E Banking Problems and Prospects in Ethiopia A.

A.Devamohan* Background of the Study: Now a days Modern Technology is being introduced in all the fields and it changes the world with full of innovations. In Banking also electronic devices play a dominant role in order to satisfy the growing needs of the customers. The traditional banking activities are modernized by using the Electronic Banking system (E Banking). These changes are being made due to the influence of Information Technology and the developments in the technology of Telecommunications and Electronic Data Processing. Information Technology which implies the integration of information system with communication technology has altered the traditional ways of doing banking and allowed banks to wipe out the differences in time as well as distance. The wings of changes are started blowing in Ethiopia with a view to integrating the economy to the global economy. In this contest, this paper attempts to trace the present status of E Banking in Ethiopia, visualize its prospects and looks at the challenges and problems to be crossed. Objectives of the Study: The general objective is to study the problems and prospects of EBanking in Ethiopia. The study is having the following main objectives.
1. To review the literature of E-Banking 2. To identify the existing E Banking services in Ethiopia 3. To analyse the problems of E Banking system in Ethiopia 4. To recommend the possible E Banking system in Ethiopia

Overview of E Banking:
Banking system is the backbone of the economy and Information Technology in turn has become the backbone of banking activities.

* A. Devamohan is working as a Lecturer in Banking & Insurance, Faculty of Business & Economics, Jimma University, Jimma, Ethiopia.

The IT developments bring the customers closer to the banks and banks are able to offer multiple products/ services under Single-Window concept. The hi-tech multiple service channels and delivery mechanism provide a great opportunity to reach and inform the customers with much ease. The technology has its own role to play in branch banking activities with variety of options and innovative services The E Banking concepts become popular when the banking activities and information technology are merged. The banking transactions become ease after the introduction of computers in banking sector. The banks are enabled to automate the accounting process and back office functions like maintenance of deposits, calculation of interest and maintenance of general ledgers. The automation of front-office functions improves the customer service with reduction in processing time. When the internet facilities enter into the banking sector, the inter-bank activities are linked through internet and the concept of Anywhere Banking or Net Banking is also introduced. Internet banking enables a customer to do banking transactions through the banks website in the internet. It is more or less like bringing the bank to customers computer, at the place and time of customers choice. Concept of E Banking: Electronic Banking or e banking is a web-based service the enables a banks customer access their account. It allows the customers to log on to the banks website with the help of a bank-issued identification and a personal identification number. The banking system verifies the user and provides access to the required services. The range of services and products offered by each bank differs widely in their content. The other aspect of e-banking is e-payment. Payment is generally known as a transfer of funds from the payer to the payee. The Electronic payment or e-payment is a payment carried out electronically. That is, the payment that is initiated, processed and received electronically is known as epayment. In e-payment funds are held, processed and received in the form of digital information and their transaction is initiated via electronic instrument like ATM card.

The concepts of e-banking and internet banking are used as synonymous in the banking industry, though in reality banking activities carried out through the internet just constitute a part of the whole gamut of ebanking. The most significant benefit of e-banking is the ready accessibility of bank accounts at all times. The inconvenience of visiting and waiting at the banks is also eliminated. E-payment greatly increases payment efficiency by reducing transaction costs. It will enhance the customer satisfaction and increase the customer base. From bankers point of view, e-banking considerably reduces transaction costs for the banks. Review of e-banking services: Information and Communication technology has made the world a global village and removed the time and geographical barriers. With the use of electronic network, billions of dollars can move across borders by click of a computer key and this creates tremendous impact on the economy. The banks can provide e-banking services by using this electronic network. The following are the some of the services coming under e-banking: 1. Electronic Data Interchange (EDI): EDI is a technique used to communicate business, financial and transaction information between computer systems of different organizations and their business partners. Unlike email, it is structured communication and sent in machine processable form. EDI was first used in North America by retail industries in the late 1960s. In mid-1980s EDI was introduced in other areas including automotive, manufacturing, distribution and tourism sectors. In banks, Financial EDI (FEDI) is mostly used to settle the bills with the objective of making the right financial resources available at the right time. Banks can play a vital role in FEDI for the payments in real time. Banks have to interact with the systems of customers on one side and the service providers on the other side. It enables the customers to view/ download account details. EDI implementation in banks results in reduced cost, improved efficiency and customer satisfaction resulting in improved growth

and profitability. In India, EDI is implemented between the Indian Bank and Chennai Customs and Port Trust. 2. Automated Teller Machine (ATM): ATM is a device that allows customers who have an ATM Card to perform routine banking transactions without interacting with the human teller. The ATM card holder can do most of the banking transactions like withdrawals, deposits of cash and cheque, balance enquiry, etc. Even railway and airway tickets can be blocked with the use of ATMs. The origin of ATMs can be traced back to June 1967 when Barclays Bank installed the first cash dispenser in UK. At that time ATMs basically dispensed cash and offered very limited banking functions. Now a days, ATMs are offering a wide range of bank services with the technology of web-enabled ATMs. With the use of ATMs, the banks are providing Any Where and Any Time Banking to their customers. That is the customer can have access to ATMs at any where within the country or throughout the world at any time. It also reduces the transactions time. The banks can use these ATMs as media for publicity by displaying products on the screen. And the cost of setting up ATMs is much lesser than the branch. 3. Electronic Clearing Service (ECS): the primary goal of any national payment system is to enable the circulation of money in its country. The payment system should be efficient and secure. The ECS is created to establish safe, secure, sound and efficient payment and settlement systems for the country. It can be divided into two categories namely, Credit Clearing and Debit Clearing. The ECS credit clearing is a mode of payment electronically instead of paper warrants. Through this ECS credit clearing, an institution makes a large number of payments like salaries, pension, interest, dividend to a large number of employees/ex-employees/investors/share holders. The ECS debit clearing is a mode of payments whereby an institution receives payments from a large number of customers/consumers. This method helps utility institutions, insurance companies, credit card companies and finance companies to collect the proceeds of telephone/electricity bills,

insurance premiums or periodical installments, etc. on due date based on the instructions. For ECS, the Central Bank of the country has to open centralized clearing centres throughout the country. The transactions will be settled on the next day of submission of data to the clearing house. Banks can act as clearing houses. The advantage of this method is faster collection of bills by companies and automatic debiting/creating to the accounts. 4. Plastic Card Currency: Plastic cards also known as plastic currency involving electronic device in their functioning is gaining popular as a convenient mode of payme nt. By using these plastic card, financial exchanges takes place on line between buyers and sellers. This exchange is in the form of digital financial instrument such as credit card numbers and debit card numbers backed by a bank or an intermediary. Recently several innovations helped to simplify consumer payment which includes Credit Cards, Debit Cards, ATM Cards and Smart Cards. Credit Card: Credit Card can be called as an equivalent of a loan sanctioned by the bank to its customers. Credit card facilitates and makes it possible to Use First and Pay Later the specified amount of credit as per the agreed terms of sanction. Before issuing the card, the bank would like to know and be sure the identification, age, level and source of income and repaying capacity. This card facilitates the cardholder to purchase goods and services from the merchant establishments and shops through the collaborating credit card companies like VISA, MasterCard, Maestro, and Cirrus. Interest will be charged by the bank on monthly basis for the credit provided through the card. And service charges also will be collected from the cardholder for the transaction and processing. Debit Card: A Debit Card provides for online electronic payment like Credit Card but from savings or current accounts of the cardholder for purchases. This card is a deposit access product where cardholder uses his own money in his

bank account through the debit card on the principle of Pay First and Use Later. Debit card can be used to make purchase at retail shops and merchant establishments in the same way as the credit card is used. But in order to use the debit card, the cardholder must have sufficient balance in his/her account. Debit card contains the symbol or hologram of collaborating company such as VISA, MasterCard, Maestro and Cirrus etc. ATM card: As mentioned earlier, ATM Card can be used to withdraw money, deposit money, balance enquires, deposit bills in the account. The cardholder must maintain a savings bank account or current account with the bank. On issuance of card, the cardholder is intimated a four digit secret Personal Identification Number (PIN). The cardholder is always required to maintain safely the PIN to prevent fraudulent activity. ATM Card-cum-Debit Card: ATM Card-cum-Debit Card can be used both as an ATM card and Debit card as a method of payment when purchasing goods and services in India and Overseas. The cardholder is responsible for all transaction made by the use of the card. Most of the debit cards issued by banks are also ATM cards. Smart Card: The smart card is an amazing piece of technology. It is the size of a regular ATM card but is capable of storing over a 1000 times more data. The data can be encrypted and hence the card is completely temper-proof. The card can also be personalized to the holder by printing personal and other details on the card face. Mart card is issued to the formers to provide adequate and timely credit support for their cultivation needs including all purchases. The formers can use this card wherever they needs. The loan amount sanctioned to the former will be recorded in the card. The merchants can sell the goods to the former based on the card and they can collect the amount from the local branch of the issued bank or any other bank. 5. E-payments:

Payment is generally understood as a transfer of fund from the one person (payer to other person (Payee). In E-payments, the funds are transferred through electronic mode. The following are coming under the Epayment system. Banknet: Banknet is a communication backbone connecting various centres of a country to facilitate the transfer of inter-bank or inter-branch messages. Most of the centres of a country are being brought on the network. The main objective of the Banknet is to speedup the process of transfer of funds from one bank to another bank and one branch to another branch. SWIFT: The society for Worldwide Inter-bank Financial Telecommunication (SWIFT) provides reliable, secured and expeditious telecommunication facilities for exchange of financial messages all over the world. It operates 24 hours on all days. The banks have to become the member of International Financial Messages Communication Network. The banks can do foreign exchange business safely and secured mode. We can say, the foreign exchange business which the banks are conducting today would not have been possible without SWIFT. Electronic Fund Transfer (EFT): EFT system permits transfer of funds from any account at any branch of any member bank in any city to any other account at any branch of any member bank in any other city. This system utilizes the Service Branches of the member banks. It facilitates the transfer of funds from one place to another place within the country quickly and safely. Banks collect service charges from the customers. Importance of E-Banking: The importance of e-banking can be discussed in the following ways: Customers Point of View: E-Banking offers substantial advantages to the customers in the form of convenience, timesaving and easy access to the banking services. The

customers can transact in their account at any time and any where throughout the country or outside the country. There is no time and place restriction. The customers need not visit the branch for each and every transaction and no need to wait in the big queue. By this they can save the time. The customers can avail 24*7 access to the banking services at any where. With the help of e-banking, the easy access to the banks will be another advantage to the customers. Thus the e-banking provides sophisticated services to the customers. Banks Point of View: In this competitive world, E-banking helps the banks to attract more number of customers and tackle the competition from other banks. The banks can enhance the customer satisfaction through sophisticated services. By providing secured e-banking services, the banks can avoid fraudulent activities. With the help of e-banking, banks can save time and hence they can increase the number of transactions and business. Challenges of E-Banking: 1. Security: Security is first and foremost requirement of E-banking as the internet is inherently unsecured. Securing the process in e-banking involves authenticating both customer and banker and protecting the information to be transmitted from interception. This authentication can be done using user ID and passwords. Banks should take effective steps for the interests of customers from data tampering and hacking. Software failures can also destroy entire portions of a network and bring huge losses. In e-banking system there are many ways in which private information may be accesses by attackers. And this information could be used to make fraudulent transactions that could lead to a loss of money. 2. Standardization: One of the major issues in E-banking is the standardization of software which is necessary to offer e-banking services. Proven high quality software is a must for high-tech banking services. For the sophisticated services, the standardization of operating systems, systems software and application

software throughout the banking industry is a necessary condition, which may have to be pursued. 3. Legislative and Regulatory Issues: National, regional and international laws, rules and regulations are important prerequisites for successful implementation of e-banking. Legal or Legislative support is essential for protecting the interests of customers and banks in various areas relating to e-banking and payment systems. Some of the main issues like liability for loss in case of fraud, allocation of loss in case of insolvency, cheque truncation, evidence and burden of proof, preservation of records, prevention of fraud, etc. are to be cleared in the legislation. This can be done by adopting model laws at global level such as UNCITRAL Model Law on E-commerce and UNCITRAL Model Law on E-signature. 4. Infrastructure: The other challenge for e-banking is well developed infrastructure. For effective deployment of e-banking services, it is necessary to have a reliable and cost effective infrastructure that can be accessible to the majority of the population. The base communication infrastructure for e-banking is computer network with internet facility. Most of the transactions use internet to communicate with the customers. Automating the banking services is another prerequisite for e-banking. Close financial links between banks and other financial institutions is necessary. This link is used for clearing and payment systems among these institutions. 5. Heavy Investment Costs: In order to offer e-banking services, banks have to invest huge amount of money. They have to incur heavy maintenance costs also. This may not be the problem for well established banks. But in case of new and small banks, they have to face financial problems at the initial stage. Banks in developed countries have already deployed huge amount of investments for e-banking services. For banks in developing and underdeveloped countries, this may create financial crisis. 6. Socio-Cultural Challenges:

Normally customers confidence and trust in traditional banking system will make customers less likely to adopt new technologies. New technologies will not be successful until customers are satisfied with privacy and security aspects. It also requires some time to earn confidence among the customers even it is easier and cheaper than the traditional methods. E-Banking in Ethiopia The Ethiopian banking industry is consisting of three public and seven private sector banks under the control of National Bank of Ethiopia (NBE), the central bank of the country. The NBE is having full control over the commercial banks in the country. The Commercial Bank of Ethiopia (CBE), a public sector bank, is playing major role in the industry with 184 branches. The banking systems in Ethiopia can be viewed as two major categories namely Traditional Banking System and Modern Banking System. Traditional Banking System: The commercial banks in Ethiopia started their traditional way of banking in the year 1906 with the establishment of first bank called Bank of Abyssinia as a private bank. In 1931, the Bank of Abyssinia became Bank of Ethiopia a fully government-owned bank providing central and commercial banking services. In 1964, National Bank of Ethiopia and Commercial Bank ofEthiopia started their operations. Private Banks came into existence after the changes in the Economic Policy in the year 1994. Basically the Ethiopian banks are following the American way of banking system. Accepting deposits from the public, lending money to the borrowers and transferring funds from one place to another, etc. are the basic banking activities of commercial banks in Ethiopia. NBE has authorized Ethiopian Birr to be used as a legal tender throughout the country. Birr is representing the values and used as major instrument of payment. The second major instrument of payment is cheque. The customers who have checking account can use cheques to make payments and for other uses. Cheques are typically used for large transactions. Drafts are also used to send money or to make payments to

another place. Mail Transfers and Telegraphic Transfers are used to transfer money form one account to another account. E-Banking System: The banks in Ethiopia are having the following E-banking services; 1. SWIFT: SWIFT provides a messaging service that enables to settle majority of high value payments internationally. Banks in Ethiopia currently settle their foreign transaction payment through SWIFT. They are using SWIFT as a primary payment system for international payment system. Connection to SWIFT network is done only through a dial up connection which makes the usage of SWIFT as expensive. Banks must make a dial up call to the server found in Brussels. 2. Western Union Money Transfer: Western union is the worlds largest money transfer network with morethan 212,000 agents in over 195 countries. In Ethiopia, Commercial Bank of Ethiopia, Construction and Business Bank and Dashen Bank S.C. are three agent companies Western Union. The money transfers are paid out in Ethiopian Birr with the maximum ceiling of Br.60,000. It includes a test question to be answered by the receiver. Unlike SWIFT, which is used to transfer money from Ethiopia to abroad and vice versa, Western Union is used to transfer money only from abroad to Ethiopia. 3. Credit Card: Currently, there is no issue of local and international credit cards in Ethiopia. But there are some business firms (Hotels, Supermarkets, etc.) that accept international credit cards.Dashen Bank currently gives encashment services to VISA and Master Card users. This card is mostly used by foreigners and Ethiopians residing abroad. Dashen Bank only acts as a merchant accepting credit card issued by banks outside Ethiopia. But the bank is finalizing its preparation to start issuing credit cards. 4. Automated Teller Machine (ATM):

In Ethiopia, the Commercial Bank of Ethiopia is offering ATM services to its customers with eight ATMs located only in Addis Ababa. These ATMs enable the customers to withdraw limited amount of money from their account and to check their account balances. But depositing money through ATM is not possible. Since the bank has connected only six branches, ATM services are given only to the customers of these six branches. The bank has planned to add more number of ATMs in the future. In order to use ATM, the customers need ATM cards and secrete PIN codes which are given by the bank for the purpose of security. Challenges of E-banking in Ethiopia E-banking in Ethiopia is having the following challenges: 1. Infrastructure: Information and Communication Technology (ICT) infrastructure is prior most to offer and to implement e-banking services. Communication infrastructure such as Internet, WAN, Telephone lines must be adequate for ebanking. In Ethiopia, due to poor telecommunication infrastructure, ICT is facing lot of problems or challenges. Ethiopian Telecommunication Corporation is unable to provide reliable and fast telecommunication services. Failures in telephone line and other network lines are happening frequently. This will create problems to offer e-banking services. Especially, Internet is the major problem because of Low bandwidth and low speed. Another major problem is frequent Electric Power disruption. This will create lot of problems in e-banking activities which are basically depending on power supply. It will force the banks to depend on generators results in high operational cost. These problems are considered as obstacles for the expansion of ebanking services in the country. 2. Establishment Expenses: Initially, banks have to invest huge amount of money in order to provide e-banking services. They have to buy and install the required systems and facilities which lead increased establishment expense. For wellestablished banks like Commercial Bank of Ethiopia, the establishment cost

may not be a problem. But for small and new banks, it is very difficult to invest such huge amount. 3. Lack of Skilled Manpower: In order to offer and maintain e-banking services without any fault, banks need skilled manpower. But in Ethiopia, the banks are suffering due to inadequate skilled manpower. They have to hire manpower from foreign countries to overcome this problem. Otherwise, they have to provide proper training to the existing manpower. Both will result in increased operating expenses. 4. Legal Framework: Legal framework is plying a crucial role in facilitating e-banking system and in its growth. Instead of strict regulation, the country should make some amendments in order to coincide with the e-banking practices. Ethiopia has not yet set a comprehensive legal framework for e-commerce in general and e-banking in particular. The reason for nonexistence of comprehensive legal framework in Ethiopia may be the lesser e-banking activities. Another reason may be the existence of Ethiopian Civil Code of 1960, which is open by many standards to incorporate technical and institutional improvements. The Ethiopian Civil Code addresses some of the most important legal issues pertaining to electronic transactions. But mostly in developed countries, they have developed a comprehensive legal framework for e-commerce which includes e-banking. The National Bank of Ethiopia does not clearly mention its role in regulating the e-banking system in its governing legislation. It has some short comes such as e-signature, lack of significant penalties for frauds and other abuses and lack of adequate provision for e-banking, especially e-payment. Another reason for nonexistence of legal framework may be the banks, which provide some of the e-banking services, might have not faced any major problem regarding the regulatory aspects. 5. Socio-Cultural Aspects: The banks in Ethiopia, especially Dashen Bank and Commercial Bank of Ethiopia, have faced some problems related to social and cultural

attitude. There is a resistance to changes among customers and some staff members. This is mainly because of lack of awareness on new technologies and its benefits. The fear of risk is also another reason for their resistance. In case of staff members, the lack of training and sticking with existing structure are the problems. Conclusion and Recommendations Conclusion: This study is aimed to review the literature related to e-banking, to identify the problems or challenges of e-banking in Ethiopia and to explain the prospects of e-banking in Ethiopia along with recommendations. The study found that in Ethiopia the e-banking aspects are recent phenomenon. Some banks are aiming to introduce these aspects to their customers. The major challenges of e-banking in Ethiopia are; Lack of Infrastructure facilities Unbearable establishment cost Lack of skilled man-power Unavailability of comprehensive legal framework Socio-Cultural aspects Recommendations: The recommendations part gives the valuable suggestions to increase the e-banking services with the consideration of prospects of e-banking in Ethiopia. The recommendations are given below: 1. In Ethiopia ICT infrastructure facilities are not well developed. Due to this, banks are not in a position to extent the e-banking services. But the efforts taken by ETC to develop ITC infrastructure is encouraging. The National ITC draft policy has given great emphasis on the expansion of ITC infrastructure. The governments effort to establish nation wide network such asWerdaNet and RevenueNet need to be encouraged and expanded. 2. Another constrain in ITC is high cost structure. For e-banking services the banks need 24 hours internet service. But in Ethiopia the cost of dialup internet is expensive. Because of this banks are not in a position to

extend e-banking services. In order to overcome this problem, the cost of ITC has to be reduced and ITC services should be available for all people in cost effective manner. 3. In order to establish e-banking, banks must go for automation of banking services with in the bank. That is banks have to create links between all branches of the bank by using financial network system. Here the banks are facing problem relating to the reliable electric power supply. In Ethiopia the electric power supply is frequently interrupted. Thus the electric power providers should take efforts to provide uninterrupted power supply throughout the country. 4. Most of the banks, especially small banks, in Ethiopia are not in a position to establish the e-banking services due to high establishment cost. For instance if a bank wants to install ATMs, it has to incur huge amount of establishment cost. In order to overcome this problem the banks can go for low cost products such as low cost ATMs which will reduce the establishment cost upto some extent. Otherwise, banks can offer these services jointly. For instance the small banks can share the ATMs of well established banks in order to provide services to their customers. 5. The Ethiopian banks are lacking in skilled man-power which is necessary to extent e-banking services. Some times the banks may face resistant from the staff members to establish these services. First of all, the banks have to create awareness among the employees and then they have to provide proper training to them. 6. The regulatory and legal framework for ITC is essential to create reliable environment for e-banking. It plays a crucial role in developing the ebanking. The Ethiopian Civil Code is not enough to make adequate changes in the legal framework. Still Ethiopia lags behind in establishing separate legal framework for e-commerce which includes e-banking such as data protection laws, Internet laws. The government has to give emphasis on establishing comprehensive legal framework in order to facilitate e-banking. 7. In order to overcome the problems relating to socio-cultural aspects, the banks have to create public awareness about the benefits of new

technologies and its impact. Schools, Higher Institutions and Media should give due attention to achieve the above. The banks should be bold enough to face these types of problems. ***********************************************************************