Challenges of Deposit Mobilization for

Private Commercial Banks in Ethiopia

(The Case of Awash International Bank S.C.)

By: Samuel Tesfahunegn

ID: GSE1116/05

Submitted to Addis Ababa University, School of Graduate Studies,

In partial fulfillment of the requirement for

Executive Master of Business Administration

Advisor: Gemechu Waktola (PhD)

October, 2015
 Table of contents

CHAPTER 1: Introduction
1.1. Background of the study.............................................................................. 1

1.2. Statement of the problem ............................................................................ 3

1.3. Research questions ….................................................................................. 4

1.4. Objectives of the study ................................................................................ 4

1.4.1 General Objective ….................................................................................. 4

1.4.2 Specific Objectives .................................................................................... 4

1.5. Significance of the study ............................................................................. 5

1.6. Limitations and Delimitations of the Study ................................................ 5

1.6.1 Limitations of the Study ........................................................................... 5

1.6.2 Delimitations of the Study ......................................................................... 5

1.7. Organization of the study ............................................................................ 6

CHAPTER 2: Literature Review ................................................................................7

2.1. The Concept of Banking ...............................................................................7
2.2 Determinants of banks’ Performance..…...................................................... 8
2.3. Banking in Ethiopia ………………….………...…………………..……...14

2.4. The Importance of Deposits ……………………………..……….............. 18

2.5. Types of Deposits …………………………………..………………...…... 21

2.6. Factors Affecting Deposits of Commercial Banks …………………...…...21

 2.7. Background of Awash International Bank s.c. …………………………… 36

CHAPTER 3: Research Methodology ....................................................................... 38

3.1 Data …………………………………………………………………………38
3.2 Type of Research Design ……………………………………………………38
3.3 Sampling Design …………………………………………………………… 39
3.3.1 Target Population …………………………………………………………39
3.3.2 Sample Size ………………………………………………………………..39
3.3.3 Sampling Technique ……………………………………………………… 39
3.3.4 Sampling Procedure ……………………………………………………… 40
3.4 Sources and Tools of Data Collection ……………………………………….40
3.5 Data Analysis and Interpretation …………………………………………….40
CHAPTER 4: Data Presentation and Analysis ………………………………………42
4.1 Data Presentation and Discussion …………………………………………... 42
4.1.1 AIB’s Deposit Mobilization Performance ………………………… 42
4.1.2 Branch Expansion for Deposit Mobilization …………………..….. 45
4.1.3 Major Points on Deposit Mobilization Activities of AIB
(2010-2015) ………………………………………………………... 46
4.2 Survey results ………………………………………………………………. 47
Chapter 5: Summary Conclusion and Recommendation ………………………….. 59
5.1 Summary ……………………………………………………………………59
5.2. Conclusion …………………………………………………………………. 62
5.3 Recommendations ………………………………………………………….. 64
Bibliography…………………………………………………………………………… 66
 Addis Ababa University
School of Graduate Studies
This is to certify that the project prepared by Samuel Tesfahunegn H/Sellassie,
entitled: Challenges in Deposit Mobilization for Private Banks, (The Case of
Awash International Bank S.C.) and submitted in partial fulfillment of the
requirements for the Degree of Executive Master of Business Administration
complies with the regulations of the University and meets the accepted standards
with respect to originality and quality.

Advisor

____________________ signature ____________________ date______________

Internal Examiner

___________________ signature___________________ date_________________

External Examiner

___________________ signature ___________________ date________________

Acknowledgement

I would like to thank my project advisor, Gemechu Waktola (PhD), for his patient

and caring approach.

 List of Tables Page

Table 2.1. Private commercial banks in Ethiopia………………………. 18

Table 4.1. Composition of Deposits………………………………….. 43

Table 4.2. Composition of Income…………………………………… 45

Table 4.3. Market Share of AIB………………………………………. 46

Table 4.4. Sample size and returned questionnaires…………………… 47

Table 4.5. Job position of the Respondents…………………………….. 47
Table 4.6. Gender Distribution of the Respondents……………………. 48
Table 4.7. Age Distribution of the Respondents……………………….. 48

Table 4.8. Work experience of the Respondents……………………….. 49

Table 4.9. Understanding and Commitment of staffs for deposit

Mobilization………………………………………………… 51

Table 4.10. Contribution of Recently Introduced Various New

Products of Deposit Accounts in Mobilizing Deposit……... 51
Table 4.11. Volume of Deposits Grow because of Special Services
Provided for the Corporate Depositors/customers………... 53

Table 4.12. customers’ satisfaction Rating……………………………… 53

Table 4.13. Major Cause for the variation in deposit among branches

of AIB……………………………………………………… 54

Table 4.14. Time Taken for a Customer to Open a New Account……… 55

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Table 4.15. Time Taken for a Customer to Withdraw/ deposit cash
from/to Account……………………………………………. 56
Table 4.16. Main Reason for AIB’s Continuous Deposit Growth for
the last five years…………………………………………… 56
Table 4.17. Major Depositors of Awash International Bank S.C………... 57

Table 4.18. Competition with Other Private and Government Banks…… 57

Table 4.19. Banks which pose more competition to AIB………………… 58

List of Figure Page

Figure 4.1. Absolute Deposit Growth of Selected Private Banks,

2014/15……………………………………………………… 44

List of Appendices

Appendix I. Questionnaire distributed to AIB Staffs

Acronyms

AIB - Awash International Bank s.c.

NBE - National Bank of Ethiopia

CBE - Commercial Bank of Ethiopia

DB - Dashen Bank

CBO - Cooperative Bank of Oromiya

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BOA - Bank of Abyssinia

DR - Deposit Rate

LIQUIDITY - Liquidity of Commercial Banks

DIV - Dividends

ABSTRACT

This study intends to identify the challenges in deposit mobilization for private banks in
Ethiopia by concentrating the case on Awash International Bank s.c, Descriptive method
particularly survey design approach was adopted for the study. The survey was conducted
with staff individuals working in Awash International Bank s.c at different positions
using questionnaire. In addition, the study used unstructured review of documents and
records held by other commercial banks and NBE. The study identifies that AIB is
registering a continuous deposit growth for the last few years. Individuals, business
organizations and NGOs are the major source of deposit for AIB. The findings of the
study show that AIB and other private banks are operating in a dynamic and highly
competitive environment and there is high possibility of catch-up and by-pass among
these banks. Also, private commercial banks should prepare for the inevitable stiff
competition that will arise from local and with the eminent future entrant of foreign
banks. By doing so, they can solve the paradox of the liquidity problem and the unbanked
resources.

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 Chapter I: Introduction

1.1. Background of the study

Banks play a key role in improving economic efficiency by channeling funds from
resource surplus unit to those with better productive investment opportunities. Banks also
play key role in trade and payment system by significantly reducing transaction costs and
increasing convenience (NCA, 2006). In less monetized countries, like Ethiopia, whilst
financial sector is dominated by banking industry, effective and efficient functioning of
the latter has significant role in accelerating economic growth. To enhance the role of
banks in an economy, competition is an important driving force; without competition, it
is improbable to bring about efficiency and foster financial sector development. In other
words, insufficient banking services may result in substantial social losses on account of
higher price, higher transaction cost, lower credit supply, lack of innovation and poor
service quality. (Zerayehu, 2013)

According to Mohammad and Mahdi (2010), financial resources 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. Given this general facts, therefore, the bank is expected
to mobilize its deposit. Managing deposits is not possible without knowing and
controlling the factors affecting it. There are several factors that are claimed to be
determinants of deposits.

As done by N. Desinga (1975), we can classify the variables which are claimed to have
effect on commercial banks’ deposit into two, namely exogenous and endogenous
factors. Exogenous factors can further be divided into country specific factors and bank

1
specific factors for clarification purpose. Endogenous (Internal) factors can be controlled
by the banking system. However, the Exogenous factors (The bank specific factors and
the country specific factors) cannot be controlled by the banking system. The bank
specific factors are factors that are specific to the banking system and the country specific
factors are factors that are beyond the banking system.

In Ethiopia, during the pre-1975 imperial era, there had few banks (dominated by foreign
ownership) and the absorptive capacity of the economy was too low even to
accommodate moderate competition. In the Derg regime (1975-1991), private banks were
fully nationalized and left no room for competition. After the down fall of the Derg
regime in 1991, private banks were again allowed to operate in consistent with the
ideology of market oriented economic policy under the proclamation of licensing and
Supervision of Banking Business Proclamation No.84/1994. Accordingly, new private banks
were established and their role and position in the industry have been flourished from
time to time. Ethiopia appears unique compared to most African countries and many
other developing countries because it has not yet opened its banking sector to foreign
participation. (Gedey 1990, Abebaw 2011).

The Ethiopian banking sector remains isolated from the impact of globalization. The
government believes that liberalization may result in loss of control over the economy
and may not be economically beneficial. Ethiopia has no capital market and investing in
shares of private companies is limited. A series of financial sector reforms has been
introduced since 1994, after private banks were allowed to operate. But, the state-owned
bank, Commercial bank of Ethiopia continues to dominate the market in terms of capital,
deposit, profit and assets. (Abebaw 2011).

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 1.2. Statement of the Problem
Financial development is crucial to economic growth and banks are the most important
elements of the financial system. Banks as financial intermediaries are expected to
provide a venue for people to save incomes not expended on consumption. It is from the
savings they accumulate that they are expected to extend credit facilities to entrepreneurs
and other industrialists. This function enables banks mobilize deposits which otherwise
would have remained idle and unproductive in the hands of the surplus economic unit.
The fund mobilized is then made available to the deficit unit for economically and
socially desirable purposes.

Deposit mobilization is an integral part of banking activity. Mobilization of savings

through intensive deposit collection has been regarded as the major task of banking in
Ethiopia today.

However, sources from National Bank of Ethiopia indicate that from deposits that should
be mobilized by banks, only a few are mobilized (NBE annual Report 2012/13). This
indicates that from the money that can be deposited in the bank, most of it is not yet
mobilized. And though such a case, it appears that in most of the years commercial banks
are in a serious threat of illiquidity. (AIB Annual report 2012/13, 2013/14)

These show that, in addition to the current practices, the deposit mobilization practices of
commercial banks in the country can be well developed and additional mechanisms can
be identified to mobilize such deposit.

Therefore, the purpose of this study is, to evaluate the trend and growth of deposit
mobilization and recommend ways for enhancing the capacity for mobilizing
concentrating the case mainly on Awash International Bank S.C.
3
 1.3. Research questions
The research conducted on the title of Challenges in Deposit Mobilization for Private
Banks (The Case of Awash International Bank S.C.) tried to answer the following
questions:-
What are the factors that can affect the volume of AIB’s deposit?
How did branch expansion and service quality related to AIB’s deposit?
What is the effect of awareness of the society, convenience of bank’s office,
deposit mobilization efforts on AIB’s total deposit?
What should be done to have a progressive deposit?

1.4. Objective of the study

1.4.1. General Objective
To identify and assess the challenges awaiting private commercial banks of
Ethiopia with regard to deposit mobilization in the future and at the end to
conclude and suggest.

1.4.2. Specific objectives

To identify the factors that determines total deposit of Awash International bank
s.c. (AIB).
To assess the challenges and problems AIB is facing with respect to deposit
mobilization.
To have a bird’s eye view about the business development issues like information
technology, branch expansion and customer service related to AIB
To determine the effect of awareness of the society, convenience of bank’s office,
branch expansion and service quality on total deposit of AIB.

4
 1.5. Significance of the study
Studying the challenges in Deposit Mobilization for Private Banks (The Case of Awash
International Bank S.C.) has the following significances;
The study will help commercial banks to manage their deposit by letting them
know what affects it and which variable is the most important,
It serves for further study in the sector and will help as additional input for
concerned policy makers and future researchers,
The study will add knowledge on the field of banking and financial resource
studies.

1.6. Limitation and Delimitation of the study

1.6.1. Limitation of the Study
The study is conducted using the data of the past few years. The sample of the study is
shortened and so it is the main limitation of the study in interpreting and using the result
of the study. The other limitation of the study is the fact that it only considers Awash
International Bank S.C. It is selected because it is a first private bank since the financial
sector reform has been introduced in 1994 and its convenience to the researcher.

1.6.2. Delimitation of the Study

This study is focused on the challenges of deposit mobilization for private commercial
banks. It determines the factors that affect commercial banks’ total deposit. There are
around 16 private commercial banks in Ethiopia, However, this study is conducted using
Awash International Bank S.C. as a base. AIB had about 200 branches around the
country. The data needed for this study is collected from AIB and other stakeholders and
the total deposit trend is the sum of all AIB’s branches total deposit.

5
 1.7. Organization of the study
The final paper for the study is organized into five chapters including the introduction
part of the study. The first chapter deals with the background of the study, statement of
the problem, research questions, objectives of the study, the significance of the study and
limitation and delimitation of the study. The second chapter, literature review, deals with
the literatures on the concept of banking, major determinants for banks’ Performance and
preview of Ethiopian banking industry. It also briefly recites the importance of deposit,
the types of deposit and factors affecting deposits of commercial Banks. The third chapter
deals with the methodology of the study. The sources of qualitative and quantitative data
of the study are indicated. The fourth chapter deals with analysis of the data and
presentation of the output. In the fifth chapter the researcher concludes the findings of the
study and recommends based on the conclusion made.

6
 Chapter 2: Literature Review

2.1. The concept of Banking

Banking is one of the oldest professions in human history, it also flourished with
civilizations. Since humans started, using money bank services were in use throughout
history. Modern banking as we know it today was established in Italy and Greece in the
15th century. Today, banks are one of the most important institutions for a modern
economy to work in any country. (Gedey, 1990)

Different historical sources states that the first foundations of the banking service in the
world were put by goldsmiths and silversmiths. They have a safe box to put & they were
the most trusted. They used to receive gold, silver and various jewelries to put with them.
Therefore an individual or a merchant puts his wealth under their custody, for their
service they charge a small amount of money and give the customer a receipt to
guarantee their acceptance. Then they started using, money paying instrument what we
now call this document as ‘check’. However as time goes by , the goldsmiths and
silversmiths observed that their customers wouldn’t take their jewelry soon, and those
clients, whenever they face the shortage of money, they started lending to this people and
started to get profit from their service. They encouraged depositing and lending and
rather than making the customers to pay a charge for depositing, they started to pay them
interest and introduced the public to work with money. It is believed that, ancient
Assyrians, Babylonians, Athenians, Romans and Abyssinians also used the banking
service. (Gedey, 1990)

Some authorities, relying upon a broad definition of banking that equates it with any sort
of intermediation activity, trace early banking as far back as ancient Mesopotamia, where

7
temples, royal palaces, and some private houses served as storage facilities for valuable
commodities such as grain, the ownership of which could be transferred by means of
written receipts. There are records of loans by the temples of Babylon as early as 2000
BC. Temples were considered especially safe depositories because, as they were sacred
places watched over by gods, their contents were believed to be protected from theft.
Companies of traders in ancient times provided banking services that were connected
with the buying and selling of goods. (Britannica, 2010)

A broader definition of a bank is any financial institution that receives, collects, transfers,
pays, exchanges, lends, invests, or safeguards money for its customers. This broader
definition includes many other financial institutions that are not usually thought of as
banks but which nevertheless provide one or more of these broadly defined banking
services. These institutions include finance companies, investment companies,
investment banks, insurance companies, pension funds, security brokers and dealers,
mortgage companies, and real estate investment trusts. (Encarta, 2009)

Banks play a very important role in the economic development of every nation. They
have control over a large part of the supply of money circulation. Banks are the main
stimulus of the economic progress of a country. The financial sectors contribution to
growth lies in the central role it plays in mobilizing savings and allocating these resources
efficiently to the most productive uses and investments in the real sector. (Ayalew, 2009)

2.2. Determinants of Bank’s Performance

Different empirical evidences suggested that performance of financial institutions
specifically banks are affected by internal and external factors. Andreas and Gabrielle
(2009) stated that bank profitability is usually measured by the return on average assets
and is expressed as a function of internal and external determinants. The internal
determinants include bank-specific variables. The external variables reflect
environmental variables that are expected to affect the profitability of banks. Internal
8
factors such as liquidity, capital adequacy ratio, asset size, asset quality, net-worth,
earnings quality, loan performance, business risk, management quality, people,
technology and operating environment are major determinant that are used to analyze the
determinants of bank profitability. External macroeconomic and industry-specific factors
include effective tax rate, real GDP growth, inflation, regulation and Bank concentration.
Some of the stated internal and external determinants are discussed below.

I. Liquidity
A bank or financial institution has to be liquid to meet payment obligations to depositors
and creditors. This calls for a sound Asset Liability Management by the bank. Liquidity
analysis considers the bank’s ability to meet its obligations and is very critical for a bank
to remain a going concern. The absence of liquidity can lead to failure of a bank. It also
considers the proportion of liquid assets to total assets along with their deposit renewal
rate (brickwork rating 2010). Abdus Samad (2001) and Pak and Huh (1995) used loan to
deposit ratio to calculate the level of liquidity in their study.

Liquidity allows banks to meet depositors’ and creditors’ demand and so to maintain
public confidence. There needs to be an effective asset and liability management system
to minimize maturity mismatches between assets and liabilities and to optimize returns.
As liquidity has inverse relationship with profitability, and banks must strike a balance
between liquidity and profitability (Financial Management and Analysis of Projects
2006). According to Molyneux and Thornton (1992), and Guru (1999), there is a negative
and significant relationship between the level of liquidity and profitability. In contrast,
Bourke (1989) reports an opposite result, while the effect of credit risk on profitability of
banks appears clearly negative.

Current and quick ratios are inappropriate for measuring banks liquidity as per Brickwork
rating (2008). A loan-to-deposit ratio is more relevant. However, a bank’s liquidity and
solvency are directly affected by portfolio quality. Consequently, financial analysts
9
(investment officers) are carefully analyzing the bank’s portfolio quality based on
collectability and loan-loss provisioning. The trade-offs that generally exist between
return and liquidity risk are demonstrated by observing that a shift from short term
securities to long term securities or loans raises a bank’s return but also increases its
liquidity risks and the inverse is true. Thus management of liquidity level for the banks
because it affect the bank’s profitability (Tobias and Themba 2011).

II. Bank size

Total assets of the bank measure bank size. In most of the finance literature, the total
assets of the banks are used as a proxy for bank size. Size is used to capture the fact that
larger banks are better placed than smaller banks in harnessing economies of scale in
transactions to the plain effect that they will tend to enjoy a higher level of profits.
Consequently, a positive relationship is expected between size and profit (Indranarain
2009).

One of the most important questions in the literature is how to determine an optimal bank
size in order to maximize bank profitability. According to Andreas and Gabrielle (2009),
larger banks are likely to have a higher degree of product and loan diversification than
smaller banks. In addition to the higher diversification potential, economies of scale can
also arise from a larger size. Diversification reduces risks and economies of scale lead to
increased operational efficiency. The growing banking size is positively related to bank
profitability. However, they also argued that banks that have become extremely large
exhibit a negative relationship between size and profitability due to agency costs,
bureaucratic processes and other reasons related to a large firm size.

10
 III. Bank concentration
The bank concentration variable is defined as the ratio of the largest banks’ assets to the
total assets of the entire banking sector. Market structure in the banking industry
measured by means of the bank concentration variable according to the structure conduct
profitability of banks in highly concentrated markets earn monopoly rents, as they tend to
collude (Gilbert 1984). As collusion may result in higher rates being charged on loans
and lower interest rates being paid on deposits, a higher bank concentration have a
positive impact on profitability. On the other hand, a higher bank concentration might be
the result of a tougher competition in the banking industry, which would suggest a
negative relationship between profitability and market concentration as stated in (Boone
and Weigand 2000). As a result, the overall effect of market concentration on banking
performance is again undetermined.

IV. Human capital

The people in a bank are the most valuable resources and the major driving force for
successes and failures. The quality of human resources employed by a bank greatly
affects its profitability i.e, the recruitment process and training standard of the financial
institution reflects the quality of the people in the organization, compensation package as
per the industry norms and attrition rate in the financial institution which reflect the
satisfaction among the employees towards their work and organization. (Brickwork
ratings 2008).

The human capital in organizations is valuable because of the capabilities that the people
have. As part of the strategic role, Human Resource managers are often seen as
responsible for expanding the capabilities of the human resources in an organization.
Currently, considerable emphasis is being focused on the competencies that the

11
employees in the organization have and will need the organization to grow in the future.
Yet the mobility of human capital is less a threat to competitive advantage than it would
first seem to be because once an organization integrates human capital with other
complementary resources and uses this integration to create organizational capabilities,
losing one or a few individuals may not lead to a loss of competitive advantage (John I
Njugun 2009).

V. Management quality
Performance will depend on the vision, capability, agility, professionalism, integrity, and
competence of the Financial Institution’s management. A sound management is crucial
for the success of any institution. The quality of the management will determine the
success of a bank or financial institution. The performance of a bank is largely dependent
on the vision, competence, and integrity and risk appetite of the management (Financial
Management and Analysis of Projects 2006). A positive relationship is expected between
efficiency and profitability of banks. The analysis of the quality of a management is
based on the experience of the management and their track record in terms of their vision
and competence in running the bank.

The analysis of the management also factors in their integrity and the overall corporate
governance standards in the bank. The risk appetite in terms of the bank’s exposure to
various categories of asset, adoption of technology and responsiveness to competition and
growth strategy impacts the bank’s profitability thus is considered during the analysis of
bank profitability (Brickwork ratings 2008). Although, the relationship between
expenditure and profits appears straightforward implying that higher expenses mean
lower profits and the opposite, this may not always be the case. The reason is that higher
amounts of expenses may be associated with higher volume of banking activities and
therefore higher revenues (Tobias and Themba 2011).

12
 VI. Technology
European central bank (1999) stated that the information communication technology
development had a strong influence on the structure and the activities of the banking
sector. The elements that have changed are several, besides allowing transactions to be
conducted more efficiently; technology allows banks to market their products more
effectively. The technology deployed in banks affects its operational efficiency and
determines its competitive position in the market (Brickwork ratings 2008).

As per Thomas Ogoro (2010), technological development removed repetitive and time
consuming tasks, reduced human error and extended access to banking related facilities.
Technology also provides customer information that it would be much more expensive to
provide on a person-to-person basis. The dilemma still remains, however, as to how to
maintain a satisfactory number of face-to-face interactions with the customers.

Information technology developments affect banking in two main ways. First, it

contribute to the reduction of the costs associated with the management of information
(collection, storage, processing and transmission) by replacing paper-based and labor-
intensive methods with automated processes. Second, it modifies the ways in which
customers have accesses to banks‟ services and products, mainly through automated
channels (remote banking). Whereas improvements in the area of information
management have been taking place for a long time, remote banking is a more recent
phenomenon with developments occurring more progressively, especially in retail
banking (European Central Bank 1999).

13
 VII. Gross Domestic Product (GDP)
Macroeconomic conditions affect banks’ performance in a number of ways. Firstly, there
will be a higher demand for bank credit in times of economic boom than in times of
recession. According to Belayneh (2011), from microeconomic indicators, the only
significant factor of bank profitability is real GDP growth. He stated that the current real
economic growth of the country makes commercial banks to be more profitable. A high
aggregate growth rate may strengthen the debt servicing capacity of domestic borrowers,
and therefore, contribute to less credit risk. Alternatively, adverse macroeconomic
conditions hurt banks by increasing the amount of non-performing loans. Thus, it is
expected that an improvement in economic growth enhance banks’ performance.

VIII. Regulation
The banking industry is among the most heavily regulated industries in the world and
Ethiopian banking industry is also one of the most heavily regulated industry. As quoted
from Sudin Haron (1996), the main reason for regulation is to provide a sound, stable and
healthy financial system, and Peltzman (1968) was among the first researchers to
empirically test the effects of regulation on performance. Instead of profit, he used the
bank’s capital as a proxy for performance. Peltzman’s findings indicated that a
prohibition on interstate branching and legal restrictions on new entry had a significant
impact on the market value of a bank’s capital. Fraser and Rose (1972) also studied
whether the opening of new institutions had any significant adverse effect on the growth
and profitability of competing institutions. They found that, despite some evidence of
slowing in the growth rate of deposits, the profitability of existing institutions was not
adversely affected by the opening of new branches by their competitors.

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 2.3. Banking in Ethiopia
Traditional financial system in Ethiopia has long history and paramount contribution to
economic betterment and social wellbeing of the society. Traditional institutions
organized with a sense of cooperation and risk sharing has enabled Ethiopians to
experience saving and financial management within its cultural context. Equb and Edir
are some of the informal financial institutions that shaped the social bond and interaction
(Gebeyaw Aychile 2008).

Modern banking in Ethiopia was introduced after the agreement that was reached in 1905
between Emperor Minilik II and Ma Gillivray, representative of the British owned
National Bank of Egypt. Following the agreement, the first bank called Bank of Abysinia
was inaugurated in Feb.16, 1906 by the Emperor. Within the first fifteen years of its
operation, Bank of Abysinia opened branches in different areas of the country in Harar
(Eastern Ethiopia), Dire Dawa, Dessie and Djibouti. By 1931, Bank of Abyssinia was
legally replaced by Bank of Ethiopia shortly after Emperor Haile Selassie came to power.

The new Bank, Bank of Ethiopia, a purely Ethiopian institution, was the first indigenous
bank in Africa, and established by an official decree on August 29, 1931 with capital of
£750,000. In 1941, another foreign bank, Barclays Bank, came to Ethiopia with the
British troops and organized banking services in Addis Ababa, until its withdrawal in
1943. Then, on 15th April 1943, the State Bank of Ethiopia commenced full operation
after 8 months of preparatory activities. In 1945 and 1949, the Bank was granted the sole
right of issuing currency and deal in foreign currency. The Bank also functioned as the
principal commercial bank in the country and engaged in all commercial banking
activities. The National Bank of Ethiopia with more power and duties started its operation
in January 1964. Following the incorporation as a share company on December 16, 1963
as per proclamation No.207/1955 of October 1963, Commercial Bank of Ethiopia took
15
over the commercial banking activities of the former State Bank of Ethiopia. It started
operation on January 1, 1964 with a capital of Eth. Birr 20 million. In the new
Commercial Bank of Ethiopia, in contrast with the former State Bank of Ethiopia, all
employees were Ethiopians.

There were two other banks in operation namely Banco di Roma S.C. and Banco di
Napoli S.C. that later reapplied for license according to the new proclamation each
having a paid up capital of Eth. Birr 2 million. The first privately owned bank, Addis
Ababa Bank Share Company, was established on Ethiopians initiative and started
operation in 1964 with a capital of 2 million in association with National and Grindlay
Bank, London which had 40 percent of the total share. In 1968, the original capital of the
Bank rose to 5.0 million and until it ceased operation, it had 300 staff at 26 branches.

There were other financial institutions operating in the country like:

Imperial Savings and Home Ownership public Association, which specialized in
providing loans for the construction of residential houses and to individuals under
the guarantee of their savings.

Saving and Mortgage Corporation of Ethiopia whose aims and duties were to
accept savings and trust deposits account and provide loans for the construction,
repair and improvement of residential houses, commercial and industrial buildings
and carry out all activities related to mortgage operations.

Agricultural Bank that provides loan for the agricultural and other relevant
projects established in 1945. But in 1951 the Investment Bank of Ethiopia
replaced it. In 1965, the name of the bank once again hanged to Ethiopian
Investment Corporation Share Company and the capital rose to Eth. Birr 20
million, which was fully paid up.

16
Following the declaration of socialism in 1974, the government extended its control over
the whole economy and nationalized all large corporations. Organizational setups were
taken in order to create stronger institutions by merging those that perform similar
functions. Accordingly, the three private owned banks, Addis Ababa Bank, Banco di
Roma and Banco di Napoli Merged in 1976 to form the second largest Bank in Ethiopia
called Addis Bank with a capital of Eth. birr 20 million and had a staff of 480 and 34
branches. Then Addis Bank and Commercial Bank of Ethiopia S.C were merged by
proclamation No.184 of August 2, 1980 to form the sole commercial bank in the country
until the establishment of private commercial banks in 1994.

The Savings and Mortgage Corporation S.C. and Imperial Saving and Home Ownership
Public Association were also merged to form the Housing and Saving Bank with working
capital of Birr 6.0 million and all rights, privileges, assets and liabilities were transferred
by proclamation No.60, 1975 to the new bank. The financial sector that the socialist
oriented government left behind constituted only three banks and each enjoying
monopoly in its respective market, the following was the structure of the sector at the end
of the era: the National Bank of Ethiopia (NBE), the Commercial Bank of Ethiopia, and
Agricultural and Industrial Development Bank.

Following the demise of the Dergue regime in 1991 that ruled the country for 17 years
under the rule of command economy, the Ethiopian People’s Revolutionary Democratic
Front declared a liberal economy system. In line with this, Monetary and Banking
proclamation of 1994 established the national bank of Ethiopia as a judicial entity,
separated from the government and outlined its main function. Monetary and Banking
proclamation No.83/1994 and the Licensing and Supervision of Banking Business
No.84/1994 laid down the legal basis for investment in the banking sector. Currently
private commercial banks in Ethiopia reached to sixteen as shown in the table below.

17
 Table 2.1.Private commercial banks in Ethiopia
No Private Commercial Banks Establishment Year

1 Awash International Bank 1994

2 Dashen Bank 1995

3 Abyssinia Bank 1996

4 Wegagen Bank 1997

5 United Bank 1998

6 Nib International Bank 1999

7 Cooperative Bank of Oromia 2004

8 Lion International Bank 2006

9 Oromia International Bank 2008

10 Zemen Bank 2008

11 Bunna International Bank 2009

12 Birhan International Bank 2009

13 Abay Bank 2010

14 Addis International Bank 2011

15 Debub Global Bank 2012

16 Enat Bank 2013

Source: www.nbe.gov.et

18
 2.4. The Importance of Deposits
Deposit, is a main source for providing loans and so are important financial source of
banks.

Banks make profit using their deposits: Mahendra (2005) said that deposits
provide most of the raw materials for bank loans and thus represent the ultimate source of
the bank’s profits and growth. Banks make profit by using their deposits, therefore it is
said that depositors can disciple banks. Maria and Sergio (2001), found that depositors
discipline banks by withdrawing deposits and by requiring higher interest rates. For
depository corporations mainly deposit money banks, their principal objectives is
undertaking financial intermediation to make profit and increase their shareholders value
(Sheku, 2005). They achieve their objectives mainly by attracting deposits and investing
the money on profitable investment portfolio.

Cheaper than raising equity: Banks, as any other business organizations, funds
from debt and/or equity. In the banks context raising equity is more expensive or costly
than attracting deposits. Lorenzo et al (2010) states that, if the lending channel plays a
role, the deposit growth should lead to an increase in the supply of loans due to the
additional source of financing for banks. As demand for loan increases because of the
development work done by individuals, businesses and government, banks should extend
their deposit base. When a commercial bank creates a deposit by lending to a business
man, it is clearly performing a function for which it is entitled to a return in the form of
interest payments (Harold, 1946).

Fund investment and/or development projects: Debt is largely held by domestic

commercial banks which are funded mainly from deposits. The government demand for
bank assets enabled banks to continue to expand their deposit base rapidly and profitably
19
(Herald and Heiko, 2009). Individual investors and government are mainly depend on the
deposits of banks to fund their investments and/or development projects.

Generally, the banking system can be viable only if it can mobilize deposits at the
required rate. And this can be done only by making a bank deposit more attractive (V. V.
Bhatt, 1970).

The ability of a bank’s management and staff to attract checking and savings accounts
from business and individuals is an important measure of the bank’s acceptance by the
public (Mahendra, 2005). Banks’ management major concern is the variability of
deposits for several reasons. George (1972) mentioned the reasons why the variability of
banks’ deposits is important as follows:-
Deposit variability is frequently included as an important determinant of portfolio
strategy. The more volatile a bank’s deposits are the more liquid its mix of assets
will be.
To the extent deposit variability affects bank holdings of cash and excess reserves,
variability affects the distribution of total member bank reserves within the
banking system and thereby the path and speed of monetary policy actions.
To the extent deposit variability affects the mix of banks’ assets, it affects the
availability of funds for loans and consequently the loan rate.
To the extent deposit variability affects both the mix of earnings assets and the
frequency of engaging in costly reserve adjustments, variability affects the
profitability of individual banks.
Deposit variability is an important factor influencing bank use of the Federal
Reserve discount window and thereby affects discount administration.

20
 2.5. Types of Deposits
Bank deposits are broadly classified into three types; (S. Venkatesan, 2012)
Current deposits,
Saving deposits and
Term (Fixed) deposits.
Current deposits: It is a deposit generally used by businessman, industrialist and others
to settle debts. These current deposits, on which cheques are issued, are also known as
cash deposits or demand deposits. They are mostly non-interest bearing.

Saving deposits: Most people as a form of savings maintain these deposits so as to earn
interest from the banks. The saving deposits are not only held to meet the needs of the
present or the near future but are also kept by individuals as part of their total stock of
wealth.

Term (Fixed) deposits: In this deposit, deposited money will be kept by bank for some
specified terms to mature with a predetermined or negotiated interest rate. The money can
be withdrawn only after a given period of time (or) term.

2.6. Factors Affecting Deposits of Commercial Banks

An important indicator of the success and efficiency of any credit agency, which is also a
banking institution is, the extent to which it is able to mobilize the savings of the
community in the form of deposit. But deposit mobilization is very difficult task. It
depends up on various factors internal and external to the banking system (N. Desinga,
1975). External factors are the general economic environment of the region, the volume
of business transaction of the region, the confidence of the people on the banking system,
the banking habit of the people and the saving potential of the region. Even when external

21
factors are more conducive for deposit mobilization, banks may fail because of
unfavorable internal factors such as location, type of building and window dressing
(furniture, cheque books, vouchers, pay slips etc), which assure the customers about the
physical fitness of a bank (N. Desinga, 1975).

N. Desinga (1975) classifies the variables which are claimed to have effect on
commercial banks’ deposit into two, namely exogenous and endogenous factors.
Exogenous has further divided into country specific factors and bank specific factors for
clarification purpose. Endogenous (Internal) factors can be controlled by the banking
system. However, the Exogenous factors (The bank specific factors and the country
specific factors) cannot be controlled by the banking system. The bank specific factors
are factors that are specific to the banking system and the country specific factors are
factors that are beyond the banking system.

I. Country Specific Factors

The country’s economic, social and political factors can affect commercial banks.
According to Herald and Heiko (2009), country specific risks such as political, economic
and financial risks may affect the propensity for depositors to place funds in the banking
system. Any single bank operates under the rule and regulation of the country where it
belongs, also different problems and shocks that has happened in the country has its own
concern in the banks operation. Generally, banks’ success in their operation is mainly
depends on the environment where the business is undertaken. The researcher has
identified ten country specific factors that have effect on the commercial banks deposits
from the literature. These are saving interest rate or deposit rate, inflation, real interest
rate, number of commercial banks available in the country, population growth, per capita
income of the society, economic growth, consumer price index, gross domestic product
(GDP) and shocks.

22
 1. Saving interest rate (Deposit Interest rate)
One of the most effective factors for deciding to deposit in banking system is the interest
rate (Mohammad and Mahdi, 2010). Moreover, this article shows the impact of interest
rate on the performance of the banking system to achieve the goals that are expected from
the banking system. Herald and Heiko(2009), also mentioned interest as one of the
determining factor for commercial banks deposits. Philip (1968), also states that the
offering of attractive interest rate on bank deposits may be considered to have had a
beneficial effect. Moreover, Mustafa and Sayera(2009) said that low deposit rates are
discouraging saving mobilization. V. V. Bhatt (1970), said that the banking system is
unlikely to be in a position to meet the demand for bank credit unless concerted policy is
pursued to raise the rate of saving generally and the rate of saving in the form of deposits
in particular.

Interest rate in the banking system is held as investment cost from the investor’s point of
view and opportunity cost from the depositor’s point of view (Mohammad and Mahdi,
2010). Thus, capital market forces balance interest rates. In other words, the just and
correct interest rate should be determined through market mechanism, that is, interest rate
is balanced in supply and demand conditions in proportion with the inflation rate.
Eustacius and David (1995) states that deposits are more interest rate sensitive and banks
may choose to increase investments in interest rate sensitive assets and to decrease
investments in loans. That is commercial bank deposits are interest rate sensitive,
therefore as the interest rate changes the deposit of the commercial banks will change.

It is known that depositors bring money to the bank which the bank in turn lends it to
borrowers. The gross earnings of the bank are determined by the volume and composition
of loanable funds and the rates at which they are loaned. After losses and expenses of
operation are deducted, the net earnings provide a margin out of which interest on
23
deposits can be paid. Because of the competition for these funds among bankers who
desire to loan them at a profit, a bank must pay interest or lose deposits to a competitor.
The payment of interest on deposits is explained in this wise, like any other interest rate.
As to Erna and Ekki (2004),

Economists, mainly conventional ones, believe that depositors are attracted to deposit
their money in banks because of the opportunity cost of holding cash in hand is high
when the interest rate is also high (Romer, 2001, p. 346; Athukorala and Sen, 2004, p.
498). This can easily be explained by the utility maximization (cost minimization)
premise, as a depositor will choose an action that will maximize their welfare or
satisfaction. As to Richard (1971), regulation of the commercial banking industry affects
the returns which commercial banks realize on their deposits and capital. That is although
deposits are the source for profit of banks it is influenced by regulation of the country.
Accordingly, the higher profit rate on demand deposits is to a large extent the result of
the prohibition against the payment of interest on these deposits. Therefore, depositors
are motivated by returns. Using an Adaptive Expectation Model (AEM), it is founded
that depositors are indeed motivated by returns in Malaysia (Erna and Ekki, 2004). On
the other hand, Erna and Ekki (2004) state that Ghafur’s (2003) shows that the rate of
interest does not have influence on the volume of the deposits. However, Rose (2001)
said that banks increase their deposits by offering higher deposit rate. These are the
articles that contradict to each other in identifying the relationship between the
commercial banks deposits and saving interest rates or deposit rate.

2. Inflation
As to Herald and Heiko (2009), inflation is one of the factor that determines commercial
banks deposits. Fischer showed that in Latin America the effect of inflation on savings
and time deposit to GDP was significantly negative (Mohammad and Mahdi, 2010).

24
The classical belief is that, because bank assets and liabilities are expressed in monetary
terms and because these assets will normally grow in line with growth in money supply,
banks are relatively immune from the effects of inflation (Devinaga, 2010). In brief,
monetary policy works by controlling the cost and availability of credit. During inflation,
the Central bank can raise the cost of borrowing and reduce the credit creating capacity of
commercial banks. According to Devinga (2010), this will make borrowing more costly
than before and thereby the demand for funds will be reduced. Similarly with a reduction
in their credit creating capacity, the banks will be more cautious in their lending policies.
Since the banks demand for fund decreases obviously the deposits will decrease. Banking
system was affected by inflation in terms of deposit absorption and facilities grant
(Mohammad and Mahdi, 2010). As to Mohammad and Mahdi (2010), in developed
countries negative correlation between inflation and absorbed deposits and granted
facilities has been documented. However, in developing countries the opposite is true.
Inflation is seen as an economic problem in developed countries in the second half of
20th century.

Inflation with effect in economic growth, employment, income distribution and wealth as
well as social and political conditions of a country can influence its entire dignity
(Mohammad and Mahdi, 2010). Moreover Mohammad and Mahdi (2010) Banking
system as an important effective factor in economic performance has also been under the
influence of inflation. As to Mohammad and Mahdi (2010), as far as the effect of
inflation on financial sector conceived the literature demonstrates that inflation affects the
capacity of financial sector for optimal allocating of resources. That is as inflation rate
increases, true yield rate of money and assets decrease; therefore deposits are no longer
attractive. Also the increase of inflation rate has a negative effect on the performance of
financial sector through the market credits and in turn, on the performances of banks and
capital markets and finally on the long term economic growth (Mohammad and Mahdi,
2010).

25
With respect to the effect of inflation on savings, it can be mentioned that in general, all
individuals who save a part of their incomes in banks are directly damaged by the
inflation and their assets decrease in proportion with money value decrease (Mohammad
and Mahdi, 2010). In that case as Mohammad and Mahdi (2010) describes people try to
change their cashes and savings to more reliable and stable forms such as land, jewelry,
antiques, art collections, foreign currencies that causes to definite decrease in commercial
bank’s total deposit. High inflation rates reduce the real value of deposits (M. A. Baqui et
al, 1987). According to M. A. Baqui et al (1987), inflation technically did not decrease
deposit; however, it decreases the value of deposits.

3. Real 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 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-Choong 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).

4. Population growth of the country

The twin objectives of commercial banks, i.e. acquiring deposits and advancing credit
cannot be attained without good banking habits of the people (Mahendra, 2005).
Moreover Mahendra (2005) states that, the number of deposit accounts is more important
because it ensures that the probability of account is more important because it ensures

26
that the probability of account holders withdrawing cash at a time decreases as the
number of deposit account increase, thereby creating advantage for banks in terms of
increasing the size of the loanable fund. So the higher number of deposit accounts the
greater is the advantage to banks. The number of deposit accounts depends on the number
of deposit account holders.

5. Per capita income of the society

According to Jim (2008), per capita is the level of GDP divided by the population of a
country or region. 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. If households and
firms desire to hold more money, deposits will increase (Evan, 2006). So, the relationship
between income and deposits is positive. That is, as the income of the society increases
the same happens for the commercial banks’ deposits. Income is expected to have a
positive effect on deposits (M. A. Baqui et al, 1987). Therefore as society’s per capita
income increases the same will happen for commercial banks deposits. Mahendra (2005)
also indicates that income of the society matters for banks’ deposit growth. Eshetu &
Mammo (2009), Ethiopia is one of the poorest countries in the world with an estimated
per capita income of just $203(IMF 2007 cited by the Financial Standards Foundation).

6. 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 (Yanne et al, 2007). It is universally applied according to common standards, and
has some undeniable benefits mainly due to its simplicity (Yanne et al, 2007).
According to Herald and Heiko (2009), 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) (Jim, 2008). Erna and Ekki (2004) finds four variables, GDP,

27
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.

7. Consumer price index

According to Herald and Heiko (2009), price can also determine commercial bank
deposit and it can be indicated by consumer price index. In literature there is an evidence
for the influence of consumer price index on commercial banks deposit.

8. Shocks
Aggregate shocks affect deposits and interest rates during crises, regardless of bank
fundamentals and investors’ responsiveness to bank risk taking increases in the aftermath
crises (Maria and Sergio, 2001). Therefore, given all other variables the shocks happened
in the economy can affect the banks’ deposits.

II. Bank Specific Factors

1. Liquidity of the banks
The concept of liquidity in finance principally lies in two areas (ISMAL, RIFKI, 2010):-
Liquidity of financial instruments in the financial market
The liquidity related to solvency.
The former related to liquid financial markets and financial instruments, smooth
transactions and no barriers. As to ISMAL, RIFKI, (2010), the latter discusses the
obligation of banks to make payments to third parties (Fiedler, 2000:442). Some
examples of this includes: setting up liquidity management policies, reserve liquidity,
balancing assets and liabilities and preparing liquid financial instruments (ISMAL,
RIFKI, 2010).

28
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 (Devinga, 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). According to Voon-Choong et al
(2010), the basic need for liquidity, asset, liability, capital adequacy, credit and interest
rates risks management are now more challenging than before (Mishkin, 2007). The
banks’ liquidity management involves acquiring sufficient liquid asset to meet the bank’s
obligation to depositors (Voon-Choong et al, 2010). According to the findings of
Dorothee and Andrea (2009) it is more profitable for savings banks to hold liquid assets
than to invest in illiquid assets, such as medium-term interbank lending to other credit
institutions.

According to the theories of financial intermediation, the two most crucial reasons for the
existence of financial institutions, especially banks, are their provision of liquidity and
financial services (ISMAL, RIFKI, 2010). According to ISMAL, RIFKI, 2010, Regarding
the provision of liquidity, banks accept funds from depositors and extend such funds to
the real sector while providing liquidity for any withdrawal of deposits, however the
banks’ role in transforming short term deposits into long term loans makes them
inherently vulnerable to liquidity risk (Bank for International Settlements (BIS),
2008b:1). Individual, business and government will be willing to deposits their money in
banks if they are certain that they are save to withdraw the money whenever they want,
this is the question of liquidity of banks. The more liquid banks can attract the deposits.
Liquidity risk occurs in two cases;
It arises symmetrically to the borrowers in their relationship with the banks, for
example when banks decide to terminate the loans but the borrowers cannot afford
it.

29
 It arises in the context of the banks’ relationships with their depositors, for
example, when depositors decide to redeem their depositors but the bank cannot
afford it.
Liquidity risk is the possibility that depositors may withdraw some or all of their funds,
and default risk is the possibility that borrowers may not repay all their debts when due
(M. Shubik and M. J. Sobel, 1992).

Banks that are perceived as less risky maintain a high level of liquidity or have a lower
concentration of assets, particularly to the government, may be expected to be able to
attract more deposits than their peers (Herald and Heiko, 2009).

A higher degree of financial intermediation (proxied by the loan-to-assets ratios) 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 (Herald and Heiko, 2009). A higher
liquidity buffers (measured by the ratio of liquid assets to deposits) tend factor favoring
deposit demand (Herald and Heiko, 2009). Liquid banks as well as banks with a higher
loan exposure are associated with higher deposit growth. Herald and Heiko (2009), states
that the liquidity situation of the bank also plays a significant role in determining banks
deposit growth. According to Nada (2010), Banks perceived as risky should have had
more difficulty attracting deposits and making loans than banks perceived as safe. When
banks fail to pay for its depositors then it faces liquidity risk that makes other depositors
not to deposit in that particular bank.

2. Profitability of the bank

Erna and Ekki (2004) find the long run relationship between commercial banks deposits
and the profitability of the banks. Higher bank profits would tend to signal increased
bank soundness, which could make it easier for these banks to attract Deposits (Herald
and Heiko, 2009). However, the effect of bank profitability and bank size are found to be

30
insignificant once controlling for the other variables. So, the effect of profitability and
banks size on commercial bank deposit is lower as compared with other variables.

3. Security of the bank

Security of banks matters in mobilizing deposit. Riskier banks would be able to attract
deposits only paying higher Interest rates. The security of banks has its own impact on its
attractiveness for depositors. For example in the existence of deposit insurance the
depositors no longer are concerned about the soundness of their banks because their
deposits are insured in the event of bank failure. So the bank should secure its system so
as to mobilize more deposit than before and to attract new depositors and maintain the
exiting depositors.

4. Branches
There is a relationship between commercial banks deposits and commercial bank’s
branch expansion. Not only are deposits influenced by bank branches, but the expansion
of bank branches is also influenced by the level of deposits in any area (M. A. Baqui et
al, 1987). It is expected that banks make decisions on expanding their facilities by
considering factors such as level of competition, deposit potential, regional income and
existence of road and vehicles. As deposit potential is one thing that banks consider in
expanding its branches, the deposit can also be a reason for branch expansion strategy
that the banking sector uses. According to Erna and Ekki (2004), there is a long run
relationship between commercial bank branch and commercial banks deposits.

It is often argued that branching stabilizes banking system by facilitating diversification

of bank portfolios (Carlson and Mitcheer, 2006). Mark and Kris (2006), found from
theoretical literature on banking regulation that branch banking leads to more stable
banking systems by enabling banks to better diversify their assets and widen their deposit
base (Gart, 1994, Hubbard, 1994). An argument commonly articulated in the literature is

31
that branch banking stabilizes banking systems by reducing their vulnerability to local
economic shocks; branching enables banks to diversify their loans and deposits over a
wider geographical area or customer base (Mark and Kris, 2006). Restrictions on
branching have been linked to the instability of banking systems.

Daniel (2005), suggest that the lack of widespread branching bank networks hindered the
development of large-scale industrial firms. It is stated that unit banks become
increasingly incapable of receiving deposits from a widespread geographic area. The
single office bank is also not able to monitor geographically diffuse debtors as easily as
could be done with multiple offices. Moreover, it can be concluded that under branch
banking the mobility of capital is almost perfect.

5. Bank size
Among the factors prominently identified as affecting deposit variability one is bank size.
Evidence indicates that the number and diversity of the ownership of individual deposit
accounts as well as the distribution of deposits by type vary with bank size (George,
1972). Herald and Heiko (2009) founds that although insignificant once controlled by
other variables bank size have an effect on deposits. Smaller banks has to generate less
deposits in absolute terms to achieve the same deposit growth than large banks, thus
possibly favoring smaller banks in achieving higher deposit growth. But a larger bank
with economies of scale as well as larger branch network might be able to better attract
deposits (Herald and Heiko, 2009).

6. Reserves
Richard Goode and Richard S. Thom (1959), said that reserves that are fixed legally can
influence the deposits that banks can hold. According to them reserve requirements
determine the maximum amount of loans and investments that each commercial banks
and the banking system as a whole may maintain in relation to deposits. Thus, if the

32
reserve requirement is 20 percent of deposits, loans and investment (of the bank’s own
choosing) may not exceed 80 percent of deposits. Therefore, reserve requirements limit
the total expansion of bank deposits that can occur on the basis of any primary increase in
deposits. Reserve requirements also have the effect of limiting the reduction in bank
credit and deposits that is forced up on the banking system by a primary decrease in
deposits. The commercial banks can obtain currency to pay out to customers only by
drawing down their reserve deposits at the central bank or by using till money (Richard
Goode and Richard S. Thom, 1959). Till money, according to Richard Goode and
Richard S. Thom (1959) is the currency that banks keep on hand to satisfy day to day
needs. They pointed out that bank deposits are a large part of the money supply in
virtually all countries.

7. Transaction cost
Important indicator of management’s effectiveness in any bank are whether or not
deposited funds have been raised at the lowest possible cost and whether enough deposits
are available to fund those loans the bank wishes to make (Mahendra, 2005). This last
point highlights the two key issues that every bank must deal with in managing its
deposits (Mahendra, 2005):-
Where can the bank raise funds at the lowest possible cost,
How can management ensure that every bank always has enough deposits to
support the volume of loans and other financial services demanded by the public?

III. Internal Factors

In the literature three internal factors are identified that can affect the growth of
commercial banks deposits. They are awareness of the society for using banks to deposit
their money, convenience of Bank’s office and service in the banks.

33
 1. Awareness of the society
According to M. A. Baqui et al (1987), some analysts argue that demand for deposits is
influenced by education level which in turn increases the awareness of the rural people
about banking services (Mauri; Von Pischke). Since the study of M. A. Baqui et al (1987)
conducted by taking rural area as its base it is obvious that it considers the awareness as a
factor of deposit mobilization. It was also found that literacy as a proxy for awareness
about banking, positively influence deposits.

2. Convenience of Bank’s office

Road and vehicles directly influence interest bearing deposits because of the reduction in
depositors’ transaction costs through reduced time spent in travelling to and from banks
(M. A. Baqui et al,1987). Banks can mobilize more deposit when they make themselves
closer to their customers (depositors).

3. Services
It is known that banks are service giving organizations and the service delivery can affect
their business undertakings. M. A. Baqui et al (1987) stated that there is some empirical
evidence demonstrating the positive influence of services rendered to depositors. Baqui
further suggested two innovations to be tested to provide incentives to depositors:-
Additional benefit like prize bounds could be given to depositors for maintaining
deposits for particular period.
As recommended by Nathan (1986a), one category of deposits might be
specifically tied to future loans. Bank customers might be encouraged to
participate in a savings program that, for example, provides machinery or housing
after a predetermined amount of savings has been accumulated.

34
Services in the bank should be attractive enough for the depositors so as to mobilize
deposits. If the banks could offer these services, the savers would be inclined to keep a
part of their saving in the form of deposits (V. V. Bhatt, 1970).

The followings are services that V. V. Bhatt (1970) claims to use to mobilize deposits:-
Door-to-door collection of small saving in the form of deposits.
Offering land revenue or insurance premium: If the banks offer to pay land
revenue or insurance premium out of the interest earned on deposits, some persons
may be inclined to put deposits of such amounts as would earn enough interest to
meet their land revenue or insurance premium liability. To attract deposits these
types of services are worth providing.
An investment service: Some savers have neither the inclination nor the time to
select an appropriate portfolio of financial investment. Banks can select the
portfolio of investments on their behalf, keep the securities in safe custody, collect
Interest/dividend income and even fill income-tax forms; with such services
offered, some savers would be inclined to keep their liquid funds in the form of
deposits.
Some persons like farmers get their incomes say once or twice in a year, while
their expenditure is spread over the whole year. If banks could collect deposits
from them at the harvesting season, and assure them regular withdrawals during
the year, farmers may be inclined to keep deposits with the banks. This scheme
would ensure safety of their funds, prudence in their management and certainty of
regular monthly means to meet their current liabilities. In addition they would earn
some interest. With a sympathetic and persuasive approach, farmers could be
attracted to such a scheme.
While giving loans to farmers and small sector, the banks could provide them with
facility of purchases from recognized dealers instead of giving cash. In this case,
the dealers could send the bills to the banks, which would debit the accounts of the
loan receivers. Some banks have introduced agri-cards with such a purpose in

35
 mind. If such facilities are provided to others also, the customers would use bank
money rather than currency for making payment and once they form this habit,
they would be induced to keep their transaction balances in the form of deposits
rather than in the form of currency.

According to V. V. Bhatt (1970) these are some of the new deposit schemes which, if
introduced, could raise the rate of saving as well as the rate of growth of bank deposits.
To the extent to which the rate of saving is raised, the growth rate of the economy would
be higher. To the extent to which the deposit growth rate is raised, the community would
have more effective control over the allocation of financial resources for Plan purposes.

2.7 Background of Awash International Bank s.c.

Awash International Bank s.c was established as a first private bank after the dawn fall of
the Dergue regime and introduction of market economic policy in 1991.

Initially, it was established by 486 founder shareholders with a paid-up capital of Birr
24.2 million. It was licensed on November 10, 1994, and started banking operations on
February 13, 1995. The number of shareholders and paid up capital have been increasing
continuously and currently its capital stood at Birr 1.5 billion. However, the
13th Extraordinary Annual General Meeting of the shareholders of AIB endorsed the
increase of paid-up capital to Birr 3 billon and subscribed capital to 6 billion within the
coming three years. (www.awashbank.com). Awash International Bank s.c is also the
first private bank to build its own head quarter and other buildings in different areas.
(Annual Management Report – Engineering Department, 2014/15). Currently, the Bank
has total of 205 branches of which 104 branches are located in Addis Ababa while the
remaining 101 branches are located in regional towns. (Annual Management Report –
Branch Affairs Directorate, 2014/15)

36
New Core Banking project was completed since July 2014 and currently, all branches are
being embraced by the new system replacing the old one which referred as the “Bank
Master”. AIB expects that the solution will provide an edge over competition by helping
meet market demands with greater agility and the automated services of the Core banking
solution will ensure faster processing front and back office request and an improved
turnaround time for customers. (AIB Annual Report 2013/14)

Similarly, the Bank started providing a card banking payment services, Automatic Teller
Machine (ATM) in collaboration with other private banks under auspice of a share
company named “Premier Switch Solutions (PSS) for the operation of joint and
management of Automatic Teller Machine (ATM) and Point of Sale (POS) terminals. In
similar development, Awash International Bank has been certified as a principal member
for accepting Master Card branded Card by Master Card International as of March 2014
Visa card as of August 2015. The Bank also announces to be on the verge of starting to
provide Debit Card, Credit Card and prepaid Card services. AIB installed 120 its own
Automatic Teller Machines (ATM) and 500 Point of Sales (POS) terminals at convenient
places for its customers. (www.awashbank.com).

37
 CHAPTER III

RESEARCH METHODOLOGY

The previous chapter presents literatures on the concept of banking, major determinants
for banks’ Performance and preview of Ethiopian banking industry. It also briefly
narrates the importance of deposit, the types of deposit and factors affecting deposits of
commercial Banks. This chapter discusses the methodology employed for the study.

3.1. Data

The study uses both primary and secondary data. The primary data is collected from
management and supervisory staffs of Awash International Bank S.C. Questionnaires
prepared are distributed in order to gather information from employees of Awash
International Bank S.C. The number of questionnaires distributed is 60.

Moreover, additional data is collected on various issues from annual bulletins of the
National Bank of Ethiopia, annual reports of Awash International Bank S.C,
Proclamations and regulations related to banking and finance, directives issued by the
Monetary Authority, and other relevant sources.

3.2 Type of Research Design

The researcher chooses to conduct an applied research which is directly related to his
career. The primary objective of this study is to identify the challenges in deposit
mobilization for private banks in Ethiopia taking AIB as a model bank through a
descriptive analysis and to recommend ways for betterment.

38
From the perspective of this specific objective, the type of research design undertaken in
this research study is descriptive and explanatory type. Therefore, the data collection
methodology employed in this study includes both primary and secondary sources of data
in order to get adequate and relevant information about the subject matter.

3.3 Sampling Design

3.3.1 Target Population

The data obtained through interview from AIB’s Branch Affairs Directorate and the
President Office personnel shows that currently there are 202 branches, 8 Directorate
Offices, 9 departments, 21 divisions, 3 vice presidents and the president. Moreover, as
per NBE’s 2013/14 report, there are 16 private banks in the industry.

As the primary objective of this study is focused on the deposit mobilization activities of
private banks and mainly on AIB, the staffs that are included in the sample are the once
which have better experience in operational and deposit mobilization activities and
believed to be better sources of information for the study. For this reason, staffs of AIB
have been taken as a target population for the study.

3.3.2 Sample Size

The Sample size of the study is 202 branches, 8 directorate Offices, 9 departments, 21
divisions, 3 vice presidents and the president Office of Awash International Bank s.c.

3.3.3 Sampling Technique

In order to obtain representative data, non probability purposive sampling tools

(convenience sampling and judgment sampling) technique was employed in this study.

39
 3.3.4 Sampling Procedure

The sampling procedure employed was that from the target population of branches,
divisions, departments, directorate offices and the executive offices of Awash
International Bank s.c, 4 directors, 3 department managers, 7 division managers, 26
branch managers, 12 assistant branch managers and 8 supervisors who are believed to
have a better exposure and experience to deposit mobilization activities were selected as
a sample for the study.

3.4 Sources and Tools of Data Collection

The study used both primary and secondary source of data. In the same way quantitative
and qualitative data was also used. In order to address the research objectives, primary
data was collected from each sample office managers and directors using questionnaires.

In line with this, secondary data was gathered from:

Literatures and previous studies in the sector and experience of other countries,

Studies, Reports, newsletters and Journals of Awash International Bank s.c,

National Bank of Ethiopia, Commercial Bank of Ethiopia, and other private banks.

Any other related Journals and Articles.

3.5 Data Analysis and Interpretation

As the study uses a descriptive analysis method, the data collected was presented,
organized, analyzed and interpreted using descriptive statistical tools such as frequency,
cumulative frequency, percentages and pie charts as per the convenience to the types of
data to use for best interpretation and easy understanding.

40
The questionnaires are analyzed using descriptive analysis techniques. The researcher
uses Excel software to analyze the questionnaires and describe the result. Accordingly 46
questionnaires are analyzed and interpreted using the statistic result that the excel
displays.

In order to show the trend of total deposit of AIB, the researcher uses deposit figures
collected from annual reports of AIB and NBE from the year 2009GC up to 2015G.C and
interpreted.

41
 Chapter IV

Data Presentation and Analysis

The previous chapters present orientation of the study, the literature review and the
research methods adopted in the study. As discussed in the preceding chapters, this study
is aimed at evaluating the trend and growth of deposit mobilization activities of Awash
International Bank S.C. and so, to recommend ways for enhancing the deposit
mobilization activities

4.1 Data Presentation and Discussion

4.1.1. AIB’s Deposit Mobilization Performance

All private banks including AIB mobilize their funds from shareholders contribution,
their operational profit and customers’ deposit. From these sources, the largest proportion
is deposit. Therefore, deposit mobilization is a major task for banks and is becoming a
decisive factor for private banks in Ethiopia following the growing demand for loans of
the expanding business activities of the country and after the issuance of NBE directive
with regard to 27% bill purchase. This directive instructs all private banks to purchase
government bond on 27% of all loan disbursements. (NBE Directive no:
MFA/NBEBILLS/001/2011)

AIB mobilize deposit mainly in three forms, i.e. demand deposit, fixed deposit and
saving deposit. Saving deposit is an interest bearing. The minimum interest on saving
deposit is fixed by the national bank of Ethiopia (NBE). Demand deposit is non interest
bearing deposit that the bank collects mainly from companies and businessmen with the
deal that they can withdraw their money on demand. The last one, Fixed deposit is the
42
contract between the bank and its customers, which states about the date of the
withdrawal and the special and negotiated interest the bank should give to the depositor.
Commercial banks in the country can give interest above the minimum interest rate fixed
by NBE as a means to attract customers and compete with each other. However, they
cannot give interest less than the minimum interest rate fixed by NBE.

In terms of composition of deposits, the largest proportion of deposit is Saving deposit.

for instance, with respect to the composition of deposits at the end of June 2015, saving
deposits amounted to Birr 10.3 billion, accounting for the lion’s share of deposits (63.6
percent), followed by demand deposits (22.5 percent), time deposits (7.2 percent) and
margins held on letters of credit (6.7percent).

Table 4.1. Composition of Deposits (In ‘000 Birr)

Financial Year

2011/12 2012/13 2013/14

Description
A B C
Saving deposits 6,565,012.1 8,505,559.9 10,250,098.8
Demand deposits 2,158,287.9 3,289,689.1 3,628,751.4
Fixed deposits 481,057.7 749,959.6 1,160,865.3

L/C Margin 360,182.4 559,587.9 1,078,117.6

Total Deposits 9,564,540.1 13,104,796.5 16,117,833.1
(AIB Annual report 2011/12, 2012/13, 2013/14)

As a prior activity, deposit of AIB has been growing during the last few years. For
example, total deposits of AIB has increased by Birr 3 billion (23percent) to Birr 16.1
billion by the end of June 2014 compared with same period of the previous year and also
has increased by 3.48 billion to Birr 19.6 billion by the end of June 2015. AIB largely
believed that the growth reflects the effect of concerted efforts of deposit mobilization,
43
the planned branch expansion of the Bank and the growing public confidence in the
Bank. The recorded growth in deposits is considered as a commendable achievement and
the best performance among peer banks amidst stiff competition among commercial
banks through branch expansion, provision of diversified services and products and
offering of attractive rates and charges. (AIB Annual report 2012/13, 2013/14)

Figure 4.1 Absolute Deposit Growth of Selected Private Banks, 2014/15

4000
3500
In Millions of Birr

3000
2500
2000
1500 3480
3002
2507 2157
1000 2015 1915
500
0

(AIB’s Business Development Department: Report 2014/15)

Concerning the composition of income, the lion’s share of income (63 percent) was
accounted for by interest income, followed by commissions and service charges (24%),
gains on foreign exchange dealings (11%) and other income (2%). (AIB Annual report
2013/14).

Interest incomes are the result of loans and these loans are given from the mobilized
deposit. This shows that AIB’s profitability is mainly dependent on the amount of deposit
mobilized.

44
 Table 4.2. Composition of Income (In ‘000 Birr)
Financial Year
2011/12 2012/13 2013/14
Description A B C
Interest Income 668,692.9 890,192.1 1,218,157.0
Commission and Services 251,323.8 322,727.2 451,410.3
Charges
Gains on Foreign Exchange 166,912.0 171,464.0 206,133.0
Dealings
Other Income 23,802.1 35,317.9 45,467.8

Total Income 1,110,730.8 1,419,701.2 1,921,168.2

4.1.2 Branch Expansion for Deposit Mobilization

Banks use branches as a means for deposit mobilization. And so, as banks increase their
number of branches and widen the geographical coverage, they can mobilize more
deposits. During the 2013/14 fiscal year, all commercial banks opened 480 new branches
raising the total branch network in the country to 2,208 from 1,728 of the previous fiscal
year. As a result, bank branch to population ratio declined from 1:49,826 people to
1:39,402 in 2013/14. The significant branch expansion was undertaken by Commercial
Bank of Ethiopia (CBE) with 124 branches, followed by Oromiya International Bank (44
branches), Awash International Bank (38 branches), Cooperative Bank of Oromiya (31
branches), Dashen Bank and Bunna International Bank (30 branches each), Berhan
International Bank (26 branches), and United Bank (24 branches). The share of public
banks in total branch network slightly went down to 45.4 percent at the end of 2013/14
from 50.3 percent of 2012/13 fiscal year signifying the steady growth in private banks.
The number of bank branches in Addis Ababa, the capital city and major business center

45
of the country, increased by 29.4 percent over last year, indicating the booming economic
activities in the city. (NBE annual Report 2013/14).

During the 2014/15 fiscal year, CBE alone opened about 124 branches and 460 new
branches were opened by private banks. AIB opened 52 new branches during the 2014/15
period. (AIB’s Business Development Report - 2014/15)

4.1.3. Major Points on Deposit Mobilization Activities of AIB (2010-2015)

Average Year-to-year growth=21%, owing to increase in all components of
deposits, except letter of credit margin
Time deposits and saving deposits depicted significant growth of 66 and 20%
respectively.
As compared to plan of 2014/15, it registered a short fall of 3.5 % (Birr 699.6
million) largely associated with a short fall of saving deposits (4.5% or Birr 586.8
million) and L/C margin (33.4% or Birr 495 million)
Share of time deposit increased to 9.9 percent from 5 percent in 2011/12.
AIB maintained its deposit market share, amidst decline in market share of peer
banks, for instance from 26 percent in 2010 to 17 percent for some bank in 2015.
The gap between the leader from private banks and AIB declined to Birr 1.3
billion in 2014/15 from over birr 4 billion in 2009/10.
The gap between AIB and its follower widened to over Birr 6 billion in 2014/15
from less than Birr a billion Birr in 2009/10.

Table 4.3. Market Share of AIB, In Percent

Particulars June 2010 June 2015
Deposits 16 16
Loans and Advances 15 17
Branch Network 16 13
(AIB’s Business Development Report - 2014/15)

46
The implication is that AIB is operating in a dynamic environment and there is high
possibility of catch-up and by-pass. (AIB’s Business Development Report, 2014/15, AIB
Annual Report 2009/10, 2010/11, 2011/12, 2012/13, 2013/14, 2014/15)

4.2 Survey results

Questionnaires were distributed to AIB staffs with job positions ranging from directors,
Department managers, Branch managers, Assistant branch managers and supervisors.
The questionnaires were physically distributed to 60 employees.

Table 4.4. Sample size and returned questionnaires

60
Sample Size
46
Completed and Returned Questionnaires
76.67%
Response Rate
Source: Own Survey and computation
Out of the 60 questionnaires distributed, 46 were completed by the respondents and were
collected. Therefore, the response rate was 76.67 percent.

Table 4.5. Job position of the Respondents

Frequency
percentage Cumulative
Job Positions Frequency Frequency
Director 3 7% 7%
Department Manager 2 4% 11%
Division Manager 5 11% 22%
Branch Manager 22 48% 70%
Assistant Branch Manager 9 20% 89%
Supervisor 5 11% 100.00%
Total 46 100%
Source: Own Survey and computation

47
The survey targets respondents with job positions of senior and middle level management
positions and branch supervisors. As indicated in the above table, major respondents are
branch managers (almost half) and 20% are assistant branch managers. Moreover, 11%
each of the respondents are division managers and branch supervisors. Also, 7% and 4%
of the respondents are directors and department managers respectively
.
Table 4.6. Gender Distribution of the Respondents
Frequency Cumulative
Sex Frequency percentage Frequency

Male 35 76% 76%

Female 11 24% 100%

Total 46 100%

Source: Own Survey and computation

The above table shows that most of the respondents (76%) are males and the rest 24% are
females.

Table 4.7. Age Distribution of the Respondents

Frequency
percentage Cumulative
Age Frequency Frequency
Below 30 years 7 15% 15%
31 - 40 years 27 59% 74%
41 - 50 years 12 26% 100%
51and above 0 0% 100%
Total 46 100%
Source: Own Survey and computation

With respect to age, all respondents are below 50 years of age and the majority of the
respondents (59%) are between 31 and 40 years. 26% of the respondents are between 41
and 50 years and 15% of the respondents are staffs with below 30 years.

48
 Table 4.8. Work experience of the Respondents
Frequency
percentage Cumulative
Work Experience Frequency Frequency
Below one year 0 0% 0%
1 - 5 years 4 9% 9%
6 - 10 years 14 30% 39%
10 - 15 years 9 20% 59%
16 years and above 19 41% 100%
Total 46 100%
Source: Own Survey and computation

With regard to work experience, many of the respondents (41%) are highly experienced
staffs who stay more than 16 years in the banking industry. 20% of the respondents have
a banking experience of 10 to 15 years, 30% with 6 to 10 years of banking experience
and 9% of the respondents are AIB staffs with 1 to 5 years banking experience.

II. Deposit Mobilization Issues

The first question raised to respondents with regard to deposit mobilization is about the
mechanisms that the bank use to encourage/ motivate deposit mobilization efforts made
by branches. With this regard, respondents states that there are resource mobilization
teams formed at the head office and branch level. These teams exert relentless effort to
increase the volume of deposits. The Head office resource mobilization committee
supports the teams at branch level and evaluates and rank branches monthly on the basis
of activities of the branch teams and deposit result.

Major criteria set for evaluating deposit mobilization performance of branches include;
Deposit growth measured as compared to the previous month
balance, the branches’ budget for the month and balance of
previous year same period;

49
 Number of accounts growth during the month;
Number of ATM cards (Awash card) sold during the month;
Number of re-activated or re-instated customer accounts which
had been inactive before.
As elucidated by respondents, AIB classifies its branches in to four classes and one
special branch based on the number of customers and volume of transactions. Therefore,
branches compete with in their respective classes and city branches (Addis Ababa area)
and outline branches (branches outside Addis) compete separately.

Based on the cumulative results of branches for the whole budget year, AIB
acknowledges best performer branches and branch managers by rewarding them during
its annual management meeting.

Respondents also identify the strengths and weaknesses of the current deposit
mobilization efforts/practices of the bank;
Strength
It encourages branches to exert their efforts consistently for deposit growth
Through the effort of reactivating inactive accounts, it helps to recall loyal
customers of the bank;
Being net increase in number of accounts as a performance criterion, it
helps to widen the customer base of AIB;
The activities broaden the marketing knowledge of staffs
Weaknesses
In evaluating branches, it considers only branches’ month end deposit
balance;
It doesn’t consider location advantages/disadvantages of branches

50
 Table 4.9. Understanding and Commitment of staffs for deposit mobilization
Frequency Cumulative
Frequency percentage Frequency

Very good 14 30% 30%

Good 10 22% 52%

Satisfactory 13 28% 80%

Poor 9 20% 100%

Total 46 100%

Source: Own Survey and computation

Respondents are asked to evaluate the understanding and commitment of AIB’s staffs on
deposit mobilization. 30% of the respondents evaluate as very good, 22% of the
respondents evaluate the understanding and commitment of AIB’s staffs on deposit
mobilization as good and 28% of them evaluate as satisfactory. However, 20% of the
respondents evaluate that the understanding and commitment of AIB’s staffs on deposit
mobilization is poor.

Table 4.10. Contribution of Recently Introduced Various New Products

of Deposit Accounts in Mobilizing Deposit

Effect of New Products on Frequency

percentage Cumulative
Deposit Mobilization Frequency Frequency
Very good 5 11% 11%
Good 13 28% 39%
Satisfactory 12 26% 65%
Poor 16 35% 100%
Total 46 100%
Source: Own Survey and computation

51
In May 2014, with the intension of expanding its product base, AIB introduced various
types of special deposit accounts including Smart Children’s Account, Awash Student
Solution Account, Awash Salary Solution Account, Check Payment Solution Scheme
(CPSS), Investment Solution Account and Provident Fund Solution Account. These
accounts have special features such as higher interest rate, gift, term loan facility and
protection of cheque bouncing.

With this regard, respondents are asked on how they measure the contribution of these
new products for deposit mobilization. 11% of the respondents reply that these new
products have a very good contribution while 28% of them measure the contribution as
good. Also, 26% of the respondents measure the contribution only as satisfactory. But,
35% of the respondents believe that the contribution of these new products for the deposit
mobilization effort was poor.

What has been done in Awash International Bank S.C.to promote awareness of the
society pertaining to AIB’s services?
Use of advertisements on TV, radio, newspapers, magazines;
Sponsoring films, TV dramas, documentaries and various events;
Donations

The ability to attract and retain big depositors has a decisive role to the deposit growth of
a bank. And so, special consideration and handling to these corporate depositors should
be given. Respondents mention what they identify as special services that AIB provides
for corporate depositors. These are;
Presenting gifts and postcards during holidays;
Higher interest rate for deposits with fixed term;
Cash collection directly from the customers’ office;
Handling of staff salary,

52
 Table 4.11. Volume of Deposits Grows because of Special Services
Provided for the Corporate Depositors/customers
Frequency
percentage Cumulative
Frequency Frequency
Yes 35 76% 76%
No 11 24% 100%
Total 46 100%
Source: Own Survey and computation

As can be seen in the above table, most of the respondents, i.e. 76%, believed that
because of the special services given to the corporate customers, volume of deposit is
increasing. Only 24% of the respondents do not believe the increase in deposit due to the
special services rendered to those customers.

The survey also confirms that 95% of the respondents with job positions at a branch
level, i.e. branch manager, assistant branch manager and supervisors, believe the growth
of deposit as a result of the special services given to the corporate customers.

Table 4.12. customers’ satisfaction Rating

Frequency Cumulative
Rating of Customers’ Satisfaction Frequency percentage Frequency

Very good 13 28% 28%

Good 15 33% 61%

Satisfactory 10 22% 83%

Poor 8 17% 100%

Total 46 100%

Source: Own Survey and computation

53
Respondents are asked about their evaluation on the level of customers’ satisfaction. 28%
of them respond that the level of satisfaction is very good while 33% of the respondents
say the level of satisfaction is good. However, 22% of the respondents believe that the
level of customers’ satisfaction is only satisfactory and 17% of the respondents say that
there is poor customers’ satisfaction on AIB’s services.

As explicated in the questionnaire, customers express their satisfaction/ dissatisfaction to

the bank using the below listed mechanisms.
Suggestion boxes,
Direct reporting to branch supervisors,
Direct reporting to HO through the telephone numbers posted at the counter
of all branches
Reporting to Deposit Mobilization team members during their visit
Leave the bank

Table 4.13 Major Cause for the variation in deposit among branches of AIB
Frequency
percentage Cumulative
Frequency Frequency

Convenience of branch office/ location 13 28% 28%

Availability of parking areas 7 15% 43%
Effort of the branch staffs 14 30% 74%
Most of the surrounding society of the branch
are/are not identified target customers of AIB 8 17% 91%
Other reasons 4 9% 100%
Total 46 100%
Source: Own Survey and computation

In relation to the main reason for the variation in deposit among branches of AIB, 28% of
the respondents believe that convenience and location of the branch are major reasons for

54
the variation and 15% gives the main reason to availability of parking areas. 30% of the
respondents relate the variation with the deposit mobilization efforts made by the branch
staffs. Nevertheless, 17% of the respondents reasoned for availability or non availability
of identified target customers of AIB in the surrounding areas of the branch.

Furthermore, 9% of the respondents consider age of the branch and availability of big
businesses and other organizations in the surroundings for the deposit variation among
branches.

Table 4.14. Time Taken for a Customer to Open a New Account

Frequency Cumulative
Time to open a New Account Frequency percentage Frequency

Less than 10 minutes 7 15% 15%

10 to 30 minutes 28 61% 76%

More than 30 minutes 11 24% 100%

Total 46 100%

Source: Own Survey and computation

Pertaining to the time taken for a customer to open a new account, 15% of the
respondents observed that it takes less than 10 minutes to open an account whereas 61%
of them witness that it needs 10 to 15 minutes to open the account. Yet, 24% of the
respondents witness that it takes more than 30 minutes to open a new account for a
customer.

55
 Table 4.15. Time Taken for a Customer to Withdraw/ deposit
cash from/to Account
Frequency
percentage Cumulative
Time to Withdraw from Account Frequency Frequency
Less than 10 minutes 21 46% 46%
10 to 30 minutes 17 37% 83%
More than 30 minutes 8 17% 100%
Total 46 100%
Source: Own Survey and computation
Concerning the time taken for a customer to Withdraw/ deposit cash from/to Account,
46% of the respondents observed that it takes less than 10 minutes to Withdraw/ deposit
cash from/to Account whereas 37% of them witness that it needs 10 to 15 minutes to
Withdraw/ deposit cash from/to Account. Yet, 17% of the respondents witness that it
takes more than 30 minutes to Withdraw/ deposit cash from/to Account.

Table 4.16. Main Reason for AIB’s Continuous Deposit Growth

for the last five years

Reason for Continuous Deposit Frequency

percentage Cumulative
Growth Frequency Frequency
Societies’ preference to deposit their
savings than other investment 2 4% 4%
AIB have many branches and larger
market share from private banks 16 35% 39%
Service given by the bank 13 28% 67%

Goodwill of the bank 15 33% 100%

Other reasons 0 0% 100%
Total 46 100%
Source: Own Survey and computation

56
As it is observed in the annual reports, AIB is registering a continuous deposit growth for
the last consecutive fiscal years. With this regard, the reason for the continuous growth is
asked to the respondents. 35% of them pick the availability of many branches and owning
larger market share compared to other private banks where as 33% of the respondents
select good will of the bank as a reason. 28% consider service quality of the bank as a
main reason for the growth. Two respondents take societies’ preference to deposit their
savings than investing their money in another business as a reason for the growth.

Table 4.17. Major Depositors of Awash International Bank S.C.

Frequency
percentage Cumulative
Major Depositors of AIB Frequency Frequency
Individual Customers 21 46% 46%
Business Organizations 17 37% 83%
NGOs 8 17% 100%
Government 0 0% 100%
Total 46 100%
Source: Own Survey and computation
As can be observed in the above table, government organizations, which are major source
of deposit, have no contribution in fulfilling deposit demand of AIB. 46% of the
respondents view individuals as the major source of deposit for AIB and 37% of them
consider business organizations as major depositors. NGOs regarded as major depositors
by 17% of the respondents.

Table 4.18. Competition with Other Private and Government Banks

Frequency
Competition with Other Private and Cumulative
percentage
Government Banks Frequency Frequency
Weak 3 7% 7%
Moderate 17 37% 43%
Stiff 26 57% 100%
Total 46 100%

57
As indicated in the above table, majority of the respondents (57%) measure the
competition with government and other private banks as stiff. 37% of the respondents
believe that there is a moderate competition with other private banks and government
banks. On the other hand, three respondents measure the competition as weak.

Table 4.19. Banks which pose more competition to AIB

Frequency
percentage Cumulative
Major Depositors of AIB Frequency Frequency
Commercial Bank of Ethiopia 18 39% 39%
Construction and Business Bank 1 2% 41%
Dashen Bank 5 11% 52%
Abyssinia Bank 1 2% 54%
Wegagen Bank 2 4% 59%
United Bank S.C. 1 2% 61%
Nib International Bank 3 7% 67%
Cooperative Bank of Oromiya 8 17% 85%
Other Private Banks 7 15% 100%
Total 46 100%

Commercial Bank of Ethiopia is considered by 39% of the respondents as key competitor

who poses more competition to AIB. Cooperative Bank of Oromiya and Dashen Bank are
also identified by 17% and 11% of the respondents respectively as major competitors
who posed more competition to AIB. 7% identifies Nib International Bank as a major
competitor. Wegagen Bank is also identified as a major competitor to AIB by 4% of the
respondents. Construction and Business Bank, Abyssinia and United bank are identified
as a major competitor each by 2% of the respondents. The other private banks are
considered by 15% of the respondents as major competitor to AIB.

58
 Chapter 5
Summary Conclusion and Recommendation
5.1 Summary
The main objective of this project is by taking the case of Awash International Bank s.c,
to identify the challenges in deposit mobilization for private banks in Ethiopia and go
through with a descriptive analysis. As a result of the analysis made, the following are the
summary of the findings.

AIB mobilize funds from shareholders contribution, operational profit and

customers’ deposit. From these sources, the largest proportion is deposit
AIB’s profitability is mainly dependent on the amount of deposit mobilized.
AIB uses to encourage/ motivate deposit mobilization efforts made by branches by
using resource mobilization teams formed at the head office and branch level.
These teams work to increase the volume of deposits. The Head office resource
mobilization committee supports the teams at branch level and evaluates and rank
branches monthly on the basis of activities of the branch teams and deposit result.
Major criteria set for evaluating deposit mobilization performance of branches
include;
Deposit growth measured as compared to the previous month balance, the
branches’ budget for the month and balance of previous year same
period;
Number of accounts growth during the month;
Number of ATM cards (Awash card) sold during the month;
Number of re-activated or re-instated customer accounts which had been
inactive before.
AIB acknowledges best performer branches and branch managers by rewarding
them during its annual management meeting.

59
AIB’s current deposit mobilization efforts/practices have the following strengths,
It encourages branches to exert their efforts consistently for deposit growth
Through the effort of reactivating inactive accounts, it helps to recall loyal
customers of the bank;
Being net increase in number of accounts as a performance criterion, it
helps to widen the customer base of AIB;
The activities broaden the marketing knowledge of staffs
AIB’s current deposit mobilization efforts/practices have the following
weaknesses,
In evaluating branches, it considers only branches’ month end deposit
balance;
It doesn’t consider location advantages/disadvantages of branches
The understanding and commitment of AIB’s staffs on deposit mobilization is
partially good.
AIB introduced various types of special deposit accounts including Smart
Children’s Account, Awash Student Solution Account, Awash Salary Solution
Account, Check Payment Solution Scheme (CPSS), Investment Solution Account
and Provident Fund Solution Account. But these new products do not contribute
much for deposit mobilization.
AIB uses the following mechanisms to promote awareness of the society
pertaining to its services?
Use of advertisements on TV, radio, newspapers, magazines;
Sponsoring films, TV dramas, documentaries and various events;
Donations
AIB, in order to attract and retain big depositors, provides special services for
corporate depositors. These are;
Presenting gifts and postcards during holidays;
Higher interest rate for deposits with fixed term;
Cash collection directly from the customers’ office;

60
 Handling of staff salary,
Because of the special services given to the corporate customers, volume of
deposit is increasing.
Majority of AIB’s customers are satisfied with AIB’s services.
Customers express their satisfaction/ dissatisfaction to the bank using the below
listed mechanisms.
Suggestion boxes,
Direct reporting to branch supervisors,
Direct reporting to HO through the telephone numbers posted at the counter
of all branches
Reporting to Deposit Mobilization team members during their visit
Leave the bank
In most of the cases, account opening, cash deposit and cash withdrawal takes
more than 10 minutes.
AIB is registering a continuous deposit growth for the last few years because of
the availability of many branches, owning larger market share compared to other
private banks, good will of the bank, service quality of the bank and in some cases,
societies’ preference to deposit their savings than investing their money in another
business.
Individuals, business organizations and NGOs are the major source of deposit for
AIB.
AIB is operating in a dynamic and highly competitive environment and there is
high possibility of catch-up and by-pass among banks.
Commercial Bank of Ethiopia is key competitor who poses more competition to
AIB. Cooperative Bank of Oromiya and Dashen Bank are also major competitors
who posed more competition to AIB. Nib International Bank and Wegagen Bank
also poses a moderate competition to AIB.

61
 5.2. Conclusion
Given the summary result of the descriptive analysis, the study had concluded the
following to private banks by taking AIB as evidence of the study.
AIB mobilize funds mainly from deposit. Shareholders’ contribution and
operational profit contribute some as a source of fund and so AIB’s profitability is
mainly dependent on the amount of deposit mobilized.
AIB achieved in increasing the volume of deposits through activities of Resource
Mobilization teams formed at the head office and branch level and by;
o Setting major criteria for evaluating deposit mobilization performance of
branches which include;
Deposit growth measured as compared to the previous month balance, the
branches’ budget for the month and balance of previous year same
period;
Number of accounts growth during the month;
Number of ATM cards (Awash card) sold during the month;
Number of re-activated or re-instated customer accounts which had been
inactive before.
o By acknowledging best performer branches and branch managers and
rewarding them during its annual management meeting.
AIB’s current deposit mobilization efforts/practices have the following strengths,
It encourages branches to exert their efforts consistently for deposit growth
Through the effort of reactivating inactive accounts, it helps to recall loyal
customers of the bank;
Being net increase in number of accounts as a performance criterion, it
helps to widen the customer base of AIB;
The activities broaden the marketing knowledge of staffs

62
AIB’s current deposit mobilization efforts/practices have the following
weaknesses,
In evaluating branches, it considers only branches’ month end deposit
balance;
It doesn’t consider location advantages/disadvantages of branches
The understanding and commitment of AIB’s staffs on deposit mobilization is
partially good.
AIB introduced various types of special deposit accounts including Smart
Children’s Account, Awash Student Solution Account, Awash Salary Solution
Account, Check Payment Solution Scheme (CPSS), Investment Solution Account
and Provident Fund Solution Account. But these new products do not contribute
much for deposit mobilization.
AIB uses the following mechanisms to promote awareness of the society
pertaining to its services?
Use of advertisements on TV, radio, newspapers, magazines;
Sponsoring films, TV dramas, documentaries and various events;
Donations
AIB, in order to attract and retain big depositors, provides special services for
corporate depositors and because of the special services given to the corporate
customers, volume of deposit is increasing.
Majority of AIB’s customers are satisfied with AIB’s services and express their
satisfaction/ dissatisfaction to the bank using the below listed mechanisms.
Suggestion boxes,
Direct reporting to branch supervisors,
Direct reporting to HO through the telephone numbers posted at the counter
of all branches
Reporting to Deposit Mobilization team members during their visit
Leave the bank

63
 In most of the cases, account opening, cash deposit and cash withdrawal takes
more than 10 minutes.
AIB is registering a continuous deposit growth for the last few years.
Individuals, business organizations and NGOs are the major source of deposit for
AIB.
AIB is operating in a dynamic and highly competitive environment and there is
high possibility of catch-up and by-pass among banks.
Commercial Bank of Ethiopia, Cooperative Bank of Oromiya and Dashen Bank
are identified as key competitors who pose more competition to AIB.

5.3. Recommendations
Based on the findings and conclusions made, the following are recommended for AIB in
order to achieve its target of mobilizing deposit and inclusion of unbanked resources.
AIB should develop a procedure on standard service delivery time to facilitate
delivery of fast and quality services to its customers.
AIB should work in acquainting customers with the newly introduced various
types of special deposit accounts.
In evaluating branches for their performance in deposit mobilization, AIB should
consider average of the month deposit balance instead of month end deposit
balance. Moreover, it should take location advantages/disadvantages of branches
in to consideration.
Since the main source of fund for banks is deposit, they should give more attention
and effort to mobilize deposit.
AIB should go beyond the expectation of its customers by providing technology
based state of the art services. Services such as internet banking, mobile banking
and other similar services should be adopted in order to catch up with banks who
already adopted it.
AIB should go through promotional effort and awareness creation campaigns to
have well informed society.

64
AIB should have convenient office environment with hard working employees to
attract depositors.
AIB should also go after the customers’ preference and compete with other
commercial banks to attract more depositors.
Since high interest rate has a positive effect in attracting deposit, AIB should
consider increasing the deposit rate.
Since branch expansion has positive and significant effect on total deposit of
commercial banks, AIB should also work more on branch expansion in order to
increase their deposit.

65
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70
 Addis Ababa University
School of Graduate Studies
Executive Master of Business Administration
This questionnaire is prepared to directors and managers of Awash International Bank
S.C. The objective is to get an input for the accomplishment of EMBA Project Paper on
the title of Challenges in Deposit Mobilization for Private Banks (The Case of Awash
International Bank S.C.). The information you provide is valuable for the success of the
research paper and will only be used for academic purpose. It shall also be kept
confidential.

No need of writing your name

I. Personal Information
1. Sex
Female______ Male______
2. Age
Below 30 years_____ 31-40 years______
41-50 years______ 51 and above______
3. What is your position in Awash International Bank S.C?
• Director______
• Department Manager______
• Division Manager______
• Branch manager______
• Assistant Branch manager______
• Supervisor
4. Work experience in the banking industry;
• Below one year______
• 1-5 years______
• 6-10 years______

-1-
 • 10-15 years______
• 16 and above years______

II. Deposit Mobilization Issues

1. What mechanisms does the bank use to encourage/ motivate deposit mobilization
efforts made by branches?
________________________________________________________
________________________________________________________
________________________________________________________
2. How do you evaluate the understanding and commitment of staffs for deposit
mobilization?
Very Good______ good______ Satisfactory______ Poor_____
3. Recently, the bank has introduced various new products on deposit accounts. How
do you measure their contribution in the effort to mobilize deposit?
Very Good______ good______ Satisfactory______ Poor_____
4. What has been done in Awash International Bank S.C.to promote awareness of the
society pertaining to AIB’s services?
______________________________________________________
______________________________________________________
______________________________________________________
______________________________________________________
5. What special services do the bank provides for corporate depositors/customers?
______________________________________________________
______________________________________________________
______________________________________________________

6. Does the volume of deposits grow because of such special services provided for
the corporate depositors?
Yes______ No______
-2-
7. How do you rate your customers satisfaction?
Very Good______ good______ Satisfactory______ Poor_____
8. What tools or techniques do customers have to express their satisfaction/
dissatisfaction?
______________________________________________________
______________________________________________________
______________________________________________________
9. What are the strengths and weaknesses of the current deposit mobilization
efforts/practices of the bank;
Strength________________________________________________________
________________________________________________________
________________________________________________________
Weakness_______________________________________________________
_______________________________________________________
_______________________________________________________
10. What is the major cause for the variation in deposit among branches of Awash
International Bank S.C.?
• Convenience of branch office/location ______
• Availability of parking areas______
• Effort of the branch staffs______
• Most of the surrounding society of the branch are/are not identified target
customers of AIB______
• Other reasons (specify)________________________
11. How much time does it take for a customer to open a new account in your bank?
• Less than 10 minutes______
• 10 to 30 minutes______
• More than 30 minutes______

-3-
12. How much time does it take for a customer to withdraw or deposit cash to his
account?
• Less than 10 minutes______
• 10 to 30 minutes______
• More than 30 minutes______
13. As per the annual reports, total deposit of Awash International Bank S.C. is
continuously growing during the last five years. What is the main reason?
• Societies’ preference to deposit their savings than other investment______
• Awash International Bank S.C. have many branches and larger market
share from private banks______
• The service given by the bank______
• The goodwill of the bank______
• Other reasons (specify)________________________
14. Who do you think are major depositors of Awash International Bank S.C.?
• Individual customers______
• Business organizations______
• NGOs______
• Government______
15. How do you measure the competition with other private and government owned
banks?
Weak______ Moderate______ Stiff______
16. Which banks pose more competition to AIB?
• Commercial Bank of Ethiopia______
• Construction and Business Bank______
• Dashen Bank______
• Abyssinia Bank______
• Wegagen Bank______
• United Bank______

-4-
 • Nib International Bank______
• Cooperative Bank of Oromia______
• Other Private banks______

Thank You for Your Cooperation.

-5-