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.
Inhaltsverzeichnis (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
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This thesis aims to investigate the relationship between banking sector development and economic growth in Ethiopia, specifically examining which theory—demand-following or supply-leading—better explains this relationship within the Ethiopian context. It utilizes the ARDL-bounds testing approach to analyze this relationship, employing multiple proxies for banking sector development to ensure robustness.
- The impact of banking sector development on economic growth in Ethiopia.
- The applicability of demand-following and supply-leading theories to the Ethiopian banking sector.
- The robustness of empirical results using different proxies for banking sector development.
- Policy recommendations for enhancing the contribution of the banking sector to economic growth.
- Analysis of long-run and short-run relationships between banking development and economic growth.
Zusammenfassung der Kapitel (Chapter Summaries)
CHAPTER ONE: INTRODUCTION: This chapter sets the stage for the thesis by providing background information on the Ethiopian economy and the role of the banking sector. It clearly articulates the research problem, highlighting the existing gap in understanding the relationship between banking development and economic growth in Ethiopia. The chapter then outlines the study's objectives, research questions, hypotheses, significance, scope, limitations, and the organization of the subsequent chapters. The specific focus is on identifying the appropriate theoretical framework and methodological approach to analyze the complex interaction between banking sector development and economic growth in the context of the Ethiopian economy. The statement of the problem lays out the need for a comprehensive investigation, utilizing recent econometric techniques to address the limitations of previous research.
CHAPTER TWO: LITERATURE REVIEW: This chapter presents a critical review of existing literature on the relationship between banking sector development and economic growth. It examines various theoretical perspectives, including the demand-following and supply-leading hypotheses, and summarizes empirical findings from previous studies conducted in different contexts. The review aims to provide a comprehensive understanding of the existing knowledge and identify areas where further research is needed. The chapter also establishes the theoretical foundation for the current study, identifying the limitations of previous research and justifying the adoption of the ARDL-bounds testing approach in this particular context.
Schlüsselwörter (Keywords)
Bank sector development, economic growth, Ethiopia, ARDL bounds test, cointegration, unit root test, domestic credit, broad money supply, private credit, demand-following theory, supply-leading theory.
Frequently Asked Questions: Comprehensive Language Preview
What is the overall purpose of this research?
This thesis investigates the relationship between banking sector development and economic growth in Ethiopia. It aims to determine whether the demand-following or supply-leading theory better explains this relationship within the Ethiopian context, using the ARDL-bounds testing approach and multiple proxies for banking sector development.
What are the key research questions and objectives?
The research seeks to understand the impact of banking sector development on Ethiopian economic growth, assess the applicability of demand-following and supply-leading theories to the Ethiopian banking sector, ensure robustness of results using various proxies, provide policy recommendations for enhancing banking sector contribution to growth, and analyze both long-run and short-run relationships between banking development and economic growth.
What are the main themes explored in this study?
The key themes revolve around the impact of banking sector development on economic growth in Ethiopia, the applicability of different theoretical models (demand-following and supply-leading) to this context, the use of econometric techniques (ARDL-bounds testing) to establish robust empirical findings, and the development of policy recommendations based on the research results.
What methodologies are used in this research?
The study utilizes the ARDL-bounds testing approach to analyze the cointegration and causal relationship between banking sector development and economic growth. It employs multiple proxies for banking sector development (e.g., domestic credit, broad money supply, private credit) to ensure the robustness of the findings.
What is the structure of the thesis?
The thesis is structured into chapters: Chapter One provides an introduction, including background, problem statement, objectives, research questions, hypotheses, significance, scope, limitations and organization. Chapter Two presents a literature review covering existing theoretical perspectives and empirical findings on the relationship between banking sector development and economic growth. (Further chapters are not detailed in this preview.)
What are the key findings (as previewed)?
Detailed findings are not provided in this preview. However, the preview highlights the use of the ARDL bounds testing approach and multiple proxies to ensure robust analysis of the relationship between banking sector development and economic growth in Ethiopia, considering the applicability of demand-following and supply-leading theories.
What are the keywords associated with this research?
Keywords include: Bank sector development, economic growth, Ethiopia, ARDL bounds test, cointegration, unit root test, domestic credit, broad money supply, private credit, demand-following theory, supply-leading theory.
What is the significance of this study?
The study aims to fill a gap in understanding the relationship between banking development and economic growth in Ethiopia. The results will inform policy recommendations aimed at enhancing the banking sector's contribution to economic growth in the country.
What are the limitations of the study (as previewed)?
Specific limitations are not detailed in this preview, but the acknowledgement of limitations suggests potential constraints related to data availability, model specifications, or other factors affecting the study's scope and conclusions.
- Quote paper
- Zelalem Birhan (Author), 2020, The Effect of Banking Sector Development on Economic Growth. Empirical Analysis from Ethiopian Economy Final, Munich, GRIN Verlag, https://www.grin.com/document/1417074
