The Role of Banking Sector in Capital Accumulation and Economic Growth of Ethiopia: An ARDL Approach
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Date
2024-06-02
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A.A.U
Abstract
This study uses the financial sector development indicator variables of deposit, loan, asset, and
profit as explanatory factors and RGDP as a dependent variable to examine the empirical
relationship between the banking industry and Ethiopia's economic growth. Using time series
data covering the years 1980–2022, the paper empirically evaluates the contribution of the
banking industry to capital accumulation and economic growth in Ethiopia. Unit root
examinations, cointegration tests utilizing the ARDL approach, Granger non-causality tests, and
VECM dynamics investigations of the short- and long-term dynamics are all included in the
model estimate process. The analysis's result demonstrates that, although credit only has a
substantial impact on short-term capital accumulation, deposits have a significantly favorable
short-term impact on both economic growth and capital accumulation. However, aside from
deposits, a well-designed quantitative technique has the advantage of making findings reliable
and lessening the impact of researcher and subject biases, especially when the research purpose
is to analyse the problems and function of the banking sector in capital accumulation and
economic progress. There is unidirectional linkage that exists between credit and economic
growth, although there is a reciprocal causal connection between deposits and economic
expansion, according to the analysis done to ascertain the cause and effect direction. Thus, the
study recommends policymakers to strengthen the sector's capacity in a manner that would
effectively distribute funds to the economy's most productive sector and mobilize larger savings
in order to achieve rapid capital accumulation and sustainable economic growth. In the short
run, gross national saving makes a substantial and positive contribution to capital accumulation
and economic growth; however, over time, this contribution diminishes and becomes less
significant. On the other hand, government expenditure has a significant long- and short-term
influence on capital formation; nevertheless, it has a negligibly favorable long-term impact on
economic growth and a substantially negative short-term impact.