Does Digital Technology and Banking Regulation Matter for Income Diversification in Ethiopian Commercial Banks?

This study examines the effect of financial technology and banking regulation on income diversification in Ethiopian Commercial Banks. The study used panel data from 17 Ethiopian Commercial Banks spanning 2015–2024. Using two-step system GMM, the study revealed that financial technology proxy by the volume and value of digital transaction and bank management’s operational efficiency are the most robust and consistent drivers of income diversification across Ethiopian Commercial banks. Banking regulation exerts a marginal adverse effect on income diversification. Bank size, years in operation and lending strategy have no significant impact once endogeneity is controlled . The findings provide valuable implications for policy makers, bank executives and researchers. The persuasive influence of digital transformation to accelerate the modernization of the financial sector by expanding digital infrastructure, supporting interoperability, and revisiting outdated directives that limit innovation should be the prime focus of policy makers. Besides, strategic investment in digital channels, payment systems, and process efficiency should be prioritized ahead of traditional expansion metrics such as branch networks or asset size . These implications underscore that enhancing the digital maturity and operational capabilities of banks is central to improve profitability, strengthening competitive positioning, and reducing overreliance on interest income in the Ethiopian banking landscape.