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Determinants of financial development in Ethiopia: ARDL approach

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  • Teshager Mazengia Asratie
  • David McMillan

Abstract

Sustainable economic growth requires financial sector development. However, financial development is low in Ethiopia. Hence, the main objective of the study was to examine determinants of financial development in Ethiopia. Annual data from 1980 to 2019 was used and examined by ARDL estimation technique. Private sector credit and money supply as percentage of GDP were used as dependent variables. Independent variables include external debt, reserve requirement, real exchange rate, lending interest rate, inflation, political freedom index, trade openness and economic growth. Broad money supply model is positively affected by political freedom index, economic growth and trade openness both in the short run and long run. While it is negatively affected by interest rate and reserve requirement. However, real exchange rate has negative effect in the long run and insignificant effect in the short run. On the other hand, credit to private sector model is positively affected by inflation, and political freedom, economic growth and trade openness. While it is negatively affected by external debt, reserve requirement and lending interest rate. Error correction estimation result of credit to private sector model shows the adjustment coefficient is −0.263 and statistically significant at 5% level of significance, which means short run deviation from long run equilibrium is adjusted at a rate of 26.3%. The adjustment coefficient for broad money supply model is −0.254. The study recommends that the government needs to improve trade and the quality of factors of production, reduce reserve requirement, reducing interest rate on lending, political.

Suggested Citation

  • Teshager Mazengia Asratie & David McMillan, 2021. "Determinants of financial development in Ethiopia: ARDL approach," Cogent Economics & Finance, Taylor & Francis Journals, vol. 9(1), pages 1963063-196, January.
    • Handle: RePEc:taf:oaefxx:v:9:y:2021:i:1:p:1963063
    DOI: 10.1080/23322039.2021.1963063
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    Citations

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    Cited by:

    1. Muhammad Suhail Saleem & Asad Abbas & Dr Muhammad Ramzan Sheikh & Sana Sultan, 2024. "Financial Development in the SAARC Region: Identifying Influential Factors," Bulletin of Business and Economics (BBE), Research Foundation for Humanity (RFH), vol. 13(2), pages 513-525.
    2. Edosa Getachew & Zoltan Lakner & Goshu Desalegn & Anita Tangl & Anita Boros, 2024. "Sustainable Financing for Renewable Energy: Examining the Impact of Sectoral Economy on Renewable Energy Consumption," Economies, MDPI, vol. 12(6), pages 1-16, May.
    3. Bayiley, Yitbarek Takele & Belay, Hibret, 2021. "Determinants of Commercial Bank Deposit Growth in Ethiopia," Ethiopian Journal of Economics, Ethiopian Economics Association, vol. 30(02), October.
    4. James Obilikwu, 2024. "Financial Technologies (Fintech) and Financial Development in Nigeria," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 8(6), pages 3111-3123, June.
    5. Samuel Godadaw Ayinaddis & Birhan Ambachew Taye & Bantie Getnet Yirsaw, 2023. "Examining the effect of electronic banking service quality on customer satisfaction and loyalty: an implication for technological innovation," Journal of Innovation and Entrepreneurship, Springer, vol. 12(1), pages 1-18, December.

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