This paper examined the relationship between banking sector development and economic growth in Ethiopia. The paper also examines the effect of banking development on economic growth in Ethiopia and to establish which theory holds for Ethiopia between the demand-following and the supply-leading theory.
Unlike the majority of previous studies, this study uses the newly developed ARDL-bounds testing approach to examine the relationship. The ARDL-bounds testing approach has numerous advantages over other co-integration techniques, especially when a short time-series dataset is used. In order to test the robustness of the empirical results, three proxies of bank-based financial development have been used; namely: 1) the domestic credit provided by the banking sector as a ratio of GDP, 2) broad money supply as a ratio of GD, 3) private credit as percentage of GDP. Annual time series data between the years 1987 and 2019 were used for the study, from the National Bank of Ethiopia (NBE) statistical bulletin.
The structural break unit root test revealed that all the variables are stationary at their first difference; the bound test cointegration analysis established the existence of long run relationship among the variables. The ARDL revealed that domestic credit provided by the banking sector significantly affected economic growth in the long run, while private credit statistical significant and negatively affect economic growth in the short run during the period of study. The empirical results of this study show that the effect of banking sector development and economic growth in Ethiopia is sensitive to the proxy used to measure the banking sector development.
The policymakers need to make policies that can lead to establishment of banking institutions in the rural areas which have limited access to banking services and create enabling legal environment for efficient allocation of credit to the private sector at the same time the supervisory organ shall establish conducive environment for banking institution which are engaging in loan granting for diversified economic sectors for private investment.
Table of Contents
CHAPTER ONE
INTRODUCTION
1.1.Background of the Study
1.2.Statement of the Problem
1.3.Objectives of the Study
1.4.Key Research Questions
1.5.Research Hypothesis
1.6.Significance of the Study
1.7.Scope of the Study
1.8.Limitations of the Study
1.9.Organization of the Study
CHAPTER TWO
LITERATURE REVIEW
2.1.Conceptual Review
2.2.Theoretical Literature
2.2.1. Economic Growth Models
2.2.2.The Neo-Classical Growth Model
2.2.3.Endogenous Growth Models
2.2.4.Theory of Financial Intermediation
2.3.Empirical Literatures
2.5.Conceptual Framework
CHAPTER THREE
RESEARCH METHODOLOGY
3.1.Research Design
3.2.Description of Variables
3.3.Model Specification and Data
3.4.Methodology of Data Analysis
3.4.1.Unit Root Test
3.4.2.The Autoregressive Distributed Lag Model (ARDL)
3.4.3.Granger Causality Test
3.5.Types and Sources of Data
3.6.Data Processing and analysis
CHAPTER FOUR
DATA ANALYSIS AND PRESENTATION
4.1.Descriptive Analysis
4.2.Unit Root Test
4.3.Co-integration Analysis
4.4.Estimation of the Long-Run Relationship
4.5.Estimation of Short-Run Parameters
4.6.Diagnostic Test and Model Stability
4.6.1.Test of Parameter Stability
4.6.2.Normality Test
4.6.3.Heteroscedasticity Tests
4.7.Granger Causality Test
CHAPTER FIVE
CONCLUSIONS AND RECOMMENDATION
5.1.Conclusion
5.2.Recommendation
Objectives and Topics
This study aims to examine the empirical relationship between banking sector development and economic growth in Ethiopia for the period 1987 to 2019, utilizing the ARDL bounds testing approach to determine both long-run and short-run dynamics and test the validity of supply-leading versus demand-following hypotheses.
- Banking sector development and its role in economic growth
- Empirical evaluation of supply-leading and demand-following theories
- Application of the Autoregressive Distributed Lag (ARDL) model
- Impact of domestic credit, broad money supply, and private credit on GDP
- Analysis of causal relationships using Granger causality tests
Auszug aus dem Buch
1.1. Background of the Study
The banking sector is a subset of the financial sector and its role in the growth process of an economy cannot be over- emphasized. It plays a dominant role in the financial intermediation process of most developing and developed countries, thus connoting that the financial sector of most countries is bank-based. The banking sector is a pivotal segment in many countries; hence the need for continuous implementation of adequate policy measures and reforms in order to ensure that the banking sector performs its function efficiently. According to (Levine R. , 2005) , the banking sector performs five functions which can facilitate economic growth. These functions are (i) providing ex ante information about possible investments and allocate capital, (ii) monitoring investments and (Hugh, 2017) exert corporate governance after providing credit, (iii) facilitating trading, and risk diversification, and risk management (iv) mobilizing and pooling deposits, and (v) facilitating the exchange of goods and services.
Economic growth theory believes that financial institutions specially bank is considered a useful instrument for improving the productive capacity of the economy and its important internal source of fund for any country especially in the birth stages of economic growth (Schumpeter, 1911).
Banking system is important to the economic growth through collecting deposits from savers. Secondly, its role in providing loans to encourage investment and production. Thirdly its ability in creating economic expansion to the most of economic sectors such as; Agriculture, industry and trade sector. Fourthly, it’s intermarry role between savers and borrowers. Finally, banking industry contributes to the formation of initial capital for investment projects. (Abusharbeh, 2017)
Summary of Chapters
CHAPTER ONE: This chapter provides the foundation for the study, including background, the problem statement, objectives, research questions, and scope regarding the impact of banking development in Ethiopia.
CHAPTER TWO: This section reviews relevant theoretical frameworks and empirical literature concerning financial intermediation, economic growth models, and the supply-leading versus demand-following hypotheses.
CHAPTER THREE: This chapter outlines the quantitative methodology, specifically the ARDL model, data sources, and variables used to investigate the causal link between the banking sector and economic output.
CHAPTER FOUR: This chapter presents the empirical findings, including descriptive statistics, unit root tests, cointegration analysis, and diagnostic tests for model stability.
CHAPTER FIVE: This chapter summarizes the empirical conclusions and provides policy recommendations for enhancing banking sector efficiency and economic growth in Ethiopia.
Keywords
banking sector development, economic growth, ARDL bounds test, cointegration, unit root test, Granger causality, supply-leading hypothesis, demand-following hypothesis, financial intermediation, real GDP, domestic credit, Ethiopia, financial development, time series analysis, banking policy
Frequently Asked Questions
What is the core focus of this thesis?
The thesis investigates the impact of banking sector development on the economic growth of Ethiopia from 1987 to 2019, specifically analyzing the causal relationship between financial institution activity and GDP growth.
What are the primary themes examined?
The study centers on financial deepening, banking efficiency, the supply-leading theory (finance driving growth) versus the demand-following theory (growth driving finance), and the impact of banking reforms.
What is the main objective of the research?
The main objective is to empirically determine if a long-run relationship exists between banking sector indicators (such as domestic credit, private credit, and broad money supply) and Ethiopia's economic growth, and to identify the direction of causality.
Which scientific methodology is employed?
The researcher employs the Autoregressive Distributed Lag (ARDL) model, also known as the bounds testing approach, which is particularly robust for small-sample time series data.
What does the main body cover?
The main body covers the theoretical framework, a literature review of global and regional empirical studies, the specification of the ARDL models, and detailed diagnostic tests of the model's validity and stability.
Which keywords categorize this work?
Key terms include bank sector development, economic growth, ARDL bounds test, cointegration, unit root test, and supply-leading hypothesis.
What significance do the ARDL bounds tests have for this research?
These tests are critical because they allow the researcher to examine long-run relationships among variables even when they are integrated at different levels, which is a common feature of macroeconomic time series data in developing economies.
How does this study differ from previous research in Ethiopia?
Unlike previous studies, this research specifically isolates the banking sector as the focus, uses updated data up to 2019, and applies the ARDL approach to address endogeneity and short-run/long-run dynamics comprehensively.
- Arbeit zitieren
- Zelalem Birhan (Autor:in), 2020, The Effect of Banking Sector Development on Economic Growth. Empirical Analysis from Ethiopian Economy Final, München, GRIN Verlag, https://www.grin.com/document/1417074
