FACTORS AFFECTING DEPOSIT MOBILIZATION: THE CASE

OF SELECTED PRIVATE COMERCIAL BANKS IN ETHIOPIA

BY:
WONDOSEN ANTENEH YOSEPH

DEPARTMENT OF ACCOUNTING AND FINANCE

COLLEGE OF BUSINESS AND ECONOMICS

HAWASSA UNIVERSITY

HAWASSA, ETHIOPIA

DECEMBER 2021
 FACTORS AFFECTING DEPOSIT MOBILIZATION: THE CASE OF
SELECTED PRIVATE COMERCIAL BANKS IN ETHIOPIA

BY:

WONDOSEN ANTENEH YOSEPH

A THESIS PROPOSAL SUBMITTED TO HAWASSA UNIVERSITY, FACULTY OF

BUSINESS AND ECONOMICS, DEPARTMENT OF ACCOUNTING AND FINANCE
IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF
MASTERS OF SCIENCE IN ACCOUNTING AND FINANCE

MAJOR ADVISOR: ANDINET ASMELASH (ASSIST. PROF)

CO-ADVISOR: HARKA M (MSC)

HAWASSA, ETHIOPIA

DECEMBER 2021
 CHAPTER ONE
INTRODUCTION
1.1. Background of the Study
Banking system is the backbone of financial intermediation through the mobilization and
channeling of financial resources. Banks in performing their pivotal role in the economy,
facilitate financial settlement through the payment system, influence money market rates and
provide a means for international payment. The sector mobilizes funds from the surplus spending
units into the economy and by lending such funds to the deficit spending units for investment,
banks in the process increase the quantum of national savings and investment (Mordi, 2004).
Financial resources of banking systems are naturally provided from people’s deposit. Therefore,
we can say that deposits are the most important resource of commercial banks. Thus the amount
of deposit a commercial bank should have at hand should be enough to make the bank involve in
the market and to satisfy the financial needs of its customers. Now a day, commercial banks are
managing their deposit to fulfill the need of their customers. However, their managing systems
for the deposits are being affected by some exogenous and endogenous factors (Garo, 2015).
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 those
countries, especially when the economy has difficulty raising capital from international donors,
financiers and markets (Giragn, 2015). Herald (2009) states deposits are the main source of
banks to provide loan. This deposit is mainly provided by people. However deposits can also be
provided by business organizations, NGOs, government and so on. Therefore, whether deposits
are from individuals, businesses and government they are important financial source of banks
(Mohammad & Mahdi, 2010).
Some of the variables that have effect on commercial banks’ deposit into Exogenous and
Endogenous factors. Endogenous factors can be controlled by the banking system; however, the
exogenous factors cannot be controlled by the banking system. Exogenous factors are further sub
divided into two; country specific factors and bank specific factors. Country specific factors
includes saving interest rate, inflation, real interest rate, population growth of the country, per
capita income of the society, economic growth (as measured by real GDP), exchange rate
consumer price index and shocks (Andinet, 2016).
Bank specific factors include liquidity of the bank, profitability of the bank, security of the bank,
number of commercial bank`s branches, bank size, reserves and transaction cost, awareness of
the society, convenience of bank`s office and services in the bank. These are the variables that
are claimed in the literature to affect the volume of total deposit of commercial banks (Dereje,
2017).
1.2. Overview of Private Commercial Banks in Ethiopia
Private commercial banks are a recent phenomenon in the Ethiopian economy. They came into
existence after the downfall of the Derge regime two and half decades ago. Before the Derge,
private commercial banks used to operate in the economy. But after it came to power, private
commercial banks were nationalized and amalgamated with the state owned banks, then after
that Ethiopian economy was dominated by state owned banks. In the time of Derge, no one was
allowed to have a sum of money more than birr 500, 000.00 in personal bank account. After the
downfall of the Derge private commercial banks were allowed to operate and they started to have
market share and now they are playing major role in the Ethiopian economy. National Bank of
Ethiopia (NBE) entry constraint, minimum paid up capital requirement was initially set million
then raised to 500 million and within few years they should raise to 2 billion, which is impossible
for new entrants as well for those who joined lately, since 2013 no new private commercial bank
has entered to the market because of the capital requirement.
Following the Proclamation of Licensing and Supervision of Banking Business Proclamation No.
84/1994, awash bank was registered as the first private commercial bank in modern Ethiopia
banking business. There are eighteen banks operated in Ethiopia. The new economy policy
introduced in November, 1991 caused the culmination of the command economic heard ling the
establishment of a market oriented one. This policy change created an opportunity and a
conducive environment for the emergency of private financial institutions aimed at bringing a
meaningful economic role in the development efforts of the country (NBE 2019/20).
Mobilizing on resources has always been the main bank system tasks. Banks collect the surplus
amount of money and thus carry out its main role which is going between depositors and loan
suppliants. Usually, in a bank activities, financial resources attraction is of a great significance
since the success in this respect will provide way for other organizations success. For each bank
and banks system, attracting financial resources relates to factors both inside and outside the
organization (Shaban, 2013). Therefore, identifying these factors and their effectiveness is very
important for success in the entire economy. This study has evaluated both endogenous and
exogenous factors that affecting deposit mobilization in Ethiopian private commercial banks.
1.3. Statement of the Problem
Financial resources of banking systems are naturally provided from people’s deposit. Therefore,
deposits are the most important resource of commercial banks. Thus the amount of deposit a
commercial bank should have at hand be enough to make the bank involve in the market and to
satisfy the financial needs of its customers. Now a day, commercial banks are managing their
deposit to fulfill the need of their customers but their managing systems for the deposits are
being affected by some exogenous and endogenous factors (Shemsu, 2014).
Banks mobilize deposits as their primary source of funds. Having optimal deposits level, banks
shall be able to lend the funds to generate interest on lending. In addition to lending, the deposits
fund can be placed in certain investments areas which suits the banks‟ or the deposits’
objectives.
Deposit mobilization is a continuous function for a bank to ensure the sum total of deposits, At
any time adequate to maintain the current level of lending and investments especially to
compensate the withdrawals made by depositors. Usually, the deposits level is kept slightly or
certain percentages above the lending and investments level to ensure the bank has adequate cash
reserves to meet expected withdrawals and also recurring withdrawals called liquidity. Deposit
mobilization is important as a source of investment, profit and for economic growth and
development (Helani, 2018).
Mobilizing deposits domestically is crucial in many developing countries. Domestic funds
provide a cheap and reliable source of funds for development, which is a great value in
developing countries, especially when the economy has difficulty in raising capital in
international markets. Most banks in many developing countries have been privatized, so factors
that affect deposit mobilization are important for the success for the entire economy (Shaban,
2013). A survival of every commercial bank highly depends on bank deposit, because deposit
mobilization is a major activity of all commercial banks.as a result the issue of banks deposit and
its determinant is crucial to financial sector of developing country like Ethiopia (Mamo, 2017).
Various studies were conducted on the factors affecting deposit mobilization by commercial
banks like Shemsu (2015) reveled that inflation rate has positive insignificant effect on deposit
growth. Muluken (2018) empirically investigates determinants of deposit mobilization in
commercial bank of Ethiopia as a result banks liquidity, exchange rate positively and statistically
significant and inflation positive and significant, credit risk and government expenditure negative
insignificant influence to bank deposit (Ashenafi, 2016). Similarly, Menbere (2018) Inflation
affects positively insignificant and can increase CBE’s deposit. Furthermore, Wubetu (2012)
found that Branch expansion had positive and significant effect on total deposit whereas deposit
interest rate and inflation rate were insignificant. As indicated above various researchers tried to
study about factors affecting deposit mobilization in Ethiopia. However, their findings revealed
that there is inconsistency among researchers on factors affecting deposit mobilization. This
paper is prepared to fill the above stated gap and to identify both the internal and external factors
that can affect deposit mobilization activities of Commercial Bank of Ethiopia using both
descriptive statistics and regression analysis method.
In general, managing deposits is not possible without knowing and controlling the factors
affecting it. Private commercial banks identify the sources of deposit by considering the
determining factors of bank deposit. From the empirical review most of the researchers
conducted on commercial bank of Ethiopia as a case study and there is inconsistency of study
results that influencing deposit mobilization. Thus, this study empirically investigates factors
affecting deposit mobilization of Ethiopian private commercial banks.
1.4. Objective of the Study
1.4.1. General Objective
The general objective of this study is to identify factors affecting deposit mobilization in
Ethiopian private commercial banks.
1.4.2. Specific Objectives
The specific objectives of this study are:
1) Determining the relationship between the various factors affecting deposit
2) To evaluate the effect of banks liquidity and credit risk on commercial banks deposit
mobilization.
3) To identify factors that affect deposit mobilization commercial bank deposit
4) To evaluate the impact of identified factors on each bank’s profitability.
1.5. Research Hypothesis
Hypothesis of the study stand on theories and empirical findings related to bank’s deposit that
has been developed over the years by banking area scholars. The primary function of the
commercial banks is deposit mobilization (Nathanael, 2014). Therefore, this study will test the
following hypotheses:
H1: Number of bank branches has no significant impact on commercial banks deposit

growth.

H2: Deposit interest rate has no significant impact on commercial banks deposit growth.

H3: Liquid asset to deposit ratio has no significant impact on commercial banks deposit growth.

H4: Lagged bank deposit has no significant impact on commercial banks deposit growth.

H5: Net interest margin (Profitability) has no significant impact on commercial banks

deposit growth.

H6: Inflation rate has no significant impact on commercial banks deposit growth in

Ethiopia.

H7: GDP has no significant impact on commercial banks Deposit growth in Ethiopia.

1.6. Research Questions

The study try to answer the following research questions:
1) What are the effect of banks liquidity and credit risk on commercial banks deposit
mobilization ?
2) Is there a relationship between the various factors affecting deposit?
3) What are the factors that affect deposit mobilization commercial bank deposit?
4) What are impact of identified factors on each banks profitability?
1.7. Significance of the Study
The Ethiopian economy has yet untapped large potential for commercial banking and private
banks in Ethiopia are in their infant stage. They are less in number and scope. However, they are
playing a decisive role in the economy of the country at the same time challenges exist in their
operation especially mobilizing vital resources. Therefore, the significance of the study is to
point out various factors that affect the deposit mobilization activity by private commercial
banks.
 This study is helpful to private 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
 The study has benefit to stakeholders like government, NBE and bank professionals
  The study have a great contribution to the body of knowledge by identifying the potential
relationship between bank deposit and factors determining it
 Finally, this study give good insight to the researcher about this specific topic and general
knowledge about any research
1.8. Scope of the Study
The work of this research is will delimit to some major factors that determine bank deposit
mobilization in private commercial banks in Ethiopia. The research is not cover all private
commercial banks and their branches’ rather some banks will be selected purposively based on
seniority. Timely, the study only delimited to 15 years data from 2006-2020 GC.
1.9. Limitations of the Study
The study is will use only 15 years data from 2006-2020 GC. The sample of the study is
shortened because of lack of data; however, it is believed that it can be the main limitation of the
study, which should be considered when interpreting and using the result of the study. The other
limitation of this study will be the fact that it will only use quantitative approach and secondary
data
1.10. Organization of the Paper
This research paper will be organized in five chapters. Chapter one will provide general
introduction about the whole study. Chapter two will describe the review of related literatures.
Chapter three will provide detail description of the methodology. Chapter four will contains data
presentation, analysis and interpretation. Finally, the last chapter will conclude the total work of
the research and gives relevant recommendations based on the findings.
 CHAPTER TWO
LITERATURE REVIEW
2.1. Introduction
Literature review is prepared in three parts i.e. theoretical, empirical and conceptual framework
part. In the theoretical review part the researcher has reviewed related literature regarding the
role of financial system for economic development of a country and included certain
explanations as to what deposits are and the types of deposits. In the empirical literature review
part the researcher also discusses past studies that were conducted on the area of factors
determining commercial banks deposits. In the conceptual framework schema of the relationship
between the dependent variable (commercial banks deposit) and independent (GDP, Inflation,
Exchange rate, Bank profitability, Bank liquidity & Bank credit risk) variables has been
discussed.
2.2. Theoretical and conceptual literature review
Development of any country depends on the economic growth the country achieves over a period
of time. Economic growth deals about investment and production and also the extent of Gross
domestic product in a country. Only when this grows, the people will experience growth in the
form of improved standard of living, namely economic development.
Also the economic development of any country is dependent on its financial system which
includes its banks, stock markets, insurance sector, pension fund and the like. These sectors
influence a nation’s currency and interest rates. In developed countries, they work together to
promote growth and avoid runaway price inflation. When a country is still in a developing stage,
the lack of a strong, sound financial system generally works against the national economy.
The financial system acts as a mediator between those in need of finance (borrowers) and those
who have excess funds (lenders). This type of transaction can be done straight forward by
engaging in direct lending or indirectly via organized markets (stock markets) or financial
intermediaries like banks. The financial system plays an important role in the allocation of
resources in any economy. Since it helps in the channeling of money from the saving portion of
the population to the corporate sector. It also assists in the allocation of investment funds among
companies and enables the sharing of risks between firms and the household sector.
In the context of African continent, financial institutions in particular the banking industry
carries the greater share of the financial system (Sheku, 2005). Most of the business rely on
banking sector as a source of financing (Medhat, 2004). It is no exception to Ethiopia where the
others like insurance companies and microfinance institution (MFI) are led by banks in terms of
capital size, total assets, employment capacity and profits (NBE, 2018/19).
There has been a debate in the academic world as to whether the efficiency of financial sector
really plays a role in economic development in the country. Arrests et al. (2001) use both bank
and stock market to assess the finance and growth relationship using quarterly data on a sample
of developing countries. They find a positive and significant association between finance
growths, with the larger impact from banking sector measures. Growth leads to financial
development and finance is overstressed in explaining growth.
In Ethiopian context, Ethiopia is low income country has been the reason for reliance on foreign
debt and aids from international community, in general, the rate of investment in Ethiopia has
remained very low. For the past few years, the government has recognized the importance of
mobilizing domestic savings for huge investments.
According to Ethiopian Country Commercial Guide (2018), Under the Growth and
Transformation Plan II (GTP II), NBE increased the minimum capital for banks to operate to 2
billion Birr ($90 million) and requires all sixteen currently operating private banks to increase
their paid up capital to that amount by 2020. As of mid-2018, foreign banks are not permitted to
provide financial services in Ethiopia and the market is closed to foreign retail banks, but the
sector may be subject to reforms as the government of Prime Minister Abiy Ahmed pursues
broad economic reforms. Currently, Ethiopia has allowed some foreign banks to open liaison
offices in Addis to facilitate credit to companies from their countries of origins. Chinese,
German, Kenyan, Turkish, and South African banks have opened liaison offices in Ethiopia.
Based on the most recently data, the Commercial Bank of Ethiopia (CBE) mobilizes more than
60 percent of total bank deposits, bank loans and foreign exchange. NBE controls the bank’s
minimum deposit rate, which now stands at 5 percent, while loan interest rates are allowed to
float. Real deposit interest rates have been negative in recent years mainly due to inflation
(Ethiopia Country Commercial Guide, 2018).
The state-owned Commercial Bank of Ethiopia (CBE) dominates the market in terms of assets,
deposits, bank branches, and total banking workforce. The other government-owned bank is the
Development Bank of Ethiopia (DBE), which provides loans to investors operating in priority
sectors. DBE extends short, medium, and long-term loans for viable development projects,
including industrial and agricultural projects. DBE also provides other banking services such as
checking and saving accounts to its clients (Ethiopia Country Commercial Guide, 2018).
NBE aims to foster monetary stability and a sound financial system, maintaining credit and
exchange conditions conducive to the balanced growth of the economy. NBE may engage with
banks and other financial institutions in the discount, rediscount, purchase, or sale of duly signed
and endorsed bills of exchange, promissory notes, acceptances, and other credit instruments with
maturity periods not exceeding 180 days from the date of their discount, rediscount, or
acquisition by the bank. The bank may buy, sell, and hold foreign currency notes and coins and
such documents and instruments, including telegraphic transfers, as they are customarily
employed in international payments or transfers of funds. Lack of access to finance is a
significant constraint for local businesses. In 2015, NBE allowed commercial banks to provide
mobile banking service and agent banking. Pursuant to NBE’s permit, many of the commercial
banks added mobile and agent banking in their line of services (Ethiopia Country Commercial
Guide, 2018).
2.3. Commercial Banks Deposit
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 public sectors, as their deposit and lending
service are utilized by households, business and government agencies (Ketema, 2017).
The three types of deposits, namely saving, demand deposit and term of fixed time deposits
accounts services, are provided by all the commercial banks in Ethiopia. Although the forms of
the three deposits and how they are being opened and used differ, they are all installed to
mobilize deposits to the banks. The definitions of the three deposits types are mentioned as
followed.
1) Time or term deposits: These deposits are kept by the bank for specified period of time per
the agreement between the bank and depositor. Higher interest rate are paid by the banks for
such kinds of deposits depending upon the amount of deposits and the length of period for
keeping the deposits provided there is no breach of the agreement.
2) Saving deposits: These accounts are opened by many people who need to save their wealth
usually beyond current consumption and in anticipation of future investment such as building
own house, buy car and to self-sponsor education etc. In doing so the account holder earns
interest on the saving balance. Saving accounts are the most favored deposit account for
commercial banks as they are cheap and are usually stable in nature. They are the services with
which banks reach out the broad mass of people.
3) Current deposits: These deposits are generally used by business persons to settle debts
usually through use of cheques. They are most often ready for payment upon demand anytime
and usually no interest are paid on these accounts (Giragn 2015).
2.4 Importance of deposit Mobilization
Deposits are the foundation upon which Banks thrive and grow. They are a unique item on
banks’ balance sheet that distinguishes it from other types of business firms.
A. Source of investment;- According to Ongore and 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 and Asoya (2013) noted 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.
B. Low cost;- According to Shettar and 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 and 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. 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 and
Mebera (2015) also affirmed 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 and 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.
2.5. Empirical Literature Review
Several studies have examined the determinants of deposit mobilization in many countries
around the world. Most of the studies considered banks specific internal factor and external
factors and examine either a particular country or a number of countries and a number of
explanatory variables have been proposed three categories, according to the nature and purpose
of each study.
Azmi and 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 behaviour 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. The researcher considers in this research
analysis a number of factors that have been identified in the economic literature as potential
determinants of savings. 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 behavioral 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 behavioral 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, it focuses this subject matter in the future research
agenda.
Andinet (2016) noted that 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 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.
Dereje (2017) the purpose of his 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 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.
2.6 Factors affecting Deposit mobilization of commercial Banks
An important indicator of the success of any resource mobilization agency, which is also a
banking institution is, the extent to which it is able to mobilize the resource of the community in
the form of customer deposits.
Though deposits have great significance to the banks in developing world, few have been studied
as the factors that have an impact on it. Study made by Mohammad and Mahdi (2010) indicates
that developing economies are characterized by unstable macroeconomic environments such as
inflation, inappropriate fiscal and monetary policies, interest rate controls. The net effect is the
change in liquidity which affects savings and capital formation. Where the macroeconomic
environment is favorable to savings then the commercial banks are in a better position to
increase savings. On the contrary, where macroeconomic policies erode liquidity from the hands
of the people then deposits reduce and may negatively impact on capital growth and investment
in the country.
According to Giragn (2015) the determinants of deposit mobilization of commercial banks are
classified in to two- bank specific factors and non- bank specific factors.
2.6.1 Bank Specific factors for deposit mobilization
2.6.1.1 Liquidity of the Bank
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 estate’s due to
Banking liquidity is the ability to meet obligations when they come due without incurring
unacceptable losses.
Therefore; bankers are always sensitive to the issue of liquidity and liquidity risk and the central
bank is also there to monitor that banks are liquid enough to meet their respective obligations
when the public demands. The more liquid the banks are, the better they attract deposits. Higher
liquidity buffers tend to signal greater bank soundness, which could be a factor favoring deposit
demand (Herald & Heiko, 2009).
2.6.1.2. Bank profitability, size, and security and number of bank branches
Herald and Heiko (2009) state that higher bank profits would tend to signal increased bank
soundness, which could make it easier for these banks to attract deposits. Erna and Ekki (2004)
find that there is a long run relationship between commercial banks deposits and the profitability
of the banks. One of the reason as to why people deposit in banks is to ensure a feeling of
security of their money. Larger banks in terms of total assets or capital attract better deposit
amounts than smaller ones in absolute terms (Herald & Heiko, 2009). This is largely because of
the bigger banks have many branches, huge capital and or assets and provide a better sense of
security to savers apart from their low transaction costs due to economies of scale.
According to the study made by CGAP, 2010, Financial Access 2010, Ethiopia has low
geographic and demographic penetration of bank branches in the sub-Saharan Africa. The
population is hugely unbanked and there is only 1.39 branches open for every 100,000 adults
whereas 5.11, 4.38 and 2.25 for Ghana, Kenya and Uganda respectively. Most banks are head
quartered in Addis Ababa and their branches too are concentrated in the capital (Muluneh, 2012).
Many researchers 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”.
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 & Bashir, 2003).
2.6.1.3 Credit Risk (Proxied by the loans-to-asset ratio)
Rodrik and Subramanian (2008) argue that an improvement in financial intermediation, which
raises domestic saving and enhances access of firms to domestic finance in an investment
constrained economy. A higher degree of intermediation may signal a bank’s success in
generating income as well as a need for it to attract more deposits to support its increased lending
activities.
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 Institutions 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”.
2.6.2 Non-Bank Specific Factors for Deposit Mobilization
Ketema (2017) states that 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. Non-bank specific factors are defined for this research as factors that
have an impact on deposit mobilization that are beyond the control of the banks themselves. The
macroeconomic factors that can affect bank’s deposit include factors such as; Exchange Rate,
Inflation and GDP among others.
2.6.2.1 Economic growth
Economic performance is generally being measured through GDP (Gross Domestic Product), a
variable that has also become the de facto universal metric for 'standards of living. It is
universally applied according to common standards, and has some undeniable benefits mainly
due to its simplicity.
According to Herald and Heiko (2008), growth is one of the determining factors for commercial
banks deposits. GDP is calculated by adding up the value-added at each stage of production
(deducting the cost of produced inputs and materials purchased from an industry’s suppliers.
(Erna & Ekki, 2004), finds four variables, GDP, number of Islamic bank’s branch offices, profit
sharing rate, and interest rate that are thought to have influence on the volume of deposits. So,
GDP can influence the growth of commercial banks deposits.
2.6.2.2 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 & 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.
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 & Nixon, 2001) expresses the most popular view held by economists by
characterizing 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
2.6.2.3 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 (2014) explanation, the
term depreciation and appreciation is used to show the decrease and increase in the value of
currency. Depreciations a decrease in the value of currency relative to another currency.
Appreciations 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.
2.8. Empirical Review
The empirical literature part discusses past studies that were conducted on the area of factors
determining commercial bank deposits focusing on Ethiopia commercial banks.
Wubitu (2012) study on “Factors that affect commercial bank deposits from 2000 to 2011”
stated that both exogenous and endogenous factors affect the deposit mobilization effort of
Commercial Bank of Ethiopia positively. Similarly, Shemsu (2015) study on “Determinants of
commercial bank deposits in commercial bank of Ethiopia from 1998 - 2014” stated that overall
inflation rate, number of branch opening, gross domestic product, individual foreign remittance
and dummy variable 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 other variables affect positively and can increase CBE’s deposit.
Andinet (2016) study on “Factors determining deposit mobilization performance: In the Case of
Private Commercial Banks in Ethiopia from 2005-2015” indicated 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.
Misrak (2019) study on “Determinants of Deposit Mobilization in Commercial Banks of
Ethiopia from 2003-2016” stated that bank profitability, gross domestic product and liquidity are
positively and statistically significant on bank deposit growth; whereas, Exchange rate and credit
risk is negatively and statistically insignificant on bank deposit growth. General inflation had
insignificant positive influence on bank deposit growth. In addition, Ashenafi (2016) study on
“Factors that affect deposit mobilization of Commercial Bank of Ethiopia” identified that
nominal GDP, exchange rate, branch expansion and foreign remittance was found to have a
positive relationship with bank deposit growth and the effect on bank deposit is significant. On
the other hand deposit interest rate and Inflation are affects positively and can increase CBE’s
deposit but these factors are insignificant, since p value of those variables is greater than the
significant level.
Adissalem (2020) study on “Factors influencing deposit mobilization: A study on commercial
bank of Ethiopia from 2000 -2015” revealed that long run Reserve Requirement and Consumer
Price Index negatively affect the Total Deposit in Commercial Bank of Ethiopia whereas the
Total Asset, Total Liability and Total Loans and Advance affect Commercial Bank of Ethiopia`s
Deposit positively and all are statically significant. Among the given determinants of
Commercial Bank Deposit only Consumer Price Index and the total loans and advance are
significant and affect the Deposit in Commercial Bank of Ethiopia negatively.
Menene (2020) study on “Factors affecting deposit mobilizations of Ethiopian private
commercial banks for the periods 2010 to 2019” stated that Banks Liquidity has a positive
insignificant effect, credit risk and exchange rate have positive and statistically significant and
inflation has significant negative influences on commercial bank deposit mobilization.
Misrak (2019) study on “Determinants of commercial banks deposit mobilization in Ethiopia for
the periods 2003-2016” indicated that Bank Profitability, Gross domestic product and liquidity
are positively and statistically significant on bank deposit growth; whereas, Exchange rate and
credit risk is negatively and statistically insignificant on bank deposit growth. General inflation
had insignificant positive influence on bank deposit growth. Since the depositor confidence
increases if the commercial banks are profitable and have adequate asset return, so commercial
banks should sustain their profitability to increase their amount of deposit.
Muluken (2019) study on “Determinants of deposit mobilizations and identify which of those
factors are influential in affecting the deposit mobilization of CBE for the periods 1995 -2017”
identified Bank’s Liquidity (statistically significant), exchange rate, and Bank Profitability are
positively and statistically insignificant on bank deposit growth; whereas, Money Supply
influence is negatively and statistically significant on bank deposit growth. Deposit Interest Rate
and Inflation had insignificant positive influence on bank deposit growth, whereas credit risk and
Government Expenditure had insignificant negative influence on bank deposit growth.
Mamo (2017) study on “An Investigation of Determinants of Deposit Mobilization in
Commercial Banks of Ethiopia from 1995 to 2014” indicated that loan provision, branch
expansion and number of customers are found to have significant positive impact for the growth
of deposit mobilization . However the emergence of new competitors and interest rate is not
found to have positive impact to induce deposit mobilization in the bank
2.9. 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, GDP, Exchange rate, Bank profitability, bank liquidity and Bank credit
risk. The study has quantified how these variables are determining the deposit of commercial
banks in Ethiopia.
The conceptual schema of the relationship between the dependent variable (private commercial
banks deposit) and independent (GDP, Inflation, Exchange rate, Bank profitability, Bank
liquidity & Bank credit risk) variables are depicted here below:
 Macroeconomic
Factors Private
GDP Bank
Commercial Deposit
Inflation Banks Growth
Interest Rate

Bank specific Factors

Number of Branches
Lagged value of bank
deposit
Liquid asset to deposit
ratio
Net interest margin

Source: Developed by the researcher

As it is mentioned in chapter one and chapter two, there are many variables claimed to affect
deposit mobilization of commercial banks. Some of the independent variables may affect the
dependent variable directly and others indirectly. It this study the dependent variable was private
commercial banks deposit and independent includes both macro and micro determinants of bank
deposit like GDP, Inflation, Exchange rate, Bank profitability, Bank liquidity & Bank credit
risk.
 CHAPTER THREE
RESEARCH METHODOLOGY
3.1. Research Design and Approach
The choice of research design depends on objectives that the researcher wants to achieve (Admas
et al., 2007). Since this study was designed to examine the relationships between deposit growth
and its determinants, a logical reasoning either deductive or inductive is required. Induction is
the process of reasoning to reach general principles by looking at a set of facts. Whereas,
deduction is the process of carefully thinking about known facts to reach an answer or decision
about a particular question.
Besides, deductive reasoning is applicable for quantitative research whereas inductive reasoning
is for qualitative research (Admas et al., 2007). Thus, due to quantitative nature of data, the
researcher used deductive reasoning to examine the cause and effect relationships between bank
deposit and its determinants in this study.
Kothari (2004) noted that explanatory research design examines the cause and effect
relationships between dependent and independent variables. Therefore, since this study examined
the cause and effect relationships between growth of deposit and its determinant, it is an
explanatory research. The objective to be achieved in the study is a base for determining the
research approach for the study. In case, if the problem identified is factors affecting the outcome
having numeric value, it is quantitative approach (Creswell, 2003). Therefore, the study will
employ quantitative research approach and explanatory research design to see the regression
result analysis with respective empirical literatures on the determinants of private commercial
bank deposit.
3.2. Population Size and Sampling Techniques
As to September of 2021, there are fifteen private commercial banks in Ethiopia. It includes
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.
Kothari (2004) noted that good sample design must be viable in the context of time and funds
available for the research study. Accordingly, this study will employ purposive sampling
technique to select the required sample of banks from the above listed banks since it is viable in
line with time and funds available for this study. This sampling method is a form of non-
probability sampling in which decision concerning the individual source of data to be included in
the sample is taken by the researcher, based upon a variety of criteria. The major limitation of
purposive sampling is making description rather than generalization (Dawson 2002). The
researcher considers that the sample size is sufficient to make sound conclusion about the
population as far as it covers around 40% of the total population. Moreover, the big portion of
total deposit of private commercial banks is found in the banks selected as sample i.e. banks
established before 2005 G.C
The selection criteria set by the researcher was first, the required banks are only private
commercial banks in Ethiopia. Second, those private commercial banks should operate after
2005/06 and before 2020/21 having financial statements for consecutive fifteen years. Third, the
researcher chose this sample because they play a major deposit share in the entire research
period. With regard to deposit shares, there was also concentration in favor of CBE, though with
a declining trend. In 2019, among the private banks, the highest share went to Dashen Bank
(9.7%), followed by Awash International Bank (6.2%) and Bank of Abyssinia (5.4%) (Zerayehu
et al. 2020). Based on such criteria, six private commercial banks out of sixteen private
commercial banks operating since 2005 G.C are selected. It includes Awash International Bank
S.C, Dashen Bank S.C, Bank of Abyssinia S.C, Wegagen Bank S.C, United Bank S.C and NIB
International Bank S.C.
To this end, the sample size for this study is not less than specified sample size required for ones’
study. That is why this study will use six experienced private commercial banks in Ethiopia for
fifteen years. The cut date for the sample size is based on the fact that private commercial banks
starts computation with state owned banks starting from 2005 (Zerayehu et al., 2020).
3.3. Data Types and Source
The sources of data for this research will be secondary sources. Secondary panel data set for
Ethiopian private commercial banks between 2006 and 2020, for fifteen years. The researcher
will gather the annual reports of selected private commercial banks from proper source mainly
from NBE. The bank specific data were collected from financial statements (i.e. Balance Sheet
and Profit & Loss Statement) of CBE and macroeconomic data will be collect from NBE,
Central Statistical Authority (CSA) and World Bank annual report (WB). These data include
both bank specific and macroeconomic factors. Bank specific data was sourced from annual
reports and statement of accounts of the selected banks. However, data on macroeconomic
variable (GDP growth and inflation will be sourced from annual report bulletins published by the
National Bank of Ethiopia (NBE) and Ministry of Finance and Economic Development
(MoFED). The data will be collect from 2006 to 2020 on annual base and the figures for most of
the variables will be on June 30th of each year under study.
Six private banks operating in Ethiopia during the period under the study will include in the
panel data set. The researcher prefers to use panel data since panel data can take heterogeneity
among different units into account over time by allowing for individual-specific variables.
Besides, by combining time series and cross-section observations, it gives more informative data.
Furthermore, panel data can better detect and measure effects that simply cannot be observed in
pure cross-section or pure time series data (Gujarati, 2004) and panel data models provide much
more insights than time series models or cross section data models because it is theoretically
possible to isolate the effects of specific effects and actions (Hsiao, 2003).
3.4. 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 and
publications of Commercial Bank of Ethiopia are check to find variance with each other that will
support the reliability of the data. This study, however, will be threatened by the fact that the data
will use mainly from secondary sources and therefore any error from that data collection process
will definitely affect the outcome. The methodology will use for this study will be selected
because of its suitability in its dependence on certified information from recognized institutions
other than subjective opinions, which will be associated with secondary sources. The F test and
the coefficient of determination will be used to test the validity and reliability of the relationship
established by the regression analysis.
3.5. Method of Data Analysis and Interpretation
Secondary data will collect from annual financial statements of the concerned private
commercial banks in Ethiopia, NBE and MoFED will analyze to determine its suitability,
reliability, adequacy and accuracy. Thus, this study will utilize both descriptive and econometric
analysis based on a panel data from 2006 to 2020 to examine the relationship between the growth
of deposit and its determinant factors in private commercial banks found in Ethiopia.
Time series analysis will conduct using E View 10 data analysis econometric packages to
determine the exact nature of the relationship that exist between private 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
CBE over the period under study. Prior to the estimation of the regression line, descriptive
analysis will be used to describe the behavior of the individual variables over the period under
review. The descriptive analysis will inculcate a brief assessment of the general external and
internal variables in the country over the period. Correlation analysis will conduct 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. The model assumption tests of Multicolliniarity, Autocorrelation, Hetroskedasticity and
Normality test will be test by E-Views 10 system before the model used for analysis purpose.
3.6. Model Specification
The literature reviewed in the previous chapter identify different factors determining deposit
growth in various countries. This section presents a framework of analysis on the basis of these
studies, and involves adopting a model that would help to demonstrate the responsiveness of
certain key variables that influence bank deposit growth in Ethiopia.
The theoretical literature discussed above suggests that commercial bank deposit, Exchange rate,
Interest Rate, Inflation, Money Supply, Government Expenditure, Bank Profitability, Bank
Liquidity and Loan to Asset Ratio are related 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”.
A general function accommodating all the hypotheses that explain deposit growth and the
variables obtained therefrom, the study can therefore be adopt following Herald and
Heiko (2016). The model is consistent with research hypothesis that addresses the internal
and external factors for different cross sections. Panel regression model has employed to
test the relationship between bank deposit growth and the internal and external
determinants. Thus, the study estimated the linear regression equation by calculating the values
of the variables in the following equation”:

BDGti = αi + β1 * NBBit + β2* DIRit + β3* LATDit + β4* LOBD – 1it + β5* NIMit + β6* GDPt + β7*
INFt + β8* ROEit + β9* EXCit + GOVEXPit + β10* + ϵit …………………………………. 1
Where:
I=1, 2… N is the i-bank; t=1,2… T corresponds to the year t
αi, β1, β2, β3, β4, β5, β6, β7, β8, β9 and β10 are vectors of parameters and represents fixed effect
BDGti = Bank Deposit Growth (Response Variable) of bank i at time t
NBBit = Number of Bank Branches (NBB) of bank i at time t
DIRit = Interest Rate on the Commercial Bank Deposits (DIR) of bank i at time t
LATDit = Liquid asset to Deposit Ratio (Liquidity Ratio) of bank i at time t measured as liquid
asset to total asset
LOBD – 1it = Lagged Value of Bank Deposit of banks i at time t
LATDit = Liquidity risk (LIR) of bank i at time t is measured as liquid asset to total asset;
NIMit = Net Interest Margin (NIM) of bank i at time t is calculated as Interest
Incomes on loan to total Loans minus Interest Expense on Deposit to total
Deposits:
GDPt= Economic growth (GDP) measured as change in the real domestic product/GDP growth
of Ethiopia on the year t. The proxy will be change in growth rate of real GDP.
INFit = Inflation measured as percentage change in consumer price index in Ethiopia the year t.
ROEit = Bank profitability
EXCit = Exchange rate
GOVEXPit = Government Expenditure
ϵit = Is the error term
It also represents all the relevant variables, which were omitted from the model as well as the
random errors from the estimation process and β represent the estimated parameters or represent
the slope co-efficient to the dependent variable.
3.7. Variables of the study and Research Hypothesis
This section deals with the analysis of variables for determining private commercial banks in
Ethiopia’s deposit mobilization.
3.7.1. Definition of Variables
 Bank Deposit: is a liability owed by the bank to the depositor. It’s also referred as an amount
of money in cash or check for or sent via aware transfer placed in to a bank account. The
deposit account consists saving accounts, checking accounts and money market accounts. In
this study, commercial bank of Ethiopia deposit represents the total accumulated amount of
customer’s deposit with the bank. The performance of the bank was best measured by the
size of its deposit liabilities and measured by in billions birr.
 Exchange Rate: refers to the price of a nation’s currency in terms of another currency or
exchange rate is the rate at which one currency will be exchanged for another. It is also
regarded as the value of one country’s currency in relation to another currency. Thus an
exchange rate has two components, the domestic currency and foreign currency. According
to Nugel (2012) 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 (Alemayehu, 2015) also
confirms that for developing country in general saving is negatively correlated with unstable
exchange rate. In this study it is measured as the growth of Ethiopia BIRR against USD.
 Interest Rate: is the amount interest due per period, as proportion of the amount deposited.
It is also the rate at which the bank pays for it savers for keeping money in an account. It is
calculated annually and measured in percent. 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.
 Inflation: is defined as an increase in the overall price level in the country and measured in
percent real value of money decline resulting in benefit to debtors and loss to creditors”
(Brealey & 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.
 Government expenditure: refers to the overall public spending carried out by the
government. Government spending or expenditure includes all governments’ consumption,
investment and transfer payments etc. government acquisition of goods and services intended
to create feature benefits, such as infrastructure investment or research spending, is classed as
government investment (government gross capital formation). Governments spend money on
health care, education, social security benefits, and infrastructure and defense activities. It is
measured by in Billions birr. 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).
 Money Supply: is the total value of monetary assets available in an economy at a specific
time. Broad money supply consist both narrow money and quasi money. Where narrow
money contains currency outside the bank and net demand deposits while quasi-money
includes both saving and time deposits. Broad money supply is the broadest measure of
financial development and it measures the depth of the financial system. It also indicates the
degree of monetization with respect to the real economy. It is measured by in billions of birr.
 Credit Risk: -is the probable risk of loss resulting from a borrower’s failure to repay a loan
or meet contractual obligations. Traditionally, it refers to the risk that a lender may not
receive the owed principal and interest, which results in an interruption of cash flows and
increased cost for collection. In other words credit risk is a financial exposure resulting from
a bank’s dependence on another party (counterparty) to perform an obligation as agreed
(NBE, 2010). Credit risk is the degree of value fluctuations in debt instruments and
derivatives due to changes in the underlying credit quality of borrowers and counterparties
(Chen & Pan, 2012). It is measured by Loan to asset ratio for a certain period.
 Bank’s Liquidity: -is a measure of the ability and ease with which assets can be converted to
cash in order to meet financial obligations an important measure of liquidity is loan to
deposit ratio. The loans to deposit ratio is inversely related to liquidity and consequently the
higher the loans to deposit ratio the lower the liquidity and vice versa (Devinaga, 2010). Key
liquidity indicators such as central bank credit to financial institutions, deposits as a share of
monetary aggregates, loans to deposits ratios, are important for open market operations and
liquidity management (Sheku, 2005).
 Bank Profitability:-is an important indicator of bank performance, it represents the rate of
return a bank has. Profit can be measured as a return on asset (ROA) and return on equity
(ROE) the study uses ROA to measured banks profitability. It is defined as the ratio of profit
to assets. 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 banks 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”. 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”.
 Gross Domestic Product (GDP): GDP is one of the explanatory variables commonly used
as determinants of economic growth. According to Jim (2008), the level of GDP divided by
the population of a country or region is what is known as per capita income. Changes in real
GDP per capita over time are often interpreted as a measure of changes in the average
standard of living of a country. Thus, the relation between income of the society and deposit
volume is expected to be positive and significant. Studies by Mahendra (2005) and Chris
(2008) both reveal that growth in income have a positive effect on deposits.
3.7.2. Research Hypothesis
Table 1: Summary of description of variables
No Variables Description Proxy Expectation
1 Dependent Variable
Private banks deposit(DEP)  Continuous Total value of
demand, time and
saving deposit (% of
GDP)
2 Independent variables
Exchange rate (EXC) Continuous Yearly average +
Interest rate (INTR) Continuous return on domestically +
held short-dated
government bonds 
Gross Domestic Product(GDP) Continuous Annual percentage +
change of real GDP
Inflation (INFL) Continuous Consumer prices -
(annual %)
Government expenditure (GOVEXG) Continuous share of the -
government
consumption
spending to GDP
Bank liquidity(LIQD) Continuous the ratio of liquid -
assets by total assets
(LATA) and total
loans by total deposits
(TLTD)
Credit risk (CRISK) Continuous the ratio of loan-loss +
reserves to gross
loans (LLRGL)
Money supply (MS) Continuous money velocity +
constant
Profitability (PROF) Continuous Proxied by bank net +
interest margin
Broad Money (BM) Continuous Broad money supply -
(% of GDP)
Source: Developed from various sources
 CHAPTER FOUR
BUDGET BREAKDOWN AND TIME SCDULE
4.1. Cost Breakdown
No Activities to be done Description Budget
allocated
1 Stationary and secretarial works
2 Duplicating paper for questionnaire and final report 4 reams (4x200birr) 800
3 Printing cost 400 pages X5birr 2,000
4 Secretarial work 10man-days X100 birr 1000
Sub total 3800
2 Per diem for researcher 6,500
Sub total 6,500
3 Others
3.1 Transportation expenses 4,000
3.2 Report compilation and binding 2,500
3.3 Contingency (5%) 1160
Total 18,460

4.2. Time Frame

No Activities Date for action in G.C
1 Proposal development
2 Preparation of data collection Tools
3 Data collection
4 Data analysis
5 Report writing
6 Submission of first draft
7 Submission of final draft
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