Effect of Banking sector development on Ethiopian Economic Growth

Abstract

Financial development and economic growth go hand in hand. For instance, banking industry has expanded along with the economy, providing more chances for deposit and loan services. As banking industry has expanded, more people now have access to credit and financial services. But there were problems with providing timely, inexpensive, and accessible credit to the private sectors that generate jobs in Ethiopia's banking industry. The objective of the study was examining the link between Ethiopia's financial development and economic growth. The study was conducted using a method that combined quantitative and descriptive research. Secondary long-term data from 1984 to 2021 was used. The examination of time series data was combined with a multivariate regression analysis and Vector error correction model estimation. stationary tests and co-integration tests were conducted. The results showed a positive correlation between financial development indicators, such as bank branch network, credit, and investment capital, and economic growth, and a negative correlation with bank lending interest rates. Additionally, there was little correlation between financial development and economic growth in the short term, but there was a significant correlation in the long term. These indicated access to credit and increased investment capital were possible by the expansion of bank branch networks for long-term job possibilities. The findings of the study suggested that policy intervention should be kept to a minimum while financial liberalization is permitted through joint ventures between domestic and foreign banks, financial intermediary services to be improved, inclusive credit policy to be maintained, financing for investments that generate more jobs is made more accessible.