“The Effects of Currency Demonetization in The Banking Industry: The Case of Selected Private Banks in Addis Ababa, Ethiopia’’

Abstract

This study investigates the impact of currency demonetization on the performance of Ethiopian private banks over the period 2018–2022, with a particular focus on profitability, liquidity, and credit risk. Using descriptive statistics and the Generalized Method of Moments (GMM) estimation technique, the analysis captures both pre- and post-demonetization dynamics, with 2020–2022 marked as the post-demonetization period. The descriptive statistics reveal that, on average, Ethiopian private banks remained profitable and maintained adequate capital levels, though they faced moderate credit risk and macroeconomic volatility. The GMM estimation results indicate that demonetization had a statistically significant and negative effect on bank profitability, highlighting a decline in income sources due to disruptions in cash-based transactions. Conversely, the liquidity position of banks improved slightly, possibly due to a shift toward digital and mobile banking platforms. However, credit risk worsened, as reflected by the increase in non-performing loans, likely driven by borrowers’ repayment difficulties during the liquidity crunch. Among control variables, inflation and GDP growth were found to increase credit risk and bank performance respectively, while interest rate hikes and currency depreciation exerted downward pressure on profitability. Overall, the findings suggest that while demonetization introduced certain digital banking opportunities, it also posed considerable challenges to profitability and credit stability in the Ethiopian banking sector.