ST MARR’Y UNIVERSTITY

SCHOOL OF GRADUATE STUDIES

DETERMINANTS OF COMMERCIAL BANKS DEPOSIT

MOBILIZATION IN ETHIOPIA

KETEMA GETACHEW BOGALE

MBAAF/0355/2008A

JUNE, 2017
ADDIS ABABA, ETHIOPIA
DETERMINANTS OF COMMERCIAL BANKS DEPOSIT
MOBILIZATION IN ETHIOPIA

A thesis submitted to School of Post Graduate Studies

(Institute of MBA in Accounting and Finance)
ST. MERRY UNIVERSITY

In partial fulfillment of the requirements of MASTER OF

ART IN MBA in Accounting and Finance

KETEMA GETACHEW BOGALE

JUNE, 2017
ADDIS ABABA, ETHIOPIA
 DECLARATION
I, the undersigned, declared that this thesis is my original work and has not been
presented for a first degree or master's degree in any other university, and that all
source of materials used for this thesis have been duly acknowledged.

Declared By:

Name: __________________

Signature: _____________________

Date: ________________________

Place and date of Submission_____________________________

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 ENDORSEMENT
This thesis has been submitted to St. Mary’s University, School of Graduate
Studies for examination with my approval as a university advisor.

______________________________
_______________________

Advisor Signature
St. Mary’s University, Addis Ababa June, 2017

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 APPROVAL SHEET
As members of board of examining of the final MSc thesis open defense, we certify that
we have read and evaluated the thesis prepared by Ketema Getachew under the title
“DETERMINANTS OF COMMERCIAL BANKS DEPOSIT MOBILIZATION IN ETHIOPIA”
we recommend that this thesis to be accepted as fulfilling the thesis requirement for the
Degree of Master of Science in Development Economics

____________________________
_______________________

Chairperson Signature

____________________________
________________________

Advisor Signature

____________________________
________________________

Internal Examiner Signature

____________________________
________________________

External Examiner Signature

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 Dedication
I would like to dedicate this Master Thesis to My Mother W/ro Gettie Demissie and to My Father
Ato Getachew Bogale. Emye I always remember all your pain, all your suffering, all your love to
me and to all your children and I always remember it and love you both Rest In Peace.

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Table of Contents Page
Table of Contents ........................................................................................................................................ ii
Acknowledgements .................................................................................................................................... iv
Acronyms & Abbreviations ....................................................................................................................... v
List of Tables and Figures ......................................................................................................................... vi
Abstract...................................................................................................................................................... vii
Chapter One ................................................................................................................................................ 1
1. Introduction ......................................................................................................................................... 1
1.1 Background of the Study ............................................................................................................ 1
1.2 Statement of the Problem ........................................................................................................... 2
1.3 Objectives of The Study.............................................................................................................. 4
1.3.1. General Objective ......................................................................................................................... 4
1.3.2 Specific Objective ........................................................................................................................... 4
1.4 Hypothesis of the study ............................................................................................................... 5
1.5 Significance of the study ............................................................................................................. 5
1.6 Scope of the Study ....................................................................................................................... 6
1.7 Limitation of the Study ............................................................................................................... 6
1.8 Organization of the paper .......................................................................................................... 6
Chapter Two ................................................................................................................................................ 7
2. Related Literature Review ................................................................................................................. 7
2.1. Theoretical and Conceptual Literature Review ............................................................................ 7
2.1.1 Commercial Bank Deposit.................................................................................................. 8
2.1.2 Major Types of Deposit products ...................................................................................... 8
2.1.3 Importance of Deposit mobilization .................................................................................. 9
2.1.4 The Effects of Poor Deposit Mobilization ....................................................................... 10
2.2 The Determinants of Commercial Banks Deposits- Theory.................................................. 11
2.2.1 Macroeconomic Factors .......................................................................................................... 11
2.2.2 Bank Specific Factors .............................................................................................................. 14
2.3 Empirical Literature Review ................................................................................................... 16
2.4 Conceptual Framework ............................................................................................................ 22
Chapter Three ........................................................................................................................................... 25
3. Research Methodology ..................................................................................................................... 25
3.1 Introduction ............................................................................................................................... 25
3.2 Research Approach and Research Design .............................................................................. 25

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 3.3 Data Types and Source ............................................................................................................. 25
3.4 Sample and Population ............................................................................................................. 26
3.5. Description of Variables ................................................................................................................ 26
3.5.1 Dependent variables ................................................................................................................. 27
3.5.2 Independent variables.............................................................................................................. 27
3.6 Model Specification ........................................................................................................................ 32
3.7. Data Analysis Methods .................................................................................................................. 33
3.8 Diagnostic Analysis ......................................................................................................................... 34
3.10 Validity and Reliability of Data ................................................................................................... 36
Chapter Four ............................................................................................................................................. 37
4. Data Analysis and Discussion of Findings .......................................................................................... 37
4.1 Descriptive Analysis of Independent Variables and dependent Variable .................................. 37
Test for non-normality test............................................................................................................... 43
Test for Multicollinearity ................................................................................................................. 43
4.3 Fixed Effect Versus Random Effect Model .................................................................................. 45
4.4 Results of Regression Analysis ....................................................................................................... 45
4.4.1 Interpretation of R-squared .................................................................................................... 47
4.4.2. Interpretation of Adjusted R-squared .................................................................................. 47
4.4.3. Interpretation Results of the Regressors Values ............................................................... 47
Chapter Five .............................................................................................................................................. 51
5. Conclusions and Recommendations .................................................................................................... 51
5.2 Conclusions ...................................................................................................................................... 51
5.3 Recommendation................................................................................................................................. 53
Reference ................................................................................................................................................... 54
Appendices ................................................................................................................................................... v

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Acknowledgements

First and for most, I would like to express my sincere thanks to Almighty God and his mother St.
Marry, who helped me in all aspect of my life.

I would also like to convey my heartfelt appreciation and deepest gratitude to my advisor,
Ato Asmamaw Gettie (Asst. Prof) for his invaluable comments, encouragements and expert
guidance at various stage of the study.

Then my heartfelt gratitude goes to My Boss and My Friend Ato Wubshet Nigussie for his heart
full encouragement, appreciation and Support throughout my study and thesis work. Moreover, I
am thankful to my friends Berihun, Balew, Kedir, Hilina, Dagachew, and Fitsum for their
friendship and consistent support.

Last but not the least, my special gratitude goes my colleagues at Wegagen Bank Gerji Mebrat
Hayil and Gerji Sunshine Branch’s for their encouragement, and support.

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Acronyms & Abbreviations

ATM Automatic Teller Machine

CBE Commercial Bank of Ethiopia

CD Certificate of Deposit

CLRM Classical Linear Regression Model

CPI Consumer Price Index

CSA Central Statistical Authority

FDI Foreign Direct Investment

FMOLS Fully Modified Ordinary Least Square

GDP Gross Domestic Product

MOFED Ministry of Finance and Economic Development

NBE National Bank of Ethiopia

OLS Ordinary Least Square

ROA Return on Asset

ROE Return on Equity

USD United State Dollar

WDI World development Indicator

WAMA West African Monetary Agency

REM Random Effect Model

FEM Fixed Effect Model

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List of Tables and Figures

Table 1 Variables, Definitions, Notations and Expected Signs

Table 2 Summary Statistics – Dependent and Independent Variable
Table 3 Test For Non-Normality Test
Table 4 The Heteroskedasticity Test of The Multiple Regression
Table 5 Correlation Matrixes
Table 6 Results of Fixed Effect Regression Model

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 Abstract
Deposit mobilization is a fundamental part of banking activity. Hence, deposit mobilization is
critical to Banks. Understanding the nature of Deposit Mobilization behavior is critical in
designing policies to promote savings and investment which in turn enhance economic
growth through capital formation. This paper empirically examines the determinants of
commercial banks deposit mobilization in Ethiopia for the periods 2000-2015. From total of
seventeen Commercial Banks which are engaged in commercial bank activities, seven selected
based on the historical time formation of banks. The researcher adopted Quantitative research
approach. Bank specific and macroeconomic variables were analyzed by using the balanced
panel fixed effect regression model. Different diagnostic tests (test for assumption of
Homoscedasticity, Autocorrelation, Normality, average value of the error is zero and
independent variables are non-stochastic) were conducted to check the appropriateness of
the model. The results reveal that credit risk, exchange rate, and Bank Profitability are positively
and statistically significant on bank deposit growth; whereas, Loan to Deposit ratio (Bank’s
Liquidity) and Money Supply influence is negatively and statistically significant on bank deposit
growth. Deposit Interest Rate had insignificant positive influence on bank deposit growth.
Whereas Inflation and Government Expenditure had insignificant negative influence on bank
deposit growth. The researcher recommends that Government should decrease the broad Money
Supply to the economy since it had a negative significant effect on deposit mobilization. Since the
depositor confidence will increase if the commercial banks are profitable and have adequate asset
return so commercial banks should sustain their profitability to increase their amount of deposit.
Commercial Banks should also decrease their outstanding loan and advance to reduce their credit
risk and decreases their liquidity by mobilizing more fixed time deposit instead of individual and
demand deposit since credit risk had a positive and significant effect on bank deposit.

Keywords: Commercial Banks, Deposit Mobilization, Fixed Effect Model

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 Chapter One
1. Introduction
1.1 Background of the Study

Economic growth is the common goal of all nations. Everybody lives with more comfortable,
better standard of living than before and holding a better welfare because of the surge in
economic growth. Government in each country aims to reduce poverty and increase the level
of national income. Therefore, to achieve the main target of economic growth, governments
may implement various kinds of policies such as encouraging saving, stimulating investment
and production in their countries (Pinchawawee, 2011).

Mobilizing deposits is one of the essential issues in developing countries as domestic funds
provide cheap and reliable source of funds for development, which is of great value to these
countries, especially when the economy has difficulty raising capital from international donors,
investors and markets. Yet, in many developing countries, there is a considerable amount of
savings that are not intermediated through the formal sector particularly there exist significant
savings potential in the rural (and/or semi-urban) sector of many developing countries.

Selvaraj & Kumar (2015) State that, the success of the banking greatly lies on the deposit
mobilization. Performances of the bank depend on deposits, as the deposits are normally
considered as a cost effective source of working fund. Mobilization of rural savings is one of
the important objectives of the Commercial Banks. It helps to expand banking operations. The
successful functioning of commercial banks depends on the extent of funds mobilized. Deposits
constitute a vital source of funds required for banking business. There are different types of
deposits, with different maturity pattern carrying different rates of interests. Mobilization of
deposits for a bank is as essential as oxygen for human being.

Compared to most countries, Ethiopia has taken a cautious approach toward the liberalization
of its banking industry. For all intents and purposes, its industry is closed and generally
less developed than its regional peers. The industry comprises one state-owned development
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bank and the financial giant dominant Commercial Bank of Ethiopia (CBE) which embarks
on aggressive branch network expansion aimed at mobilization of deposit resources; continued
amassing of foreign currency proceeds of export items channeled from China, channeling of
savings made for the housing project in the capital city (though it also lends householders at a
lower interest rate); imposition of private banks to purchase NBE-Bills and the sum effect of
the above and other factors enable the CBE secure competitive edge over private banks with
assets accounting for more than 65 percent of the industry’s total holdings. The banking
industry’s nonperforming loan ratio is commendably low, and profitability is good, but the
dominance of public sector banking certainly restricts financial intermediation and economic
growth. It contrasts with regional and international peer countries where banking industries
have a much higher share of private sector and foreign participation (Dereje, 2017).

According to (Abay, 2010), by sub-Saharan Africa standards, Ethiopia‘s rate of domestic saving
has been very low. From 1997 to 2010, the average saving rate in low-income countries of the
region was about 9 per cent, while it was about 19 per cent for middle-income countries. In the
same period, the average saving rate of ―fragile sub-Saharan African states was 11.5 per cent,
still significantly higher than Ethiopia‘s rate of 4 per cent.

In this study the determinants of commercial bank deposit at macro level and micro economic
level were studied empirically and the relationship between these variables and total deposit of
commercial banks is identified. Issue of banks deposits and its determinants is crucial to the
financial sector of developing country like Ethiopia. This study enables banks and regulators to
keep control to the issue of deposit which is very important to the security of their operation as
well as the economy as a whole in the country. Therefore, this paper aimed to identify and
evaluate those factors affecting deposit of Commercial Banks in Ethiopia.

1.2 Statement of the Problem

Deposits are the primary source of funds for a bank, which facilitates the uses of funds (loans
and investments). The higher the deposits amount, the bigger the lending and investments
portfolio can be maintained by the banks to sustain its expansion and future growth. The banks
must have adequate deposits to meet the lending volume required by the public and at the same

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time maintain extra cash for withdrawals by depositors. The cash reserve is a component of
liquidity reserves which measure the ability of the bank to meet its expected withdrawals and
recurring withdrawals. The withdrawals made from there serves are oddly-offset against new
deposits which the banks should continuously mobilize. The inability to get sufficient deposits
could result in negative fund situation. The level of deposits growth also indicates the bank's
performance in relation to customers' satisfaction on interest payout and services rendered.

The fast growing economy of the country, which is proactively investing in road infrastructure,
building hydropower dams, constructing thousands of housing condominiums and expanding
agricultural and other investments in the country are hugely relying on the commercial banks
for loans and credits. Moreover, there have been multiple small enterprises incubated in the
last decades and increasing number of import and export companies, heavily relying on
commercial banks for loans, foreign currency and trade assurances. This calls for an
increased demand for deposit mobilization from public institutions, private sector and other
potential contributors (Hibret, 2015).

Ethiopian banking industry is still in its growing stage. The deposit generated by the county
economy not yet been mobilized as much as expected. NBE indicates that from deposits that
should be mobilized by banks only 7% is mobilized as of 2012 (Wubitu, 2012). This indicates
that from the money that should be deposited in the bank 93% of it was not mobilized.

Moreover, in the contexts of Ethiopia, the related research has mostly focus on only one public
Bank (Commercial Bank of Ethiopia) or Private commercial Banks separately to assessed the
factors affecting the total amount of deposits of Ethiopian commercial banks. In addition to
this, there is also inconsistency finding among researcher. This inconsistency of results might
be attributable to the method of data analysis used by different researchers, the time period
used and different category of banks. Determinant variables commonly explained as a
factor affecting deposit are Inflation and Interest rate.

For instance; Inflation Rate taken as explanatory variable by (Andinet, 2016) the result of his
study indicates inflation has a negative relation and insignificant to Privets Commercial Bank
Deposit. (Giagn, 2015) also used the variable in his study to determine the effect of inflation

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to Commercial Bank Deposit Growth result of the study was positive relation and significant
for deposit. Finally (Shemsu, 2014) used Inflation rate as an explanatory variable to determine
the effect on the Commercial bank of Ethiopia deposit result was positive relation and
insignificant to the dependent variable deposit.

Interest rate: was taken as an explanatory variable by (Andinet, 2016), the result is positive
and significant to deposit. (Shemsu, 2014) the result is positive and insignificant and (Giang,
2015) the result is negative and insignificant and lastly (Wubit, 2012) result shows positive
and insignificant.

The study also take the recommendation for further study made by (Andinet, 2016), (Shemsu,
2014) & (Dereje, 2017)to determine the factors affecting the commercial bank deposit by
introducing additional variable at Micro level Bank Credit Risk and at Macro level Government
Expenditure.

Thus commercial banks found in Ethiopia must increase their deposits by overcoming the existing
challenges. To do so they have to knows the main factors that determine deposit mobilization or
financial savings. This study empirically investigates determinants of deposit mobilizations in
financial savings for banks in Ethiopia and which of those factors are influential and also
minimize the research gaps on factors affecting deposit mobilization in commercial banks.

1.3 Objectives of The Study

1.3.1. General Objective

The study aims to examine the determinants of commercial banks deposit mobilization in
Ethiopia.
1.3.2 Specific Objective

 To Evaluate and estimate a model that explains the factors which determine
commercial bank deposit.
 To Examine the effect of Bank Profitability on commercial bank deposit
 To Examine the effect of Bank Liquidity on Commercial bank deposit
 To Examine the effect of Bank Credit Risk on Commercial Bank Deposit
 To Examine the effect of Money Supply on Commercial Bank Deposit
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  To Examine the effect of Government Expenditure on Commercial Bank Deposit
 To Examine the effect of Exchange Rate on Commercial Bank Deposit
 To Examine the effect of Deposit Interest Rate on Commercial bank Deposit
 To Examine the effect of Inflation rate on Commercial bank Deposit

1.4 Hypothesis of the study

H1: Exchange Rate has significant effect on commercial banks deposit.
H2: Deposit interest rate has significant effect on commercial banks deposit.
H3: Inflation has a significant effect on commercial banks deposit.
H4: Government Expenditure has insignificant effect on commercial banks deposit.
H5: Liquidity Ratio has significant effect on commercial banks deposit.
H6: Loan to Asset Ratio has significant effect on commercial banks deposit in Ethiopia.
H7: Money Supply has significant effect on commercial bank deposit.
H8: Return on Asset has insignificant effect on commercial banks Deposit growth in
Ethiopia.

1.5 Significance of the study

The study conducted on the Determinants of Commercial Banks deposit mobilization is

expected to be used by all stakeholders. Accordingly, the following are the significances that
are attained from the study:
 This study is helpful to commercial banks to manage their deposit by identifying factors
determining deposit mobilization and further identify which variable is the most important
so that more emphasis has to be given
 It is also helpful to the regulatory body to take as an additional input for future policy
making.
 It provides information for all stakeholders especially for boards and management of the
commercial banks in order to minimize the impact of factors determining deposits
mobilization by making them to design effective strategies.
 It serves as source of reference for further studies in the area of deposit mobilization.

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1.6 Scope of the Study

The work of this research is delimited to some major macro and micro level factors that determine
commercial bank deposit mobilization in Ethiopia. The research is not cover all commercial
banks and all factors which affects the deposit mobilization of the commercial banks rather some
banks has be selected purposively based on seniority and some factors are selected in the study.

1.7 Limitation of the Study

As of June 30, 2016 the number of banks engaged in operation reached 18 in Ethiopia which
includes 17 commercial banks and 1 development bank. But this study was conducted on seven
selected commercial banks in Ethiopia, excluding ten private commercial banks with less than
16 years services, and the other financial institutions, Micro finances institutions, saving and
credit associations, Iqube and Idir respectively. The study excludes the year 2016 because of
Commercial Bank of Ethiopia June 2016 report is not publish and not released to the public.
The study focused only on one of the area of finance which the factors determining commercial
banks deposit. The regressions have one dependent variable (total deposit of selected
commercial banks), and eight independent variables including Interest Rate, Inflation,
Government Expenditure, Money Supply, Liquidity ratio or Liquidity risk, Loan to Asset ratio
or Credit risk, Return on Asset or ROA and Exchange rate

1.8 Organization of the paper

This thesis paper organized into five chapters. The first chapter is the introduction part which
consists of the background of the study, history of banking development in Ethiopia, statement
of the problem, objectives of the study, research questions, significance of the study, and
delimitation of the study. The second chapter introduces related literature review which deals
with the theoretical and empirical literatures on commercial bank deposits. The third chapter
deals with research design and methodology of the study. The fourth chapter concerned with
findings and discussion of the study. The fifth chapter which is the last but not the least focused
on conclusions, limitations and recommendation of the study.

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 Chapter Two
2. Related Literature Review
Literature Review is prepared in two parts, the theoretical part and the empirical part. In the
theoretical review part the theories that states about the commercial banks deposits and the
variables that are claimed to affect it will be discussed. The empirical literature part discusses past
st udies that were conducted on the area of factors determining commercial banks deposits.

2.1. Theoretical and Conceptual Literature Review

Financial sector mainly constitute financial markets and financial institutions. A financial market
is a market in which financial assets (securities) such as stocks and bonds can be purchased or
sold. Financial markets, thus, facilitate the flow of funds and thereby allow financing and investing
by households, firms and government agencies (Madura, 2011). Examples include commodity
markets, money markets and capital markets. Financial institutions (intermediaries) are institutions
that provide financial services for their customers. They play an important role in the economy
because they provide liquidity services, promote risk sharing and also solve information problems
thereby allowing small savers and borrowers to benefit from the existence of financial markets.

Financial institutions can be divided into:

1. Depository institutions (e.g. commercial banks, savings institutions, credit unions) that obtain
funds mainly through deposits from the public; and,

2. Non-depository institutions (e.g. finance companies, mutual funds, securities firms, insurance
companies, pension funds) that finance their investment activities from the sale of securities or
insurances.

Commercial banks are the most dominant depository institution. They serve investors by offering
a wide variety of deposit accounts, and they transfer deposited funds to deficit units by providing
direct loans or purchasing debt securities. Commercial banks serve both the private and public
sectors, as their deposit and lending services are utilized by households, businesses, and
government agencies.

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2.1.1 Commercial Bank Deposit
Commercial bank deposits are major liabilities for commercial banks. (Kelvin, 2001) said that
deposits of commercial banks account for about 75% of commercial banks liabilities.
Commercial banks keep lending as long as they possess adequate deposit.

Therefore, banks will be better off if they are mobilizing more deposits. However, as (N. Desinga,
1975) indicates deposit mobilization is a very difficult task. The cost of intermediation for
mobilizing deposits is also very important part of overall intermediation cost of the banking
system as (E.A. Shaw 1995) indicates. In spite of the difficulties, deposits play an important
role not only to the banking sector but also the overall economy.

All the financial performance of most of the commercial banks in one way or the other related to
the deposit it managed to be mobilized. Deposits provide limits to the working capital of the bank.
The higher the deposit, the higher will be the funds at the disposal of a bank to lend and earn profits
(N. Desinga, 1975). Therefore, to maximize its profit the bank should increase its deposit.
(Mahendra, 2005) had also mentioned deposits as a foundation up on which banks thrive and grow
and deposit is unique items on a bank’s balance sheet that distinguish them from other type of
business organizations.

Commercial banking is a service industry with a high degree of built in profit potential (Meenakshi,
1975). Commercial banks mainly depend on the funds deposited with them by the public to lend
it out to others in order to earn interest income (Davinaga, 2010). However, banks attract deposits
by paying a risk free return to the savers. Interest expense is number one expense on the
income statement of most commercial banks. (Hamid 2011) said that if banks lose their deposit
base they rely on non-deposit based funding that is very expensive and consequently minimize the
profit margin.

2.1.2 Major Types of Deposit products

Deposit account is a savings account, current account or any other type of bank account
that allows money to be deposited and withdrawn by the account holder. These transactions
are recorded on the bank's books, and the resulting balance is recorded as a liability for the bank
and represents the amount owed by the bank to the customer. Some banks may charge a fee for
this service, while others may pay the customer interest on the funds deposited. The account holder

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 has the right to withdraw any deposited funds, as set forth in the terms and conditions of
the account. The following are most common type of bank deposit.

Demand Deposit: it consists of funds held in an account from which deposited funds can be
withdrawn at any time without any advance notice to the depository institution. Demand
deposits can be "demanded" by an account holder at any time. Many checking accounts today are
demand deposits and are accessible by the account holder through a variety of banking options,
including teller, ATM and online banking.

Savings Account: is a deposit account held at a bank or other financial institution that provides
principal security and a modest interest rate. Depending on the specific type of savings account,
the account holder may not be able to write checks from the account (without incurring
extra fees or expenses) and the account is likely to have a limited number of free
transfers/transactions.

Time Deposit: time deposit or certificate of deposit (CD) held for a fixed-term, with the
understanding that the depositor can make a withdrawal only by giving notice. A time deposit is
an interest-bearing bank deposit that has a specified date of maturity. Generally speaking, the
longer the term the better the yield on the money (Dereje, 2017)

2.1.3 Importance of Deposit mobilization

A. A source of investment

According to (Ongore & Kusa, 2013), Intermediation function of banks play a vital role in the
efficient allocation of resources of countries by mobilizing resources for productive activities.
They transfer funds from those who don't have productive use of it to those with productive
venture. (Nwanko, Ewuim, & Asoya, 2013) States that, savings are resources which one decides
to put aside for investment purposes and not for luxury. What people save, avoiding to
consume all their income, is called "personal savings". These savings can remain on the bank
accounts for future use or be actively invested in houses, real estate, bonds, shares and
other financial instruments.

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 B. Low cost

According to (Shettar & Sheshgiri, 2014) the success of the banking greatly lies on the deposit
mobilization. Performances of the bank depend on deposits, as the deposits are normally
considered as a cost effective source of working fund.

Elser, Hannig, & Wisniwski, (1999) savings are a source of funds with low financial costs
i.e., interest costs, Compared to other commercial funds. With regard to financial costs, most of
the institutions apply a differentiated interest rate schedule, compensating for the higher
administrative costs with no or low interest rates on small savings and increasing them according
to the size of the deposit.

C. A source of profit

According to (Varman, 2005) the ability of a bank‘s management and staff to attract checking
and saving accounts from business and individuals is an important measure of the bank‘s
acceptance by the public. Deposits provide most of the raw materials for bank loans and thus
represent the ultimate source of bank profits and growth.

Tuyishime, Memba, & Mbera, (2015) also affirmed that, Deposits are an indispensable
tool commercial banks use to enhance its profitability through advancing deposits mobilized to
its customers in form of loans which make in return interest to commercial banks.

D. Economic Growth and Development

According to (Ongore & Kusa, 2013), In addition to resource allocation good bank performance
rewards the shareholders with sufficient return for their investment. When there is return there
shall be an investment which, in turn, brings about economic growth. On the other hand, poor
banking performance has a negative repercussion on the economic growth and development.
Poor performance can lead to runs, failures and crises. Banking crisis could entail financial crisis
which in turn brings the economic meltdown.

2.1.4 The Effects of Poor Deposit Mobilization

According to (Khalayi, Ondiek, & Musiega, 2014) there are a number of effects that are brought
about as a result of the poor deposit mobilization. These Include

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  Inability to disburse loans to qualifying members on demand,
 Inability to meet operation costs,
 Inability to service debts,
 Unstable board of directors due to frequent reshuffle as disgruntled members vote officials
out,
 Quitting of members to competitors,
 Falsification of financial reports.

These can cause the voting out of elected officials on accusations of fraud, financial
mismanagement practices. In addition, dissatisfied members can quit in large numbers to
join alternative and emerging financial institutions for fear of losing their savings if the situation
deteriorates.

2.2 The Determinants of Commercial Banks Deposits- Theory

According to (Dereje, 2017) the determinants of commercial band deposit is classified as
macroeconomic factors and micro economic factories that can affect the growth of
commercial banks deposits. There are discussed as follows:-

2.2.1 Macroeconomic Factors

The external or macro determinants are variables that are not related to bank management but
reflect the economic and legal environment that affects the operation and deposit positions
of Banks. The macroeconomic factors that can affect bank’s deposit include factors such
as; Deposit Rate, Exchange Rate, Inflation and Government Expenditure among others.

Deposit Rate

The main focus of every financial system is financial intermediary that is, mobilizing financial
resources from the surplus sector and lend to the deficit outlets to facilitate business transactions
and economic development based on the monetary and fiscal policy of the nation. The attraction
for getting the deposit from the surplus sector is interest payment, which must be reasonable and
acceptable to the owner of the money (Dereje, 2017).

The classical theory of interest otherwise called the demand and supply theory of interest,
maintains that the rate of interest is determined by the demand for and the supply of funds by

11
businessmen and households respectively. The supply of funds is governed by the time
preference and the demand for capital by the expected productivity of capital.

McKinnon (1973) and Shaw (1973) argue that for the typical developing country, the net impact
of a change in real interest rate on saving is likely to be positive. This is because, in the typical
developing economy where there is no robust market for stocks and bonds, cash balances and
quasi-monetary assets usually account for a greater proportion of household saving compared to
that in developed countries.

Government Expenditure

Government expenditure refers to all monetary expenditure on goods and services made by the
government on behalf of the community. It includes both recurrent and capital expenditure
on items like health, education, administration and so on. The recurrent expenditure refers to
the expenditures that occur at regular intervals in the annual budget of the government. These
expenses include expenditure on defense, administration and debt servicing particularly
payment of interest on loans, road maintenance, and cost of health and education services.

Sahoo et al (2001) in the Indian case “accepts that “saving is the engine of growth. Expenditure
that creates jobs ensures regular income and savings, hence, bank deposits increase. On the other
hand, expenditure on investment such as importation of capital goods, development of
institutional and infrastructure facilities which aid private sector investments may generate
employment and multiplier on savings and output in the long run. Where the latter situation holds,
all things being equal, deposit mobilization will increase”.

Generally, an Increase in government expenditure injects more money into the hands of the people
and assuming no change in inflation and tax rates as well as demand for more goods and services,
more income will be available for savings and deposits will increase accordingly. Also, where
expansionary government expenditure leads to increase in domestic borrowing, interest rates
on loans increase and all other things being equal, more deposits would be attracted.(Osie, 2015)

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Inflation

“Banks in their quest to boost deposits and increase self-sufficiency must analyze the
behavior of depositors in a period of inflation. The latter is the persistent increase in the general
price level for a specified period of time. Thus, it is a fall in the market value of money (purchasing
power) as a result of persistent rise in prices. Real value of money declines resulting in
benefit to debtors and loss to creditors” (Brealey and Myers 2003). “From the monetarist point
of view inflation is demand pull and an exogenous rise in money supply is the causality.
In the short run an increase in money supply induces demand above supply of goods and
services which causes prices to rise until the market adjusts to the equilibrium.

The structuralist, however, argues from the effect of changes in the socio-political, economic
and institutional structures with the view to increasing growth in the economy of market
failures”. (Kirkpatrick and Nixon, Beim 2001) expresses the most popular view held by
economists by characterising on int1ationary period as the period of uncertainty. Distortion of
capital gains and negatively impacts on the real interest rates making markets difficult to allocate
resources efficiently (Beim et al., 2001). Investors with surplus funds hold on to assets which can
appreciate in value rather than money whose value are frequently eroded away. Empirical
evidence from Latin American countries as stated in the World Development Reports
indicates that inflation is an implicit tax on depositors and has the capacity to reduce profits
through low deposit rates. A strong correlation exists between real interest rates and inflation as
both can impact on deposits and savings

Monetary Policy

Monetary policy to be “a policy used by a government or central bank to influence the

supply of money and credit in private hands, used for controlling inflation. In Ethiopia the
government controls money supply through the central bank unlike in the United Kingdom where
the Bank of England is independent of the government in pursuing monetary policies. The central
bank being the main actor in this respect uses monetary tools such as reserve ratios, discount
rates, and open market operations to control money supply and inflation in the economy. Control
of money supply has a direct relationship with deposit mobilization and inflation control.

13
Exchange Rate

Exchange rates are quoted as foreign currency per unit of domestic currency or domestic
currency per unit of foreign currency (Bishop, 2006). Exchange rate allows denominating
the cost or price of a good or service in a common currency. As Thomas’s explanation,
the term depreciation and appreciation is used to show the decrease and increase in the value of
currency. Depreciationis a decrease in the value of currency relative to another currency.
Appreciationis an increase in the value of a currency relative to another currency. The main factors
that influence exchange rate are: inflation, interest rate, speculation, and change in
competitiveness, balance of payment, government debt, government intervention and Economic
growth / recession.

According to (Nugel 2012) as currencies depreciated in one country deposit will be reduced
since investors tend to withdraw deposit and exchanged to keep it by appreciating currency
(Hard currency) or invest in another form of investment rather than bank deposit. (Alemayeh
2015) also confirms that for developing country in general saving is negatively correlated with
unstable exchange rate.

2.2.2 Bank Specific Factors

The Bank specific factors are factors that are related to internal efficiencies and managerial
decisions. Such factors include determinants such as Bank Profitability, Bank Liquidity, Bank
Credit Risk and the like.

Bank Profitability

Many researches have found return on asset to be significantly related to commercial banks
deposit mobilization. The known measures of banks deposit performance over the years have been
either based on return on assets or return on equity. However, in the measuring these performance,
many researchers have argued for the return on assets (ROA) as against return on equity (ROE).
According to (Hassan & Bashir 2003), “ROA shows the profit earned per dollar of assets and most
importantly, it reflects the management's ability to utilize the bank's financial and real investment
resources to generate profits. For any bank, ROA depends on the bank's policy decisions as well
as on uncontrollable factors relating to the economy and government regulations”.

14
Rivard and Thomas (1997) suggest that “bank deposit performance is best measured by ROA in
that ROA is not distorted by high equity multipliers and ROA represents a better measure of the
ability of a firm to generate returns on its portfolio of assets”. ROE on the other hand, “reflects
how effectively a bank management is in utilizing its shareholders funds. Since ROA tend to be
lower for financial intermediaries, most banks heavily utilized financial leverage heavily to
increase their ROE to competitive levels”. (Hassan and Bashir, 2003).

Bank’s Liquidity

Liquidity can be defined as a measure of the relative amount of asset in cash or which can be
quickly converted into cash without any loss in value available to meet short term liabilities. The
liquidity measure provides suggestions about the level of liquidity on which the commercial
banks are operating.

According to (Olagunju, Olanrewaju, Olabode and Samuel 2011) Liquidity involves three
elements or characteristics namely Marketability, Stability and Conservatism. Liquid assets
should be more marketable or transferable. That means, they are expected to be converted
to cash easily and promptly, and are redeemed prior to maturity. All assets that cannot be redeemed
at maturity are said to be illiquid. the fact that the prices of the former are fixed and have lesser
variability than the prices and value of the later that experience considerable fluctuation.

Conservatism quality of liquidity refers to the ability of the holders of liquid assets to recover the
cost of the asset on the time of resale. On the basis, common stocks are not considered highly
liquid asset despite its ready marketability. This can be attributed to the fact that on certain
periods, the current prices are lower than their initial or original prices. In consideration of these
qualities, people and firms decide to hold cash which is the only perfectly liquid asset. Another
quality of liquid asset is price stability. Based on this characteristic, bank deposits and short term
securities are more liquid than equity investments such as common stocks and real estates due to
Banking liquidity is the ability to meet obligations when they come due without incurring
unacceptable losses.

Credit Risk

According to (Osie, 2015) “institutional governance, ownership and reputation of the financial
institutions is key factors for successful deposit mobilization. Prior to offering voluntary
15
deposit services, Financial Institutins must ensure that they have the institutional structures
that allow them to mobilize savings legally. “Institutional capacity requires that adequate
governance, management, staff and operational structures are in place to provide savings services”.
(Ledgerwood, 1998) Moreover, (Klaehn et al, 2002) expound that the “vision, commitment and
disposition of the pro poor institutions are critical in successfully mobilizing deposit from
the public”.

2.3 Empirical Literature Review

Under this section, previous empirical studies on the determinants of commercial banks deposit
mobilization and related studies in developed and developing countries like Ethiopia will be
reviewed.

The past models for banks deposit have been further developed in recent times and empirically
tested worldwide. Many empirical studies have estimated the effects of various economic and
demographic variables on bank deposit in cross-country, using time series and panel data samples.
The literature suggests that there are a number of factors that crucially determine the commercial
banks deposit including Interest Rate, Inflation, Gross Domestic Product(GDP) ,Equity to Asset
ratio, Liquidity ratio or Liquidity risk, Loan to Asset ratio or Credit risk, Return on Asset or ROA
and Bank size. The significance of each factor, however, differs across group of countries,
countries, and time period.

Empirical Review about Determinant of Commercial Banks Deposit Outside Ethiopia

Azmi & Haron (2006) this study investigates the structural determinants of deposits level of
commercial banks in Malaysia, using cointegration techniques. The results suggest that
determinants such as rates of profit of Islamic bank, rates of interest on deposits, Base Lending
Rate, Kuala Lumpur Composite Index, Consumer Price Index, Money Supply and Gross Domestic
Product have significant impact on deposits. We also find that in most cases, customers of
conventional system behave in conformity with the savings behavior theories.

This is a seminal work, which attempts to identify factors that influence depositors’ behaviour in
Malaysia. Both financial and economic variables are introduced and their long- and short-run
relationships examined using cointegration techniques. We consider in our analysis a number of
factors that have been identified in the economic literature as potential determinants of savings.

16
This includes rates of return, inflation, money supply and GDP. New variables, namely base
lending rate and composite index were introduced as a factor believed to have an influence on the
level of deposits in Malaysia. In most cases, the behavioural patterns of Malaysian depositors are
in conformity with the existing saving theories. However, there are also deviations from these
theories. For example, both inflation and returns on deposit are supposed to have a positive
relationship but this study found otherwise. Similarly, instead of an inverse relationship, both
composite index and money supply have positive sign with savings account. For each of the
deviation found, an explanation has been put forward. Finally, this study does not differentiate the
behavioural pattern of different classes of depositors. It is interesting to examine whether different
types of depositors have the same long-run influencing factors. In view of this, we will focus this
subject matter in our future research agenda.

Siaw & Lawer (2015) the study investigates the influence of selected macroeconomic and financial
level variables on bank deposits in Ghana. It specifically examines the dynamic effect of deposit
interest rate, inflation, monetary policy rate, growth of money supply and stock prices on the level
of bank deposits. The dataset for the study consisted of quarterly data spanning the years of 2000
to 2013 gathered from the Bank of Ghana monetary time series database and the World
development Indicator (WDI) database. Employing a Co-integration analysis and Fully Modified
Ordinary Least Square (FMOLS), both short and long run elasticity’s of the model are estimated.
The short run effects of a change in the independent variables on bank deposit were found to have
the expected influence on bank deposits. However, only inflation and growth of money supply
variables were found to be significant in explaining the short run dynamics of bank deposit.

A change in the growth of money supply produced a negative sign as expected by the model and
a change in CPI also produced a negative impact on bank deposit, which conforms to theory. The
study results also reported a significant speed of adjustment (error correction term) with the sign
of the error correction factor indicating that the variables share a common trend in the long run,
and that approximately 15 per cent of any disturbances in the model is corrected every year.

The results also revealed that the saving pattern of the Ghanaian depositor conforms to existing
theories, although there were some deviations. The study found that inflation as a measure of
consumer price index (CPI) negatively impacts on bank deposits in both the short run and long
rum. This means that in periods of high inflation, economic agents, both households and firms are

17
forced to supplement their expenses by drawing from the bank accounts, hence a reduction in bank
deposits.

It is therefore imperative for banks to adopt some promotional campaigns and other prudent
measures to curb the adverse effects of inflation on deposits. In anticipation of inflation, banks
could adjust their deposit interest rate in some high volume deposits in order to minimize the level
of leakages (withdrawals) from the bank’s vaults. Again, the growth of money supply was found
to have both negative and positive impacts on the level of bank deposits in the short and long run.

However the long run positive effect of growth of money supply on bank deposits was found to
far outweigh the negative effect in the short run. It is however also important that the bank curbs
the level of withdrawals in the short run when there is an increase in money supply. On the
macroeconomic level also, this result serves as a tool to the policy makers, especially the Central
Bank in its monetary policy. Thus, if the bank of Ghana wants to reduce the level of loan
advancement by commercial banks in the short-run, it could achieve this by implementing a
contractionary policy through decreases in money supply. This results in excess demand for money
which increases the cost of loanable fund, hence a reduction in people’s willingness to acquire or
take bank loans all things being equal.

Osei, (2015) the general objective of this study is to examine whether equity to asset ratio or
capitalization, Liquidity ratio or Liquidity risk, Loan to asset ratio or credit risk, Return on asset
or profitability and Log of assets or bank size are the factors that determine rural banks deposit
mobilization in Ghana. The research included 112 rural banks in Ghana out of a total number of
137. These banks have been selected depending on the availability of their quarterly data from
2009Q1 to 2013Q4. Panel least regression with fixed effects has been used for analysis. The equity
to asset ratio also known as the capitalization of the rural banks was found to negatively
insignificantly influence rural banks deposit accumulation meaning a rise in capital requirements
might lead to lower levels of deposit and vice versa.

Again, the results indicated that liquidity ratio thus cash and due balances held at other financial
institutions to total assets is positively correlated with rural banks deposit growth rate. This
suggests that as liquid assets of rural banks increases deposit mobilization also increases and vice
versa.

18
The coefficient of loan to asset ratio is positively and significantly related to rural banks deposit
mobilization. A rise in the loan portfolio of the bank has a significant impact on the banks‟ ability
to attract deposit from the general public and in the same vein a reduction in loan portfolio can
reduce a banks deposit growth rate. Most deposit customers of rural banks have the desire to
contract loans from the bank they save with after a certain point in time. The banks failure to meet
this expectation will cause a sense of disappointment in the customers and hence may stop
contributing or saving with the bank. However, the banks ability to deliver on its promises of
providing loans to the clients has the potency of attracting several deposit customers.

Return on asset, representing profit before interest and tax, was found to have a negative
relationship with bank deposit mobilization but the relationship is however insignificant. An
increase in profit leads to a decrease in rural deposit mobilization whiles a decrease in deposit
mobilization can be attributed to fallen profitability. The insignificant nature of this fact could be
due to the fact that in Ghana, the customers of rural banks are not ways better informed about the
financial performance of a rural bank. Besides rural depositors do not see any motivation in rural
banks profit since they are not the ultimate beneficiaries of the profits.

The coefficient of size (log of assets) is positive and significant, suggesting size is important in
explaining deposit performance of rural banks, with this finding being consistent with most studies
of Western banks, where size has a positive influence on performance, which is often attributed to
benefits achieved through economies of scale. But it is inconsistent with the results of (Shih et al.
2007) and (Lin and Zhang 2008). This result also agrees with (Sufien et al., 2008) that “log of total
assets is a variable that measures bank size and is generally used to capture potential economies or
diseconomies of scale in the banking sector”. Bigger banks are able to open branches at the
convenience of depositors. As the rural bank gets closer to the people, more people are able to
save.

Empirical Review about Determinant of Ethiopian’s Commercial Bank Deposit

Mobilization

Andinet (2016) the aim of this study is to examine factors influencing deposit mobilization in
private commercial banks in Ethiopia. In doing so, the study adopted quantitative methods research
approach using secondary data. The study had found variables that can affect the total deposits of

19
the banks. Seven variables are regressed with the dependent variable i.e. total deposit. The
explanatory variables are number of bank branches, deposit interest rate, liquid asset to deposit
ratio, lagged value of bank deposits, net interest margin, inflation rate and economic growth
(GDP). The data for these variables were collected from the respective private commercial banks’
financial statements, national bank of Ethiopia, central statistical authority and MOFEC of the
sample year 2005 up to 2015. Different diagnostic test were performed to know whether the model
is valid or not. All the tests were valid and eventually regression analysis was performed using E
view statistical package. The result from regression analysis showed that number of bank branches,
deposit interest rate, net interest margin and GDP were significantly and positively correlated with
the explained variable. Lagged value of bank deposit was significantly and negatively correlated
with total deposit. However, liquid asset to deposit ratio and inflation rate were insignificantly
negatively correlated with bank deposit. Finally the study had recommended what should be done
to mobilize more deposits.

Kibebe(2016) the research tried to determine factors that affect deposit mobilization, the associated
costs of deposit mobilization in private banks. Therefore, the study adopts mixed approach to
gather the data. The primary data is gathered using questionnaire. Sampling method of the primary
data is purposive sampling technique. While the secondary sources of data were extracted from
annual reports of all private commercial banks of Ethiopia, data from National Bank of Ethiopia
(NBE) and from Central Statistical Authority (CSA). Regarding the secondary data, the study used
time series data from 2000-2014 for analysis made using Classical linear regression method. The
study shows that, Age dependency ratio, Investment and money supply, are the most significant
factors of deposit mobilization activity. The other variable such as Per capita income has
insignificant power to influence the dependent variable. As a result, the study recommended that,
Government should increase investment so as to promote economic growth to mobilize deposits
since there exists a positive relationship between Deposit and Investment. And private banks ought
to increase number of branches to mobilize more resources.

Shemsu(2015) this study aimed to identify and evaluate those factors affecting bank deposit in
general by taking Commercial Bank of Ethiopia as evidence. Accordingly, the researcher adopts
mixed research approach. Regarding to the qualitative data; questionnaire is used to gather
information from the employees of commercial bank of Ethiopia particularly for those employees

20
who actively participated in deposit mobilization tasks in CBE city branches. Regarding to the
secondary data; time series data covering 1998 -2014 was analyzed. First, the time series data were
assessed using descriptive statistics for the variables as well as the test for heteroskedasticity,
autocorrelation and normality testing to know if the assumptions of CLRM violated or not.

Second, estimated model was a single regression equation with deposit as the dependent variable
and explanatory variables as deposit interest rate, overall inflation rate, number of branch opening,
gross domestic product, individual foreign remittance and dummy variable.

Estimation was done using Ordinary Least Squares technique by E-views7 statistical package. The
results from economic analysis showed that all the explanatory variables were positively correlated
with the explained variable. Among these variables, branch opening is an important strategy for
deposit mobilization, it is highly significant than others. Individual remittances from diasporas is
also next to branch opening is significantly affects CBE’s deposit. The others are affects positively
and can increase CBE’s deposit. And finally, the study had recommended what should be done to
encouraging deposits growth by Commercial bank of Ethiopia for the benefit of the domestic
deposit mobilization.

Dereje (2017) the purpose of this study is to investigate determinants of deposit mobilization in
private commercial banks of Ethiopia using panel data of six private commercial banks from year
2002 to 2012. The study used both quantitative and qualitative research approach. Secondary
financial data are analyzed using multiple linear regressions models for the six bank‟s deposit.
Fixed or random effect regression model was applied to investigate the impact of bank branches,
exchange rate, Real Gross domestic product, Capital Adequacy and Liquidity on private
commercial banks deposits. Besides, the study used primary data analysis to solicit managers‟
perception towards the determinants of private commercial banks deposit mobilization. The
empirical results from regression analysis showed that bank branches, exchange rate, and real gross
domestic product affects deposit of the bank positively whereas, capital adequacy and liquidity
affects the deposit of the private banks negatively. This implication show that better capitalized
banks tend to create less liquidity that leads to mobilize little deposit amount. On the other hand
the feedback of respondents depicted that managerial efficiency, government policy, convenience
of bank office, technology, bank size and awareness of savings by society affected deposit level
of the banks significantly. Thus, management bodies of private commercial banks should strive to

21
strengthen the identified significant factors and government bodies should also see the adverse
effect of tight polices imposed on the existing private commercial banks as well as for the new
entrant banks.

Giragn (2015) this paper then explores the theoretical as well as empirical analysis of those factors
having an impact on deposit volume in banks and even assesses which ones are more significant
or less significant. To do the practical investigation in terms of commercial banks in Ethiopia, the
researcher collected the relevant data from annual reports of twelve years (2001/2-2012/13) and
from questionnaires and interviews made to senior bank officers of seven banks. The data is
analyzed through the econometric analysis using SPSS software.

The study reveals that the branch expansion, the money supply, the exchange rate of Birr to USD
and general inflation are the most significant factors of deposit mobilization activity. The other
variables-deposit rate and real per capita GDP growth rate have insignificant power to influence
the dependent variable. In this research, as opposed to the conventional economic theory, the
deposit rate is found to have negative relation against the deposit volume for the period under
study. The study also exposes that the deposit mobilization activity is becoming challenging, its
associated costs are escalating and the competition is also becoming stiff-the outcome of the
competition favoring the big size state banks. Beyond that the government policies are also
favoring the latter in an effort to mobilize huge fund for a national development activities. The
research recommends that banks have to do much in branch expansion studying potential deposit
areas.

2.4 Conceptual Framework

From the above theoretical and empirical literature reviews the main factors that determine the
deposit growth of financial institution specifically banks is divided by mainly by both macro and
micro economic factors. This study used both macro and micro determinants of bank deposit
that includes Inflation rate, Interest rate, Exchange rate, Money Supply, Government Expenditure,
Bank Profitability and Bank Credit Risk. The study has quantified how these variables are
determining the deposit of commercial banks in Ethiopia.

22
The conceptual schema of the relationship between the dependent variable (commercial banks
deposit) and independent (Interest Rate, Inflation, Government Expenditure, Money Supply,
Liquidity ratio or Liquidity risk, Loan to Asset ratio or Credit risk, Return on Asset or ROA and
Exchange rate) variables are depicted here below:

Micro Economics Factors

Bank Profitability

Bank Liquidity
Macro Economics Factors Bank Credit Risk
Exchange Rate

Government Expenditure

Money Supply

Inflation &

Interest Rate

Source; The Researcher Construction (2017)

2.6 Knowledge Gap

Mobilization of deposits is one of the important functions of banking business. It is an important

source of working fund for the bank. Deposit mobilization is an indispensable factor to increase
the sources of the banks to serve effectively. Mobilization of deposit plays an important role in
providing satisfactory service to different sectors of the economy. The success of the banking
greatly lies on the deposit mobilization. Performances of the bank depend on deposits, as the
deposits are normally considered as a cost effective source of working fund.

23
As it was discussed in the literature review part, Most of study undertaken in our country related
to the topic of determinates of deposit mobilization focus on a separately treating the total
deposit amount to the private banks and the public Banks and some internal and external
factors that are reviewed by different researchers indifferent research techniques also showed
different effect on Bank deposit. Thus, the inconsistency funding among researchers and little
attention given by researcher on the determinate of the overall deposit mobilization commercial
banks of Ethiopia, motivated the researcher to undertake a research in this particular area by
adding new additional variable to fill these gap.

24
 Chapter Three
3. Research Methodology
3.1 Introduction
This chapter covers the research approach, the type and source of data and the research design. It
explains the type of data used for the study and the techniques employed in identifying the factors
that influence the mobilization of deposits, identifies the challenges facing commercial banks in
deposit mobilization and offers recommendation. The validity and reliability of the data were also
high –lighted.

3.2 Research Approach and Research Design

The study examine the cause and effect relationships between growth of deposit and its
determinant, therefore it is an explanatory research and the problem identified factors affecting the
outcome having numeric value, it is quantitative approach.

Therefore the researcher had employed quantitative research methodology and techniques
using an econometric model and Descriptive Quantitative & Qualitative Analysis in order to
address the research questions. Multiple regression using OLS (Ordinary Least Square)
estimates of the dependent(Total Deposit Amount) and independent five macroeconomic
variables Inflation, Interest Rate, Money Supply, Government Expenditure and Exchange and
three bank specific variables Bank Profitability, Bank Liquidity and Bank Credit Risk were
employed. It uses time series data covering the period from 2000 through 2015.

3.3 Data Types and Source

The sources of data for this research were secondary sources. The researcher gathered the annual
reports of seven commercial banks from proper source. The bank specific data were collected from
financial statements (i.e. Balance Sheet and Profit & Loss Statement) of each selected
commercial banks included in the sample and macroeconomic data were collected from
NBE and Central Statistical Authority (CSA). The data were collected from 2000 to 2015 on
annual base and the figures for the variables were on June 30th of each year under study.

25
3.4 Sample and Population
As to June of 2016 there are eighteen banks in Ethiopia, These are Commercial bank of Ethiopia,
Awash International Bank S.C, Bank of Abyssinia S.C, Wegagen Bank S.C, United Bank S.C, Nib
International Bank S.C, Dashen Bank S.C, Development Bank of Ethiopia, Cooperative Bank of
Oromia S.C, Lion International Bank S.C, Zemen Bank S.C, Oromia International Bank S.C, Buna
International Bank S.C, Berhan International Bank S.C, Abay Bank S.C, Addis International Bank
S.C, Debub Global Bank S.C, and Enat Banks S.C. However, from all the above listed banks,
Development Bank of Ethiopia is not commercial bank. Among the total eighteen banks, two of
them are owned by the government and the remaining sixteen are privately owned (Birritu
2015) Hence, The main objective of the study is to investigate the determinant of commercial
banks deposit in Ethiopia, the seventeen commercial banks can be treated as population of the
study.

In line with balanced panel data approach, to meet the desired objective of this study and to make
generalization from sample to population, the researcher used maximum combination of years
and number of banks and achieved the maximum number of observations through purposive
sampling technique. Thus, out of seventeen commercial banks that are registered and operated in
Ethiopia, seven are selected.

Therefore, the matrix for the frame is 16*7 that includes 112 observations. The sampled
commercial Bank are Commercial Bank of Ethiopia, Awash International Bank S.C, Bank of
Abyssinia S.C, Wegagen Bank S.C, United Bank S.C, Nib International Bank S.C, and Dashen
Bank S.C,

These Commercial Banks are selected purposively, because the use of purposive sampling enables
the researcher to generate meaningful insights that help to gain a deeper understanding of the
research phenomena by selecting the most informative participants that is satisfactory to its
specific needs.

3.5. Description of Variables

This section deals with the analysis of variables for determining commercial banks deposit
mobilization. A summary of the variables and how they are measured is presented in table.

26
3.5.1 Dependent variables
In this study, commercial banks deposit has been used as the dependent variable. Deposit
represents the total accumulated amount of customer financial savings with the commercial banks.
The performance of commercial banks is best measured by the size of its deposit liabilities. A large
portion of commercial banks asset base is often finance by their deposit mobilization. For instance,
a commercial banks ability to lend more loans to its customers will be determined by the size of
its deposit. The growth of the bank is therefore subject to its ability to mobilize more deposit at
cheaper cost from the general public. In view of this it is worth studying and identifying the major
determinants of efficient deposit mobilization.

3.5.2 Independent variables

The following independent variables hypothesis is proposed to increase our understanding of the
determinant factors of deposit growth in commercial banks. These factors were determined by
detailed review of the literatures.

1. Exchange Rate

The National Bank of Ethiopia (Central Bank) follows a managed floating exchange rate regime
where the local currency Birr is pegged to the US Dollar. Accordingly, drastic movements in the
nominal exchange rate are not expected. Birr continued to depreciate but at a very slow rate and it
reached 18.19/USD at the end of 2012/13. This gradual depreciation is in line with the goal to
enhance competitiveness of Ethiopian exports and attract foreign direct investment (IFD).

The average exchange rate of Birr against US dollar in the official market showed annual
depreciation of 5.4 % since 2011/12. In January 2014, the exchange rate reached 19.107
Birr/USD, a 4.85 % depreciation since January 2013.

H1: Exchange Rate has significant effect on commercial banks deposit.

2. Interest Rate

Real interest rate is nominal interest rate minus inflation rate. Mohammad and Mahdi (2010) said
that in negative real interest rate condition, people withdraw their resources from banking system.
According to (Mohammad and Mahdi 2010), Some research supposed that decrease in real interest

27
rate could decrease true demands for money (in its extensive definition including savings and time
deposits). Therefore it states that the interest rate and deposit of the banks have positive
relationship. According to (Voon et al 2010), while interest rates risk is a major concern for banks
due to the nominal nature of their assets and the asset-liability maturity mismatch (Hasan and
Sarkar, 2002), some researchers emphasized that higher interest rates had positive impact on banks
(Hanweck and Ryu, 2004; Hyde, 2007).

H2: Deposit interest rate has significant effect on commercial banks deposit.

3. Inflation

Inflation is a sustained rise in the general level of prices – the price level. The inflation rate is the
rate at which the price level increases. As (Deaton 1991) explained inflation is measured
alternatively by Consumer price index. The first theory he assumed that greater uncertainty
should raise savings since risk-averse consumers set resources aside as a precaution against
possible adverse changes in income and other factor. Hence inflation may increase
precautionary savings by individuals. Precautionary saving is additional saving that result from the
knowledge that the future is uncertain (D. Carroll, 2006). The second theory was, inflation can
influence saving through its impact on real wealth. As inflation accelerates, deposits become less
attractive, depending on the interest rate. In this case, the assumption would be that as
deposit interest rates rise, deposits would increase in principle as well. The narrower the spread
between deposit rates and inflation, the less attractive it should be to hold deposits above
the required level.

H3: Inflation has a significant effect on commercial banks deposit.

4. Government expenditure

All monetary expenditure on goods and services made by the government on behalf of the
community is named as capital expenditure. It includes both recurrent and capital expenditure
on items like health, education, administration and so on. The recurrent expenditure refers
to the expenditures that occur at regular intervals in the annual budget of the government. These
expenses include expenditure on defense, administration and debt servicing particularly

28
payment of interest on loans, road maintenance, and cost of health and education services. Thus,
if Government expenditure increases, it will create additional job opportunities that lead to enhance
the income of the nation and increase deposit mobilization of the society.

H4: Government Expenditure has insignificant effect on commercial banks deposit.

5. Bank’s Liquidity

Managing liquidity is a daily process requiring bankers to monitor and project cash flows
to ensure adequate liquidity is maintained. Maintaining a balance between short-term assets
and short-term liabilities is critical. For commercial bank, clients' deposits are its primary
liabilities, whereas reserves and loans are its primary assets. Bank liquidity can be measured with
different liquidity ratio.

For the purpose of this study, Total loan and advance to deposit liquidity ratio is used. The
ratio serves as a useful planning and control tool in liquidity management since commercial
banks use it as a guide in lending and investment decision. Loans & Advances are the major
portion of a bank’s asset and it is the most earning asset of a bank. This ratio tells us the percentage
of funding sources tied up by illiquid asset. It relates illiquid asset with liquid liability. This
ratio also indicates the percentage of deposit locked in to illiquid asset. The ratio reflects the
proportion of the customers' deposits that has been given out in the form of loans and the
percentage that is retained in the liquid forms. As this liquidity ratio decreased, Bank can easily
able to respond to their withdrawal needs, thus the following hypothesis is drawn

H5: Liquidity Ratio has significant effect on commercial banks deposit.

6. Credit Risk

According to (Osie, 2015) “institutional governance, ownership and reputation of the financial
institutions is key factors for successful deposit mobilization. Prior to offering voluntary
deposit services, Financial Institutins must ensure that they have the institutional structures
that allow them to mobilize savings legally. “Institutional capacity requires that adequate
governance, management, staff and operational structures are in place to provide savings services”.

29
H6: Loan to Asset Ratio has significant effect on commercial banks deposit in Ethiopia.

7. Money Supply

Money supply is one of the tools used by the government in the conduct of its monetary policy.
Hence, any changes in money supply can have a major impact on economic conditions. An
increase in money supply makes loanable funds cheaper, thus reducing cost of borrowing for
corporate and individual customers. In this case, it is expected that people will increase
consumption and reduce savings and thus money supply will have an inverse relationship with
deposits. On the other hand, it could also be argued as well that as more money is supplied to the
economy, more deposits could put in banks accumulating the fund for transactional and
investment purposes.

H7: Money Supply has significant effect on commercial bank deposit.

8. Profitability

Profitability accounts for the impact of better financial soundness on bank risk bearing capacity
and on their ability to perform liquidity transformation (Rauch et al. 2008 and Shen et al. 2010).
Most commonly, profitability is measured by return on asset (ROA) and return on equity (ROE).
For the purpose of this study, the proxy of profitability is return on asset that measures
the overall financial performance of banks and the return on asset (ROA) is measured by the ratio
of net profit after tax to total Asset. (Bhalla 2006), in his book, explains ROA as a ratio which is
used to measure the company’s efficiency in the use of its assets to generate profit. It means that a
more efficient company will generate a higher level of profit from a given level of total asset than
its less efficient competitor.

Finger and Hesse (2009) state that higher bank profits would tend to signal increased ban
soundness, which could make it easier for these banks to attract deposits. (Rachmawati and
syamsulhakim 2004) also find that there is a long run relationship between commercial banks
deposits and the profitability of the banks. This study considered there is a positive relationship
between Profitable & Bank’s Deposit and draws the following hypothesis.

30
H8: Return on Asset has insignificant effect on commercial banks Deposit growth in
Ethiopia.

Table 3.1 Variables, definitions, notations and expected signs

Dependent Variable

Variable Definitions Notations Expected Signs

Deposit mobilization The annual growth of the DEP
of commercial banks total amount of deposit

Independent Variables

Variable Definitions Notations Expected Signs

Interest Rate The rate of interest on deposit given INT +
by commercial banks
Inflation The overall inflation rate in INF -
Ethiopia
Money Supply The Growth of Broad Money MSG +
Supply
Loan to Asset ratio Total loans divided by total assets CRISK +
Return on Asset Profit before interest and tax ROA -
divided by total assets
Government Expenditure The growth of total amount of the GOVEXG _
Current and Capital Expenditure
Exchange Rate The Growth Ethiopia Birr with EXG +
USD
Bank Liquidity Total Deposit divided by Total LIQ _
Asset
Source; The Researcher Construction (2017)

31
3.6 Model Specification
The theoretical literature discussed above suggests that commercial bank deposit, Inflation,
Interest Rate, Money Supply, Government Expenditure, Exchange Bank Profitability, Bank
Liquidity and Loan to Asset Ratio are related. (McKinnon 1973) for example, “argues that
investment in a typical developing country is lumpy and self-financed and hence cannot be
materialized unless adequate savings are accumulated in the form of bank deposits”

Following these theoretical views and based on (Ang and McKibbin 2005), “the study estimated
the linear regression equation by calculating the values of the variables in the following equation”:

𝐷𝐸𝑃𝐺𝑖𝑡 = 𝛼𝑖 + 𝛽1 ∗ 𝐼𝑁𝑇𝑖𝑡 + 𝛽2 ∗ 𝐼𝑁𝐹𝑖𝑡 + 𝛽3 ∗ 𝑀𝑆𝐺𝑖𝑡 + 𝛽4 ∗ 𝐶𝑅𝐼𝑆𝐾𝑖𝑡 + 𝛽5 ∗ 𝑅𝑂𝐴𝑖𝑡 + 𝛽𝑖𝑡

∗ 𝐺𝑂𝑉𝐸𝑋𝐺𝑖𝑡 + 𝛽𝑖𝑡 ∗ 𝐸𝑋𝑅𝐺𝑖𝑡 + 𝛽𝑖𝑡 ∗ 𝐿𝐼𝑄𝑖𝑡 … … … … … … … … … … … … 𝑒𝑞(1)

Where`q

𝑫𝑬𝑷𝒊𝒕 is the dependent variable and represents the growth total amount of deposits held by all
commercial banks for period t,

𝐼𝑁𝑇𝑖𝑡 Represents commercial bank interest rate on deposit for period t,

𝐼𝑁𝐹𝑖𝑡 Represents the overall inflation rate in Ethiopia for period t,

𝑀𝑆𝐺𝑖𝑡 Represents the growth broad money of Ethiopia for period t,

𝐺𝑂𝑉𝐸𝑋𝐺𝑖𝑡 Represents the growth of government expenditure for period t,

𝐸𝑋𝐺𝑖𝑡 Represents the growth of the exchange birr to USD for period t,

𝐿𝐼𝑄𝑖𝑡 t Represents total deposit to total asset ratio for period t,

CRISK 𝑖𝑡 t Represents Loan to asset ratio for period t ,

ROA𝑖𝑡 t Represents Bank Profitability for period t,

µt represent the stochastic error term of the linear regression model. It also represents all the
relevant variables, which were omitted from the model as well as the random errors from the
estimation process and

32
β represent the estimated parameters or represent the slope co-efficient to the dependent variable.

3.7. Data Analysis Methods

Data analysis as defined by Montgomery (1991) is a careful examination of collected information
in an organised form in order to understand the growing trend in any situation. Creswell (2005)
defined data analysis as a process which involves drawing conclusions and explaining findings in
words about a study.

Panel regression analysis has conducted using E-View 9 data analysis econometric packages to
determine the exact nature of the relationship that exist between commercial banks deposit and
Interest Rate, Inflation, Government Expenditure, Money Supply, Liquidity ratio or Liquidity risk,
Loan to Asset ratio or Credit risk, Return on Asset or ROA and Exchange rate in Ethiopia over the
period under study. Prior to the estimation of the regression line, descriptive analysis was used
to describe the behavior of the individual variables over the period under review. Correlation
analysis was also conducted to see the relationship among the dependent and independent
variables. This would help to get an initial picture as to the nature of the relationship among the
variables before proceeding to regression analysis.

Ordinary Least Square

According to Brooks (2008), ordinary least squares (OLS) or linear least squares is a
method to estimate the slope and intercept in a linear regression model. This study used an ordinary
least squares (OLS) regression to estimate the linear equation. The rational for choosing OLS is
that, if the Classical Linear Regression Model (CLRM) assumptions hold true, then the
estimators determined by OLS will have a number of desirable properties, and are known
as Best Linear Unbiased Estimators (Brooks, 2008). In addition, as noted in Petra (2007) OLS
outperforms the other estimation methods when the following holds; the cross section is small and
the time dimension is short. Therefore, as far as both the above facts hold true in this study it is
rational to use OLS. Thus, the following section discussed the CLRM assumptions.

According to Brooks (2008), the assumptions of ordinary least squares are:

1. The assumption of average value of the error is zero E(ut)=0.

2. The assumption of Homocedasticity Var(ut)=σ 2<∞.
3. The assumption of autocorrelation Cov(ui,uj)=0 for i ≠ j.

33
 4. The assumption of independent variables are non-stochastic Cov(ut, xt)=0.
5. The assumption of disturbance are normally distributed ut ∼N(0, σ2).

3.8 Diagnostic Analysis

Diagnostic checking is done to test whether the sample is consistent with the above
assumptions. If all the above assumptions are consistent with the sample, E-view result will be
accurate and reliable. The following tests are done in this research to test the above
assumptions.

Heteroscedasticity

According to Brooks (2008), Heteroscedasticity means that error terms do not have a
constant variance. If Heteroscedasticity occur, the estimators of the ordinary least square
method are inefficient and hypothesis testing is no longer reliable or valid as it will
underestimate the variances and standard errors. There are several tests to detect the
Heteroscedasticity problem, which are Park Test, Glesjer Test, Breusch-Pagan-Goldfrey Test,
White’s Test and Autoregressive Conditional Heteroscedasticity (ARCH) test. In this
study, the popular Breusch Godfrey test (BG test) was employed to test for the presence
of Heteroscedasticity. The hypothesis for the Heteroscedasticity test was formulated as
follow:

Autocorrelation

According to Brooks (2008), when the error term for any observation is related to the
error term of other observation, it indicates that autocorrelation problem exist in this
model. In the case of autocorrelation problem, the estimated parameters can still remain
unbiased and consistent, but it is inefficient. The result of T-test, F-test or the confidence
interval will become invalid due to the variances of estimators tend to be underestimated or
overestimated. Due to the invalid hypothesis testing, it may lead to misleading results on the
significance of parameters in the model.

Normality

Normality tests are used to determine if a data set is well-modeled by a normal

distribution. With the normality assumption, ordinary least square estimation can be

34
 easily derived and would be much more valid and straight forward. This study used
JarqueBera Test (JB test) to find out whether the error term is normally distributed or not.

Correlation Matrix & Multicollinearity

First, there is a correlation matrix created in which all variables are included. This matrix shows
the correlations and their corresponding significance between the variables. The correlation
matrix gives a first insight in the direction and the strength of the relationships between the
variables. When the correlation between two or more independent variables is (too) high, the
problem of multicollinearity occurs (Wooldridge, 2000). The problem of multicollinearity may
lead to less accurate results in the analyses; the coefficients may have very high standard errors
and perhaps even incorrect signs or implausibly large magnitudes. Multicollinearity can
be detected by calculating the variance inflation factors (VIF) for each independent variable.
Multicollinearity is present when VIF values are larger than 10. Furthermore, the critical value
can be calculated by 1/VIF. If this value is below 0.1, this would mean that more than 90% of
the variation in the variable is explained by the other variables. The variable(s) with VIF values
larger than 10 or 1/VIF values below 0.1 should be excluded from the analyses (Rabe-Hesketh
and Everitt, 2004)

Different empirical studies show different argument towards the mulitcolinarity problem.
Mashotra (2007) stated that multilicolliantory problems exist when the correlation
coefficient among variables greater than 0.75. Cooper and Schindler (2009) suggested that a
correlation above 0.8 between explanatory variables should be corrected for. Lastly, Hair et
al. (2006) argued that also correlation coefficient below 0.9 may not cause serious
multicolinary problem. A correlation matrix was used in this study to ensure the correlation
between explanatory variables. Then balanced panel data models are applied to control for
multicollinearity.
3.9 Estimation Procedure

This study used deductive approach as it tried to find the relationship that exist between real
deposit, Inflation, Interest Rate, Money Supply, Government Expenditure, Exchange, Bank
Profitability, Bank Liquidity and Loan to Asset Ratio within the Ethiopia economy. The multiple
regressions are used to statistically establish the model for the study by expressing, testing

35
operationally fit and examining the outcomes. Under the ordinary least squares estimation (OLS)
of regression models, the assumptions of no serial correlation of the error terms as well as a
constant variance of the error terms are held. The logarithm values of the time series data were
taken before Ordinary Least Square (OLS) techniques were used for estimating a model for bank
deposits.

3.10 Validity and Reliability of Data

Reliability of data concerns its consistency. Thus, reliability refers to the extent to which the data
is the same irrespective of their source. That is, the data specifically, the annual reports of the
commercial banks and publications of Association of Commercial Banks Apex Bank were not at
variance with each other and therefore were reliable. This study, however, is threatened by the fact
that the data used was mainly from secondary sources and therefore any error from that data
collection process will definitely affect the outcome. The methodology used for this study was
selected because of its suitability in its dependence on certified information from recognized
institutions other than subjective opinions, which would have been associated with primary
sources. The F test and the coefficient of determination were used to test the validity and reliability
of the relationship established by the regression analysis.

36
 Chapter Four

4. Data Analysis and Discussion of Findings

This chapter consists of the analysis of quantitative data identified in the previous chapter. It has
five sections. The first section presents descriptive analysis of the dependent and independent
variables using graphs and tables to provide an insight on the distribution of the data by bank and
across time. Section two presents the classical linear regression model assumptions diagnostic
test results. Section three presents the correlation analysis result of dependent and independent
variables. The Fourth section presents the results of the regression analysis and finally discussion
of the regression results are presented under section five.

4.1 Descriptive Analysis of Independent Variables and dependent Variable

In this section, the summary statistics of each variables of the study has been discussed.
The variables included the dependent and independent. The dependent variable used in this study
in order to measure the sampled commercial banks deposit is bank deposit growth whereas
the explanatory variables are: Inflation, Interest Rate, Money Supply, Government Expenditure,
Exchange, Bank Profitability, Bank Liquidity and Loan to Asset Ratio.

Table 4.1 Summary statistics – Dependent and Independent Variable

DEPG CRISK EXG GOVEXG INF INT LIQ MSG ROA

Mean 0.303632 0.517066 0.065905 0.193725 0.120544 0.041875 0.762857 0.205013 0.025511

Median 0.264349 0.514303 0.049759 0.197997 0.1035 0.04 0.78 0.2068 0.027699

Maximum 1.666667 0.766741 0.250324 0.495741 0.364 0.06 0.87 0.3921 0.046801

Minimum -0.03341 0.224572 0.003375 -0.027323 -0.106 0.03 0.49 0.1013 -0.02159

Std. Dev. 0.214557 0.116301 0.075259 0.125923 0.117516 0.010783 0.066012 0.07764 0.011003

Skewness 2.962934 -0.151924 1.52649 0.271817 0.496172 0.228547 -1.468586 0.621916 -1.000744

Kurtosis 17.24836 2.263165 4.169533 3.47462 3.063112 1.680218 5.864384 2.913885 4.901131

Jarque-Bera 77.60421 2.964502 49.87966 2.430415 4.61407 9.10354 78.54784 7.2545 35.56119

Prob 0 0.227126 0 0.296648 0.099556 0.010549 0 0.026589 0

Sum 34.00683 57.91141 7.381311 21.69724 13.5009 4.69 85.44 22.9614 2.857226

37
 Sum Sq. Dev. 5.109832 1.501368 0.628692 1.760076 1.532916 0.012906 0.483686 0.669097 0.013438

Obs 112 112 112 112 112 112 112 112 112

Source: E-Views 9 Output

As shown in the table 4.1 above, the mean value of bank deposit growth was around
30.36 percent for sampled commercial banks in Ethiopia. It can be noticed that the bank deposit
growth is between -3. and 1.66 percent. The minimum deposit growth is recorded by Wegagen
bank the year 2012 and the maximum deposit growth is recorded by NIB bank after its
establishment in 200. This means, commercial banks were achieved 24.3 percent average
deposit growth achieved from depositors for the period of 2000-2015.

Theoretically, a growth rate of 32.1% in deposits may be considered sufficient to increase

supply of loanable funds (Sylvester, 2011). The standard deviation among banks in terms of bank
deposit growth was 21.4 percent; this confirms that there were high variations of deposit growth
among commercial banks during the study period. Though the performances of deposit among
commercial banks conform to supply the loanable fund, the trend of deposit is increasing year to
year at increasing rate.

As shown in the result, there were higher credit risk the mean value of was 51.7 percent
the standard deviation was 11.6 percent, while 76.7 and 22.4 observed as maximum and
minimum values, respectively, exhibits higher dispersion larger than its mean value, this
implies that commercial bank loan disbursement is increasing for the study period. The mean
amount in credit risk is greater than the mean amount of the deposit collected. The result shows
the commercial banks credit risk is higher.

In the above table 4.1 the result of average growth of exchange rate is 6.59 percent. The minimum
and the maximum growth was .3 percent and 25.03 percent the growth is increasing from year to
year with the standard deviation of 7.5 percent which is a very low dispersion.

The average growth rate of government expenditure is 19.37 percent with minimum growth rate
negative 2.7 percent and the maximum growth rate of 49.5 percent. The result indicate the
government expenditure increases from year to year with an increasing rate. The dispersion of the
government expenditure growth is 12.59 percent which is moderate. The increase of the

38
government expenditure is related to the increase of the budget and the increase of capital
expenditure for different big government projects.

The average general inflation of the country over the sample period was recorded 12.05 percent.
The maximum inflation was recorded in the year 2008 value 36.4 percent and the minimum was
in the year 2002 value -10.6 percent. The rate of inflation dispersed which exhibits higher
dispersion larger than its average value over the periods under study towards its mean with
standard deviation of 11.75%. This clearly shows that there was a bit more variations in terms of
cost of living as it measured by inflation consumer price index.

The mean value of the bank deposit interest rate over the period under study was 4.2 percent with
the maximum and minimum values of 6.0 percent and 3.0 percent respectively. There was little
variation of interest rate towards its mean value over the periods under study with the
value of standard deviation 1.07 percent. This implies that the stability of deposit interest rate for
subsequent years under the study periods in a sense there is a control of minimum and maximum
deposit interest rate by the government body. So there was no competition between commercial
banks to attract the customers with a motive of return on deposit under the study period.

The average loan to deposit ratio of the studied commercial banks was 76.28 percent. The
maximum loan to deposit ratio of 87 percent was registered in the year 2005 and 2006 by Awash
International Bank. This indicates that, on average the commercial banks in Ethiopia have higher
amount of volatile deposits which are tied up with illiquid loans. On the other hand, the minimum
loan to deposit ratio of 49 percent was register in the year 2001 by NIB. The standard deviation
of 6% percent shows there was low dispersion of loan to deposit ratio from its mean value.

The mean growth rate of broad money supply by the government is 20.5 percent, the maximum
and the minimum growth rate of broad money supply was 39.21 percent and 10.13 percent. The
growth rate of dispersion is 7.7 percent which is moderate.

Profitability is the likelihood of a business earning the desired level of income within a specific
period of time under certain prevailing business conditions. Average return on asset of studied
banks for the period from 2000 to 2015 was 2.5 percent. The minimum return on asset of -2.1
percent was registered in the year 2002 by CBE and the maximum return on asset of 4.6
percent was registered on the year 2011 by Wegagen Bank. The standard deviation of 1.1 percent

39
reveals that there was very little dispersion of average return on asset of studied banks towards
their mean value.

4.2 Testing the Classical Linear Regression Model (CLRM) Assumptions

This study focuses on the relationship between banks deposit and the determining factors of bank
deposit. The researcher had used the econometric model of multiple regressions. The model
contains one dependent variable, eight independent variables, the constant term and the error term.
The ordinary least square (OLS) method is used to come up with the econometric results. There
are five assumptions made in relation to the classical linear regression model (CLRM).The
researcher has tested if there exist the violation of these assumptions. The method used to test these
assumptions by the researcher is described as follows:

The Assumption of Average Value of the Error is Zero

The first assumption required is that the average value of the errors is zero. In fact, if a constant
term is included in the regression equation, this assumption will never be violated. In our case the
model have constant term which is proved that the line did not pass through the origin and the first
assumption of CLRM is not violated. Therefore the variation in the dependent variable, deposit of
commercial banks, is explained by the independent variables.

The Assumption of Homoscedasticity

The test of heteroskedasticity is a test of the second assumption of OLS estimator that says the
variance of errors term is constant. The researcher uses Breusch Godfrey test (BG test) to test for
heteroskedasticity.

Ho: The assumption that there exists homoscedasticity

H1: There is no homoscedasticity (there is Heteroskedasticity)

Table 4.3 : The Heteroskedasticity test of the multiple regression

Heteroskedasticity Test: Breusch-Pagan-Godfrey

F-statistic 1.228693 Prob. F(8,103) 0.2899

Obs*R-squared 9.757276 Prob. Chi-Square(8) 0.2825
Scaled explained SS 12.47371 Prob. Chi-Square(8) 0.1313

40
Test Equation:
Dependent Variable: RESID^2
Method: Least Squares
Date: 06/02/17 Time: 06:31
Sample: 1 112
Included observations: 112

Variable Coefficient Std. Error t-Statistic Prob.

C 0.074461 0.036515 2.039190 0.0440

CRISK 0.011484 0.025282 0.454214 0.6506
EXG 0.009239 0.047380 0.194993 0.8458
GOVEXG 0.000288 0.027750 0.010385 0.9917
INF 0.003241 0.024453 0.132537 0.8948
INT 0.037114 0.261697 0.141820 0.8875
LIQ -0.089550 0.038927 -2.300482 0.0234
MSG -0.039225 0.067568 -0.580519 0.5628
ROA 0.301384 0.291570 1.033658 0.3037

R-squared 0.087119 Mean dependent var 0.014341

Adjusted R-squared 0.016215 S.D. dependent var 0.025047
S.E. of regression 0.024843 Akaike info criterion -4.475530
Sum squared resid 0.063569 Schwarz criterion -4.257079
Log likelihood 259.6297 Hannan-Quinn criter. -4.386897
F-statistic 1.228693 Durbin-Watson stat 1.875594
Prob(F-statistic) 0.289885

Source:EViews 9 output for heteroskedasticity

Based on the result displayed in the above table 4.3 the three different types of tests for
heteroskedasticity and all fails to reject the null hypothesis of homoscedasticity presence.
Therefore it can be concluded that the variance of error term is constant or the second
assumption of CLRM is not violated.

The Assumption of Autocorrelation

Covariance between the error terms overtime (or cross sectionally, for the type of data) is zero, It is assumed
that the errors are uncorrelated with one another. In other words, it is assumed that the errors are
uncorrelated with one another. If the errors are not uncorrelated with one another, it would be stated that
they are ‘autocorrelated’ or that they are ‘serially correlated’. The study uses Durbin-Watson test (DW test)

41
to test autocorrelation. The null hypothesis for this test is the error at the current time and the error at
previous time is independent of one another(there is no autocorrelation) and the alternative hypothesis
is that the error at the current time is dependent on the error of the previous time(there is evidence for the
presence of autocorrelation). Therefore if the null hypothesis is rejected then it is said that there is
an evidence for the presence of autocorrelation.

According to Brooks (2008), the DW test does not follow a standard statistical distribution such as a t, F,
or χ2. DW has 2 critical values: an upper critical value (dU) and a lower critical value (dL), and there is
also an intermediate region where the null hypothesis of no autocorrelation can neither be rejected nor
not rejected. The rejection, non-rejection, and inconclusive regions are shown on the number line
below

The null hypothesis is rejected and the existence of positive autocorrelation presumed if DW is less than
the lower critical value (dL); the null hypothesis is rejected and the existence of negative
autocorrelation presumed if DW is greater than 4 minus the lower critical value (4-dL); the null hypothesis
is not rejected and no significant residual autocorrelation is presumed if DW is between the upper critical
value (dU) and 4 minus the upper critical limits (4-dU) (Brooks 2008).

The study has eight explanatories variables (k) and 16 years period of time .So it has total of ninety
observations and as per the DW table in Appendix-II for 128 observations with eight explanatory
variables at 1% level of significance, the dL and dU values are 1.515 and 1.737, respectively
Accordingly, the value of 4-dU and 4-dL are 2.263 and 2.485, respectively. The DW value of this study
is 1.877707, (Appendix-II) which lies in the no evidence of autocorrelation region where the null
hypothesis of no autocorrelation do not be rejected. Therefore, given these result it can be concluded
that there is no evidence for the existence of autocorrelation.

The Assumption of Independent Variables are Non Stochastic

The assumption of Independent Variables are Non Stochastic OLS estimator is consistent and unbiased
in the presence of stochastic regressors, provided that the regressors are not correlated with the error term
of the estimation equation. However, if one or more of the explanatory variables is contemporaneously
correlated with the disturbance term, the OLS estimator will not even be consistent. The regressors

42
(independent variables) are not correlated with error term of the estimations equation is the assumption
that is violated if the constant term does not exist.

This study has a constant term in its model, therefore it can be concluded that it protected from the violation
of assumption number one and four

The Assumption of Disturbances are Normally Distributed

Test for non-normality test

Ho: The residuals are normally distributed

H1: The residuals are not normally distributed

Table 4.2 Test for non-normality test

16
Series: Standardized Residuals
14 Sample 2000 2015
Observations 112
12
Mean -1.97e-18
10
Median -0.003484
Maximum 0.325585
8
Minimum -0.247535
6 Std. Dev. 0.107554
Skewness 0.309479
4 Kurtosis 3.297492

2 Jarque-Bera 2.200851
Probability 0.332729
0
-0.2 -0.1 0.0 0.1 0.2 0.3

Source: EViews9 output for normality test

A Jarque-Bera normality test has been used for normality test. The non-normality test table 4.2
indicates that the kurtosis value is around 3.29 which are related to 3. Jarque-Bera’s also
indicates that the residuals are normally distributed having the value 2.20 which is greater than
0.05. The p-value given at the bottom of the normality test screen should be bigger than 0.05 to
fail to reject the null hypothesis at the 5% level (Chris, 2008) In this case the p-value
0.33 which is greater than 0.05 had failed to reject the null hypothesis of normality presence.

Test for Multicollinearity

The results of correlation tests are depicted by a correlation matrix table:

Table 4.4 : Correlation matrixes

43
Covariance Analysis: Ordinary
Date: 06/02/17 Time: 06:24
Sample: 2000 2015
Included observations: 112

Correlation
Probability CRISK EXG GOVEXG INF INT LIQ MSG ROA
CRISK 1.000000
-----

EXG -0.488979 1.000000

0.0000 -----

GOVEXG -0.251749 0.347667 1.000000

0.0074 0.0002 -----

INF -0.255142 0.211565 0.461064 1.000000

0.0066 0.0251 0.0000 -----

INT -0.231785 0.340560 -0.089580 0.085135 1.000000

0.0139 0.0002 0.3476 0.3721 -----

LIQ -0.031754 -0.063013 0.154082 0.034788 -0.224022 1.000000

0.7396 0.5092 0.1048 0.7158 0.0176 -----

MSG -0.546821 0.704361 0.636056 0.483095 0.323503 0.099231 1.000000

0.0000 0.0000 0.0000 0.0000 0.0005 0.2979 -----

ROA -0.164706 0.305185 0.514563 0.460505 0.110963 -0.083467 0.579116 1.000000

0.0827 0.0011 0.0000 0.0000 0.2441 0.3816 0.0000 -----

Source: EViews 9 output for Correlation matrixes

The above table reports the correlation matrix of the variables of the estimation model.
The correlation matrix also shows that the pair-wise correlations between explanatory variables
are not quite high, indicating that multicollinearity is not a serious problem.

44
4.3 Fixed Effect Versus Random Effect Model
The collected data were estimated based on panel model, which includes cross sectional and time
series observations for seven commercial banks that ranges over 16 years. The estimation
technique was carried out on the basis of balanced panel data regression. A balanced panel data
have equal time series observations for the study entities. In this study, the cross sectional units
are seven and the time series (period taken for the study) is 16 years. The commonly used models
for panel data are fixed effects and random effects a models. The random effects model is more
appropriate when the entities in the sample can be thought of as having been randomly selected
from the population while fixed effect model is more appropriate when the entities in the sample
effectively constitutes the entire population (Brooks, 2008). According to Gujarati (2004), if
T (the number of time series data) is large and N (the number of cross-sectional units) is
small, there is likely to be little difference in the values of the parameters estimated by
fixed effect model/FEM and random effect model/REM. Hence the choice here is based on
computational convenience. On this score, FEM may be preferable. Since the number of time
series (i.e. 16 year) is greater than the number of cross-sectional units (i.e. 7 commercial banks),
FEM is preferable in this case.

According to Brooks (2008); Verbeek (2004) and Wooldridge (2004), it is often said that the
REM is more appropriate when the entities in the sample can be thought of as having been
randomly selected from the population, but a FEM is more plausible when the entities in
the sample effectively constitute the entire population/sample frame. Hence, the sample for
this study was not selected randomly and equals to the sample frame FEM is appropriate.

4.4 Results of Regression Analysis

This section discusses the regression results of fixed effect model that determines deposit
mobilization in commercial banks of Ethiopia. This regression analysis is based on the data
collected from National Bank of Ethiopia and MOFED from the year 2000 to 2015. The
relationship between one dependent variable and eight independent variables is regressed using
econometric software called EViews 9 Thus, the model used to examine statistically significant
determinants of commercial banks deposit measured by

45
𝐵𝐷𝐺𝑖𝑡 = 𝛼𝑖 + 𝛽1 ∗ 𝑅𝑂𝐴𝑖𝑡 + 𝛽2 ∗ 𝐿𝐼𝑄𝑖𝑡 + 𝛽3 ∗ 𝐶𝐴𝑃𝑖𝑡 + 𝛽4 ∗ 𝐿&𝐴𝐴𝑖𝑡 + 𝛽5 ∗ 𝐼𝑁𝐹𝑖𝑡 + 𝛽𝑖𝑡 ∗ 𝐺𝐷𝑃𝑖𝑡
+ 𝛽𝑖𝑡 ∗ 𝐺𝐺𝑂𝑉 𝐸𝑋𝑖𝑡 + 𝛽𝑖𝑡 ∗ 𝐵𝑂𝑃𝑖𝑡 … … … … … … … … … … … … 𝑒𝑞(1)

Accordingly, Table 4.5 below presents the result of fixed effect regression model that
examines the impact of explanatory variables on bank deposit growth. Hence, DEPG is
dependent variable whereas Inflation(INF), Interest Rate(INT), Money Supply(MSG),
Government Expenditure(GOVEXG), Exchange Rate(EXG), Bank Profitability(ROA), Bank
Liquidity(LIQ) and Loan to Asset Ratio(CRISK)

Table 4.5-Results of fixed effect regression model

Dependent Variable: DEPG

Method: Panel Least Squares
Date: 06/02/17 Time: 06:33
Sample: 2000 2015
Periods included: 16
Cross-sections included: 7
Total panel (balanced) observations: 112

Variable Coefficient Std. Error t-Statistic Prob.

CRISK* 0.520230 0.166480 3.124885 0.0023*

EXG* 0.403632 0.225250 1.791929 0.0763**
GOVEXG** -0.130463 0.129678 -1.006056 0.3169
INF** -0.028525 0.113663 -0.250957 0.8024
INT** 0.091312 1.245806 0.073296 0.9417
LIQ* -0.892431 0.254464 -3.507108 0.0007*
MSG* -0.692737 0.339808 -2.038615 0.0442*
ROA* 2.578504 1.474057 1.749257 0.0834**
C 0.780484 0.227741 3.427072 0.0009

Effects Specification

Cross-section fixed (dummy variables)

R-squared 0.582041 Mean dependent var 0.294152

Adjusted R-squared 0.521717 S.D. dependent var 0.166365
S.E. of regression 0.115054 Akaike info criterion -1.362755
Sum squared resid 1.284038 Schwarz criterion -0.998671
Log likelihood 91.31429 Hannan-Quinn criter. -1.215035
F-statistic 9.648595 Durbin-Watson stat 1.877707

46
Prob(F-statistic) 0.000000

Note: * significant at 1%, and ** significant at 5%

H* accept null and H** reject null hypothesis
Source Eview 9 Result for Regression analysis

Based on the regression result, the relationship between the variables included in the model can,
therefore, be represented as follows;

4.4.1 Interpretation of R-squared

As shown in Table 4.5, an R-squared coefficient of 0.582041 obtained from the estimated model
revealing that 58.20 percent of variation in deposit growth (DEPG) is explained by the selected
explanatory of Inflation(INF), Interest Rate(INT), Money Supply(MSG), Government
Expenditure(GOVEXG), Exchange Rate(EXG), Bank Profitability(ROA), Bank Liquidity(LIQ)
and Loan to Asset Ratio(CRISK)

4.4.2. Interpretation of Adjusted R-squared

An adjusted R-squared value, which takes into account the loss of degrees of freedom
associated with adding extra variables were inferred to see the explanatory powers of the models.
In other words, the adjusted R-squared shows a very good levels, which mean that nearly
52.17 percent of the volatilities in deposit growth are explained by the volatilities of
independent variables included in the equation. Therefore, an adjusted R square having value of
0.521717 shows that 52.17 percent of dependent variable is explained by the independent
variables included in the model.

4.4.3. Interpretation Results of the Regressors Values

A. Bank Credit Risk and Commercial Bank Deposit

Bank credit risk was measured as a ratio of total deposit to total asset which has a significant
positive impact on commercial bank deposit. The coefficient of this relationship is 0.520230
indicates that holding other things constant one unit increase in commercial bank deposit resulted
0.520230 unit increase the credit risk of the commercial bank. The result of the study is consistent
with the finding of (Osie, 2015)

47
B. Exchange Rate and Commercial Bank Deposit

Exchange Rate was found to have a positive relationship with commercial bank deposit
growth and the relationship significant according to the model in Table 4.5 above. This
could be the attribution of remittance from Diasporas to families in home-country is increasing.
According to NBE report, in Ethiopia remittance from Diaspora is one of the most beneficial
sources to offset foreign trade deficit of the foreign currency for the country. It has positive impact
on individual’s income and savings (Shemisu, 2014). The correlation coefficient for deposit rates
is 0.403632 indicating that ceteris paribus a 1unit increase in exchange rate leads to a 0.403632
increase in commercial bank deposit deposits. The significant relation was consistent with the
findings of (Jembere 2014), Hibret (2015) and Girang(2015).

C. Government Expenditure and Commercial Bank Deposit

The other macroeconomic variable included in this study was Government Expenditure.
According to the regression result of this study, Government Expenditure has negative and
statistically insignificant impact on deposit of commercial banks. The negative relation of the
Government Expenditure and Commercial Bank’s deposit is not consistence with our expectation.
Thus, the hypothesis: Government Expenditure has positively and significant effect on commercial
bank deposit should be fail to accept.

One of the depositor of commercial banks are government organization so this organization will
withdraw their deposit if their expenditure will increases and the commercial banks will be
influenced by holding higher amount of money to meet the request of the customer withdrawal.

D. Deposit Rate and Commercial Bank’s Deposit

Interest rate on deposit as a fraction of total deposit is taken as a measure for interest rate on
deposit. It was hypothesized that deposit rate has positive and insignificant impact on bank’s
deposit. The result of the regression shows that, interest rate on deposit has positive and
insignificant impact on commercial banks deposit.

The positive relation was consistent with the findings of Hibret and Shemsu (2015) on commercial
Bank of Ethiopia and (Andebet, 2016) on Private Commercial Banks.

48
E. Inflation and Commercial Bank Deposit

The other macroeconomic variable included in this study was Inflation. According to the
regression result of this study, Inflation has negative and statistically insignificant impact on
deposit of commercial banks. The negative relation of the Government Expenditure and
Commercial Bank’s deposit is not consistence with our expectation.

The coefficient of this relationship of 0.028525 indicates that holding other things constant, a unit
increase in inflation rate will lead to an 2.8-unit decrease in bank deposit growth at an
insignificant level of more than 10 percent. This implies that persistent inflation has a
negative insignificant effect on growth of bank deposit. So higher inflation induces savers
to save less, perhaps households get stable price prediction from deposit. This result is
consistent with the precautionary motive, suggesting that increased macroeconomic uncertainty
induces people to save a proportion of their incomes. This is particularly true for households in
developing countries such as Ethiopia whose income prospects are more uncertain than their
counterparts in developed countries. The negative relation was consistent with the findings of
(Hibret 2015) on commercial Bank of Ethiopia on the long run and (Andebet, 2016) on Private
Commercial Banks. Thus, the hypothesis: population growth has positively and significant impact
on deposit should be rejected.

F Bank Liquidity and Commercial Bank Deposit.

In this study, Ratio of total loan and advance to total deposit is used as a proxy bank liquidity. The
ratio of loan and advances to deposits reflects the quantity or proportion of the customers' deposits
that has been given out in form of loans. When the ratio is high it means that large
portion deposit is given out in the form of loan. The result in this study found the at Bank liquidity
is negatively and statistically significant impact on commercial banks deposit at 1% significant
level. According to the regression result, a one unit change in the Bank’s liquidity, keeping other
things constant, has resulted in .892431 unit change on the level of deposit of commercial banks
in opposite direction. In other word, it means that the depositors are concerned with liquidity
position which determines a bank's ability to respond to the withdrawal needs which are normally
on demand or on a short notice as the case may be.

49
This significant impact relation Bank’s liquidity and deposit is consistent with the funding
of Jemeber (2012) and Bahredin (2016).

G. Money Supply and Commercial Bank Deposit

The other macroeconomic variable included in this study was Money Supply. According to the
regression result of this study, Money Supply has negatively and statistically significant impact on
deposit of commercial banks. The negative relation of the Money Supply and Commercial Bank’s
deposit is not consistence with our expectation.

The coefficient of this relationship of 0.692737 indicates that holding other things constant, a unit
increase in Money Supply will lead to an 0.692737-unit decrease in bank deposit growth at a
significant level. This significant impact relation of Commercial Bank Deposit and Money
Supply is consistent with the funding of (Jemebere2012), (Hibret, 2015) and (Girang, 2015).

However, according to WAMA (West African Monetary Agency), Excess money supply,
whether created though the direct or indirect channels, influences economic activity (growth)
and may provide downside risks on macroeconomic stability, impacting negatively on inflation,
interest rates and exchange rate

H. Profitability and Commercial Bank’s Deposit

Profitability in this study is measured by the return on asset (ROA). The regression result
shows that, profitability has positive and statistically significant impact on Bank’s deposit.
The positive sign of the coefficient indicates a directly relationship between profitability and
banks deposit. According to the regression result, a one unit change in the Bank’s Profitability,
keeping other things constant, has resulted in 2.578504 unit change on the level of deposit of
commercial banks in.

50
 Chapter Five

5. Conclusions and Recommendations

5.1 Summery
The study established the factors that determine Commercial Bank Deposit in Ethiopia
banking sector during the period from 2000-2015. Findings indicated that Commercial Bank
Deposit bank deposit growth are influenced by Inflation(INF), Interest Rate(INT), Money
Supply(MSG), Government Expenditure(GOVEXG), Exchange Rate(EXG), Bank
Profitability(ROA), Bank Liquidity(LIQ) and Loan to Asset Ratio(CRISK)

This chapter outlines the Conclusion and Recommendation of the study in accordance with the
study results.

5.2 Conclusions
This section presents the conclusion drawn from findings of the study.

Nowadays, finding deposit is becoming a challenging job for the banks in Ethiopia compatible
with the growing need of loans. Owing to the growing need for finances from new and existing
businesses of the country coupled with the banks own desire to make profits from those finances,
deposit mobilization is becoming the critical success factor for banks. The main objective of this
study was to identify the macroeconomic and bank specific determinants of deposit of Ethiopian
commercial banks. To comply with the objectives of the study, three bank specific and five
macroeconomic variables were used.

The bank specific variables includes; Bank Credit Risk, Bank Liquidity and Bank Profitability,
and the macroeconomic variables were Inflation, Deposit Rate ,Government Expenditure, Money
Supply and Exchange Rate. The study was used panel data for the sample of seven commercial
banks in Ethiopia which had sixteen years of banking service over the period 2000 to 2015.
The bank specific data were mainly collected from annual audited financial reports of the
respective sample banks and the macroeconomic data were collected from NBE and Central
Statistical Authority (CSA). Data was presented and analyzed by using descriptive statistics,
correlation analysis and balanced fixed effect regression analysis to identify the determinants

51
of deposit of Ethiopian commercial banks. Before performing OLS regression the model was
tested for the classical linear regression model assumptions. From eight explanatory variables,
60% of them proved to be statistically significant.

 The result of this study showed that, among the bank specific variables Bank Credit
Risk is positively and statically significant to the growth of commercial bank deposit.
 Concerning to deposit interest rate, it implies that deposit interest rate is not a major
factor in explaining the commercial banks deposit growth in Ethiopia.
 In connection with liquidity, the study indicated that the bank liquidity have negative
and statically significant effect on commercial bank deposit. Deposit growth decreases
when the bank liquidity increases or reduces liquidity risk. Liquidity arises mainly from
the type of deposit where commercial banks were collected. Most of the deposit of the
commercial banks are either individual or demand deposits and this deposits are withdrawn
by the depositor at any time so the commercial banks should have adequate money to meet
the withdrawal of the customer.
 In regard to profitability measured by Return on Asset has a significant positive impact
on commercial bank deposits growth. Higher bank profits would tend to signal increased
bank soundness, which could make it easier for these banks to attract deposits. The
depositor confidence will increase if the bank is profitable and have adequate asset return.
 The deposit growth reacts negatively towards the increase in inflation. The relationship is
similar to the expected sign. Since the county has experienced double digits inflation in the
study period that results in higher costs of doing business; which leads to decrease in
deposit mobilized by commercial banks
 The other micro level determinant of commercial bank deposit is money supply which have
a negative significant impact on the commercial bank deposit. When the government
supplies excess money to the economy the economic growth will be affected negatively by
increasing the inflation, exchange rate etc. and also the commercial bank deposit will
decrease.

52
5.3 Recommendation
This study was intended to identify the empirical determinants of deposit of Ethiopian commercial
banks; and hence on the basis of the findings of the study, the following recommendations
are drown.

 It is well known that deposits are the critical resource for the banks to stay profitable, by
the same analogy commercial Banks major activity is mobilizing deposit. Therefore the
bank should give due emphasis to its deposit mobilizing tasks by considering mobilizing
deposit is a way to survival.
 Commercial banks are highly sensitive organization open to public scrutiny. As such, they
must continuously ensure their profitability, which is essential for their deposit growth
and viability as also for infusing public confidence. Thus, banks have assumed
greater responsibilities in mobilizing domestic resources for financing the priorities of
the economy and commercial banks should have managed liquidity that contributes some
for reduction of deposit growth and NBE shall also keep its liquidity requirement in the
future to increase the deposit growth of the banks.
 A lack of liquidity can put a quick and final end to a financial institution’s efforts to
mobilize deposits and, in the worst case, can cause it to collapse or close. Deposit
mobilization requires clients to trust that they will always be able to access their savings
when they want or need them. As the study point out, commercial bank required to
have enough liquid asset to meet the demand for cash outflows, so as to generate
and sustain public confidence of the depositors.

 The government should decrease its supply of broad money to the economy. Since the
excess supply of money will have a negative impact to the growth of the country and the
growth of the commercial bank deposit.

 Since government is also one of the depositor in commercial bank deposit the growth of
the government expenditure have a negative impact on the commercial bank deposit. So
commercial banks should give to increase their time deposit instead of individual and
demand deposit.

53
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iv
Appendices
Appendix I
Trend of Commercial Bank Deposit

AIB BOA CBE DB NIB UB WB

2000 248 98 2775 220 78 30 176
2001 225 127 3959 265 79 43 167
2002 322 365 5668 408 162 105 163
2003 494 434 10458 511 204 118 259
2004 553 524 12685 647 269 243 314
2005 633 319 6166 631 366 349 558
2006 692 309 14551 667 342 307 486
2007 608 589 16456 810 417 617 993
2008 935 621.86 8965 1142.773 613 820 958
2009 1415 1002.699 7871 1261.167 1428 1155 1022
2010 2382 1355.976 6328 3029.082 2135 1527 2161
2011 1776.726 1573.298 16303 3272.061 1960 2181 2221
2012 2023.72 1637.031 12013 3528.016 2146 2013 2212.338
2013 2469 1206.635 20587 3824.949 1750 1597 1769
2014 2633.25 1735.031 20154 4060.79 958.95 2675.6 1373.21
2015 2123.69 5097.217 8724 3302.026 1010.498 2111.56 1084.22

v
Appendix II

vi
Appendix III
Raw Data Associated with regression analysis

Bank YEAR DEPG INF INT MSG EXG GOVEXG LIQ CRISK ROA

AIB 2000 0.368056 0.054 0.06 0.1432 0.084076 -0.02355 0.78 0.588933 0.0232

AIB 2001 0.270728 -0.003 0.06 0.1054 0.022757 0.129036 0.83 0.618523 0.013205

AIB 2002 0.238349 -0.106 0.03 0.1144 0.025769 -0.02732 0.84 0.572842 0.011887

AIB 2003 0.251613 0.109 0.03 0.1013 0.004495 0.145825 0.83 0.571021 0.011142

AIB 2004 0.282646 0.073 0.03 0.1517 0.004522 0.140917 0.84 0.534463 0.016399

AIB 2005 0.299397 0.061 0.03 0.1603 0.003724 0.191074 0.87 0.579515 0.019019

AIB 2006 0.323196 0.106 0.03 0.1533 0.003375 0.071388 0.87 0.633717 0.030116

AIB 2007 0.21231 0.158 0.03 0.2215 0.013051 0.495741 0.81 0.655875 0.042158

AIB 2008 0.243573 0.253 0.04 0.2035 0.051147 0.231467 0.80 0.56805 0.033064

AIB 2009 0.282171 0.364 0.04 0.2101 0.12726 0.234716 0.77 0.422388 0.025438

AIB 2010 0.230552 0.028 0.04 0.2657 0.237071 0.315367 0.77 0.395972 0.034521

AIB 2011 0.268261 0.181 0.05 0.3921 0.250324 0.32596 0.77 0.394075 0.039976

AIB 2012 0.188533 0.341 0.05 0.3028 0.070469 0.237203 0.77 0.461138 0.035732

AIB 2013 0.362994 0.135 0.05 0.2424 0.054546 0.20492 0.84 0.518877 0.037916

AIB 2014 0.34971 0.0737 0.05 0.2653 0.048371 0.242891 0.75 0.458158 0.035428

AIB 2015 0.231411 0.101 0.05 0.2472 0.053516 0.18397 0.78 0.522926 0.029402

BOA 2000 0.57657 0.054 0.06 0.1432 0.084076 -0.02355 0.67 0.727019 0.0217

BOA 2001 0.350622 -0.003 0.06 0.1054 0.022757 0.129036 0.73 0.766741 0.023544

BOA 2002 0.396313 -0.106 0.03 0.1144 0.025769 -0.02732 0.80 0.585814 -0.00196

BOA 2003 0.183718 0.109 0.03 0.1013 0.004495 0.145825 0.80 0.606902 0.004848

vii
BOA 2004 0.184944 0.073 0.03 0.1517 0.004522 0.140917 0.80 0.60694 0.026045

BOA 2005 0.276078 0.061 0.03 0.1603 0.003724 0.191074 0.79 0.599903 0.033498

BOA 2006 0.338045 0.106 0.03 0.1533 0.003375 0.071388 0.77 0.692661 0.034758

BOA 2007 0.249885 0.158 0.03 0.2215 0.013051 0.495741 0.80 0.67874 0.021509

BOA 2008 0.278207 0.253 0.04 0.2035 0.051147 0.231467 0.81 0.659764 0.003803

BOA 2009 0.292122 0.364 0.04 0.2101 0.12726 0.234716 0.82 0.494642 0.020615

BOA 2010 0.143525 0.028 0.04 0.2657 0.237071 0.315367 0.81 0.502146 0.023916

BOA 2011 0.182137 0.181 0.05 0.3921 0.250324 0.32596 0.84 0.455579 0.02669

BOA 2012 0.114568 0.341 0.05 0.3028 0.070469 0.237203 0.82 0.473014 0.02788

BOA 2013 0.254763 0.135 0.05 0.2424 0.054546 0.20492 0.84 0.464202 0.023552

BOA 2014 0.070621 0.0737 0.05 0.2653 0.048371 0.242891 0.81 0.448815 0.041804

BOA 2015 0.222296 0.101 0.05 0.2472 0.053516 0.18397 0.82 0.432062 0.023392

CBE 2000 0.140835 0.054 0.06 0.1432 0.084076 -0.02355 0.80 0.521838 0.0143

CBE 2001 0.11174 -0.003 0.06 0.1054 0.022757 0.129036 0.81 0.495975 0.00092

CBE 2002 0.060615 -0.106 0.03 0.1144 0.025769 -0.02732 0.83 0.440305 -0.02159

CBE 2003 0.066487 0.109 0.03 0.1013 0.004495 0.145825 0.82 0.35343 0.023519

CBE 2004 0.140117 0.073 0.03 0.1517 0.004522 0.140917 0.80 0.297587 0.012803

CBE 2005 0.125871 0.061 0.03 0.1603 0.003724 0.191074 0.76 0.2881 0.01871

CBE 2006 0.115071 0.106 0.03 0.1533 0.003375 0.071388 0.79 0.25931 0.02324

CBE 2007 0.162165 0.158 0.03 0.2215 0.013051 0.495741 0.76 0.224572 0.021789

CBE 2008 0.1448 0.253 0.04 0.2035 0.051147 0.231467 0.75 0.343919 0.028997

CBE 2009 0.155608 0.364 0.04 0.2101 0.12726 0.234716 0.73 0.351888 0.034982

CBE 2010 0.256548 0.028 0.04 0.2657 0.237071 0.315367 0.74 0.323736 0.029462

viii
CBE 2011 0.21702 0.181 0.05 0.3921 0.250324 0.32596 0.74 0.314891 0.030384

CBE 2012 0.374828 0.341 0.05 0.3028 0.070469 0.237203 0.73 0.392371 0.039798

CBE 2013 0.307092 0.135 0.05 0.2424 0.054546 0.20492 0.77 0.362981 0.034317

CBE 2014 0.261763 0.0737 0.05 0.2653 0.048371 0.242891 0.80 0.362975 0.030555

CBE 2015 0.250386 0.101 0.05 0.2472 0.053516 0.18397 0.79 0.354075 0.026949

DB 2000 0.35853 0.054 0.06 0.1432 0.084076 -0.02355 0.70 0.616185 0.0065

DB 2001 0.464463 -0.003 0.06 0.1054 0.022757 0.129036 0.81 0.649091 0.021374

DB 2002 0.344244 -0.106 0.03 0.1144 0.025769 -0.02732 0.80 0.58681 0.018561

DB 2003 0.361041 0.109 0.03 0.1013 0.004495 0.145825 0.81 0.636364 0.015531

DB 2004 0.343615 0.073 0.03 0.1517 0.004522 0.140917 0.82 0.631304 0.023993

DB 2005 0.300735 0.061 0.03 0.1603 0.003724 0.191074 0.83 0.652632 0.02329

DB 2006 0.303212 0.106 0.03 0.1533 0.003375 0.071388 0.81 0.695996 0.033392

DB 2007 0.316631 0.158 0.03 0.2215 0.013051 0.495741 0.80 0.660156 0.035326

DB 2008 0.265583 0.253 0.04 0.2035 0.051147 0.231467 0.78 0.559743 0.034472

DB 2009 0.288199 0.364 0.04 0.2101 0.12726 0.234716 0.82 0.457382 0.028458

DB 2010 0.280126 0.028 0.04 0.2657 0.237071 0.315367 0.82 0.408701 0.029344

DB 2011 0.167176 0.181 0.05 0.3921 0.250324 0.32596 0.81 0.424122 0.033366

DB 2012 0.187906 0.341 0.05 0.3028 0.070469 0.237203 0.80 0.463687 0.040523

DB 2013 0.126902 0.135 0.05 0.2424 0.054546 0.20492 0.80 0.448789 0.032564

DB 2014 0.11545 0.0737 0.05 0.2653 0.048371 0.242891 0.80 0.429357 0.034164

DB 2015 0.120638 0.101 0.05 0.2472 0.053516 0.18397 0.80 0.465476 0.031209

NIB 2000 0.59158 0.054 0.06 0.1432 0.084076 -0.02355 0.49 0.373418 0.0274

NIB 2001 0.65063 -0.003 0.06 0.1054 0.022757 0.129036 0.62 0.625 0.028011

ix
NIB 2002 0.658654 -0.106 0.03 0.1144 0.025769 -0.02732 0.65 0.606742 0.015152

NIB 2003 0.704348 0.109 0.03 0.1013 0.004495 0.145825 0.66 0.621469 0.012771

NIB 2004 0.414966 0.073 0.03 0.1517 0.004522 0.140917 0.67 0.630313 0.012248

NIB 2005 0.469952 0.061 0.03 0.1603 0.003724 0.191074 0.70 0.654157 0.035489

NIB 2006 0.44496 0.106 0.03 0.1533 0.003375 0.071388 0.72 0.727676 0.032934

NIB 2007 0.294077 0.158 0.03 0.2215 0.013051 0.495741 0.72 0.69697 0.033845

NIB 2008 0.314529 0.253 0.04 0.2035 0.051147 0.231467 0.68 0.579178 0.033499

NIB 2009 0.334413 0.364 0.04 0.2101 0.12726 0.234716 0.68 0.461827 0.023791

NIB 2010 0.252124 0.028 0.04 0.2657 0.237071 0.315367 0.69 0.426394 0.032992

NIB 2011 0.249576 0.181 0.05 0.3921 0.250324 0.32596 0.72 0.389061 0.034063

NIB 2012 0.132054 0.341 0.05 0.3028 0.070469 0.237203 0.71 0.448163 0.036093

NIB 2013 0.139945 0.135 0.05 0.2424 0.054546 0.20492 0.73 0.496774 0.022808

NIB 2014 0.190577 0.0737 0.05 0.2653 0.048371 0.242891 0.74 0.503173 0.018145

NIB 2015 0.233592 0.101 0.05 0.2472 0.053516 0.18397 0.74 0.520065 0.021444

UNB 2000 1.054054 0.054 0.06 0.1432 0.084076 -0.02355 0.53 0.615385 0.0274

UNB 2001 0.697368 -0.003 0.06 0.1054 0.022757 0.129036 0.60 0.626168 0.023364

UNB 2002 0.465116 -0.106 0.03 0.1144 0.025769 -0.02732 0.60 0.519108 0.012739

UNB 2003 0.518519 0.109 0.03 0.1013 0.004495 0.145825 0.61 0.618337 0.010661

UNB 2004 0.51306 0.073 0.03 0.1517 0.004522 0.140917 0.79 0.569733 0.010386

UNB 2005 0.62594 0.061 0.03 0.1603 0.003724 0.191074 0.80 0.552656 0.028891

UNB 2006 0.53178 0.106 0.03 0.1533 0.003375 0.071388 0.76 0.627892 0.027517

UNB 2007 0.263115 0.158 0.03 0.2215 0.013051 0.495741 0.70 0.6459 0.029317

UNB 2008 0.585334 0.253 0.04 0.2035 0.051147 0.231467 0.75 0.572308 0.028

x
UNB 2009 0.480147 0.364 0.04 0.2101 0.12726 0.234716 0.77 0.462597 0.020206

UNB 2010 0.306692 0.028 0.04 0.2657 0.237071 0.315367 0.80 0.443351 0.029512

UNB 2011 0.28381 0.181 0.05 0.3921 0.250324 0.32596 0.79 0.424152 0.030028

UNB 2012 0.114078 0.341 0.05 0.3028 0.070469 0.237203 0.77 0.464891 0.033914

UNB 2013 0.193104 0.135 0.05 0.2424 0.054546 0.20492 0.81 0.472139 0.021447

UNB 2014 0.2041 0.0737 0.05 0.2653 0.048371 0.242891 0.75 0.426866 0.016694

UNB 2015 0.325547 0.101 0.05 0.2472 0.053516 0.18397 0.82 0.477693 0.019589

WB 2000 0.462745 0.054 0.06 0.1432 0.084076 -0.02355 0.73 0.509728 0.0068

WB 2001 0.203753 -0.003 0.06 0.1054 0.022757 0.129036 0.77 0.590051 0.010939

WB 2002 0.146993 -0.106 0.03 0.1144 0.025769 -0.02732 0.80 0.628483 0.009764

WB 2003 0.36699 0.109 0.03 0.1013 0.004495 0.145825 0.79 0.642295 0.014332

WB 2004 0.244318 0.073 0.03 0.1517 0.004522 0.140917 0.77 0.647368 0.031543

WB 2005 0.47032 0.061 0.03 0.1603 0.003724 0.191074 0.80 0.62005 0.034833

WB 2006 0.380435 0.106 0.03 0.1533 0.003375 0.071388 0.79 0.705179 0.036645

WB 2007 0.532058 0.158 0.03 0.2215 0.013051 0.495741 0.79 0.619253 0.039031

WB 2008 0.08884 0.253 0.04 0.2035 0.051147 0.231467 0.72 0.56897 0.036555

WB 2009 0.256912 0.364 0.04 0.2101 0.12726 0.234716 0.73 0.412661 0.039165

WB 2010 0.052307 0.028 0.04 0.2657 0.237071 0.315367 0.68 0.43086 0.041068

WB 2011 0.18266 0.181 0.05 0.3921 0.250324 0.32596 0.74 0.360997 0.046801

WB 2012 -0.03341 0.341 0.05 0.3028 0.070469 0.237203 0.69 0.42718 0.040956

WB 2013 0.311393 0.135 0.05 0.2424 0.054546 0.20492 0.73 0.451222 0.036604

WB 2014 0.110317 0.0737 0.05 0.2653 0.048371 0.242891 0.74 0.409552 0.028193

WB 2015 0.177362 0.101 0.05 0.2472 0.053516 0.18397 0.72 0.442838 0.028248

xi
xii