A Transaction Cost Analysis of Commercial Bank of Ethiopia: An Empirical Analysis

Abstract

Banks are engaged in the transaction business and hence they are designed to minimize transaction costs. While transaction costs are the fundamental competitive platform in the banking industry it is believed that transaction costs are high among the developing countries banking sector. The Ethiopian banking institutions are infant to the extent that they are less competitive compared to similar economy banks. Of a number of factors limiting the competitiveness of developing economy banks high transaction costs is the major factor. Analyzing determinant factors that builds banking transaction costs taking into account the experience of Commercial Bank of Ethiopia is the main objective of this research. Descriptive statistical analysis and regression analysis methods have been employed to examine changes in the CBE transaction costs due to changes in institutional reform and deregulation, technical innovation, economic growth, competitive environment and governance structures. Both the descriptive analysis and the regression analysis results suggest that CBE is in a relatively better position in terms of addressing the issue of transaction costs. The findings displayed a reduction in transaction costs, especially, in the areas of bank account opening service and banking transaction service units which are core activities of the Bank. Factors contributing to this development are the introduction of e-banking technology, human resource development, ICT infrastructure and system development, domestic intra-industry competition and National Bank policy and regulatory support. On the other hand, both the descriptive analysis and the regression analysis results prevailed a relatively built up transaction costs in the credit service and non-core banking service units and as well related with National Bank policy and regulatory service support. Hence, since the future of the banking industry depends on domestic and international competitiveness, commercial bank of Ethiopia is expected to pay strategic attention to transaction costs. Technology aided banking, human resource development, institutional and system reforms, product and service innovation, focus on core business and upgrading competitiveness are critical in this regard. Since the future of the banking industry relies on the economy of transaction costs future research should focus on measurement issues and analytical approaches or methodologies.