The Effect Of Banking Sector On Economic Growth In Ethiopia

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.