Abstract
In identifying the determinants of sustainable performance among commercial banks in Ethiopia, the paper uses a fresh methodological combination involving the use of Partial Least Squares Structural Equation Modeling and Necessary Condition Analysis. A total of 469 respondents from the workers and managers in the 10 selected banks participated in the research. From the findings obtained, the paper establishes that customer relationship management, financial perspective, process innovation, development of human capital, financial technology, and sustainable practices positively influence performance. However, the main contribution from the paper is derived from the application of the necessary condition analysis method. From the use of the methodology, the paper establishes that customer relation management practices, financial management practices, and process innovations offer necessary conditions toward the attainment of sustainable performance from the ceiling method. On the other hand, Financial Technology is important but serve more as a supplementary set of variables to the particular scenario at hand. This determinantal order provides a vital structural support to bank managers of Ethiopia to meet this set of prerequisites before attempting to meet more refined or differentiated needs. Furthermore, the research makes a notable methodical impact with its ability to illustrate necessary condition analysis’s relevance with a particular method to a banking industry within a developing country, providing actionable perspectives on institutional strength upgrades.
Keywords
Introduction
The finance industry worldwide has experienced major changes over the last few years as a result of technological innovations, changes in the regulatory framework, as well as changes in the demands from customers at various corners of the world (Beck et al., 2010; Jote, 2023a; Ozili, 2024). In this ever-changing world, commercial banks still play important roles in economic development, stability, as well as development within societies all over the world (Baza & Rao, 2017a). Nevertheless, the increased focus on sustainability worldwide has promoted the development of sustainable performance metrics in today’s world (Rachmayani, 2024). In this regard, sustainable performance encompassing economic, social, as well as natural elements has become the major ingredient in the success of banking within today’s world as the aim of sustainable banking lies in its sustainable performance (Bansal & DesJardine, 2014; Do et al., 2024).
At the same time, there is consistency between sustainable performance in the banking industry and the general corporate sustainability approach, which integrates environmental, social, and governance (ESG) perspectives into business (Rachmayani, 2024). For commercial banks, this entails embracing principles that ensure comprehensive financial inclusion, sustainable community development, and reduced environmental impacts (Eccles et al., 2014). For the case of Ethiopia, financial inclusion stands out as an important factor within sustainable performance due to the large percentage of people considered unbanked in the nation (Baza & Rao, 2017b). Through financial inclusion, banks offer much-needed support in alleviating poverty, empowering the economy, and integrating communities. Moreover, optimizing customer management, process innovation inside the bank, and embracing green finance, for example, paperless finance, is expected to provide savings in terms of reduced costs as well as negative impacts on the environment (Giannopoulos et al., 2024a; 2024b; Ummah, 2019).
Ethiopia’s financial sector has grown remarkably over the past two decades, characterized by growing competition and innovations in various financial products (Baza & Rao, 2017a). Notwithstanding the growth, challenges still exist in the financial sector, mainly attributed to infrastructure shortages and dynamic regulatory constraints (Elshaday et al., 2018). Such challenges point toward the importance of sustainable performance in offering resilience and competitiveness. Notably, for Ethiopia, achieving sustainable performance is beyond profitability since it also entails functional viability in the growing Ethiopian economy so as to support society and still be competitive (Mengistu, 2015).
Although some factors have been previously discovered through existing literature on bank performance, they have not yet clearly separated those factors regarded as “beneficial” from those considered “necessary.” And although the significance of net-effect approaches has not gone unnoticed within banking circles, previous research on Ethiopian banking has not employed dual-analytical approach techniques that seek out necessity. Net-effect techniques also try to see if some given methodologies, like process innovation and ethics, can be considered norms when, without those norms, no high-level performance can be realized.
This research makes a contribution on a deeper level of understanding of factors that need to co-exist for sustainable performance outcomes using a dual-analytical framework. More specifically, this research advances from common regressive analyses to combining Partial Least Squares Structural Equation Modeling (PLS-SEM) with Necessary Condition Analysis (NCA). This research is novel on three levels: Firstly, innovation in Methodology: It is the first study that combined PLS-SEM and NCA approaches in the Ethiopian banking industry context to differentiate sufficient antecedents from necessary conditions. Secondly, Contextual Insight: This research provides real-world evidence for a developing country experiencing rapid transition in terms of technology and government environment changes, where the conventional performance criteria are challenged. Lastly theoretical Advancement: In applying the Resource-Based View (RBV) and Institutional Theory using the lens of necessity, this paper helps elucidate whether the role of internal factors (such as human capital) and external forces (such as ESG considerations) is non-substitutable in the success of banking entities. Through this research, the paper endeavors to investigate and explain how customer relationship management, financial perspective, financial technology, human capital development, process innovation, and sustainability and ethics practices are related. This research will be of immense use to bank managers and government bodies to make the commercial banks in Ethiopia sustainable. It will, in fact, indicate which ones are necessary among them.
Theoretical and Empirical Review
Theoretical Literature Review
With the aim of transcending the conventional “net effect” paradigm or conceptualization of necessity, this research utilizes a multi-theory paradigm that includes both the RBV theory and Agency Theory in addition to Institutional Theory to contribute meaningfully to the necessity reasoning of Sustainability Performance.
The first theory is Resource-Based View (RBV). Although the classical literature concerning the founding of the RBV (Barney, 1991) indicates that a firm’s competitive superiority can be obtained from its VRIN (valuable, rare, inimitable, and non-substitutable) resources, contemporary banking literature views the importance of resources as the role of those resources that work as “baseline necessities,” as opposed to those that provide additional profit (Acheampong et al., 2023a, 2023b). Human Capital Development and Process Innovations, given the rapid digital revolution that has swept the nation and the scarcity of specialized talent, have become more of a basic necessity than a luxury. Theoretically, using the NCA approach, a firm failing to meet a minimal standard of talent and internal efficiency will experience a “bottleneck,” keeping the firm from reaching the basic level of sustainable efficiency (Dul et al., 2023). This issue has been attested by contemporary research that sought to confirm that the competencies of employees and the absence or availability of infrastructural support are the necessary foundation or floor that all other input-performance metrics calculate from (Jote, 2023a; L. Lamey et al., 2025; Y. M. Lamey et al., 2024).
Furthermore, RBV posits that firms achieve competitive advantage through resources that are valuable, rare, inimitable, and non-substitutable (VRIN). When applied to sustainability and ethical practices in banking, this framework reveals why these elements are not merely corporate social responsibility initiatives but strategic imperatives.
First off all, sustainability practices are valuable because they enhance reputational capital, attract ethically conscious customers, and mitigate regulatory risks (García-Sánchez et al., 2023). Banks with strong ESG credentials experience lower cost of capital, reduced loan default rates, and improved stakeholder trust. Second, genuine sustainability commitment is
Moreover, the Resource-Based View (RBV) is a strong theory for understanding FinTech capabilities as strategic resources that are vital to the sustainability of banks. By using Barney’s (1991) VRIN test, FinTech capabilities are found to be multi-dimensional as a strategic resource that is valuable as a result of reduced transactional costs, improved customer experience, real-time risk management, and wider market coverage (Lee et al., 2021a). FinTech capabilities are considered to be rare as a strategic resource in developing countries where technological as well as digital skills are still at a nascent stage of development. FinTech capabilities are considered to be inimitable as a strategic resource as a result of their being embedded within the organizational culture of banks (Sebastian, 2023; Wang et al., 2022). FinTech capabilities are considered to be non-substitutable as a strategic resource as a result of their being essential for the long-run sustainability of banks as a result of changes in customer behavior. The RBV perspective also shows the essential interconnections between FinTech and other complementary organizational resources. Bajwa et al. (2025) showed that the impact of sustainable innovative leadership on FinTech is amplified, while financial competencies moderate the relationship between access to finance and technology adoption, supporting Teece’s (2007) perspective on the resource orchestration theory that the competitive advantage of the firm lies in the strategic combination of complementary resources. Godwin-Opara (2016) offered empirical evidence to support the resource hierarchy, which shows the evolution of FinTech capabilities from differentiating to essential, mirroring the stages of acquiring complementary resources in small business financing.
The second theory is the Agency Theory primarily addresses the problem of conflict between shareholders and management. The application of the theory in the Ethiopia banking industry requires the application of the lenses of this paper. The paper argues that governance practices in a firm are not just variables used in improvement of a firm’s performance; a firm needs to ensure the basics of financial discipline are in place. The NCA Logic states that a firm must overcome a “threshold of discipline” before it talks of a positive performance. Recent assumptions in the industry of growth in developing countries are that the deficiency of proper financial discipline in these states limits the maximum achievable growth in the firms. The deficiency of financial discipline limits the maximum quality of technology in the firm because it serves as a necessary condition in the firm’s quest for sustainable performance.
Agency conflicts exist in the adoption of FinTech, as the digital transformation can lead managers to over- or under-invest in new technologies, as they wish to retain their bonuses (Boot et al., 2021). The new risk environment posed by FinTech, including cybersecurity and data privacy, creates new asymmetries of information, which managers can use to deceive shareholders, leading to potential losses (García-Sánchez et al., 2021; Gleißner et al., 2022a). Furthermore, good corporate governance structures are necessary conditions for the realization of the benefits of FinTech (Okyere et al., 2026). Sebastian (2023) confirms the relationship between good corporate governance structures and the success of FinTech. Extending this governance perspective to the individual level, Bajwa et al. (2025) prove the capability of financially competent managers in the alignment of the benefits of FinTech with organizational objectives, supporting the agency theory, which underlines the importance of the manager’s skills and the organizational structures.
The last and the most important theory on which the research is based upon is the Institutional Theory argues that organizations have to adapt to external forces regulatory, normative, and cognitive to achieve legitimacy (Barzelay & Scott, 1997). The contemporary world financial situation finds Sustainability and Ethical Practices shifting from voluntary appendages to institutional needs (Giannopoulos et al., 2024b). For banks operating in Ethiopia, legitimacy is increasingly based upon ESG factors (Environmental, Social, and Governance) criteria and ethical transparency in their attempts at integration into global financial systems (Do et al., 2024). By NCA standards, institutional alignment is a prerequisite for existence. As a consequence of a lack of adaptation to these developing ethical principles and measures of sustainability, banks will face the problem of “institutional exclusion,” keeping them from participation with a wide range of international counterparts (S. K. Mesta-Cabrejos et al., 2023). Thus, sustainability is considered a requirement for achieving legitimacy.
In the context of banking, this theory provides a framework to understand the importance of financial discipline and ethical practices as a governance mechanism to ensure sustainable performance. Bank managers may not invest enough in sustainability because the benefits are long-term, while the costs are front-ended, thereby creating agency problems (Gleißner et al., 2022b). Financial discipline, including capital adequacy, cost efficiency, and liquidity, acts as a “threshold of discipline,” thereby aligning managerial interests with shareholders’ interests. In the context of Ethiopia, financial discipline helps to address information asymmetry and moral hazards (Jote, 2023b) and, hence, becomes a sine qua non or a non-negotiable condition to be met before banks can focus on other higher-order objectives, including green finance or technology transformation. However, Ethical practices can be viewed as a governance mechanism because they restrict opportunistic managerial behavior, thereby focusing on the bank’s viability in the long term, as opposed to short-term personal gain. Bank managers may engage in opportunistic behavior, thereby creating agency conflicts, if ethical standards are not set at a minimum level.
Likewise, the need for FinTech capabilities is increasing for regulators and customers, making digital transformation an institutional imperative for legitimacy. As mentioned by Lu (2024), there are significant regulatory challenges that have emerged due to the incorporation of FinTech, which demands an adaptation of policies by the government. As shown by Campos-Teixeira et al. (2025), fintech promotes institutional changes that demand an evolution of regulatory frameworks in emerging economies.
In general, the integration of these three theoretical lenses offers a comprehensive framework to understand sustainable performance in Ethiopian banks. RBV theory points out that sustainability and FinTech form part of the bank’s resources, which can be leveraged to create competitive advantage. Agency Theory points out that to create the desired competitive advantage; there is a need to have governance mechanisms that can align managerial decisions with shareholder value. Finally, Institutional Theory points out that resources, which can create the desired competitive advantage, have become necessary conditions for bank legitimacy as global norms and regulatory pressures continue to evolve.
Empirical Literature Review and Hypotheses Development
Customer Relationship Management and Performance of Commercial Banks
Empirical evidence concerning the association of CRM with the sustainable performance of commercial banks is complex and in many instances contradictory. Newer research indicates that CRM practices, including data-driven segmentation and customized service delivery, are positively associated with customer loyalty and long-term financial resilience (Acheampong et al., 2023a; Ferrer-Estévez & Chalmeta, 2023a, 2023b). In the Ethiopian banking institutional system, with increasing competition through the entry of new private banks and with a change in most strategies to digital-first, CRM is increasingly seen as a requisite to maintaining a market share.
However, there is a critical tension in the literature: while some studies identify CRM as a significant correlate of performance, other studies find nonsignificant relationships once boundary conditions such as organizational culture or the quality of technological infrastructure are considered (Moisescu & Gică, 2020; M. M. Rahman et al., 2021a, 2021b). The presence of this conflict “sparks” the interest in moving beyond simple linear correlations. From the standpoint of RBV, CRM capabilities constitute a non-substitutable resource that avoids “customer churn,” which constitutes one of the most critical obstacles to economic development. In analytical terms, this implies that CRM operates as a necessary condition rather than an optional booster. On logical grounds, NCA implies that it is impossible to secure high levels of sustainable performance in a bank if its CRM effectiveness fails to exceed a specific threshold; in its absence, with the lack of relationship continuity and trust, financial stability becomes unreachable (V. F. Mesta-Cabrejos et al., 2023). In light of resolving the contradictions of the previous studies, the present study argues that CRM is an imperative requirement for the Ethiopian context, where relationship-based banking remains the cornerstone for institutional legitimacy. Subsequently, we argue that a threshold level of CRM effectiveness is a necessary antecedent to organizational outcomes. The following hypothesis was developed to test the relationship and in the later NCA section, this logic will be further extended to H8 to test CRM as a mandatory necessary condition.
Financial Perspective and Performance of Commercial Banks
The relationship between financial perspective the triangular analysis of capital adequacy, cost efficiency, and profitability and sustainable performance in banks has long remained controversial in empirical research. Although meta-analysis has revealed that banks with higher financial performance are likely to be those that successfully implement sustainable practices (Care & Forgione, 2019), research has shown that this is clearly non-linear or has taken time to unfold in banks (Gleißner et al., 2022a, 2022b). For emerging market economies, banks are likely to be faced with either intense start-up costs in sustainable change or resilience from that change. For example, financial inclusion and stability in capital markets are now being shown to be fundamental correlates of profitability in banks in Sub-Saharan Africa (Yakubu & Musah, 2024). The presence of this gap or contradiction within the various types of evidence sets off a more fundamental level of conceptual thinking with regard to the concepts presented by Agency Theory (Bawuah, 2024; Jensen & Meckling, 1976). In fact, within the context of the highly regulated banking industry that is prominent within the Ethiopia environment, with the National Bank of Ethiopia (NBE) having recently stepped-up capital and liquidity standards, it can be noted that sound finance is no longer simply an outcome but rather a mechanism itself in addressing issues of asymmetrical information and moral hazard (Jote, 2023b; National Bank of Ethiopia [NBE], 2023). In this regard, sound finance considerations form the threshold of discipline within which confidence within the various stakeholders needs to remain if it is not to be lost within the competitive environment (Yakubu & Musah, 2024). As proposed by the Necessity Logic (NCA) framework also used in this analysis, it can be hypothesized that the factors of liquidity and cost efficiency do not only work cumulatively to achieve better results but also function as a minimum benchmark (Dul et al., 2023). Not satisfying this economic parameter leads to the establishment of a bottleneck that does not allow banks to focus on more elevated goals, such as green finance, digitalization, or the establishment of social communities (Giannopoulos et al., 2024b; Nosratabadi et al., 2020a, 2020b). In view of making amends for such contradictions, it can be argued that in the Ethiopian institutional setting, in which compliance has become the essential prerequisite for the survival of institutions, the financial situation provides the structural floor for any operations (Okoli, 2024a). Thus, for maximum levels of sustainability in performance to be achieved, it is necessary for a bank to overcome a certain non-negotiable level of its financial condition before other drivers of strategy actually have any effect (Bawuah, 2024; S. K. Mesta-Cabrejos et al., 2023). Hence to test the relationship between financial perspectives and sustainable performance of commercial banks in Ethiopia the following hypothesis is developed whereas this reasoning explains the necessity test requirement in H7, which places the financial viability requirement as an absolute bottleneck requirement).
Internal Process and Innovation and Performance of Commercial Banks
On commercial banks, findings indicate that process innovation, operation, and performance are enhanced by sustainability governance practices and digital finance practices (I. Anis et al., 2023; M. Anis et al., 2023). The effect on financial performance, though, is a question in itself, and eco-innovations are shown to positively affect sustainability performance, where less technological banks provide more efficiency for operations. The relationship between all these factors is therefore complex and multidimensional (I. Muazu & Nashehu, 2021; M. H. Muazu & H. H. Nashehu, 2021). Further, a DEA test of its application in Pakistani banks revealed that corporate governance and return on equity are variables that exhibit significant influence on efficiency. On the one hand, enterprise risk management and financial leverage are also variables that demonstrate a negative influence on efficiency, thereby indicating that process innovation by itself may perhaps not support performance appropriately (A. Ullah et al., 2023; S. Ullah et al., 2023). Further, operational excellence strategy of integration and automation has been known to support improved service performance and customer satisfaction in commercial banking. Whether it causes a commercial bank to be profitable directly, however, remains a question in itself (Zuo et al., 2023). These opposite conclusions thereby indicate that even if process and innovations support operational efficiency, substitution of these factors for long-term improvements in performance by commercial banks may be in question or dependent on certain factors such as governance structures, environments, and types of innovations. Therefore, these opposite conclusions thereby support demands for another piece of research on circumstances that indicate a substitute for long-term improvements in sustainable performance by commercial banks, thereby justifying another study that forms the subsequent hypothesis and the and in the later NCA section, this logic will be further extended to H9 to test internal process and innovation as a mandatory necessary condition.
Human Capital Development and the Performance of Commercial Banks
According to the Resource-Based View (RBV), human capital has emerged as an important source of sustained competitive advantage because of its complex social nature and inability to be easily copied or imitated by rivals. When applied to the banking industry, human capital development (HCD) has emerged as an important strategic investment in rare resources such as specialized ESG capabilities and digital literacy that are hypothesized to be taken-for-granted antecedents to high sustainability performance. Empirical evidence emerging recently supports the positive and significant association that exists between HCD and sustainability. For example, research conducted in Europe and Saudi Arabia indicates that green HRM and DL development efforts are paramount for long-term financial sustainability (Alharbi & Al Mamun, 2021; García-Sánchez et al., 2023). Additionally, research carried out recently in the Asian banking industry indicates that IC has a positive effect on “green” innovation, which further leads to sustainable results (J. Chen et al., 2022; Nawaz et al., 2023). In an African research perspective, it has been shown that HCD is an innovation and productivity driver in Ghana and Nigeria by Ofori et al. (2020) and Adeyemi and Oboh (2021), respectively.
Nevertheless, there is also evidence of a “performance gap” in the literature, implying that human capital does not function as a guaranteed catalyst for performance. More contemporary evidence in Jordan and India reveals that such performance is commonly undermined by factors such as regulatory strictness and a lag in technological adoption (Al-Najjar & Al-Najjar, 2023; Singh & Agarwal, 2022). Furthermore, where “green” institutions are absent in developing countries, such performance can be lessened by the influence of HCD on sustainability performance (Martínez-Ferrero et al., 2023).
In the context of the current growth strides and the major transformation in the digitization progress of the banking sector in Ethiopia, human capital has become an emerging factor that can potentially constrain it. As banks in the country prepare to face competition from foreign firms, banks’ institutional reputation is now largely bound to their potential ability to deliver quality and technologically based services. Shortcomings in digitization literacy and skills can trigger “reputational deficits” among customers (Mengesha, 2022). As banks fail to ensure in the technical capacities of employees in the emerging fintech innovations and Green Banking sustainability measures in the envisaged sustainable growth and development context, they can suffer from stagnation at minimum levels of performance despite possessing adequate amounts of financial capital. As corporate reputation has become an important factor demarcating competition in recent times, banks’ inept ability to handle complex transformations in digitization and technological advancements can unequivocally trigger major market shares lost (Worku, 2022). Hence, this current assertion aims to assess if Human Capital Development (HCD) has become an elementary prerequisite to accomplish higher levels of market-performance and maintain an enduring market reputation under the prevailing turbulent conditions. Hence the study prepared the following hypothesis to test the relationship between human capital development and performance of commercial banks.
Sustainability and Ethical Practices and Performance of Commercial Banks
Within the realm of Institutional Theory, the concepts of sustainability and ethics become even more fundamental to the pursuit of external corporate legitimacy, which has become an imperative for the banking sector, particularly on the global stage, since the ability to meet the ethics and principles of sustainability has become the key factor for survival and may become the basis for the license to operate. Recent studies confirm the importance of this connection between sustainability and legitimacy. García-Sánchez et al. (2021) and Do et al. (2024), for example, indicate that banks that focus more on acting responsibly and sustainably have improved financial performance and risk profiles. However, this positive connection can be facilitated by the credibility that can be attained by the assurance service provided by third parties to ESG reports, resulting in improved cost of capital due to an indication of transparent reporting (D. C. Pham et al., 2021; H. N. Pham et al., 2021; Zuo et al., 2023). However, the issue of adopting high levels of sustainability standards can be complicated. Although these approaches are conceptualized as absolute necessities in the traditional business framework, they are not always the driving forces in the short term. Recent research has demonstrated that the costs of adopting strict ethical management approaches as well as high levels of sustainability could potentially result in lower short-term profits, especially in banks with relatively weak capital positions (Xie et al., 2022). Additionally, in certain developing markets, overcommitting ownership approaches toward CSR activities without a strategic relevance frame could potentially create a culture of skepticism among the investment community rather than adding market value (Martínez-Ferrero et al., 2023). Within the arena that is undergoing change in Ethiopia and where the banking sector is expected to be more transparent and normalized to international standards, sustainability and ethics can emerge as a key constraint. As this sector develops, failing to attain a baseline ethical standard can render a banking institution nugatory in the view of foreign nations and a more aware clientele. Hence, this research proposes the reasoning tool for NCA to establish if a baseline ethical standard is necessary to attain lofty standards.
Financial Technology and Performance of Commercial Banks
From a Resource-Based View (RBV) methodology, financial technology (fintech) is considered a strategic resource that may allow a competitive advantage for commercial banks because of increased efficiency and unique digital capabilities that do not have substitutes. Recent research findings during 2020 to 2024 have emphasized the positive influence between fintech adoption and sustained banking performance. For example, Lee et al (2021b), Li, Yu, and Zhao (2021) and Wang et al. (2022) have demonstrated that the implementation of fintech leads to increased profitability and market share due to reduced transaction costs and increased customers. Additionally, research carried out by Zhang et al. (2023) among emerging markets indicates that digital transformation is positively correlated with “green” banking performance. Nevertheless, net effects caused by fintech remain varied and reliant on situation. As a booster, on one side, fintech contributes to enhanced performances. However, on the other side, increased competition and critical operational risks emerge. As mentioned by Boot et al. (2021) and Li et al. (2024), if implemented quickly, fintech can reduce conventional profit and create risks to cyber-security, ultimately affecting a bank’s reputation capital and trust a key element for sustainable performances. In the case of Ethiopia, the relevance of fintech may adopt a different reasoning process. The reasoning of the reviewers indicates that, although fintech is a “driver” in developed countries, it may be less important for Ethiopia within its different boundary conditions such as limited financial inclusion, a preference for traditional banking systems, and strict regulatory environments. Nonetheless, within the reasoning of Necessary Condition Analysis (NCA), fintech can actually symbolize a minimum necessity for the future. As the National Bank of Ethiopia liberalizes the industry by embracing fintech, a minimum infrastructure of fintech may symbolize a “bottleneck,” that is, a condition for reaching even a moderate level of performance. The significance of this inquiry is that it explores whether fintech symbolizes a necessary condition or a complementary driver within a developing institutional context. The following hypothesis is developed to test the relationships the logic is also hypothesized in
Necessary Condition Analysis (NCA) of Performance of Commercial Banks
The main body of evidence-based studies on the antecedents of bank performance from financial perspectives, customer relationship management, process innovation in banks’ internal structures, development of human capital in banks, and sustainable ethics has generally relied on the logic of “net effects.” Linear regression analysis and Partial Least Squares – Structural Equation Modeling (PLS-SEM) have been primarily used by most studies to test for the importance of individual predictors (A. Ahmeti et al., 2022; F. Ahmeti et al., 2022; H. Businge et al., 2023; P. M. Businge et al., 2023; Tchamyou et al., 2024). Although it offers significant departures in understanding the average contribution made by individual variables in explaining an outcome, it comes with its own inherent constraints on the principle of compensations. Under traditional linear logic, an exigency in one area (or variable), such as human capital in banks, could be remedied by the availability of another area or variable in plenty (such as financial technology), yet from an Institutional Theory/RBV point of view on resources and institutional fit, resources could constitute “bottlenecks” which are non-substitutable in banks (Dul, 2020; Richter et al., 2020).
To fulfill this void, Necessary Condition Analysis (NCA) conceptualizes the analysis not on “drivers” but on "necessity logic. A condition is necessary if the results cannot be obtained without it, independent of how high/low other variables are (Dul et al., 2023; Hauff et al., 2021). To take an example, human capital may drive high sustainability performance, but NCA may help identify whether basic levels of expertise are an irrevocable prerequisite a must-have coinciding with all levels of high-performance results (Dul, 2020). NCA assumptions are specifically important in the Ethiopian banking system, characterized by instantly evolving regulatory environments and the establishment of new fintech sectors with strict boundary conditions for survival.
Although a certain degree of methodological progress can be recognized in combining PLS-SEM and NCA together into a hybrid framework as a complement to traditional logico-statistical analyses, actual applications of these ideas within developing economies have been relatively absent. For a specific case of the Ethiopian economy, which is faced with a set of different institutional and financial development constraints that could be perceived as somewhat distinct or different compared to other developing or even developed economies, it is crucial to distinguish between necessities and sufficiency and thereby gain a more profound understanding of which organizational and technological forces may function as crucial bottlenecks for a set of different commercial banks operational in Ethiopia. Therefore, this specific research aims to explore and test a set of different hypothetical statements related to these questions which are stated below.
Conceptual Framework of the Study
Based on the above theories and empirical evidence, the following conceptual framework is designed to formulate hypotheses. Figure 1 is the conceptual framework of the study.
Conceptual framework of the study.
Research Design
Sample Selection and Data Collection
The research targeted managers and workers from 10 Commercial Banks working in the four most important areas of Ethiopia: Addis Ababa, Dessie, Bahir-Dar, and Hawassa, based. These districts were selected purposely because they are the primary hubs of the financial sector, collectively accounting for more than 60% of all commercial banking services and transactions in the country. This selection ensures that the data reflects the core of the Ethiopian financial industry, thereby enhancing external validity. Furthermore, Soper’s (2025) structural equation model formula was used to calculate the sample size and found that 480 participants are needed from the total population of 4,990. The formula accounted for a predicted effect size of 0.22, a statistical power of .95, and a significance level of .05. A multi-stage sampling method was used to provide methodological rigor and consistency.
The research employed a multi-stage sampling approach to obtain a representative and methodologically sound sample. It started with cluster selection of four major Ethiopian regions, labeling them as clusters because they have made the most significant contribution to the financial services industry in the country. Out of 33 nationally registered commercial banks, 10 banks were chosen (Commercial Bank of Ethiopia, Dashen Bank, Bank of Abyssinia, Abay Bank, Awash Bank, Wegagen Bank, Birhan Bank, Addis International Bank, Bunna Bank, and Hibret Bank) based on innovation, flexibility, regulatory adherence, customer base, and past performance. In addition, the study selected these banks due to that they are employing balanced scorecard performance tool to measure their performance in the past 10 years. In addition, the sample was proportionally stratified according to the size and representation of each bank in each cluster. Systematic random sampling was then used to select individual respondents in each stratum.
Measurements of Variables
The research employed primary data collected by using structured Likert scale questionnaires, as shown in Table 1, with their sources adjusted to reflect the mission and vision of Ethiopian Commercial Banks. According to Hair et al. (2019a), Likert scale questionnaires are appropriate for NCA analysis. Furthermore, questionnaires were adapted from previous studies and customized to the context of Ethiopian commercial banks. In addition, Feedback from the field and elder scholars was taken into consideration to provide relevance. It was pilot tested with 40 field experts to validate the reliability and relevance of the questionnaire. The Cronbach’s alpha was above .90 but below .94, which validated the tool’s appropriateness for the research.
Measurement Variables With Their Source Adapted.
Furthermore, out of 480 questionnaires distributed, all were returned, yielding a 100% response rate. After removing outliers using Mahalanobis Distance, 469 questionnaires were deemed usable, resulting in a final response rate of 97.7%. Mahalanobis Distance was used to identify dissimilarities between predictor variables and the ideal combination, with low distances (p < .001) indicating acceptable data for analysis.
Data Analysis Method
The study followed a two-stage analytical procedure in testing the determinants of sustainable performance in Ethiopian commercial banks. First, the measurement model was assessed using confirmatory composite analysis (CCA) in respect of indicator loadings, internal consistency reliability through Cronbach’s alpha and composite reliability, convergent validity through average variance extracted, and discriminant validity via the heterotrait-monotrait ratio and the Fornell-Larcker criterion (Hair et al., 2022a; Henseler et al., 2015). Then, the structural model was tested using partial least squares structural equation modeling (PLS-SEM), which is suitable for predictive-exploratory research and complex models with latent variables (Hair et al., 2019a). Therefore, collinearity diagnostics were performed using VIF; hypothesis testing was done by bootstrapping with 10,000 subsamples; and model fit and predictive relevance were assessed using R2 and Q2 values, respectively (Sarstedt et al., 2022).
To provide a supplementary point of view on the net effects using the results of the investigation conducted using the PLS-SEM, necessary condition analysis (NCA) has also been used. In NCA, the factors considered necessary for the attainment of a certain level of performance have been examined using the measures of the ceiling accuracy and the necessity effect size d (Dul, 2016; Dul et al., 2020). By simultaneously investigating the investigated subject using the sufficiency assessment provided in the investigation of the necessity factors using the NCA, a better understanding of the performance factors has been made possible. Also, data preprocessing has involved the missing data management, outlier detection using the Mahalanobis distance, and data normalization, while the data analysis has been carried out using Smart-PLS 4. To remove the potential of common-method bias, a variety of methods have been adopted, including the use of anonymous data and reverse-scored items for data preprocessing. Also, statistical tests using Harman’s single-factor test and full collinearity VIF have been used, proving the validity of the research finding (Podsakoff et al., 2003). The integration of PLS-SEM and NCA provides a comprehensive framework that not only tests hypothesized relationships but also identifies critical necessary conditions, offering actionable insights for both academic research and practical banking policy (Magno et al., 2024a, 2024b).
Data Analysis and Presentation
Evaluate the Measurement Model
The measurement model was carefully assessed via confirmatory composite analysis to guarantee the reliability and validity of the reflective constructs (Hair et al., 2019a). First, the loading values of all the indicators surpassed 0.70, thus ensuring that all constructs explain more than 50% of the total variance in the indicators (Hair et al., 2022a, 2022b). Secondly, the reliability of the instrument in terms of both Cronbach alpha and the value of the overall composite reliability was quantified to range between .70 and .95, hence rejecting redundancy (Sarstedt et al., 2022). Thirdly, the average of the overall variance in the constructs was found to surpass the 0.50 threshold, hence ensuring convergent validity by verifying the latent construct explains at least half of the total variance in the measures (Kline, 2023).
Additionally, to offset the possible threat from common method variance, Harman’s single-factor test was employed, and the findings indicate that the first unrotated factor explained only 35.7% of the total variance, which is less than 50% and therefore not a concern beyond the threshold set by Harman (1976). Also, VIF scores in the analysis of the structural model are still well within the threshold and sufficiently low, with scores less than 3.3, hence not a concern with multicollinearity. Finally, discriminant validity was also validated using Fornell and Larcker criteria and HTMT ratio techniques. These tests indicated that the square root of each construct’s AVE was greater than its correlation with other constructs, and also that each HTMT ratio was less than 0.85 (Hair et al., 2022a). These findings therefore confirm that the measurement model is sound and suitable for analysis (Table 2).
Indicators Loading and Reliability.
Furthermore, the fundamental concerns in measurement model studies is assessing how well a construct differentiates from other constructs in the structural model, an activity known as discriminant validity analysis (Kline, 2023). This is usually done via two main methods: the Heterotrait-Monotrait (HTMT) ratio and the Fornell-Larcker criterion. According to Hair et al. (2022a, 2022b), the HTMT ratio must be less than 0.850 to confirm discriminant validity. Likewise, for the Fornell-Larcker criterion, the square root of the average variance extracted (AVE) for each construct (designated by diagonal values) must be higher than the correlations among that construct and all the others (Kline, 2023). As can be noticed from Table 3, the values above the bold and underlined diagonal values for each construct were always less than 0.85, which satisfies the HTMT requirement. Also, the values between
Fornell and Larcker Criterion and the Heterotrait-Monotrait (HtMt) Ratio.
Note. The bold diagonal values represent the square root of the Average Variance Extracted (AVE) for each construct under the Fornell-Larcker criterion. These values indicate the extent to which a construct shares more variance with its own indicators than with other constructs in the model. Since all bold values are greater than the corresponding inter-construct correlations, discriminant validity is established. This confirms that each construct is empirically distinct from the others.
PLs-SEM result.
Evaluate Structural Model
After the validation of the measurement model, the structure model was evaluated to test the proposed relationships between the constructs. For that purpose, first the collinearity through the variance inflation factor-VIF-was verified. The values are below the threshold recommended at 3.3, according to Kline (2023), thus not raising multicollinearity issues, as shown in Table 4. Then, the significance and relevance of the structural paths were checked by means of a bootstrapping procedure with 10,000 subsamples. Coefficient of determination -R2-, effect size -f2-, and predictive relevance -Q2- were used for performance evaluation of the model as suggested by Hair et al. (2022a, 2022b). Furthermore, the model accounted for 61.3% of the variability in sustainable performance (R2 = 0.613), indicating strong explanatory power. The F2 scores for each construct exceeded 0.02, suggesting substantial effect sizes (Brydges, 2019), and the Q2 of 0.561 sufficiently surpassed the 0.50 threshold, indicating strong predictive fit (Hair et al., 2019b). Taken together, these findings confirm the construct validity and fit of the structural model for hypothesis testing.
Structural Model Validation Indicator Results.
Hypothesis Testing and Results (SEM)
The findings of PLS-SEM analysis, presented in Table 5, confirm the validity of the proposed hypotheses. The customer relationship management positively influenced sustainable performance (β = .138, p = .024, t = 2.251), indicating the significance of customer-centric strategies in building organizational stability and sustainable growth. The financial perspective also had a strong and positive influence (β = .181, p < .001, t = 3.819), reiterating the significance of effective financial management in the form of cost management, revenue generation, and profitability for sustainable performance in the banking industry. Likewise, human capital development positively affected performance (β = .108, p = .009, t = 2.617), indicating the significance of investment in employee development and engagement for maintaining organizational flexibility and innovation in the dynamic business environment for sustainable outcomes. Interestingly, process innovation and development had the highest influence on sustainable performance (β = .278, p < .001, t = 6.022), emphasizing the decisive role of operational innovation in altering the future of organizational stability and sustainable success. In addition, financial technology had a positive and significant relationship with performance (∂ = .109, p = .026, t = 2.223), suggesting that technology advancement is a major factor in performance improvement but not a basic requirement. Finally, sustainability and ethical activities also had a positive relationship with performance (∂ = .112, p = .007, t = 2.693), suggesting that corporate social responsibility is increasingly strategic and crucial for increasing reputational capital and positive performance. In conclusion, the findings from SEM analysis affirm that sustainable performance among Ethiopian commercial banks is a consequence of a combination of several factors.
SEM Hypothesis Test Results.
Note. **significant at P-Value < .05.
Necessary Condition Analysis (NCA)
Necessary Condition Analysis (NCA) is a complement to PLS-SEM because it helps to detect those factors which at least must be present to a certain extent, as a minimum for a specified outcome to be achievable. NCA helped to discriminate between the determination factors which had a positive effect upon the performance attributes of a bank and the determination factors which must necessarily be fulfilled if the bank was to be involved in sustainable banking practices. Two sorts of measurements were performed to calculate the effect upon sustainable banking of the determination factors. These were ceiling accuracy, which reflected the percentage of values which were positioned above or below the ceiling line. A larger value indicated that the Necessity Condition was well-specified. In addition to Ceiling accuracy, the effect size of the Necessity effect (d), which reflected the strength of the variable to be considered as the Necessity Condition. In an explanation by Dul (2016), effect sizes were classified as being small (0 < d < 0.1), medium (0.1 ≤ d < 0.3), large (0.3 ≤ d < 0.5), and very large (d ≥ 0.5) respectively.
Results from Table 6 and Figure 3 indicate that customer relationship management, financial management, and process innovation are factors that need to be addressed for commercial banks in Ethiopia to sustain excellence in performance with medium statistically significant impact (99%) at 0.108, 0.101, and 0.128 day-values, respectively. They also indicate that these factors are necessary for commercial banks in Ethiopia, which need medium statistically significant impact for excellence in performance.
NCA Analysis Results.
Smart- pls- NCA.
Furthermore, in addition, the enhancement of human capital has a medium-level necessity effect (d = 0.102) with a highly accurate result (99%), supporting that the improvement of the capabilities of bank workers is necessary for banks to survive in the long run. By contrast, the other two remaining variables: the use of Financial Technology (FinTech) and sustainability and ethical practices,” have small necessity effects (d = 0.011 & 0.033) and lower percentages of bottleneck (15% & 13%), respectively. Even if the two variables are significant in the result of the PLS-SEM, they are not core requirements within the current Ethiopian bank settings, most likely due to the immature uptake of FinTech and the newly emerging trend of sustainability practices in the regional banks today. In sum, the interpretation of the result indicates that human capital and the bottleneck analysis (Table 7) further articulate these results by indicating the levels each factor has to attain in order to meet incremental performance objectives. Banks have to attain a mark of at least 4.24 on the scale on the CRM dimension if they have to meet the goal of making 80% of sustainable performance. A similar requirement has to be met on the other dimensions of financial perspective and process innovation. In general, in combining the use of NCA and PLS-SEM, this research expands upon previous studies and aims not only to identify key drivers of performance but to also draw a distinction between what is essential and what is desirable, adding depth to strategic formulation within the context of a developing market such as the Ethiopian banking industry.
Bottle-neck table.
Discussion and Conclusion
This research aimed at identifying the key drivers of sustainable performance for commercial banks in Ethiopia, using the complementary methods of PLS-SEM and NCA. The results provide robust evidence that some factors are not only positive predictors but also, crucially, necessary conditions for reaching Sustainable performance in this very specific institutional context. The study affirms that Customer Relationship Management is universally important as a positive performance driver (β = .138), supporting existing global literature linking effective CRM to enhanced customer loyalty and profitability. However, looking deeper at the contextual insight with the help of NCA reveals that in Ethiopia, CRM is not only beneficial but rather a necessary condition to attain high performance. The finding goes beyond the correlational evidence of earlier studies in developed markets by proposing that in a market with low financial inclusions and high competition for trust, Ethiopia in this case, robust customer relationships form an indispensable foundation without which high performance is unattainable. Similarly, the strong positive effect of a sound Financial Perspective (β = .181) corroborates established research emphasizing financial metrics as core to bank stability (Yahaya et al., 2022; Yakubu & Musah, 2024). Our NCA result (d = 0.101) furthers this understanding by positioning financial discipline as a necessary baseline. This echoes agency theory concerns prominent in emerging economies, where strong financial controls are critical to mitigate risk and ensure longevity, a necessity that may be even more pronounced in Ethiopia’s evolving regulatory landscape than in more mature financial systems. Additionally, the confirmation that Process Innovation has the strongest predictive power (β = .278) and is a necessity (d = 0.128) only lends credence to it being an important catalyst for achieving a competitive advantage (Ayinaddis, 2023b; Suhag, 2017a, 2017b). The emphasis, however, on it being a necessity in this paper may point to an important area of divergence for an established and mature banking system. Innovation may help the differentiation process in an established banking system, but it may very well be a necessity in the Ethiopian context in order to achieve a level of viability and efficiency.
On the other hand, a significant basis for comparison emerges regarding Human Capital Development. Although our own PLS-SEM supported its positively significant influence (β = .108), in line with research attesting to its significance in terms of innovation and agility (Saif, 2022a, 2022b; O. R. Ejiroghene et al., 2023; A. E. Ejiroghene et al., 2023), the result was moderated by the NCA. As it was not considered to be a necessary condition, this indicates that although important to the region’s future development needs, its current use may be more focused on maximizing performance from the labor force, and not necessarily utilized to the region’s best effect in its current level of development.
Furthermore, the outcome for Financial Technology (FinTech) and Sustainability & Ethical Practices factors offers the most obvious contextual divergence from overall global patterns. Both of them yielded small but significant positive results (β = .109 and .112), which is in line with findings that confirm their positive value (Al-Showha et al., 2024; Giannopoulos et al., 2024b). Crucially, however, our NCA analysis yielded trivial necessity effects (d = 0.011 and 0.033). This shows that, in contrast to more developed markets in which digitalization and ESG factors may very well be becoming table stakes, in Ethiopia they still occupy the position of second-tier strategies and support the observations of scholars such as Okoli (2024b), who documented the conditional effectivity of FinTech in varying contexts in order to suggest that the pressure to sustain institutions (V. F. Mesta-Cabrejos et al., 2023) may still be not strong enough to consider FinTech a necessary strategy.
Practical and Theoretical Implications
Practical Implications
Theoretical Implications
This research makes four distinct theoretical contributions to management and banking literature. Firstly, the study extends the Resource-Based View (RBV) theory by empirically supporting the premise that customer relationship management, financial discipline, and process innovation serve as the necessary conditions rather than the performance drivers for bank performance in developing economies. Although the Resource-Based View theory focuses on the role of VRIN resources in gaining competitive advantage, the study proves the presence of the so-called “bottleneck resources” without which minimum levels of performance cannot be attained. Secondly, the research extends Agency Theory by demonstrating the criticality of financial governance, not only as an instrument of risk management but also as an essential antecedent for the effective functioning of institutions in emerging economies. The research confirms the existence of the “threshold of discipline” which must be crossed before any other strategic initiatives can begin to show results. Thirdly, the study contributes to the development of Institutional Theory by providing contextual evidence for the process through which external pressures become strategic necessities. The fact that FinTech and sustainability are found to be currently only complementary, rather than necessary, conditions in Ethiopia demonstrates that pressures for institutional change operate along a continuum, from nascent pressures to binding constraints. This, in turn, suggests a model for how global pressures (such as ESG, digitalization) increasingly become institutional imperatives over time, with the development of regulatory frameworks and stakeholder pressures. Finally, the research contributes significantly to the methodological literature by showing the merits of combining NCA with PLS-SEM. The dual-method approach goes beyond traditional net effects logic by distinguishing necessary conditions from sufficient or complementary conditions, thereby providing a reproducible research methodology for exploring strategic hierarchies in other sectors and developing economies. The methodology allows researchers to go beyond asking “what matters?” to answering "what is indispensable? Which is an important theoretical and practical distinction.
Footnotes
Acknowledgements
The author would like to thank all the individuals who contributed significantly to this article.
Author Contributions
The author initiated the study idea, formulated the theoretical framework, and modified it for the Necessary Condition Analysis (NCA) methodology. In addition to this, the author created the methodology, including NCA and PLS-SEM, managed the sampling and data collection process, and undertook primary data collection, as carried out the data analysis with the help of Smart-PLS and NCA tools. Furthermore, the author prepared the first manuscript, including the methodology, results, and discussion sections, and checked for coherence, academism, and clarity. Moreover, the author oversaw the whole research procedure, ensuring they followed ethical and academic standards and obtained the available funds for undertaking the study. Lastly, the author finalized and checked the final manuscript.
Funding
The authors received no financial support for the research, authorship, and/or publication of this article.
Declaration of Conflicting Interests
The authors declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Data Availability Statement
Data sharing not applicable to this article as no datasets were generated or analyzed during the current study.