FACTORS AFFECTING DEPOSIT GROWTH OF COMMERCIAL BANKS IN ETHIOPIA

Abstract

The purpose of this study is to determine the factors affecting deposit growth of commercial banks in Ethiopia. In order to achieve this objective descriptive and econometric analyses were performed. The target populations were all commercial banks operating in Ethiopia. Accordingly, six commercial banks were purposively selected for this study. The panel dataset for the study used consisted annual data spanning from 2001 to 2017. The data were gathered from National Bank of Ethiopia and the purposively selected commercial banks’ annual reports. The dependent variable used in this study was commercial banks’ deposit growth. The explanatory variables used in this study were advertising and publicity, bank branches, exchange rate, inflation, loan and advances, money supply and nominal gross domestic product. Different diagnostic tests namely test for zero mean of error terms, homoscedasticity, no autocorrelation, no multicollinearity and normality were conducted to check the appropriateness of the model. The diagnostic results show that none of the classical linear regression model assumption is violated. To determine the effects of the independent variables on the dependent variable fixed effect model was used The Fixed-effect model results show that bank branch, exchange rate, loan and advances and nominal gross domestic product have significant positive effect on commercial banks’ deposit growth. However, inflation and money supply found to have significant negative effect on bank deposit growth. The effect of advertising and publicity was found to be positive and insignificant. Thus, based on the findings the study suggests that commercial banks should open more branches and expand their loan giving capacity in order to increase their deposit. Further, the government should work seriously to increase the country’s gross domestic product.