Determinants of Deposit in Ethiopian Private Commercial Banks

Abstract

Understanding the nature of national savings 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 savings in private
commercial banks of Ethiopia for the 2001-2015 periods. From total of sixteen private
banks which are engaged in commercial activities, six were selected based on the
historical time of formation of banks. The conceptual framework for this study is
originally derived from Life-Cycle model and appropriately modified to accommodate the
peculiarities of a developing country and builds on the existing cross-country literature
on determinant of saving mobilization. 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 disposable income, real GDP
growth, branch expansion, are positively and statistically significant on bank deposit
growth; whereas, loan to deposit ratio (bank’s liquidity)influence is negatively and
statistically significant on bank deposit growth. Deposit rate and profitability had
insignificant positive influence on bank deposit growth. Whereas population growth and
capital to loan ratio (capital adequacy) had insignificant negative influence on bank
deposit growth. The study implies that stimulation of economic growth is most important
factor that affects bank deposit growth. The research recommends that private
commercial banks should have to intensify branch expansion to areas where there are
potential deposit sources even to remote locations. Moreover, private commercial banks
required to have enough liquid assets to meet the demand for cash outflows so as to
generate and sustain public confidence of the depositors.