Determinants of Commercial Bank Deposit Growth in Ethiopia

Abstract

The study analysed the short and long-run impacts of endogenous and exogenous factors affecting deposit growth of the Commercial Bank of Ethiopia from 1974/75 - 2013/14. We employed the Vector Error Correction Model to establish the causal relationship among the variables of the study. Results show that exchange rate and branch expansion positively influence deposit growth contemporaneously both in the short-run and long-run while interest rate maintains positive but insignificant impact both in the long-run and short-run. Population and economic growth exhibit a positive relationship with deposit growth but significant only in the long-run. Moreover, inflation maintained a positive and significant impact in the long-run but negative in the short-run. Using the Granger causality test, it was found out a unidirectional causal flow from economic growth to deposit without any feedback while deposit growth has a bidirectional causality with branch expansion and economic growth implicating inflation affecting economic growth through investment. Finally, with error correction -0.0678, full adjustment from actual deposit to equilibrium would require about 15 years, implicating a slow speed of adjustment in every following year.