Abstract:
Banks plays a key central role in a country’s financial structure and the national economy at
large through accepting deposit of money from persons who do not need it at the present and
lending it to persons who want it for investment, Financial intermediaries thereby providing
ideal source of fund for investment that were crucial in increasing production and foreign
exchange earnings of the country.The main objective of the study was to examine the effect of
banking sector on economic growth in Ethiopia over the period 2001-2021. Specifically ,it
evaluate the effect of deposits, loan and advance, profitability, and foreign currency earning
on GDP .The ARDL co-integration approach Model are employed to investigate both the
long run and short run relationships. Goodness of fit of the estimated equation, Stability of
the estimated model, Breusch-Godfrey Serial Correlation LM Test, Heteroskedasticity test:
Breusch-Pagan-Godfrey and Normality Test has been also conducted and Bounds test
showed there was long run and short run relationship between GDP, Deposit, loans and
advance, profit and foreign currency earning. The estimated ARDL model has confirmed
significantly positive effect of economic growth. This study is important to the practitioners,
policy makers, and potential researchers by providing recommendable solutions those
mitigate the obstacles in banking sector providing conductive financial and economic
theories and models were important for the banking sectors. All secondary data were
collected from the different official publications of annual National bank reports for 20 years
(2001-2021 GC). The finding shows that Deposit, Advances, profitability, and foreign
currency earned by Banks have significant effect on economic growth. In Ethiopia, the
contribution of banking sector to GDP is also very low and most of the banks attention to is
on similar services and commercial activities in the domestic banking areas rather than
diversified and international banking services and need farther improvement.
Finally, The empirical evidence of the current study may provide important policy
implications for both policymakers and banking sectors should work seriously to maintain a
stable regulatory system that enhances the effects of banking in stimulating economic growth
mainly related to promoting saving deposit, loan and advance, profit as well as foreign
currency collection from different source directly or indirectly in domestic and abroad.
