
poverty and unemployment are still major problems. This is partly because this growth
was not accompanied by structural transformation and failed to create sufficient
employment, as a result (Alemayehu, 2022a). Thus, structural change and job-creation is a
key socio-economic and political challenge that needs the attention of policy makers. Fast
 
1
    I am grateful for a number of people who extended their help in the course of this study. I am
especially grateful to Ato Shimelis Leggse and Ato Ksaye Eshetu of Dashen Bank and the bank’s
president Ato Asfaw Alemu; Ato Meklaku Kebede, president of Hibret Bank ; Ato Yitbark Tesfaye
of IT project Director at CBE and my friend Daniel Hailu of the Abysinia Bank and formerly at CBE.
I also like to thank all my informants from all private banks in the country. I also like to thank my
Financial Economics graduate student Yoseph Shibeshi for his help.
 
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and transformational growth is required to address these challenges. Disruptive

technologies (DTs, hence forth) such as digitalization are crucial in this respect. DTs can
bring about structural transformation of the economy, lead to global level of
competitiveness and transform the economy and its various sectors and sub-sectors
through technological leapfrogging (Sabbagh, et al, 2012; UNCTAD, 2018; Ab.Aziz et al;
2021). This is in particular important in the financial sector in Ethiopia which is at a very
low level of development and, hence, the focus of this study.

Such potential positive effect of DTs could be a sources of job creations. On the other hand,
the effect of DT on job-creation could also be negative because DTs could also destroy jobs
in economic agents’ bid to use DTs for efficiency and competitiveness. The role of DTs both
in structural transformation as well as the employment creation and destruction is, thus,
crucial to understand in a developing country like Ethiopia. In this study I will focus on
digitalization and digital transformation as one aspect of DTs.

DTs such as digitalization will generally be limited if they are studied or carried in isolated
manner. Thus, it is generally better to examine digitalization in the financial sector in the
context of the national digital echo system and the overall effect of DTs in transforming the
national economy where the financial sector is just one part of it. Notwithstanding such
limitations, in this study, attempt to identify the impact of digitalization in the Ethiopian
financial sector only after a brief review of the national echo system is examined. This is
done by focusing on the Ethiopian banking sector which is the de facto financial sector of
the country. To redress the limitation of focusing on the financial sector alone alluded
above, I will attempt to place the digitalization in the sector in the context of the national
digital echo system in comparison with the East African region as bench mark.

There is a dramatical accelerating pace of development and adoption of new technologies

in the world since the turn of this century. According to UNCTAD (2018) this is driven by
(a) the cumulative nature of technological change, (b) the exponential nature of
technologies growth, (c) the convergence of technologies into new combinations, (d)
dramatic reductions in costs as well as entry costs; and (e) the emergence of digital
“platforms” such as the internet. The literature groups these disruptive technologies (DTs)
into five broad categories: (i) Artificial Intelligence, (ii) Digital Technology: Big data and
the internet of things, (iii) 3D printing, (iv) Bio-technology and (v) Material/Nano-
technology. Of these categories, this study will focus on “digitalization” or what is called
the “big-data and internet of things”. Although the latter could contribute a lot in various
sectors of the national economy, and hence it is imperative to take the synergy associated
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with that, the focus of the study is on the financial sector. The study will, however, begin
by looking at its general economic growth effect to redress some of such limitation.

Even the digitalization aspect of DTs, which is the focus of this study, could have different
pillars. The World Bank (2017) uses the following as pillars of digital economy: digital
connectivity, digital financial payment systems, digital platforms, digital
entrepreneurship, and digital skills. In this study, I will focus on these pillars depending
on the relative importance of each to the financial sector.

The issue of digitalization in the financial sector is particular important for Ethiopia given
the low-level development of digitalization in the country, compared to neighboring
countries such as Kenya and its potential disruptive effect if the Ethiopian financial sector
is forced to compete with foreign banks, emerging FinTech firms and telecom companies
(such as Safaricom of Kenya). Telecom companies are increasingly relying on their earning
from mobile payment system, instead of voice and data, for their revenue. Such stiff
competition is going to happen soon since the government is in the course of opening up
the financial and the telecom (which is already in the pipeline) sector for foreign firms. For
instance, bench marking with Kenya (see below for detail), internet users in Ethiopia
constitute 21% of the population in 2021 while this was 40% in in Kenya in the same year.
Similarly, the number of mobile connections/subscribers in Ethiopia was 39% of the
population (45 million) in 2020 while the comparable figure for Kenya in the same year was
110%. The innovative Kenyan mobile payment system (M-PESA) is incomparable to
traditional branch-based banking system in Ethiopia. This underscores the challenge of
digitalization in Ethiopia, even to reach the level attained by neighbouring countries in
Eastern Africa region.

The future of the financial sector is a constant struggle between disruptive technologies
and the move to adopt and explore them to remain ahead in the business. After an
examination of 126 articles about digital banking and financial inclusion that are published
from 2014-2020, Ab.Aziz et al (2021) noted that digital banking has developed enormously
across countries in the world and this has improved efficiency by deploying cost-effective
technology, shifted the managerial focus toward enhancing the efficiency of digital channel
operation; affected many banks in downsizing their physical branch-based operations and
had turned bank client to rely for their transaction outside bank branches. It also allowed
clients new channels of funds, new ways of handling daily transactions, provided more
financial products and product information fast and less costly. It has also improved
financial inclusion (Ab.Azizf, et al 2021). Thus, the analytical framework of the study needs
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to allow to examine the impact of digitalization in Ethiopian banking sector in all these
aspects where global banks are making a big headway.

With this genera perspective, the rest of the study is organized as follows. In section 2, the
analytical approach of the study if briefly offered. Section 3 is devoted to the examination
of the economic growth effect of digitalization in Ethiopia. Section 4 will focus on the case
study of the financial sector. Section 5 concludes the study by offering the policy
implications of the study by way of conclusion.

II. The Analytical Framework

The analytical framework of the study is based on Christensen’s (2015) definition of

“disruptive technologies” as ‘coming up with cheaper, simpler, more reliable and
convenient product than existing products in the market’ (Christensen, 1997; 2015). Since,
technology is not enough to define this phenomenon, Christensen incorporated cultural
and leadership aspects of new entrants – what is now called the business model innovation
in his latter definition. “Business model innovation” is defined (Markides, 2006) as the
formation of a significantly different business model in an existing market or business.
Studies on digitalization in the financial sector found that digital technologies enable new
business models, cause (dis-)intermediation and customer centricity which becomes
increasingly important for financial service providers in many countries (Cezar, 2014).
Additionally, these studies, also found that the interaction between users, technological
changes and information is increasingly digitalized across countries (Cezar, 2014; Ab.Azizf,
et al 2021).

The issue of focusing on a new business model is imperative for the Ethiopian financial
(banking) sector, where banks are currently pursuing the traditional branch banking
model. The literature also shows that, among other innovations, the phenomenon of
FinTech is shaking the established, traditional players and according to many experts is
able to totally transform the financial business sector even further (Karagiannaki, et al, 2017
Cziesla, 2014). This new business model also includes the idea of Christensen et al (2015)
that noted disruptive innovation originates in either low-end market or new-market
foothold. In addition, DTs often do not target mainstream customers until the quality of
the product has met their standards. Hence, the mainstream customers are unlikely to
switch to low price companies immediately (Christensen et al, 2015). Today, since the new
business models met the standard in the financial business, they already became part of
the financial sector in digitally advanced countries. They are, thus, sure to be a threat to
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banks that are relying in the traditional branch-based banking model such as those in
Ethiopia.

DTs are also different from sustaining innovations which are based on enhancing the
performance of technological products or services according to the mainstream customers
evaluation (Christensen and Overdorf, 2000). “Sustaining innovation” mostly comes from
incumbents. However, what those companies cannot cope with or introduce is disruptive
innovation due to lack of processes that can handle such innovation. It is sensible to
consider the Ethiopian banking sector as characterized by “sustaining innovation” that is
confronted with technology which is potentially disruptive as defined by Christensen’s
(2015) and given above. This is because Ethiopian banks are attempting to cope with
challenge of digitalization and its disruptive effect by slowly improving the current
business model. With this conceptualization, for the purpose of this study, I will use
digitalization as proxy for disruptive technology both to examine its general picture at
national and general level as well as its effect and challenge in the financial sector. This is
done cognizant of the fact that “digitalization” is just one facet of DTs as noted above (see
also UNCTAD, 2018; World Bank, 2017).

Analytically, the study is undertaken at two levels: at macro and micro (firm) levels. The
macro level analysis is necessitated because it is crucial to consider the impact of
digitalization on economic growth in a broader context. Having this macro level picture, I
will resort to a case study (firm level) approach to concretely examine the nature, effect and
challenge of digitalization in the financial sector. The latter is aimed at informing the macro
level analysis which is too general for concretization of the issue. Both methods are
preceded and, thus, informed, first by descriptive and data exploration analysis about the
nature of digitalization in Ethiopian financial sector, by placing (benchmarking) the
Ethiopian performance in the context of the African region in general and countries in the
Eastern African region in particular.

In the first method, the macro level growth impact of digitalization is examined using a
standard Solow-growth model. A Cobb-Douglas production function that also
incorporated the effect of “disruptive technology” (D) as one of its arguments is used for
the purpose. Thus, growth of output (both GDP and sectoral GDP) is modelled as a
function of labour (L), capital (K) and an indicator of digitalization (D) - which is assumed
to affect the “productivity” indicator or the “Solow-residual” that is given by “A” in
equation [1a]. “A” is also referred as total factor productivity (TFP) indicator and normally
derived as a residual in standard growth models such as equation [1a]. “A” will be
computed here, net of the digitalization effect from the estimation of equation [1b].
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[1a]
∗
[1b]

Where: Y, K, L, D and A are, respectively, output (GDP), capital, labour, digitalization and
efficiency (total factor productivity, TFP) indicators; A* is TPF net of the “D” effect.

In relation to the effect of “D”, this model will also give us the direct effect of “D” on each
sector (agriculture, industry and services) when the dependent variable is changed to
sectoral value-added. This is helpful to get more insight about the differential effect of
disruptive technologies across sectors.

Having this general picture at macro and sectoral level in section three, I have pursed a
case study approach in section four to enrich our understanding further. The micro level
information is collected based on the case study approach using a semi-structured
interviews carried with key informants in the Ethiopian financial sector. The interview
focused on the level and impact of digitalization as well as the coping mechanism
employed to withstand the digitalization impact on the current business model of banks in
the sector. Firm level data is also collected form the case study banks to examine the
quantifiable dimension of the study The Ethiopian financial sector is selected in line with
the hypothesis that digitalization has significant disruptive effect on service sector in
general and the financial sector in particular in Ethiopian context. It is also my interest area
of study.

III. The Growth Effect of Digitalization in Ethiopia

Examining the growth effect of digitalization is important from two perspective. First, it
will give us the general impression about the economic growth impact of
digitalization/DTs at national level in quantifiable manner. Second, the impact of
digitalization in the case study firms (the financial sector) is conditional on the state of
national infrastructure that includes, in particular, access to information technology and
commutation (ITC) and related infrastructure such as access to electricity as well as the
general growth of the economy.

Before examining the growth impact of digitalization, I have examined the national digital
echo system for growth first in section 3.1. This is important because the impact of DTs
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such as digitalization on economic growth (as well as the financial sector) is also
conditional on the national digital eco-system and related national digital strategy and
policy.

3.1 The National Eco-System for Digitalization: National Strategy and

IT Infrastructure
The government of Ethiopia has issued its National Digitalization Strategy (NDS) in 2020.
(FDRE, Digital Strategy, 2020). This strategy is informed by the government’s
understanding of the drivers of the economy and its vision of the country. The NDS noted,
the strategy is “based on current economic drivers (i.e., Agriculture and Manufacturing)
and the national vision which is jobs creation, raising foreign exchange earnings and
brining about inclusive prosperity. Based on this, four pathways were selected to analyse
opportunities and frame Ethiopia’s digital journey. This is summarized in Figure 2 taken
from NDS. As summarized in Figure 2, the transformational effect of digitalization is
envisaged to be realized through transforming the agriculture, manufacturing, service
(including tourism) sectors.

Figure 3.1 The Four Pathways of Ethiopian Digitalization Stagey for Digital Transforming.

Source: FDRE, Government of Ethiopia: Digital Ethiopia 2025 – A Digital Strategy for Ethiopia’s Inclusive
Prosperity, 2020.

Among the sectors identified in Figure 3.1 the NDS noted various small initiatives
attempted in the agricultural sectors. This includes, among others, digitally aided extension
services, resource mapping, such as soil and water (FDRE, Digital Strategy, 2020).
However, the effect of digitalization and level of IT use in rural areas is limited as the rural
internet penetration has been just 4% and most of the rural population are generally IT
illiterate (except a simple mobile use). Most of the initiatives have also encountered various
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challenges that includes, connectivity, the lack of enabling regulations, appropriate finance,
and skilled human capital (FDRE, Digital Strategy, 2020).

For similar reasons, the digitalization in the industrial sector has also been found to lag
behind, confirming the findings of Alemayehu (2022a) noted above. Notwithstanding this,
the government is attempting to set up “The Ethio ICT Village” which is envisaged to serve
as a first prototype of experimentation with much more integrated “servisification” of
manufacturing in its NDS. The aim is to exploit the benefits of industrial parks the country
built recently by mixing the old forms of manufacturing with the new forms of ICT services
exports (i.e., Pathway 3 in Figure 3). However, fast and reliable internet connectivity is a
decisive factor for this. The new IT Park “Ethio ICT Village” could, if adequately connected
to residential areas, are also believed in the government strategy to serve as an initial BPO
hubs (business process outsourcing). This will also contribute to the growing use of ICT in
the service sectors, that includes the tourism service sector (the fourth pathway shown in
Figure 3.1) and goes very well with the vision of job creation.

In relation to tourism in particular, the strategy stresses the underexploited nature of the
use of ICT to benefit from tourism potential of the country. Towards that end, the
government envisage to learn from other African countries that made an advanced use of
ITC for Tourism. Digital tourism initiatives in countries such as South Africa, and Kenya
(as well as Thailand) is believed to offer valuable lessons for Ethiopia in this strategy. Prior
to digitalization, these countries had similar challenges in the tourism sector such as limited
targeted marketing, poor management of tourism data, and inadequate capacity among
tourism SMEs (FDRE, Digital Strategy, 2020). Digital initiatives have helped overcome
these challenges and driven growth of the tourism industry from which Ethiopia aspires
to learn.

The NDS (FDRE, 2020) noted that in all sectors, fast and reliable communication
infrastructure, and hence, connectivity is Ethiopia’s most binding constraint to exploit the
four pathways identified in the strategy. This is also the challenge of digitalization in the
financial sector which will be examined in detail below. Due to connectivity challenges,
Ethiopia cannot reliably take on tasks that involve real-time communication, such as virtual
assistance. Robust connectivity enables citizens and businesses to participate in the digital
economy by having access to affordable and high-quality internet, through which they can
engage in information sharing and online transactions. A direct outcome of improved core
connectivity infrastructure (e.g., mobile towers, handsets etc.) and supporting
infrastructure (e.g., power) further enables improved service access empowering both
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individuals and communities. Yet these are the challenges to make the best use of ITC in
Ethiopia as recognized in this strategy (FDRE, Digital Strategy, 2020).

In addition to connectivity, reliable network cover, affordability and poor-quality telecom

services is also found to be a major problem in the strategy (FDRE, Digital Strategy, 2020).
The latter is partly emanated from the monopoly of internet service provision by Ethio
Telecom which will be ending this year (2022). This is hopped to change for the better, with
joining of the market by Safaricom in 2022. Average download speeds and the international
bandwidth per user are both lower compared to Ethiopia’s African peers. Ethiopians have
access to internet of on average 2kb/s of international bandwidth per user, compared to
the Sub-Saharan African average of 11kb/s and the Kenyan average of 103kb/s (FDRE,
2020, National Digital Strategy). These are also the challenges the Ethiopian financial sector
facing, as will be analysed in detail in the next section.

The second related problem is the cost of service which has implications for profit of firms
in the financial sector. Internet and mobile data costs in Ethiopia are among the highest in
the world. 1 GB of monthly data in Ethiopia costs USD 51 (at purchasing power parity)
compared to USD25 in Rwanda, USD18 in Ghana and Nigeria, and USD8 in Kenya (FDRE,
2020). Similarly, 1 GB data in Ethiopia costs 9.65% of the monthly gross national income
per capita. The International Telecommunication Union (ITU) recommended benchmark
being just 2%. Ethio Telecom has slashed tariffs by some 40% since 2019 and a bit more in
2021. There is also a significant improvement in accessibility and reliability since this tariff
reduction. It is hoped that the ongoing telecommunication sector liberalization and the
coming of the new entrants, including Safaricom, will reduce the cost of the service further
and also expand the service.

The third constraint identified in the NDS is human capital. Ethiopia’s urban population is
fairly well educated with literacy rates of 80% in Addis Ababa. However, this is missing in
rural areas, that are home to 80% of the population. Human capital development (as
indicated, for instance, by enrolment figures) as well as digital literacy are correlated with
effective use of digitalization and this is very limited in Ethiopia.

Fourth, as part of the national digital echo-system, the status of E-governance is important.
The Government of Ethiopia has progressed in its various E- Governance efforts, despite
difficult human capital and infrastructural conditions. The government’s planned work on
upgrading and modernizing the government WoredaNet (county level network) to create
a fibre network backbone able to provide high-speed connectivity to public offices and
institutions can lead to increased government efficiency. It will also deepen the
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digitalization drive. On the OSI (Online Service Index) 2018 scale that is set on the scale
from 0 (lowest) to 1 (highest), Ethiopia scores 0.6, which is on par with Kenya, higher than
Nigeria (0.5), and just below Rwanda (0.7) in this area. For the overall E-Government
Development Index (EGDI) score, the country also ranked 151 among 180 economies in
2018. Despite improvements in recent years, there is still room to improve on this as
Ethiopia remains behind the global average score (FDRE, Digital Strategy, 2020).

In line with the NDS, the National Bank of Ethiopia (NBE) has also set out a National
Digital Payments Strategy (NDPS) for 2021–2024 which is important for the digitalization
in the financial sector (NBE (2021). The NDPS aims “to build a secure, competitive, efficient,
innovative, and responsible payment ecosystem to support a cash-lite and financially
inclusive economy”. The NDPS is built along four pillars that are also identified as
challenges of digitalization in Ethiopia: infrastructure, adoption, regulatory and oversight
framework and creating enabling environment for innovation. With this strategy, the NBE,
aims to transform Ethiopia’s payment landscape and it claims, it has already started this
journey through issuing digitalization related regulations (for agent banking and for
payment instrument) recently. This is aimed at encouraging the adoption of non-traditional
banking and embracing technology-enabled financial services as well as benefit from
further access to global knowledge, resources, and funding. The NDPS is aligned both with
the NBE’s internal vision and the government’s vision and reform agenda in other
institutions (external) (such as the National ID program of the Ministry of Pease and the
“home grown reform policy” of the Ministry of Finance, the telecommunication reform of
the government etc, according to the NBE (2021).

Finally, as it stands today, the responsibility of providing the communication backbone

infrastructure and digital echo system in Ethiopia is left for the publicly owned and the
only telecom company – Ethio telecom. This is identified in the NDS as a problem.
Telecommunication service is introduced in Ethiopia in 1894, amazingly just after 18 years
of its invention and the first patent given to the American Alexander Graham Bell. Since
then, Telecom remained a public company and the only one to date. Beginning in 1991 the
telecommunication sector was divided into two: The telecommunication authority (in
charge of regulation) and the telecommunication corporation (in charge of infrastructure
and service provision). The latter is renamed Ethio Telecom in 2010.

Since 1989 Ethio telecom had a Digital Microwave and Fibre Cable Communication for its
operation. Currently, Ethio Telecom has also over 20,000km of fibre optics line under its
operation (FDRE, Digital Strategy, 2020). Mobile penetration resulted in an increase in
internet coverage from 1.1% in 2011 to 18.6% in 2017. Mobile coverage has further grown
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to about 45 percent in 2021 and 60 percent in March 2022 (Table 3.1). However, compared
to countries in the rest of Africa as well as all least developing countries (LDC), its digital
depth, as measured by tele density and given in Table 3.1., is found to be half the level in
the rest of Africa. This is found relatively better for mobile, compared to internet and broad
band subscription as well a fixed line density. Active mobile broadband subscriptions in
Ethiopia stand at 7.1%, compared to 23% in Uganda, 35% both in Rwanda and Kenya and
24.8% (on average) in the SSA region (FDRE, Digital Strategy, 2020). While internet
adoption has increased, use in economically productive activities remains limited.
Currently much internet activity is focused on social media rather than E-Commerce,
business or education (FDRE, Digital Strategy, 2020). Similarly, broadband penetration rate
per 100 inhabitants in Ethiopia is one of the lowest in the region at 0.2 percent (Table 3.1).
In addition, only 1 percent of the population uses internet to carry out its transactions such
as paying bills or buying online as well as to access its account using mobile phones in 2017,
according to the 2020 Global Findex data base. This differential penetration rate of mobile
and broadband is found to have a corresponding differential effect on growth (Alemayehu,
2022a). In sum, all the challenges outlined here at national level have strong bearing on
digitalization in the financial sector. Thus, the financial sector will significantly benefit if
this challenges, including national level cyber security, which is currently being handled
by the federal government, are addressed very well at national level.

Table 3.1 Selected Indicators of Tele and Internet Density.

Tele Density 2015/16 2016/17 2017/18 2018/19 2019/20
(Per 100 inhabitants)
Mobile (per 100 inhabitants) 43 61.6 39.8 41.9 44.9
[42] [44.5]
Internet and Data (, density, per 100 inhabitants) 10 17.5 18.5 0.5 0.6
[0.502] [0.660]
Fixed Line (density, per 100 inhabitants) 1 1.2 1.2 1.2 1
[1.21] [0.979]
Broad band & Internet Subscribers (No, millions) 0.212 0.216
Broad band & Internet users (No, millions) 0.021794 0.02353
Memo*
Mobile users/100 inhabitants
Africa 86.6 87.5 86.7 89 88.7
Least Developing Countries (LDC) 67.5 67.6 68.4 71 74.9
Individuals using internet/100 inhabitants
Africa 20.3 22.3 24.8 26.3 28.6
Least Developing Countries (LDC) 12.4 14.3 16.1 17.6 19.5
Source: Author’s computation based on NBE data
Note: Figures in the square bracket [ ] are number in millions.
* is based on data from International Telecom Union (ITU) estimates, 2021.

In addition to IT related infrastructure, additional supporting infrastructure, especially

access to electricity is also crucial for effective use of digitalization. Generally, frequent
power outage is also highly correlated with network interruption and 80% of Ethiopian
 12 
 

firms encounter that (Figure 3). As shown in Figure 2, generally, access to electricity and
digital penetration in Ethiopia is one the lowest in the region. This has detrimental impact
on digital penetration in the country. In particular, access to electricity service in the
country is only 44%. This has a major difference between urban (96%) and rural areas (31%),
however (FDRE, 2020; Figure 2). In addition, access to mobile apparatus, digital ID and
Cyber security are also important for digital penetration. Ethiopia has lagged behind in all
these fronts. There is no national ID in Ethiopia yet (although is under preparation in 2022).
All these infrastructure deficit and lack of national ID are some of the other major reasons
that limits the expansion and wider use of digitalization in the Ethiopian financial sector.

Figure 3.2: Infrastructure (access to electricity and mobile subscription) Indicators (2019)

Rwanda Ethiopia Kenya Malawi Tanzania Uganda

100

85.8
82.9
82.8
82.2

81.5
76.49

80
75

57.6
47.8
45.0

42.6

45
35.5
34.7

39
18

ACCESS TO ELECTRICITY (% OF  MOBILE CELLULAR  FIRMS EXPERIENCING 

POPULATION) SUBSCRIPTIONS (PER 100  ELECTRICAL OUTAGES (% OF 
PEOPLE) FIRMS)

In sum, in relation to the national digital echo-system and the IT infrastructure which is the
backbone of digitalization in the country in general and the financial sector in particular,
we generally state that the condition in Ethiopia is very poor by regional standard. This is
the case in terms of network capacity; speed, reliability that hinder the best use of
digitalization both in the financial sector and the country at large. In addition, it is also
found to be costly both for institutions as well as citizen that further hinders its wide use.
The national digital strategy, though visionary, lacks specificity and prioritization for
implementation and quick result. I will examine the impact of this in the financial sector at
firm level after examining the general growth effective of digitalization at macro level in
the next section.
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3.2 The Effect of Digitalization on Growth: A Growth Model

A study for “The Global Information Technology Report 2012” (Sabbagh, et al, 2012). that
was based on 150 nations that includes Ethiopia for the period of six years from 2006 to
2010 categorized these countries in to four categories: “Digitally Constrained”,
“Emerging”, “Transitional” and “Advanced”. This categorization is found to correspond,
inter alia, to the contribution of digitization to economic growth, job creation, innovation
and welfare of the society. (Khan et al, 2015; Sabbagh, et al, 2012). In this classification
scheme, Ethiopia is found in the category of digitally “constrained economies” which are
countries with a digitization score below 25% and, hence, have barely begun to develop
affordable internet connections. In such countries, internet services remain expensive and
limited in reach. By contrast, “Advanced economies” are those with a score of 40 and higher
that are in the most mature stage of digitization. These countries have a talent base that can
take advantage of digital services and such services are affordable and reliable (Khan et al,
2015; Sabbagh, et al, 2012).

This study also attempted to quantify the growth effect of digitization (an index made up
of ubiquity, affordability, reliability, speed, usability and skill indicators is used) using a
classical production function-based growth model, controlling for a number of variables.
They found that an increase in digitization by 10 percentage points triggers 0.50 to 0.62
percent gain in per capita GDP growth. By contrast, previous studies that focused mainly
on broadband penetration established that a 10-percentage point increase in broadband
penetration contributes a gain in per capita GDP growth of just 0.16 to 0.25 percent
(Sabbagh, et al, 2012). The same study also noted that digitization also has a significant
impact on job creation in the overall economy: an increase of 10 percent in digitization
reduces a nation’s unemployment rate by 0.84 percent (Sabbagh, et al, 2012). Similarly,
Katz’s (2012) study showed that a 10% increase in internet (broad band) penetration can
increase a country’s GDP by 0.2 to 1.4 percent. I have estimated similar standard growth
model specified in the previous section to gauge quantitatively the impact of digitalization
on GDP growth in Ethiopia below. Since the effect of digitalization on growth could vary
significantly across sectors, I have also estimated the growth effect of digitalization on
sectoral GDP too.

The Ethiopian GDP is recently being dominated by the Service sector. The service sector’s
contribution to GDP was about 40% in the last five years (2015/16-2019/20). Its
contribution to GDP growth also ranged from 29 to 46% in the same period. The service
sector contribution to urban employment was also about 67% in -2019/20. This further
justifies our focus on the service sector using the financial sector as a case study.
 14 
 

Agriculture follows the service sector in its contribution to GDP at 33% to 36% in the same
time and 33% in 2019/20. Given the subsistence and traditional nature of agriculture as
well as the low level of industrial development to deploy DTs such as digitalization, the
impact of DTs is expected to be strong in the service sector. Within the Non-agricultural
sectors, although the industrials sector’s contribution to GDP has recently increased from
10% a decade ago to 24 to 29% in the last five years (201/16-2019/20), this is dominated by
the construction sector that is contributing about 70% to the industrial sector’s output.
Manufacturing, considered the dynamic sub-sector necessary for structural transformation
remained very small, being on average about 5 of GDP for the past four decades (NBE,
2019/20; Alemayehu 2008; Alemayehu and Addis, 2017). Thus, given the small share in
GDP and less sophisticated nature of the Ethiopian manufacturing sector (dominated by
food and metal firms) (see Alemayehu 2021a for instance), significant impact of
digitalization in the growth of this sector may not be expected.

The Econometric Model

An Auto-Regressive Distributive Lag (ARDL) based error correction model (ECM)
formulation of equations [1b] is given as equation [1c] below. This econometric approach
is chosen for the following reasons: first (i), it is a simple and straight forward approach
that can easily be implemented in a single equation framework, even if the variables in the
model are I(0) and I(1), as long as they are co-integrated. It has also excellent small sample
properties suitable to our case (Pesaran and Shin, 1999; Pesaran et al, 2001; Pesaran, 1997;
Alemayehu et al, 2015). Second (ii), since it is formulated in a dynamic ECM form, it
handles both short term dynamics as well as long-term equilibrium relationships suggested
by theory and specified as equations [1b] in a single equation (variables as defined in
equation 1).

∆Y γ ∑ γ ∆Y ∑ γ ∆L ∑ γ ∆K ∑ γ ∆D
Y [1c]

Data and Estimated Results

Both national international sources of data are used. Real level of GDP and sectoral GDP is
taken from the Ministry of National Planning and Development (MNPD) and the National
Bank of Ethiopia (NBE) for the period 1992-2012 Ethiopian calendar (1999/2000 –
2018/2019 European calendar). I have used labour and capital stock data from Groningen
 15 
 

University Structural Change database. Two indicators of digitalization are used: number
of “mobile subscribers” and “broad band subscribers”. The latter data is available since
2000, given that digitalization in Ethiopia began around this period. This data is obtained
from international telecommunication union (ITU)  World Telecommunication/ICT
Indicators database. However, this data is incomplete and inconsistent in some of the years
with the data from the national telecom operator, especially since 2015/17. Thus, staring
from this date, the data from Ethio Telecom as reported in NBE Annual Report, various
years, is used. Since the ITU data is also based on European calendar year, for the years
before 2015/16, it is converted to Ethiopian calendar years by averaging the data for two
consecutive years that correspond to the Ethiopian calendar year (the Ethiopian fiscal year
runs from July to June). The final database has 20 years data. Twenty years data point is
very limiting for timeseries analysis and the country doesn’t have a quarterly GDP data.
Thus, I have used standard software-based generation of quarterly data from the annual
data - obtaining about 80 data points. I have used the natural logarithm of all variables for
estimation. Hence, the estimated results reported in Tables 3.2a and 3.2b are elasticities.
The model passed all diagnostic tests as reported in Table 3.2a. The digitalization indicators
are also found to be co-integrated with all the variables of the model, as can be read from
the “bound test” result reported in Table 3.2a.

As can be read from the long-run estimated results of the models given in Table 3.2a, a 10
percent increase in the number of mobile subscribers leads to 0.5 percent growth in GDP.
This becomes nearly one percent in the service sector. However, this effect is found to be
relatively limited in the agricultural sector, at 0.3 percent with no effect in the industrial
sector as the value become statistically insignificant (not reported). Given, the very small
and traditional nature of the industrial sector, dominated by the construction sector, this
result is reasonable.

The same growth model is also estimated using the number of broad band subscribers (in
natural log) as a proxy for digitalization instead. As can be read from the second half part
of Table 3.2a, the effect of broad band penetration on growth still is found to be positive
and statistically significant. However, the potency of the digitalization effect is reduced
nearly by half (40 percent) for GDP growth and by 33 percent for the service sector GDP
growth. The effect of broad band expansion is found to have no effect in the agriculture
and the industrial sectors (statistically insignificant in both; not reported).
 16 
 

Table 3.2a: Growth Effect of Digitalization in Ethiopia: Long-run Estimated

Coefficient/Elasticities (n=86, 2000Q1 to 2019Q4)^
All, in natural logarithm GDP (n=68) Service GDP (n=71) Agriculture GDP(n=72
Long run Coefficients  Coefficient t-Statistic Coefficient t-Statistic Coefficient t-Statistic
Using Mobile Subscribers
Capital stock  0.24 2.09** 0.06 1.24 -0.03 -0.35
Labour  1.61 12.15* 1.69* 30.8 1.86* 20.3
Mobile Subscription  0.05 3.62* 0.09* 11.24 0.033* 2.59
Using Broad band Subscrib
Capital stock 0.15* 2.27 0.02 0.25 -0.18* -3.12
Labour 1.77* 23.4 1.79* 18.13 2.1* 30.42
Fixed Broadband Subscriptio 0.03* 3.53 0.06* 4.9 -0.01 -1.36
Diagnostic Tests
Bound Test (Co-integration t F(9.91)* [3.4L&3.8U F(21.8)* [3.4L&3.8U F(33.8)* [3.4L&3.8U]
Adjusted R-Squared 0.99 0.99 0.99
Jarque– Berra (Residual 0.81(0.66) 2.7(026)
normality) 0.52(0.77)
Heteroskedasticity ARCH F(1,58) 1.31(0.26) F(1,66) 1.97(0.16) F(48,37) 0.11 (0.74)
Ramsey RESET F(1,55) 0.00 (0.98) F(1, 62) 1.41(0.24) F(1,6) 0..11 (0.91)
Note: *, **, *** indicate the coefficient significance at 1%, 5% and 10% level of significance respectively;
^All models are found to have a serial correction problem (which gives biased results in the ARDL approach used)
hence the estimation is done using the New-West HAC correction method which corrects for both auto correction
and heteroscedasticity.

The short run elasticity values of the model extracted from the estimated error-correction
model of equation [1c] is also given in Table 3.2b. The result shows that the short-run effect
of digitalization is mixed. The short-run elasticity of GDP growth with digitalization
(mobile subscription rate) is found to be 0.04. This value is found to be 0.02 with three and
four quarters lag for the service sector. The contemporaneous effect in the agricultures
sector in the short run is also found to be positive and statistically significant at elasticity
value of 0.06, while this becomes negative 0.03 and 0.02 for the 3rd and 4th quarter lag
period. In general, the nearly “zero” nature of the short-run elasticity values for all shows
that the benefits of digitalization generally come in the long run.

In all the three models, the adjustment coefficient (the error correction term) is found to
have the correct sign that is statistically significant. However, the speed of adjustment is
generally found to be very low. Thus, only 6 to 9 percent of the deviation from equilibrium
is found to be corrected in one quarter – showing the relatively sluggish nature of
adjustment of growth to a deviation from its equilibrium level in these models with regard
to digitalization. The latter also in a way shows that if you missed the opportunity of
digitalization it takes a while to adjust it.
 17 
 

Table 3.2b The Short-run Estimated Coefficients/Elasticities: Growth Effect of Digitalization

Variable (all, in natural logarithm) GDP (n=68) Service GDP (n=71) Agriculture GDP(n=72)
Short-run Coefficients Coefficient t-Statistic Coefficient t-Statistic Coefficient t-Statistic
Δ GDP
     Lagged 1 periods (‐1)  0.33* 3.12 0.38* 8.68 0.25* 12.8
    Lagged 2 periods (‐2)  0.08* 2.35 0.20* 4.96 0.09* 7.17
    Lagged 3 periods (‐3)  0.04* 2.84
    Lagged 4 periods (‐4)  0.17* 3.11
Δ Capital stock I -0.04* 2.92 -0.61* -4.92
    Lagged 1 periods (‐1)  0.02** 2.15 -0.02*** -1.72 -1.76* -2.72
    Lagged 2 periods (‐2)  0.05* 2.4
    Lagged 3 periods (‐3)  -0.11* -2.6 3.32
    Lagged 4 periods (‐4)  -0.63* -6.12
Δ Labour  1.80** 2.0 0.74 1.56 2.7* 3.0
Δ Mobile Subscriber  0.04* 3.97 0.06* 4.7
Lagged 3 periods (‐3)  0.02** 2.0 -0.03* -2.97
Lagged 4 periods (‐4)  -0.02* 2.7 0.02* 3.13
The Error Correction Term (ECM) -0.06* -3.57 -0.08* -6.83 -0.09* -6.13
  Note: Diagnostic test are the same with Table 2a 

IV. A Case Study: Digitalization in The Financial Sector

In this section we have selected the financial sector as case study to examine the nature
and impact of disruptive technology in one of the sub-sectors of the service sector at
micro level. The focus on the financial sector is justified for it is one of the most exposed
sub-sector to the disruptive technology of digitalization.

4.1 Digitalization in the Ethiopian Financial Sector in Regional Context

International Finance Corporation (IFC) identified more than 50 factors that influence the
growth of digitalization and digital payment system in the financial sector such as mobile
money. Of these, three are especially important (IFC 2011): regulation, competition with
other instruments of financial access, and user perceptions and skills” (Donovan, 2012).
Thus, our understanding of digitalization in the Ethiopian financial sector is as a process
that allows a full use of the ICT to modernize and enhance the provision of financial
services easily and efficiently in the context of the three factors noted. Before going to this
discussion at firm level, it is imperative to briefly describe the Ethiopian financial sector by
benchmarking it with the sector’s performance in the Eastern Africa and African region at
large.

The Ethiopian financial sector is dominated by the banking sector due to its low level of
development (Figure 4). The non-banking financial sector is generally missing – thus
 18 
 

understanding the banking sector in Ethiopia is tantamount to understanding the financial

sector in the country. The sector is composed of one dominant public bank, 1 public policy
banks, 16 private banks, 18 insurance companies (16 private and 2 public) and 41 micro-
finance institutions (MFIs) (11 public, 13 private and 17 NGO owned). The banking sector
itself is also dominated by one publicly owned bank – the Commercial Bank of Ethiopia
(CBE). The CBE accounts for about 60 percent of the national deposit and lending in the
last three years. This share was much higher in the past (see Alemayehu, 2008; Alemayehu
et al, 2017; Getenet, 2021). The insurance companies are very small with a combined capital
of 9.65 billion Birr in 2020, which is just 8.5 percent of the total capital of the banking sector
(NBE, 2020). The 41 MFIs fare better than insurance companies, as they had a combined
capital of 19.4 billion, which is about 17% of the total capital of the banking sector in the
same year, 2019/2020. Thus, it makes sense to talk about the Ethiopian banking sector as
Ethiopian financial sector.

Figure 4.1 The Profile of the Ethiopian Financial Sector

The National Bank 
of Ethiopia 
(Regulator)

16 Private  41 Micro Finance 
Commerical Banks 18 Insurance firms  Instutions 
2 Public Banks
(8% Capital)
(40% of Assets) (17% of Capital)

Commemericial  The Development 
Bank of Ethiopia Bank of Ethiopia Emerging FinTech 
(Negligable)
(60% of Assets) (7% of Capital)

Source: Author’s computation based on NBE data (2019/20)

Note: Assets and capital refers to assets and capital in all the banking sector in 2019/20

Recent years saw the emergence of new FinTech (financial technology) based firms which
are both foreign and domestically owned but are generally very small and at nascent stage.
Most of them are attempting to engage in mobile payment systems and E-commerce but
 19 
 

their impact is still to be seen. In addition, the country also witnessed an emerging public
mobile payment system, Tele-Birr, which is owned by Ethio Telecom – the national telecom
monopoly. The latter claimed to register about 9.5 million customers since its establishment
four months ago, in May, 2021. It has signed an agreement with 26,000 agents, 8 banks and
a number of merchants (it also works with phones that are not smart using the SSSD
technology). With 55 million customer base it has, Ethio-Telecom has a great potential to
dominate this market like that of Kenya’s MPESA in the coming years.

With the joining of the telecom market by the first private telecom company – the Kenyan
Safaricom, in 2021, we expect a strong growth in digitalization and related services that
may disrupt the current digital-based eco-system. Given the early stage of the Tele-Birr
development and the general picture offered about the Ethiopian financial sector above,
the focus of this case-study is on the banking sector.

It is worth contextualizing the Ethiopian financial sector in the trend of the Sub-Saharan
Africa (SSA) financial sector and its recent growth. The depth and coverage of financial
systems in SSA expanded steadily over the past decade -helped by reform efforts
(Kasekende 2010; IMF 2015) and digital development (EBI, 2018). Access has also improved
significantly in recent years. Account penetration in SSA countries has recorded a
remarkable increase of almost 20 percent between 2011 and 2014; and this has further
increased to 33 percent in 2018. If we include other types of accounts which are not
necessary opened in the financial institution, such as mobile money account, the account
penetration rate (i.e., the share of account holders among the population aged 15+) rises
from its low level of 23% in 2011 to 43% in 2017 (EBI, 2018.1). This is a 100 percent growth
though still low compared to other developing countries level of 63% in 2017. Ethiopia’s
performance on this front in the region, which is below 35% is one the lowest in the
continent although better than Sudan and Burundi (Figure 4.2). Low access to financial
services and lack of awareness of existing digital financial services limit Ethiopians’ use of
digital payment systems. The country generally relies on cash-based transactions and
people trust that. As a result, accessing a physical cashier is the main withdrawal method
(83%), even compared to ATMs (1%). Online payments are negligible and interoperability
for financial transactions is in a nascent stage (FDRE, Digital Strategy, 2020).
 20 
 

Figure 4.2. Accounts at Banks or Other Financial Institutions (Population age 15+)
90.0
80.0 Ethiopia Kenya Malawi
70.0 Tanzania Uganda Rwanda
60.0
50.0
40.0 34.8
30.0
20.0 17.6
12.0
10.0 3.0 7.3
0.0
Account
ownership at a
financial Risk premium on
Domestic credit
institution or CPIA financial lending (lending
to private sector Interest rate
with a mobile‐ sector rating rate minus
by banks (% of spread
money‐service (1=low to 6=high) treasury bill rate,
GDP)
provider (% of %)
population ages
15+)
Ethiopia 34.8 3.0 17.6 7.3 12.0
Kenya 81.6 3.5 34.6 5.9 6.1
Malawi 33.7 3.1 10.5 18.4
Tanzania 46.8 3.3 13.1 6.0 7.5
Uganda 59.2 3.5 12.6 8.9 10.6
Rwanda 50.0 3.5 20.7 11.7 9.3
Source: Author’s Computation based on WDI data, The World Bank

For Katende countries such as Ethiopia with lower rate financial development, EIB (2018)
advised developing their customer base and engage in their own digitalization
development. However, this development is also dependent on the private sector
development, noted EIB (2018). The latter will require technical assistance and knowledge
transfers, not just financing, to the private sector. This is a long‐term investment that
banking groups need to do for it will be in their economic and financial advantage as they
groom tomorrow’s larger and stronger clients ‐ but the work needs to begin now (EBI,
2018). This could be done, EBI (2018) suggested by offering innovative financial and policy
instruments, including FinTech, portfolio guarantees and the like (EIB, 2018).
The continent also saw significant development in the use of IT in its banking sector in
general and on mobile banking and FinTech in particular. Thus, according to EIB survey,
half of the banking groups in SSA reported being fully deployed in terms of general IT
infrastructure but the majority of them are in deployment and planning deployment stage
in terms of internet‐banking technology, mobile banking and FinTech in 2018. As a result,
in the relatively advanced countries such as Kenya, financial inclusiveness through mobile
banking has reached unprecedent level. Ethiopia’s performance in this respect is also one
of the lowest in the region where the internet payment system being almost none existent
 21 
 

while digital payment generally being better – yet in all payment channels its level is the
lowest in the East African region (Figures 4.2 and 4.3).
Figure 4.3. Mobile Accounts (Population age 15+, as percentage)

Source: EBI (2018).

Partly because of the country’s poor performance in all indicators as given in Figures 5 and
6, except in “risk-premium on lending”, in the East African region, the Ethiopian financial
sector is the least efficient in the region making the cost of doing business for firms
expensive. Having this general understanding about the country’s lowest position in the
regional context, I will now turn to an in-depth look of a sample of banks as a case study.
This is carried to identify factors behind the challenge of digitalization in the sector,
beginning with the dominant banks, the CBE.

4.2 The Case Studies: The Financial/Banking Sector

The case study includes the dominant bank, CBE, that accounts for 60% of total deposit and
outstanding loan of the banking sector in the period 2018/19- 2020/21. The case study also
includes three private banks, out of 16 private banks in the country. The three banks are
among the top five biggest private banks with a combined deposit and lending share of 30
percent in the total deposit and lending portfolio of the private banks in the country during
the same period. The selection of the three private banks is also informed by the variation
in their deployment of digitalization in their respective banks. Thus, while Dashen Bank
prefers partnership with private Fintech foreign firms, United Bank prefers to do that in-
house. Abyssinia Bank is more devoted to have advanced digital products such as virtual
banking, which is missing on the others. The analytical approach used in conducting the
case studies is summarized in Figure 4.4
 22 
 

Figure 4.4: The Analytical Approach of the Case Studies

Desruptive Technology in the Financial Sector

Forms and Levels of Desruptive Technology (Digitalization) in the Financaal Sector

Core‐banking IT Payment Systems Other Fintech Products

Challenges and Effects of Disruptive Technology in the Financial Sector

Postive Effects (& oportunites) Negative Effects (& Challenges)

Implication for the Financial Sector Business Model
Embracing it in the Current Bussienes Model Comingup with a New Business Model

Source: Author’s computation from the literature review

4.2.1 The Public Bank: Commercial Bank of Ethiopia

The last two decade saw a significant expansion of the banking sector in Ethiopia
(Alemayehu et al, 2017). The last five years in particular witnessed significant expansion of
the banking sector in terms of branch network and capital expansion, the use IT in banking
(digital channels) as well as significant growth in domestic resource mobilization and
lending.

There are two publicly owned banks in Ethiopia. However, one of these banks, the
development bank of Ethiopia (DBE) is a policy bank that is difficult to characterize as
commercial bank (Alemayehu et al, 2017). In addition, its size is also relatively small,
accounting only for about 7 percent of the total assets of the banking sector and 1 percent
of the total bank branches in 2019/20. Thus, our focus is on the other bank, the Commercial
Bank of Ethiopia (CBE). The CBE dates back to the establishment of the State Bank of
Ethiopia in 1942. CBE was legally established as a share company in 1963. In 1974, CBE
merged with the nationalized privately owned Addis Ababa Bank and became the public
bank since then (see Alemayehu 2008).
 23 
 

Today CBE has more than 32 million account holders and 6.5 million mobile bank users as
of September, 2021 (Table 4.5). Active ATM card holders reached more than 11.5 million by
2021. With more than 40,000 permanent employees and more than 22,000 outsourced jobs
as of June 30, 2021, it is the biggest bank in the country – with a market share of about 60
percent in terms of assets, deposit mobilization and lending. It also the dominant bank both
by number of branches and capital (Table 4.2; 4.5). By 2019/20, the number of bank
branches in the country reached a total of 6,511 up from 4,257 in 2016/17. Private banks in
aggregate increased their branch network, from 681 in 2009/10 to 2,837 in 2017 and to 4,593
(a share of 70.5%) today. The CBE has also significantly increased its branches, from 1,310
branches in 2017 to 1,825 in 2021, accounting for 28% of the total. Branch expansion, which
apparently is against the impact of digitalization (see below), is taken by Ethiopian banks
as a means to their aggressive deposit mobilization endeavours with excellent success – it
was also a policy direction given by the previous (EPRDF) government. The total capital
of CBE has reached Birr 49.6 billion Birr which is 44% of the total assets of the banking
sector in 2019/20 (Table 4.2). This has been 54.6% in 2017, however (NBE, 2020). During the
last three years (2019 to 2021) CBE accounted for 60% of total outstanding loans as well as
57.3% of total deposits in the banking sector (NBE, 2020). Thus, given its dominance, we
have devoted more space to CBE’s digitalization effort in this section.

Table 4.2 Capital and Number of Branches of the Banking Sector (In millions of Birr)
2011/12 2012/13 2013/14 2015/16 2016/2017 2017/18 2018/19 2019/20
Capital (in millions of Birr)
Total (all banks) 18,010 23,346.0 26,437.3 13557.5 42579.6 85751 101498 112898
Public Banks 9134 12,046.0 11,821.9 21058.3 50174.7 51,528 57494 57332
[CBE share of 34.6 38.7 34.2 31.5 54.6 51.1 49.1 44
National, %)
Private Banks total 8,876 11,300.0 14,615.4 22002.2 27788.1 34.223 44004 55575
Branch Network (numbers)
Total (all banks) 1289 1728 2,208.0 3,301 4,257 4757 5564 6511
Public Banks 675 869 1,003.0 1260 1420 1482 1685 1918
[CBE share of 43.4 42.4 39 34.8 30.8 28.9 28 28
National, %[#]) [559] [732] [856] [1,150] [1,310] [1375] [1578] [1825]
Private Banks total 614 859.0 1,205.0 2041 2,837 3275 3879 4593
Source: Author’s computation based on NBE, Annual Report (various years),

CBE has the Leading Role in Modernizing the Payment System in the Country
With 85 percent of its 120 million people leaving in rural areas engaging in subsistence
agriculture, cash, understandably, is the main payment system in Ethiopia. Despite this,
CBE is a pioneer in digitalization that also threatened many privately owned banks and
hence forced them to engage in digitalization, playing a leading role in modernizing the
payment system in the country in the process. Table 3 shows this development in which
 24 
 

the CBE has a market share of about 50 percent in the national ATM and internet banking
while its market share in the use of POS and mobile banking reached a staggering 77.6 and
80 percent, respectively in 2017. Although we couldn’t manage to get the data for its current
market share, all indicators show it has still a leading role as that of 2017 in terms of market
share (see Table 4.3 and 4.4).

Table 4.3 Modern Payment Systems and the Market Share of CBE
Digital Channel March2016/17 2020/2021 (2013)

Payment Systems Numbers Market Share Numbers

(of CBE) (in %)
ATM networks 1,501 50 3,138
POS networks 7,382 77.6 4,412 (active)
Mobile banking users 1.9 million 85 6.6 million
Internet banking users 35,208 48 154,469

Source: CBE (2017; & 75yrs Anniversary Magazine) and CBE, 2021 data.

Table 4.3 further shows the significant number of transactions that are carried using these
digitalized payment systems. On average, CBE's ATMs channel handled 4.67 million
transactions with a value of 4 billion Birr per month in 2016/17. Similarly, the POS channel
handled about 260,000 transactions worth half a billion Birr per month in the same period.
Similarly, 221, 000 transaction that worth nearly a billion Birr per month were handled
through mobile banking during the same period (2016/17). Internet banking performed,
relatively, poor handling only 4,500 transaction that worth 125 million Birr per month. This
has significantly improved in 2021 (Tables 4 and 5). In 2019/20 for instance all digital
channels except POS expanded. As a result, about 163 million transactions worth about
Birr 200 billion were carried out through digital channels, mainly ATMs in 2019/20. This
represented 37% of the bank’s total transaction volume that could have been mediated with
teller service – which is a significant development (Annual Repot, 2019/20). Thus, the
transaction per month more than doubled and the value of these transaction grew about
three times, compared to 2016/17 (Table 4.4)
Table 4.4 Modern Payment Systems at CBE (2016/17 & 2019/20)
Based on annual 2016/17 data 2019/20 (Annual Report)
Average Average amount Average Total amount
Digital Chanel Numbers of of transaction per Numbers of Average amount
transaction month (in transaction of transaction
per month Billions of Birr) per month per month (in
Billions of Birr
ATM 4.67 million 4.040 163 million These
POS 0.258 million 0.466 transaction transactions
per year, worth 198.5
Mobile Banking 0.221 million 0.901
these are billion Birr per
Internet Banking 4,508 0.125 mainly year)
ATM.
 25 
 
Sub-total (digital 5.15 million 5.53 billion -This is - This comes to
channels) about 13.6 average
million monthly value
transaction of about
per month 16.6 billion Birr

Source: Author’s Computation based on CBE 75 yrs. Anniversary Magazine and CBE Annual
Repot, 2019

The Bank IT and Human Resource (HR) Development

The Birrs use of digitalized payment system at CBE is also accompanied by the upgrading
of its core banking software that networked all the branches that was carried in the last
three years, 2019- 2021. CBE has also began using its enterprise resource management
(ERM) system that it has been developing in the last three years. The use of ERM aims: (a)
to standardize and align business processes of the bank with industry best practices; (b) to
streamline and derive synergy among the closely related roles in the bank so as to bring
operational excellence; (c) to reduce paper work, duplication of data entries and manual
entries that is aimed at improving the efficiency and effectiveness of the bank, (d) to
establish self-service environment and improve internal communications and (e) support
sophisticated data analysis to enhance strategic decision making and planning. The ERM
aims to develop a "Human Resource Modules", a "Finance Modules", a "Supply Chain
Management Modules" (for procurement, warehouse & maintenance management) and
"Hyperion Planning Modules" such as Business Intelligence (BI) and Data Warehouse
Management (DW) which are part of CBE's digitalization and IT development strategy.
The latter two are not yet deployed.

The CBE has also already completed and operationalised the CBE-Birr (Mobile Money) and
Agent Banking system. The CBE Birr has reached 11 million users in 2021. It has also
established the CBE's contact center and disaster recovery data centre which are part of the
CBE's IT development endeavour. It has invested significantly on its data management and
data storage system, with the plan to expand the latter to a significant level that is
comparable to “cloud system” in a few years’ time. Despite the fact that it is now
comfortable with its infrastructure internally, the CBE has been and still is generally
challenged by the national communication/internet system as well as lack of National ID.
For instance, at the beginning of 2018 (end of 2017), ATM’s uptime is about 70%, 17%% of
the reasons for down time being due to network/commination problems and about 6.5%
being due to hardware failure (cash out of run and host/ATM fault).
 26 
 

IT development, deployment and its efficient use is closely related to human resource
development. Thus, CBE's advance in IT development needs to go hand in hand with its
human resource development or skill formation. It also needs continuous skill upgrading
of its staff to tackle the high turnover of such skilled personnel. With this recognition the
CBE has drawn a comprehensive human resource development (HRD) strategy in
collaboration with Frankfurt School of Finance and Management (FSFM). It has begun thus,
offering various on job-training on a continuous basis at a dedicated training centre built
in Addis. Still, the professional staff it has a long way to go, given the high turnover of staff
for greener pastures as well as CBE’s loss of its invaluable IT personnel due to
mismanagement and (ethnic) politicization of the bank by the CEO before the current
CEO/president of the bank. In general, to make best use of its IT investment, monitoring
the twining-up of the IT development and in-house skill formation on a continuous basis
needs to be done.

In sum, CBE is the leading bank in modernization (digitalization) of the payment system
in the country. Its future trajectory seems also excellent as could be read from the figures
given in here and my discussion with key-informants. Given, the significant number of
unbanked populations in Ethiopia, the CBE has to go a long way, especially in mobile
banking, by learning from the world class leading role and example of Kenya and its M-
Pesa. The coming of Safaricom to Ethiopian market needs also a strategic direction at CBE
to withstand the upcoming competition with the world class provider of mobile payment
system. The time-consuming nature of procurement rules at public firms also hinders
digitalization because it takes more than a year to procure and use technology at CBE as it
is a public bank. By the time it is ready to use the technology it acquired, the technology
could be challenged by obsolesces – showing the importance of negotiating with the
government for more autonomy to deal with such time-sensitive issues. Digitalization in
the country (including CBE) is also generally vender-driven for lack of expertise in all areas,
especially the business side of digitalization within CBE as well as the management’s risk
aversion stand in investing on in-house capacity that could replace vendors (see below the
successful story of United Bank on this). The emerging Tele-Birr (the national mobile
payment system) and the coming of new telecom operators in 2022 will be a major
challenge for CBE that needs a strategic direction on digitalization and its implications for
the CBE’s current business model.

CBE doesn’t seem to take the disruptive and transformative effect of digitalization and the
impact of the incoming new actors on its business model in its strategic business plan. This
could only be handled by aligning its IT and digital infrastructure with digital business
 27 
 

development in a strategic manner. The digital business is significantly lagging behind the
IT infrastructure development at CBE. Important services such as trade services, credit
provision, E-commerce and deploying compatible payment system in the national digital
echo system (such as Application Interface Program, API) and similar developments in the
industry are not yet developed. Thus, the alignment of the two and effective use of
digitalization requires, among other things, in-house human resource development and
deepening digitalization. More than anything it needs a digital strategic direction to handle
all these challenges mentioned and their implications for its current business model.

In addition, as a leading bank in the country, CBE needs to measure the trend of its IT and
HR development, digitalization and digital transformation not with local banks, but rather
with regional (in particular Kenya, North African, South African banks for instance) as well
as global banks so as to continuously upgrade itself and play a leading role. This is
beneficial not only for itself but also for the whole banking system in the country (which
also accords well with its mandates as a public bank). For instance, its planned data
management and storage investment (to be carried in a Town 100km north of Addis Abeba)
should have envisaged providing such big data storage, management and related services
not only for itself but also for the entire banking system, with the aim of selling that service,
which is comparable to a “cloud service” provision, to private banks – the majority of which
are small to engage in such significant investment by themselves cost effectively. Such
vision is also more appealing from national security and national sovereignty perspective
– but CBE is not doing that and it is still a worth considering task.

4.2.2 Private Banks: Dashen, Abyssinia and United Banks

I have selected three of the biggest private banks among the sixteen private banks in the
country for this analysis. The three banks account for about 30% of the total capital, deposit
as well as lending of the total private banking sector in 2017/18. This is nearly half the level
of deposit and lending at CBE (which has a share of about 64% during the same time,
2017/18).

Instead of discussing each bank separately, I have organized the information from my key-
informant (KI) interview in all banks and data obtained from each of the banks along
thematic areas: level of digital penetration, challenges encountered in digitalization, and
impact of digitalization on their current business model. A unique feature of each of the
banks relative to the disruptive effect of digitalization is discussed at the end, following the
thematic discussion. I begin this analysis by looking at the motivation for digitalization in
these banks (that is based on KI interview).
 28 
 

In all banks the importance of digitalization is understood because there is a recognition

that the future as well as the global trend is in that direction. The pioneer CBE engagement
has also impacted on digitalization drive of private banks, since the majority of the staff in
the private sector are those that migrated from the CBE when the sector is opened for
private operators. In addition, Ethiopia is populated by a young population to whom the
traditional branch banking is no longer appealing by the day. The banks also recognized
the importance of digitalization in their future competition when the banking sector is
opened for foreign competition (currently foreign owned banks are not allowed to operate
in Ethiopia). Thus, there is a recognition today by all banks that they will not survive the
competition with foreign banks, FinTech’s, and telecom companies without investing on
digitalization now. Because of this recognition, Dashen bank for instance, stopped branch
expansion although branch expansion a business model all banks pursuing in Ethiopia and
is strongly associated with significant deposit mobilization. In fact, before it is scrapped
recently, the central bank (NBE) was demanding all banks to expand their branch number
by 25% each year in a bid to increase deposit mobilization, which it believed can be done
mainly through branch expansion2.

In addition, the challenge of the pioneer digitalization activity of the CBE, the costly and
error-pro nature of storing and managing non-digital information, the impossibility of
generating timely and accurate financial statements, the costly nature of opening branches,
especially in regional towns, customer demand for digital services and the ability to
withdrew (and deposit, transact) their money at any branch (hence the need to connect
branches) have also been the major pushing factors for digitalization. Notwithstanding this
motivating factor for digitalization and the success attained in digitalization so far, the
strategic importance of digitalization in changing the current business model of banks is
not recognized across banks in the sector. Some banks are just doing it motivate primarily
by the desire to get foreign exchange by visitors (by having POS machines) or because other
banks are doing it or connecting branch banks is becoming a must to serve customers in all
branches and in all ATMs in any geographic area, or all of these factors.

a) Digital Penetration: The Peas general picture about the extent of digitalization in
the CBE and three of the private banks in this study are given in Table 5. Table 5 shows
that CBE dominated the banking sector in all forms of digital payment systems. In all the

 
2
   This interference in the working of the commercial banks by the central bank (NBE) is so
pervasive that one of the banks that was established with a strategy of no physical branch, Zemen
Bank, was forced by the government (National Bank of Ethiopia) to open 60 branch banks in a five-
years’ time to operate in the country.
 29 
 

banks all channels of digital payment system have grown significantly. This is generally
led by the growth of card-holder (and hence ATM and POS users), followed by mobile
banking users. In all banks (except United) the number of mobile bank users has more than
doubled. In all banks the number of internet bank users is found to be relatively the lowest.
In ATM transaction and value of transaction per year, CBE, Dashen and Abyssinia saw
tremendous growth in the last three years, while this growth is relatively slow in the United
Bank.

In all banks the mobile and internet bank users are generally a small proportion of their
customer base and are, thus, negligible relative to the rest of the digital channels. The
number of mobile bank users is, however, better although is still very small. For instance,
in Abyssinia Bank, it was just 13% in 2018/19 (99% of which being mobile banking users)
and increased only marginally to 14% in 2020/2021 despite the doubling of mobile bank
users in the latter period. In United bank too, the growth was modest. In the dominant
bank, CBE, the number of users of this channel however nearly doubled from 11 to 20
percent during the same period (Table 5). Great performance in this channel is registered
only in Dashen Bank where the share of its mobile users which was also significant even in
2018/19 at 43% has jumped to the impressive rate of 65%. The latter is the result of a
conscious decision of the management to go digital and reduce other channels (such as
ATM). Dashen management is generally relatively actively conscious of the incoming
competition from foreign actors in the digital front and the implication of that for its current
business model and, hence, acting accordingly.

In all the banks, except Dashen, the relatively small role of mobile banks and the dominance
of the ATM/ Card holders’ channel and its growth show the shallow penetration of
digitalization in the Ethiopian financial sector, especially compared to leading regional
countries in this frontier such as Kenya that is demonstrated in Figures 4.5 and 4.6.

. Table 4.5 Digitalized Payment Systems Channels in Ethiopian Banks

June 2018/2019 [2011 Eth Calendar] June 2020/2021 [2013 Eth Calendar]

Abyssinia Dashen United CBE Abyssinia Dashen United CBE

2011 2011 2011 2011 2013 2013 2013 2013
ATM (No) 173 355 69 2,505 1078 403 119 3,138

POS (N0) 363 1,397 223 3,399 281 1,382 323 4,412

Mobile Banking users 336,659 916,000 144,154 2.3 Mln 708,945 2.08Mln 272,265 6.6 Mln

Internet Banking users 4,655 Same as 16,845 95,000^^ Same as 23,584 154,469
above above
Number of Card 365,390 872,511 187,546 2.9 Mln 910,567 1.29 Mln 271,995 11.56 Mln
holder
ATM transition 929,315 1.795 Mln 163Mln^ 2.15 Mln 1.98 Mln 664,840*
(Number/yr)
 30 
 
ATM transition (Value, 4.33 bln 1.64 Bln 198.5 Bln^ 6.26 Bln 1.846 Bln
Br/yr)
Customers (Numbers) 2,6 Mln 2.14 Mln 21.6Mln 5 Mln 3.2 Mln 1 Mln 32.1 Mln

Mobile Transition 47,842 565,324 445,384*

Nr/year
Internet transaction, 2,775 3,950 479*
Nr/ year
Branch, No 353 413 223 1,444 625 441 345 1825
[28%] [28%]

Source: Annual Report of Banks, various years and each Banks

Note: * For CBE, these figures are per business day. CBE has also a CBE-Birr with 100,666
transaction per business day and 11.32 million users in 2020/21. ^2012 Et Cal; ^^ estimates

In general, both in the private and public banks, the number of digital customers is growing
fast, but accounts for a very small part of the bank’s total transaction (both in number and
value). Notwithstanding this fast growth, the level today is still small compared to the
potential, given about 120m population of the country, with 70% under 30 years of age,
and 60 million mobile subscribers, about 20 million of them estimated to be smart phone
users. This later demography shows digital banking is extremely small in Ethiopia. This is
especially true in comparison to the financial sectors in digitally advanced countries such
as Kenya where such channels account for over 80% of the total transaction in some of the
major banks. In the later banks, the traditional channels (such as branch banking, ATM,
POS and even agent banking) are declining fast (see Figure 7).
Moreover, according to key informants, it appears that the top management owns the
digitalization strategy but this is not internalized both within the bank staff (most don’t
have the drive, consider it risky and hence feel insecure to use digital channels and resist
to leave past habit) and also at the society (customers) level at large. Thus, digital illiteracy
is one of the major problems expressed by the banks for the low growth of digitalization.
In addition, there is also a short-sighted view at the board and share holders’ level, where
high dividend level is usually perceived as an indicator of bank performance (and, hence,
the basis for competition among private banks) instead of investing on sustainable and
digitalized banking system which is crucial in the medium to long run. This is also another
explanation for low level of digitalization in the sector. This has become a tradition in the
sector from which getting out is still a major problem and, hence, hindering investing on
digital banking and its effective use.

Figure 4.5: Trends of Digital Channels in Kenyan Banks: Equity Bank

(Number of Transaction in millions, Internet & Mobile Banking in Right Axis)
 31 
 

50 400
45 44 350
40 335
38 38 300
35 35 273
30 31 250
235
25 200
23
20 150
15 15 134
13
94 13 12 13
12 13 100
10 9 9
5 5 50
3
24 4
0 0
2015 2016 2017 2018 2019 2020

EQ Bank (ATM) EQ (Agent Banking) EQ  (Branch)

EQ  (Merchant, POS) EQ Bank (Mob &Internate)

Source: Equity Bank (2020)

b) Challenges Encountered in Digitalization: Four major challenges are

encountered in digitalization of the financial sector in Ethiopia. The first set of challenges
are related to the deficiency of the national IT infrastructure. The second set of challenges
relate to digital activities that are difficult and/or costly to be addressed by individual
banks but can be handled less costly collectively – that is, the inability of the banking sector
to exploit economies of scale due to national level “coordination failure”. The third
challenge relates to the relationship of banks with the regulatory institution – the central
bank, National Bank of Ethiopia (NBE, henceforth). Finally, the fourth challenge relates to
local IT human resource capacity building and its effective use.

All the interviewees in study noted the challenge of getting a stable, reliable, and efficient
telecom network and communication system. In fact, about a quarter of the operation of
the biggest bank (CBE) services are interrupted due to national communication/network
related problems. This level goes as high as 35% of the service down time of CBE branches
in regional towns (towns located outside of the capital). This problem is also the same
across private banks. Notwithstanding that, Ethio Telecom, which is the sole provider of
this service, has significantly improved its service in the last three years and this problem
is significantly reduced recently, as noted by all banks. In addition, the cost of the Ethio
Telecom service provided to banks (such as network communication backbone) is about
six times expensive compared to similar cost to their peers in East Asian countries. The
banking sector expects this to improve with the coming of the new competitor, Safaricom
in 2022. In addition to network communication problem and cost, frequent power outage
 32 
 

is disrupting. their activities; which is also costly to cope with as they have to use diesel
generators for that purpose.

The second challenge relates to the problem of “coordination failure” which is making the
banking service costly and inefficient. One of these challenges is that banks face significant
license fees for operating system and potentially will also face in the future for cloud service
vendors (such as Oracle, IBM, Microsoft etc). These costs and the monopoly position of
vendors as well as their ability to segment the market/the product and charge very high
price for individual banks (and also non-banking firms such as Ethiopian Airlie, Ethiopia
Shipping Line and some ministries that use such services) would have been significantly
reduced if license and related agreements are made at national, rather than firm level, as is
done in some neighbouring countries – this is what I referred as “coordination failure”
above. Lack of a national framework for cooperation among banks among banks for a win-
win approach (instead of a competition only that is akin to a race to the bottom) by
collectively investing in some indivisible assets that are costly for a single, especially small
banks but could be cheaper collectively is a major problem facing the sector. Such digital
activities that are suffering from “coordination failure” includes, inter alia, joint data
storage and management, AI-based data analysis, data security, license agreement and
potentially cloud service. Such collective efficiency consideration, which also touches upon
national security and sovereignty issues should have been factors for government (the
NBE) to take action, that includes coordinating banks, as this is primarily the government’s
(NBE) responsibility and the country is losing scarce resources for foreign firms as a result.
A related problem that some of the key informants mentioned is the ethnicization as well
as the trend for religion-based banking that is eroding their customer base which the
government may address collectively. They are, however, optimistic the competitive threat
from incoming digitalized payment (and banking) system and the need for merger to
withstand such incoming competition could be used (assisted) by government to tackle
such emerging concerns

A related “coordination failure” challenge for the banking sector is lack of national identity
document (National ID) that uniquely identify an individual. Such ID is a must for any
advance in digitalization of the financial sector. This is a difficult and costly project for the
individual banks to carry. Thus, provision of this at national level is important, yet the
country is still working on it with no end in sight. A short run solution is needed to make
full use of digitalization in the coming few years, if the Nation ID is not forthcoming soon.
One possible short-term solution is to share the customer database of Ethio Telecom with
 33 
 

banks. Ethio telecom already has such information that is acquired when mobile lines are
sold.

The third challenge is related to the banks’ relation with regulatory body, the NBE
regarding digitalization. Due to lack of well trained and capable experts on digitalization
issues at NBE, the conservative and controlling mindset stance of its staff as well as lack of
strategic thinking by understanding the current state of global (and regional) trend of
digitalization and its trajectory, digital innovation and its use has faced a major hurdle in
the banking sector. First, getting an approval both for standard and new financial product
is very bureaucratic and time consuming. This at times leads to obsolescence of the
technology/innovation at the time of approval. Second, as a defensive action to its lack of
regulatory capacity, the NBE follows a rule which de facto says any innovation that is not
in its permissible list as well as all new innovation about which no regulation exist are
illegal with significant penalty. This rule is easy for control and minimizes risk for the
regulator, especially when capacity at NBE is limited. However, it kills innovation at banks,
especially in a fast-changing technology such as IT that includes digitalization. Thus, it
appears digitalization advance in Ethiopian banking sector is bank-led (not
nationally/NBE-led through clear and all-encompassing rules). Instead of facilitating
digitalization, the regulator is a constraint for this bank-led IT-based innovations and
realization of related financial products. The NBE is not accountable when it fails in this
duty either. Sometimes it could retaliate to those who confronted it or complain about its
activities related to approval of digitalization systems or products. It is high time to change
this practice in favour an approach that encourages new innovation and innovative
financial products (see the final policy recommendation section) at NBE which is found as
one of the major challenges in relation to digitalization.

Finally, the fourth challenge relates to IT human resource capacity in the sector and its
effective use. This is not a major challenge as those outlined above as most banks have
excellent IT personnel at their IT department. But still, it is important. In most banks there
is significant dependence on vendors for technology supply (the only exception being
United Bank that has built impressive in-house capacity). There is also lack of confidence
on the part of bank management to take the risk of relying on (and building) local talent
for their major digitalization tasks. Such talent is, however, widely available in banks and
throughout the country (ie., young bright IT savvy are many). Limiting the potential
digitalization role of the small FinTech companies through government regulations and
the restriction of the financial sector to citizens only (although has its own merits) has also
 34 
 

a limiting effect on technological transfer and quick upgrading of banks’ digitalization level
to the global standard.

c) Impact on Current Business Model: One of the major and significant effects of
disruptive technology is to change the current business model of firms as noted in section
two. From my discussion with key-informants and the various strategic documents of the
banks, digitalization is appreciated by the industry and all banks have an IT department in
charge of digitalization (both the business and technical aspect). However, despite its high
growth in most aspects, it didn’t lead to a change in their branch-based dominant business
model in any meaningful way in any bank and it is difficult to see that happening in the
very short-run. In this sense IT and digitalization cannot be considered a disruptive
technology in Ethiopian financial sector yet. Still, the bulk of the banks’ business is
conducted physically being in branches and focusing on big-customers. This can also be
inferred from the contrasting trend of digital and non-digital (such as branch) channels of
the Ethiopian banking sector with that of Kenyan banks, which are well advanced in this
area. This is shown in Figures 4.5 and 4.6.

Figure 4.6. Mobile Bank Loan Advances at Commercial Bank of Kenya (in Billions of Ksh)

350
289.9
300

250 212.1
200
154
150 111.4
100 83.8
54.4
50 29.6
14
0
2016 2017 2018 2019 2020
‐50 ‐27.4
Mobile Loan Advanced (Ksh Billion) Grwoth Rate

Source: CBK, Annual Report, 2020 (We need the total loan
The trend of digitalization as can be inferred from the digital financial channels in two of
the Kenya’s banks is given in Figures 7 (for Equity Bank) and 8 (for Commercial Bank of
Kenya, CBK). Kenya has one of the very advanced financial sectors in Africa, which is
comparable to the level in emerging economies. Thus, a comparison with Kenya offers how
far the Ethiopian financial sector is in terms of digitalization. Although Figures 7 is based
on one of the dynamic banks in Kenya and the region, Equity bank, the trend is similar
across banks in Kenya. For instance, in the CBK, one of the largest banks in Kenya,
 35 
 

exhibited the same trend of a decline in transactions that are based on branch while
registering a phenomenal growth in digital transaction, including even lending, as can be
read from Figure 8.

Comparing the trend of some of the digitalization indicators in these Kenyan banks with
the trend among the Ethiopian banks shows quite a contrasting trend. For instance, in
Equity bank the use of branch tellers has declined by 38% in 2020 (compared to 2019) and
it is closing most of its branches in 2022. Similarly, ATM transaction has declined by 21%
in 2020. On the other hand, transactions using mobile and internet banking has increased
by 28 and 82%, respectively. Agent banking growth also stagnated in Equity bank in 2019
and grew only by 2% in 2020 (CBK, 2020, Figure 7). In contrast to this trend, the trend of
branch and ATM expansion in Ethiopian banks is increasing very fast and significantly so
(Table 5). What is interesting in the case of CBK is also the spectacular growth in mobile
bank-based loan advances – an excellent indictor of fast changing business model (Figure
8) – whereas there is no digital lending in Ethiopian Banks. This contrasting pattern shows
at what very early stage the Ethiopian banking sector is found in relation to digitalization
and new business model in banking that is flourishing in Kenya.

In terms of linking digitalization and current banking practice, our interviewees noted that
“process-based thinking” is missing in most banks. To think of digitalization of a particular
activity or product from the start to the end and institutionalizing that as a procedure to be
followed by operational staff is an important strategic direction worth pursuing but
missing in the banking sector. This is important to cut “ad hock” procedures and replace
them with systemic (and digitalized) approach. The lack of a digital echo system for E-
commerce (both in legal and technical framework) is also a major constraint to change the
current business model.

Regarding challenges expected in the coming years, significant digital disruption is

expected starting the year 2022 because Ethiopia is admitting a new telecom company
(Safaricom) for the first time in its over 100 years history of telecom monopoly. The outlook
among our interviewees however is optimistic in some of the private banks and a concern
in some of both private and public banks. Most expect significant improvement on quality,
reliability and cost of digital services that they are currently getting from Ethio Telecom.
Some of them also believe that they have a local knowledge and can work in partnership
(joint venture) with foreign FinTech, even foreign banks. In fact, for some of the banks such
foreign competition may lead to merger and acquisition with a positive effect on
capitalization and deescalating the ethnic and religion-based segmentation of the market,
which is eroding the customer base of multi-ethnic and multi-religious banks. The later
 36 
 

trend is also a potentially worrisome for the political stability of the country as a whole,
which requires the immediate attention of policy makers.

d) Some Special Activities in the Case Study Banks: Apart from the similar
pattern of digitalization and challenges encountered as discussed above, there are also
bank- specific digitalization features observed in the case study banks.

Dashen Bank: One unique approach in Dashen bank is the deployment of its mobile and
internet banking platform and a digital wallet called Amole in July 2018 in an integrated
and holistic approach with a spectacular success. Prior to this, the bank accounts were not
integrated with wallet. The Amole works via USSD, mobile app and internet channels. By
December 2020, over 2 million customers had been registered on the platform, up from
50,000 two years back when the project started – which is a significant growth. Thus, this
digital payment platform already surpassed the number of card transactions in retail
environment (African Business, 2021). What is unique and perhaps explains partly its
success is its ability to correctly identify the gap in the market and engage in collaboration
with its key fintech partners, Moneta Technologies, according to African Business (2021).
Officials at Dashen, attributed the success primarily to their unique vision of digitalization
and corresponding significant investment in IT (to the tune of 1.3 billion Birr per annum –
one of the highest in the industry). Regarding their vision, they take digitalization in a
holistic manner with a view to have an open omni channel platform that will be compatible
with any partners, customers’ preference, and ready to exploit uncharted territories by
adding value (e.g., includes plan to engaging in wholesale and distribution channels,
mobile lending, exploit cloud cost advantage, incentivise money senders instead of
focusing on receivers only etc…). In this endeavour it has encountered business model
related challenges such as the push by Ethio-Telecom to use Dashen’s resources for its new
mobile payment system (Tele Birr) without sharing the benefit the later generates or get
compensated for their service to Tele Birr. The push by the regulator to generate uniquely
identified customers, without having a national ID system, as well as digital illiteracy both
at regulator, its own staff and the public at large are challenges that the bank has
encountered. Despite this, it has a determined vision and strategy for digitalization which
could also be inferred from the growth trend of its different channels: it has stopped branch
expansion, significantly reduced new employment and re-directed those displaced by
digitalization to marketing tasks, for instance.

Abyssinia Bank: A unique aspect of digitalization at Abyssinia bank is its strong drive to
use digitalization extensively, relative to others bank, as well its significant growth in the
last three years. This is illustrated by its recent launching of virtual banking in selected
 37 
 

location of the capital and its current plan to launch digital lending, which is not seen in all
other banks. It has also partnered with a renowned global payment gateway solution
provider, VISA Cyber source. This has enabled the Bank to offer online shopping and
online payment services to its customers.

Hibret/United Bank: in Hibret/United bank its effort to carry most digital activities in-
house using own capacity (human capital) is one its distinguishing features. By doing this
it not only managed to save millions of Birr and foreign currency but also developed its
staff confidence and managed to tailor best the technology to Ethiopian condition. It has
also implemented key software in the business such as ERP (Enterprise Resource
Planning). United is the only bank to develop its core banking system in house, not only in
Ethiopia but also in Africa as a whole. It has also a unique in-house developed digital echo-
system called “CEO chat room” where the CEO can chat with every staff in the bank across
the country (the bank has over 4000 personnel) unanimously to find out ethical problems,
banking problem, leadership problems (including confessions that is akin to a Catholic
priest function of the same) etc. This has helped in identifying problems in the bank’s
operation that includes ethical problems of some authorities within the bank. It is also the
first bank to implement the first mobile and internet banking in the country. The interesting
question is why United Bank did this while other are not? The fundamental reason relates
to the whether the CEO’s in Ethiopian banks believe in the capacity of the young IT talent
available both at the Bank and across the country and willing to take the risk to engage
them in major tasks. The youth haves the capacity but do not have the confidence and,
hence, not willing and able to take a risk and so are most CEO’s in taking the risk and
engage the local talent on major digital tasks of the bank. The United Bank CEO took that
calculated risk, with outstanding success3.. Yet, if he had failed, he could have been
condemned for this adventure. The lesson is innovative approach and creativity needs
taking a calculate risk. Perhaps the United CEO ‘s background as an IT expert and head of
the IT and System management of the bank before his current position has helped that too.
In other situations, risks such as this need to be understood and covered by board of banks
and national level relevant institutions to spur innovation. If other banks also secure some
of their software from local innovation (such as from the United Bank) it would have
benefited the innovator, themselves (is less costly, in local currency and found next to them
in the country, compared to their current foreign vendors) and the country at large

 
3
   Interview with the CEO of United Bank. 
 38 
 

IV. Conclusion and Policy Implications

The study attempted to examine the nature, impact and future direction of disruptive
technology, in the form of digitalization, on Ethiopia economy in general and its financial
sector in particular. From the study, the level of ITC expansion as well as the related digital
transformation in the financial sector is found to be one of the lowest in the region. The
level is found to be at extremely low level, especially, when compared with neighbouring
Kenya which has significantly advanced and digitalized financial sector.

Notwithstanding the low level of digitalization, even this low level is found to be key driver
of economic growth in Ethiopia. Thus, the study noted, a 10 percent increase in
digitalization, measured by growth of mobile subscription, could lead to 0.5 percent
growth in GDP. This is found to be about 1 percent in the service sector, and about 0.3
percent in the agricultural sector. It is found to have no effect on the industrial sector,
however. The effect of broad band penetration is also found to have similar positive effect,
but nearly half in terms of potency compared to mobile penetration.

Having this macro picture, I have also attempted to look at the effect of digitalization in-
depth at micro level by taking the Ethiopian financial/banking sector as case study. From
the analysis of the digitalization activity in the banking sector, I have identified a number
of challenges in the sector, with implications for policy. The major challenges identified are
the following.

First, apart from the necessity of networking banking branches and digital documentation
of customer’s information, most banks do not seem to take digitalization as the main
strategy for transforming their current business model. Their current business model is
based on branch expansion and targeting big customers and foreign exchange generators.
All banks carry the bulk of their business physically in-branch too. In this sense the
digitalization technology in the financial sector is not that disruptive yet. Most banks seem
also to pursue newer aspects of digitalization because other banks, especially the pioneer
CBE, is engaging in it before them. Thus, digitalization is not taken as threat to their current
business model that needs immediate strategical actions yet. Notwithstanding, all banks
have an IT department and some of them have also digital business department. They are
also investing a lot on digitalization, especially on digital in-house infrastructure and
payment system.

Second, one of the major problems for advancement of digitalization in the banking sector
is lack of methods or tools that measure the impact of investing on digitalization. In general,
if it is difficult to measure an activity and its impact, it is difficult to pay serious attention
 39 
 

to it by management. In other words, we care about bank profit because we accurately

measure it and we know the consequences of its change and so is business expenditure.
Lack of similar measurement possibility about the impact of digitalization and using that
as an input for management (including board) decision is hindering management to
strategize extended development of digitalization and use as well as realizing its potential.
The tradition and expectation of significant dividend each year by the board and
shareholders in the Ethiopian banking sector accentuated this problem by limiting heavily
investing in digitalization.

Third, the current business model of Ethiopian banks is to focus on big customers and
corporate entities that are handled in-branch. This is the opposite of the trend in the
banking sectors in the rest of Africa which are focusing on micro and small firms and the
unbanked population using digitalization. Such digital transformation strategy (digital
banking) as a business model is not getting the utmost attention it deserves by Ethiopian
banks. Had their focus was on the latter group of customers, as that of the rest of Africa
such as Kenya, they would have focused on digitalization of finance and its indispensable
role in changing their current business model.

Fourth, adopting to the advances in global level of financial digitalization and venturing
on digital transformation of banking as a strategy is not observed in a substantive manner
in all the banks of the country. This is, partly, because the Ethiopian banks are comfortable
with their current business model, customer base and current profitability. This is further
strengthened by lack of a competitive threat from global players in the sector because the
sector and the telecom sector has been restricted to citizens only to date. The telecom sector
is now opened and sure to have effect on the current business model banks through
digitalization – this indicates that the Ethiopian banks need to be ready for such
competition ahead of time so as to survive in the business.

Finally, one of the major challenges to digitalization and financial innovation in the
financial sector is the existence of technically very weak, conservative and uninformed
regulatory body, the National Bank of Ethiopia (NBE). Because of these features, the NBE
doesn’t give a leeway to banks to innovate and deploy new financial products and new
business model. It doesn’t answer to the bank’s requests on time either. Neither is it
accountable when it fails to do the latter. As a result, fearing reprisal from the NBE as part
of its defensive position, which is not uncommon, and discouraged by the bureaucratic
hurdle for approval of new digital products and systems, banks are being forced to stick to
already known and approved financial products instead of working on a new and better
one. This needs a fundamental policy change from the regulator side (see below). The
 40 
 

digitalization problem is accentuated further by the lack of national ID which should have
been done at national level, spearhead, among others, by the NBE. Such problems of
“coordination failure” has been also observed on various aspects that includes, acquisition
of foreign licenses, cloud service, data management and data storage service, cyber security
etc.

Given these major challenges and more specific ones documented in the study, some of the
major policy implications of the study are the following:

First, First, the NBE needs to allow innovative financial products to flourish, requiring only
notification from firms when they develop new products or systems, instead of prohibiting
everything that is not in its list of permissible products as illegal, as is currently the practice
de facto. It has also need to learn from neighbouring Kenya that, had it not been for such
enabling environment and without the smart decision of governor Njuguna Ndung’u in
2007), Kenya wouldn’t have developed MPesa that has become a global success story of
Kenya. For this to happen, the NBE staff needs to be literate in digital finance and its
regulation ahead of time, staffed by hight calibre and well-paid experts that could design
regulatory framework following a notification by banks about their new financial products
and systems. If possible, the NBE needs to do this ahead of such notification guided by
clear strategic direction for digitalization. NBE has to be accountable and transparent when
it fails in these functions too – which is against its current posture of authoritative and
vindictive nature. A possible short-term recommendation until NBE is staffed with such
experts, plan B, is at least to regulate the “channels” (e.g., mobile banking) and leave
detailed products within the channels for banks’ creativity. Currently the NBE, however,
would like to give permission for each conceivable detail products within a channel on
product-by-product basis. As a result, it takes time, at times, a year and half to get approval
after going through an agonizing process of defending the product by commercial banks
in front of the NBE officials, which might have no idea about the technology in question.
By the time of approval, if this happens, the product could be obsolete in this fast-changing
digital world. The NBE can learn a lot on how to handle such issues, on a continuous basis,
from Kenya and the state bank of India, to just name few.

Second, there are a number of areas that enhance digitalization in the financial sector but
need to be taken collectively by all banks or by the government (NBE for instance) for
various reasons. These reasons include advantage of cost sharing, economies of scale,
national sovereignty concerns, national security concerns etc that usually emerge from
coordination failure. These challenges include having a, national ID, data storage and
management system, data security, cloud service, and national level licensing of financial
 41 
 

products from global vendors with monopoly power such as Oracle, IBM, Microsoft etc. It
is imperative for the government (NBE included) to ensure that these activities are carried
in a coordinated manner at national level as a matter of urgency.

Third, in all banks, except in a few, the disruptive technology nature of digitalization with
implication for transforming their current business model in a fundamental way is not
recognized by the management and board of banks. With the inevitability of foreign
competition that is on the horizon and the trend of growing digital business model in
neighbouring countries such as Kenya, the Ethiopian financial sector management needs
to strategically plan to digitally transform their business model. One strategic direction on
this is to optimize on partnering (including through API [application program interface])
with potential competitors that most likely be better than Ethiopian banks, including
FinTech firms and “Tele Birr”, by capitalizing on their local knowledge, in-house capacity
and customer base.

Finally, disruptive technology such as digital transformation in the financial sector could
be important (and could be used by the government) to de-ethnicize the banking sector
through disrupting the ethnic (and also becoming religious, lately) business model most
banks in Ethiopia increasingly employing. Digitalization in tandem with incoming
exposure of the sector to foreign competition could also contribute to this by making it
necessity for Ethiopian banks to go through merger, acquisition and joint-venture so as to
be a strong competitive bank. This de-ethnicization is important (in fact the government
needs to do it deliberately and quickly) for multi-ethnic banks because the ethnic and
religion-based banks are dislodging them of their customers with detrimental effect on
their business. The ethnic and religious business models are also segmenting the market in
the process. In addition, this is an emerging national threat, especially when these banks
began financing influential ethnic cadres/leaders, ethnic parties, ethnic businesses, ethnic
and religious extremists selectively as their priority customer. When the latter happens, it
is highly probable that such banks will be captured by ethnic (religious) extremists that
enhance ethnic (and religious) identity at the expense of national identity – from which
Ethiopia is already suffering in the last three decades that culminated in a devastating war
since last year.

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