Cost efficiency of commercial banks in Ethiopia: Does financial technology matter?

This study aims to assess the effects of financial technology on the cost efficiency of commercial banks in Ethiopia. Secondary panel data were collected from the audited annual reports of seventeen commercial banks for twelve fiscal years between 2011 and 2022. The cost efficiency of banks was investigated via a stochastic frontier approach. The findings indicate that commercial banks operating in Ethiopia are efficient in cost management, with an 83% efficiency rate on average. In addition to financial technology, the effects of bank size, interest spread rate, management quality, foreign exchange rate, capitalization and bank ownership are significant for cost efficiency. Notably, financial technology plays a remarkable role in the cost efficiency of commercial banks in Ethiopia. The study results show the presence of a positive association between financial innovation platforms and the cost efficiency of commercial banks. Banking services delivered via card banking, mobile banking, and internet banking improve the cost efficiency of commercial banks in Ethiopia. As a strategic resource, financial innovation in banking operations enhances the cost efficiency of banks by reducing noneconomic costs and the time needed to deliver banking services. To improve their cost efficiency, commercial banks in Ethiopia are encouraged to use financial innovation platforms to deliver financial services and update the current cost management strategy intended to reduce operating costs incurred to generate and collect loans and advances and interest expenses paid to maintain deposits and other interest-bearing liabilities.