DETERMINANTS OF COMMERCIAL BANKS DEPOSIT MOBILIZATION IN ETHIOPIA

Abstract

Deposit mobilization is a fundamental part of banking activity. Hence, deposit mobilization is critical to Banks. Understanding the nature of Deposit Mobilization behavior is critical in designing policies to promote savings and investment which in turn enhance economic growth through capital formation. This paper empirically examines the determinants of commercial banks deposit mobilization in Ethiopia for the periods 2000-2015. From total of seventeen Commercial Banks which are engaged in commercial bank activities, seven selected based on the historical time formation of banks. The researcher adopted Quantitative research approach. Bank specific and macroeconomic variables were analyzed by using the balanced panel fixed effect regression model. Different diagnostic tests (test for assumption of Homoscedasticity, Autocorrelation, Normality, average value of the error is zero and independent variables are non-stochastic) were conducted to check the appropriateness of the model. The results reveal that credit risk, exchange rate, and Bank Profitability are positively and statistically significant on bank deposit growth; whereas, Loan to Deposit ratio (Bank’s Liquidity) and Money Supply influence is negatively and statistically significant on bank deposit growth. Deposit Interest Rate had insignificant positive influence on bank deposit growth. Whereas Inflation and Government Expenditure had insignificant negative influence on bank deposit growth. The researcher recommends that Government should decrease the broad Money Supply to the economy since it had a negative significant effect on deposit mobilization. Since the depositor confidence will increase if the commercial banks are profitable and have adequate asset return so commercial banks should sustain their profitability to increase their amount of deposit. Commercial Banks should also decrease their outstanding loan and advance to reduce their credit risk and decreases their liquidity by mobilizing more fixed time deposit instead of individual and demand deposit since credit risk had a positive and significant effect on bank deposit.