The Role of Banking Sector In Capital Accumulation and Economic Growth of Ethiopia: An application of ARDL approach to Co-integration
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Date
2018-06
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Addis Ababa University
Abstract
Economists have been arguing regarding the importance of financial development for economic
growth. In this connection, the study examine the effect of the role of banking sector on capital
accumulation and economic growth of Ethiopia using time series data from 1981 to 2016. The model
estimation includes unit root tests, co-integration test using ARDL approach, granger non-causality
tests and investigates the short-run and long-run dynamics using VECM. The result of the analysis
shows that, in the short-run, deposit has a significantly positive effect on capital accumulation and
economic growth; whereas credit has only significant effect on short-run capital accumulation. On
the other hand, except deposit which has significant effect on economic growth, the role of banking
sector, as measured by deposit and credit, appeared as having no significant effect on long-run
capital accumulation & economic growth. It’s expected that capital accumulation has a significantly
positive effect on long-run economic growth. The analysis made to determine the direction of
causality shows the existence of bidirectional causality between deposit and economic growth, while
there is a unidirectional causality running from economic growth to credit. The study has only found
a unidirectional causality running from capital accumulation to deposit and credit. This confirms the
fact that banking sector of the country is not in a position to support long-run investment need which
is a precondition for sustainable economic growth. As a result the study recommends policymakers
to strengthen the capacity of the banking sector in a way that would mobilize higher savings and
efficiently allocate to most productive sector of the economy, so that the country will attain rapid
capital accumulation and sustainable economic growth.
Description
A study submitted to the department of Management in partial fulfillment of the requirements for the
Degree of Master of Business Administration in Financial Service-specialization in Banking
Keywords
ARDL, Capital Accumulation, Credit, Economic Growth