Determinants of Growth in Bank Credit to the Private Sector in Ethiopia: A Supply Side Approach

Abstract

Despite a general awareness of the factors determining the bank credit to private sector, there is limited empirical evidence in Ethiopian context. In this paper the short and long-run impact of bank-specific, monetary policy and macroeconomic variables on bank credit to private sector in Ethiopia, using supply-side approach is empirically examined over the period1978/79-2010/11. The methodology, based on the ARDL econometric approach using annual time-series data was employed, follows work by Imran and Nishat (2012) for the Pakistan. The study includes bank credit to the private sector as dependent variable while domestic deposit, foreign liabilities, lending interest rate, reserve requirement, M2 as percentage of NGDP, RGDP and inflation are major explanatory variables. The finding indicates that domestic deposits, foreign liabilities, real lending interest rate, M2 as percentage of NGDP, GDP and inflation have significant impact on banks credit to the private sector in the long-run. Whereas reserve requirement does not affect commercial banks credit to private sector both in long and short-run. Moreover, in the short-run domestic deposit and economic growth do not influence commercial banks credit to private sector. The coefficient of ECM_t-1 (-0.757) shows a rapid adjustment process and dictates that the disequilibrium of the previous period shocks is adjusted in to long-run equilibrium in the current period. The long and short-run results do not provide strong support of the influence of banking sector reform on the growth of bank credit to private sector as shown by the coefficient for the dummy variables in Ethiopia. Finally, the results recommend that efforts should be geared towards keeping the inflation rate low and maintaining stable.

Keywords: ARDL Co-integration, Bank Credit, Ethiopia