The Significance of Financial Sector to Economic Development: The Contribution of Deposit and Loan to the Ethiopian Economy

Abstract

This paper deals with the behavior and contribution of savings and loan in Ethiopianeconomy and reviews the policy option and regulation toward it with different regimes. The study identified an important policy and non policy variables which determine the savings mobilization trends in deposit taking Ethiopian financial sector. Both descriptive and multiple regression analysis were applied with annual data sets covering 1975 to 2011 to assess factors highly influencing domestic savings as well as the impact of savings and loan on Ethiopia’s economic growth. The long-run estimation approaches co-integration method while the short-run analysis employs an Error Correlation Model. The empirical results showed statistically significant and positive influence of real GDP per capita (PCY), financial deepening (FLD), Investment (I), Accessibility of Bank branches(BBR) and negative influences of inflation rate (INFR), private consumption (PRCN), on savings mobilization. On the other hand, except exchange rate (exr), other variables including gross domestic saving(GDSA), domestic credit to government (DCG), domestic credit to private sector (DCP), and interest rate spreads (IRS) have showed positive impact on Ethiopia’s economic growth both in short-run and long-run effect. The main findings of the study suggests workable policy action to improve the level of real per capita income and degree of financial depth to accelerate economic growth through fostering domestic savings and, exploring domestic credit access to small, medium and large scale enterprises and investors for capital formation as well as wealth accumulation in the national economy.