The Impacts of Private Banks on Economic Growth in Ethiopia

Yonas Yohannes

doi:10.7176/jesd/10-11-06

Abstract

An improvement in nation’s economic growth is contributed by major functions of private Banks such as deposit mobilization, giving credit to entrepreneurs, financing investment and foreign currency purchase and remittances. However, it is adversely affected due to an increasing amount of Banks non-performing loans in the long run. The studies that had been conducted on the banking sector focused on the general policy, capacity, the Bank performance and quality of service on customer satisfaction. Hence the objectives the study was to examined the short and long run impact of private Banks on economic growth in Ethiopia. The time series data which covering 1994/95 to 2015/16 from National Bank of Ethiopia was analyzed by employing VECM by using e-views software. The result indicates that deposit mobilization, investment, foreign remittance and purchase have positive and significant relationship with GDP with the coefficients of 0.8096, 0.1052 and 0.0297 respectively. The coefficients imply that for one unit rise in deposit mobilization of private Banks causes an increase of GDP by 0.8096 units, for one unit rise in investment of private Banks cause an increase in GDP by 0.1052 units and for one unit rise in foreign remittance and purchase of private Banks cause an increase in GDP by 0.0297 units respectively. Therefore, private Banks are playing indispensable role on the economic growth in Ethiopia by performing their primary functions in the economic activities. Hence, to accelerate economic growth, Banks should collect deposit from every corner of the country so as to finance larger investment projects. Keywords : economic growth, private Banks, deposit, investment, VECM DOI : 10.7176/JESD/10-11-06 Publication date :June 30 th 2019

Highlights

Banks have been perceived as engine of economic growth because they perform resource allocation function, by mobilizing and channeling resources from surplus economic units to deficit units
Descriptive Statistics The major functions of private Banks as indicators to know the impact of private Banks on GDP, a measure of economic growth in Ethiopia
Foreign currency purchase and remittance transfer by private commercial Bank as measured by the ratio of foreign currency purchase and remittance to GDP found in between 0 to 36 percent. From these the domestic investment financed by private Banks in Ethiopia is measured by investment to GDP is about 62 percent per year with a minimum and maximum values lies in between 58.1 to 66.51percent respectively

Summary

Introduction

Banks have been perceived as engine of economic growth because they perform resource allocation function, by mobilizing and channeling resources from surplus economic units to deficit units. The government of Ethiopia has declared a liberal economic system with Monetary and banking proclamation of 1994 established the national Bank of Ethiopia as a judicial entity and outlined its main functions. This is considered as turning point in the history of banking business where local private Banks are allowed to operate in the country. Given the good performance of the economy and attractive profits declared by private Banks from year to year, investors are attracted to invest in this sector with the hope that the future value of their shares will be high (Befikadu, 2015)

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