Determinants of Banking Sector Development in Ethiopia

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Addis Ababa University


The study focuses on the investigation of the macro factors that affect the development of the banking sector. Because, The banking sector is rudimentary due to the problems such as heavy dependence of investors in borrowed fund, excessive government borrowing, absence of secondary markets, less attractive deposit rate, limited outreach of banking services, underdeveloped saving culture, poor cross-selling activity of inflow of foreign remittance, deficit in the trade balance of the country. The purpose of this study is, therefore, to investigate the significant determinants and recommend courses of action to be taken and analyze the level of development in comparison to other East African countries. Quantitative research approach is applied using econometric model estimated OLS multiple linear regression and descriptive quantitative analysis technique. The study has found that Trade Openness, Real Interest rate, population growth, and Government consumption expenditure have far reaching statistically significant impact on the development of the banking sector by influencing the volume of credit provided by banks to the private sector. Remittance to GDP ratio, Real Interest Rate and GDP growth rate significantly impact the broad money supply (M2). There is also significant concentration of asset of the sector in three big banks and the Level of liquid asset to total deposit is lower than the East African countries though NPL is the least. The paper recommends strengthening of the trade balance & openness, cut budgetary deficit, increase the real interest rate, cross-selling of inflow of remittance by banks and the NBE shall take measures that enhance financial inclusion and improve the platform of required infrastructure in collaboration with the designated organs of the government to enhance development and competitiveness of the banking sector



Development in ethiopia