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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Addis Ababa University


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.


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


ARDL, Capital Accumulation, Credit, Economic Growth