Credit Drivers: Empirical Study on Commercial Banks in Ethiopia

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Addis Ababa University


Financial Development is a cornerstone for economic growth and development. Banks in developing countries like Ethiopia play dominant role in the financial sector through playing intermediation function. Hence, increasing credit supply while also ensuring the soundness of the finical sector is key for accelerating economic activity. However, like in most African countries, bank credit in Ethiopia is low though credit to GDP is growing steadily overtime. Hence, this research investigates credit drivers of Ethiopian commercial banking sector during the period from 2002 to 2014. It was conducted based on the hypothesis that credit in Ethiopian banking industry is determined by bank, industry and macro-economic specific factors. Several theories and empirical outcomes were examined to explain the determinants of bank credit supply. The variables were selected based on both theoretical and empirical literatures. Explanatory design, quantitative research approach and secondary data were used in carrying out this research. The regression technique was used to estimate the model using the EViews 8 econometric package. The results obtained indicated that bank lending is determined by banks and industry specific factors than macroeconomic specific factors. And specifically the estimation results show that deposit volume, capital of banks, liquidity position, investment portfolio, cost of financial intermediation and market concentration have significant effect on bank lending. However, economic growth proxied by real GDP and inflation are not significant. The study recommends banks to increase deposit level, manage liquidity effectively, enhance their capital level and decrease the cost of financial intermediation. Similarly, NBE needs to enhance competition with strengthened supervision. Further studies were recommended in the areas by considering additional variables and at regional and cross country level.



Credit Drivers, Commercial Banks in Ethiopia