Determinants of Commercial Banks’ Deposit Growth in Ethiopia: Case Study on the Commercial Bank of Ethiopia
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Date
2015-05
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Addis Ababa University
Abstract
This study primarily aims at determining the short and long run impacts of determinant factors
on deposit growth of commercial bank of Ethiopia for the period 1974/75 to 2013/14 using
Vector Error Correction Model (VECM). The study also checked the causal relationships that
exist between deposit growth and its determinant factors employing test of Granger causality. In
the empirical VECM model, control variables (Economic Growth, Inflation, Interest Rate,
Exchange Rate, Population Growth and Branch Expansion) are included to enable ceteris
paribus interpretation of the relationship and impact on the growth of deposit in commercial
bank of Ethiopia. The estimated results suggest that interest rate has positive but insignificant
impact on deposit growth both in the long run and short run. While Exchange rate and branch
expansion significantly increases banks deposit contemporaneously both in the short run and
long-run. Population and Economic growth also has a positive relationship with deposit growth
and it is significant in the long run but insignificant in the short run. However, Inflation has
positive and significant impact on deposit in the long-run and negative impact in the short run.
Using test of granger causality, the study found uni-directional causality that runs from deposit
to inflation, from exchange rate deposit, from deposit to interest rate, from population growth to
deposit without any feedback response. The finding also indicates that there is bi-directional
causality between branch expansion and deposit and economic growth in Ethiopia. This implies
that deposit can affect economic growth through investment. These results have important policy
implications for both domestic policy makers and the bankers working in the country. The
findings are of direct relevance to the development of deposit mobilization policy by the
commercial bank of Ethiopia.
KEY WORDS: Deposit, Determinant Factors, VECM, Granger Causality and CBE
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Keywords
Deposit, Determinant Factors, VECM, Granger Causality and CBE