The Effect of Financial Sector Development on Domestic Investment in Ethiopia: An Empirical Investigation
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Date
2023-06-04
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A.A.U
Abstract
It is widely agreeable that investment is the engine for growth. Similarly, financial institutions play a critical role to stimulate economic growth by mobilizing financial resources and availing it to investors. The study examined how domestic investment is affected by the development of financial sector in Ethiopia for the years 2000-2022. “Broadmoney supply” as a measure of “Financial Depth”, “Bank Credit to Bank Deposit” as a measure of Banks’ Intermediation Efficiency, and “domestic credit to the private sector”representing “Financial Activity” were used to measure “financial sector development”. The study employed an Auto regressive Distributed Lag (ARDL) model. It applied all relevant pre and post estimation tests to ensure that the model is well specified and free from anticipated time-serious problems. The results of the study justified that the effect of “financial sector development” on “domestic investment” in Ethiopia depends up on the measurement of financial sector development used. In this regard, “Financial Activity” has a positive and significant effect on domestic investment in the long run. However, it has a negative and significant effect in the short run. Conversely, both “Financial Depth” and intermediation
efficiency has a negative and significant effect on domestic investment in the long run. Similarly, “Financial Depth” has a negative and significant effect on domestic investment in the long run. The researcher recommended that government should monitor the supply of money so that inflation will be controlled and domestic investment will be enhanced. Besides, banks should intensify credit to the private sector by intensifying their resource mobilization
endeavour so that domestic investment will be enhanced in the long run. However, decision makers should exercise caution when selecting financial sector development metrics as a tool for promoting domestic investment.