Macroeconomic Sector-specific And Institutional Determinants Of Banking Sector Development In Ethiopia

This paper aims at investigating the macroeconomic, sector-specific and institutional determinants of banking sector development in Ethiopia using fixed effect model. Using yearly quantitative panel data from 2014 to 2018, the study found real GDP growth rate has insignificant effects on both banks private sector credit to GDP and banking stability. The regression result shows that inflation has a positive significant effect on private sector credit, and negative relationship with the banking soundness. Further, trade openness, reserve requirement and rule of law index have found significant but negative effect on private sector credit, and significant and positive influence on banking soundness. It is therefore recommended that government of Ethiopia ensures maintain low inflationary and high economic growth in order to stimulate financial development. Moreover, national bank of Ethiopia should consider adjusting the cash reserve ratio of banks downwards.

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