THE ROLE OF BANKS’ DEPOSIT MOBILIZATION AND CREDIT ON GROSS CAPITAL FORMATION IN ETHIOPIA

Abstract

It is established in economic theory that high savings, coupled with high levels of capital formation are prerequisites for long-term economic growth in any given country. National saving in macroeconomic theory is defined as the combination of public and private saving rates of a nation. Accumulated saving is the source for capital stock which leads to increase investment, output and more employment. Financial institutions play a major role of mobilizing saving or financial resources. Thus, the aim of this study is to investigate the role of bank deposit mobilization and credit on gross Capital Formation in Ethiopia using annual time series data from1991-2016. The result of co-integration test indicated that there is a long run relationship among variables and vector error correction model used to estimate the short run dynamics. The result of the models revealed Public Bank Deposit (PUBD), Public Bank Credit (PUBC), Private Bank Deposit (PBD) and National Saving (NS) have significant role on gross Capital formation in Ethiopia in the long run. But Private Bank Credit (PBC), Bank Investment (BI), Real Interest Rate (RIR) and inflation (INF), found to be statistically insignificant determinants of gross Capital formation in Ethiopia in the long run. However, in the short run, except Private Bank Deposit (PBD) and National Saving (NS) the rest of the explanatory variables such as Public Bank Deposit (PUBD), Public Bank Credit (PUBC), Private Bank Credit (PUBC), Bank Investment (BI), Real Interest Rate (RIR)and Inflation (INF) were statistically insignificant in explaining gross Capital formation in Ethiopia. The overall findings of the study underlined public/private commercial banks deposits and public bank credit are most important factors that positively and significantly influence gross capital formation in Ethiopia. Therefore, in order to acquire maximum benefit from them concerned bodies have to put their effort to sustain the saving culture through financial literacy. Government also should empower private banks on their credit allocation like by revising policies of the imposed credit ceilings on private banks, which reduced the volume of credit.