FACTORS AFFECTING DEPOSIT MOBILIZATION: THE CASE OF COMMERCIAL BANK OF ETHIOPIA

Abstract

Deposits are the primary source of funds for a bank, which facilitates the uses of funds (loans and investments).The higher the deposits amount, the bigger the lending and investments portfolio can be maintained by the banks to sustain its expansion and future growth. The banks must have adequate deposits to meet the lending volume required by the public and at the same time maintain extra cash for withdrawals by depositors. Mobilizing deposits is one of the essential issues in developing countries as domestic funds provide cheap and reliable source of funds for development the same as Commercial Bank of Ethiopia (CBE) which embarks on aggressive branch network expansion aimed at mobilization of deposit resources. This study aimed to empirically investigate determinants of deposit mobilizations and identify which of those factors are influential in affecting the deposit mobilization of CBE for the periods 1995-2017. The researcher adopted Quantitative research approach. Bank specific and macroeconomic variables were analyzed by using the time series 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 Bank‟s Liquidity (statistically significant), exchange rate, and Bank Profitability are positively and statistically insignificant on bank deposit growth; whereas, Money Supply influence is negatively and statistically significant on bank deposit growth. Deposit Interest Rate and Inflation had insignificant positive influence on bank deposit growth, whereas credit risk and Government Expenditure had insignificant negative influence on bank deposit growth. Suggestions have been made to decrease the broad Money Supply to the economy since it had a negative significant effect on deposit mobilization.