BANKING AND INSURANCE SECTORS DEVELOPMENT IN ETHIOPIA AND ITS EFFECT ON ECONOMIC GROWTH

Abstract

Banking and insurance sectors development has a vital role on economic growth. To identify the real contribution of the financial sectors, knowing the role of banking and insurance sectors to economic growth and its determinants are essential to made right decision on macroeconomic policy of the country. Although there are many previous studies on the topic of nexus between financial development and economic growth in Ethiopia, the studies were focused on only banking sector and few previous studies on the topic of nexus between insurance sector development and economic growth in Ethiopia, as far as the researchers knowledge there is no previous studies on encompass both sectors. It is a major research gap. Therefore, the aims of this study is to analyze banking and insurance sectors development in Ethiopia and its effect on economic growth using secondary data from 1980 – 2018. The data collected from NBE, EIC and World Bank data base and employed time serious data analysis using VECM. Relevant pre and post estimation tests which are unit root test, co-integration test, Granger causality test, autocorrelation test, normality test and stability test were done. The result of the study disclosed that entire explanatory variables jointly has significant and positive relationship with economic growth in long run and broad money supply/RGDP, loan provided to private sector/RGDP and insurance profit/RGDP has significant and positive association with real GDP in short run. According to Granger causality test, banking and insurance sectors and economic growth has bi-lateral causality. Moreover, the descriptive analysis showed that both banking and insurance sectors are under progress and health condition. However, both sectors are dominated by public banks, especial CBE and public insurance, EIC and the progress of insurance sector is tardy according to banking sector. On the basis of the research findings the researcher concluded that, banking and insurance sectors have vital role on economic growth in long run and short run and financial sector development and economic growth are supplementary each other. Finally, the researcher mention recommendation that ministry of finance should be restructured NBE and stratified in to two in the form of national bank of Ethiopia and national insurance of Ethiopia to improve the insurance sector performance and National Bank of Ethiopia should be bare the obligations of purchasing great renaissance dam bond and serenading of foreign currency to NBE from private banks in order to minimize burden of financial shortage of the banks, to encourage investment and to stimulate overall business activity of the country.