Determinants of Deposit Mobilization and Related Costs of

Commercial Banks in Ethiopia

By

Giragn Garo

A Research Project Paper Submitted to the Department of

Management

College of Business and Economics

Presented in Partial Fulfillment of the Requirements for the Degree of Executive

Masters of Business Administration, Addis Ababa University

January 2015

Addis Ababa, Ethiopia

 I

DECLARATION

I hereby declare that this submission is my own work and that, to the best of my knowledge and
belief, it contains no material previously published or written by another person nor material
which has been accepted for the award of any other degree or diploma of this university or other
institute of higher learning, except where due acknowledgment has been made in the text.

Giragn Garo Dadi __________ ___________

Candidate’s Name Signature Date

 II

Statement of Certification

This is to certify that I, Giragn Garo Dadi, have carried out this research work on the topic
entitled ‘Determinants of Deposit Mobilization an Related costs of Commercial Banks in Ethiopia’
and that the work is original in nature and is suitable for submission for the reward of the Degree
in Executive Masters in Business Administration from Addis Ababa University.

Advisor: Dr.Venkati Ponala

Signature ____________________ Date______________

Internal Examiner: Dr. Abebe Yitayew

Signature___________________ Date_______________

External Examiner: Dr.Samuel

Signature ___________________ Date_______________
 III

Acknowledgements

First and foremost, the Almighty God shall be praised for He has been with me on all my way to
date. This accomplishment was never started without the power and patience He has poured on
me.

I am also thankful to my wife, W/o Abalech Alemayehu, who had been on my side with ideas
and covering part of my responsibilities in life. My lovely kids namely Kena, Gemechis, Milki
and Amen deserve appreciation for their patience and the time they shared me do this job
whereas I should have been with them as a father. My mom, W/o Jemanesh Minda, has also the
root cause in my journey to arrive here and she needs admiration too.

I also want to express my sincere appreciation to my advisor, Dr.Venkati Ponnala, for his
unreserved and vital advice in making this paper.

I also owe great thanks to my families and work colleagues who were there to support me in
doing this study.
 IV

Table of Contents
Declaration ------------------------------------------------------------------------------------------------------------I
Statement of Certification-----------------------------------------------------------------------------------------II
Acknowledgements------------------------------------------------------------------------------------------------III
Table of Contents---------------------------------------------------------------------------------------------------IV
List of figures--------------------------------------------------------------------------------------------------------V
List of tables---------------------------------------------------------------------------------------------------------VI
List of acronyms and abbreviations---------------------------------------------------------------------------VII
Abstract ---------------------------------------------------------------------------------------------------------VIII

Chapter One: Introduction ............................................................................................................... 1

1.1 Background of the study ................................................................................................................ 1
1.2 Statement of the problem ............................................................................................................... 2
1.3 Objective of the study .................................................................................................................... 3
1.4 Research Questions ....................................................................................................................... 3
1.5 Research Methodology .................................................................................................................. 3
1.6 Limitations of the study ................................................................................................................. 4
1.7 Significance of the study ................................................................................................................ 4
1.8 Organization of the Study .............................................................................................................. 5

Chapter Two: Literature Review ....................................................................................................... 6

2.1 Introduction .................................................................................................................................... 6
2.2 The Role of Financial Sector for Economic Development of the Country ........................................ 6
2.3 Commercial Bank Deposit Forms and Costs of Deposits ................................................................. 7
2.4 The Necessity of Deposits for Banks ............................................................................................ 10
2.5 Determinants of Deposits and Related costs: An empirical review................................................. 11
2.5.1 Bank Specific Factors for Deposit Mobilization .................................................................... 13
2.5.2 Non-Bank Specific Factors for Deposit Mobilization ............................................................. 16
2.6 Empirical Review ......................................................................................................................... 17
2.7 The conceptual framework of the study ........................................................................................ 19

Chapter Three: Research Methodology .......................................................................................... 20

3.1 Data ............................................................................................................................................ 20
 3.1.1 Quantitative Data...................................................................................................... 20
3.1.2 Qualitative Data ....................................................................................................... 21
3.2 Data Sources ............................................................................................................................... 21
3.3 Data Collection Instruments ......................................................................................................... 21
3.4 Population and sampling strategy .................................................................................................. 21
3.5 Validity and Reliability of the Data .............................................................................................. 23
3.6 Determinants of Deposit Mobilization and Variables Descriptions .............................................. 23
3.6.1 Bank Specific Factors ................................................................................................. 24
3.6.2 Non-Bank Specific Factors ......................................................................................... 24
3.7 Dependent and independent variables .......................................................................................... 27
3.8 Data Analyzing Instruments and Descriptive Analysis ................................................................. 27
3.9 Diagnostic Testing Methods ........................................................................................................ 29
Chapter Four: Data Analysis and Presentation
4.1 Descriptive Data Analysis ........................................................................................................... 31
4.1.1 Analysis of quantitative Data .......................................................................................... 31
4.1.2 Analysis of qualitative Data ............................................................................................ 43
4.2 Summary of the findings from both methods of investigation ...................................................... 51
Chapter Five: Summary, Conclusion and Recommendations
5.1. Summary and Conclusion ......................................................................................................... 54
5.2. Recommendations .................................................................................................................... 55
5.3 For Further Research................................................................................................................. 56

Bibliography ................................................................................................................................ 57-61

Appendices
Appendix A: Survey Questionnaire(A)
Appendix B: Interview Questions(B)
Appendix C: SPSS Outputs(C)
 V

List of Figures Page

Figure 1: The Conceptual framework of the study------------------------------------------------- 19

Figure 2: Total Deposit of Private versus public banks (in millions of Birr)-------------------- 31

Figure 3: The market share of deposits for private versus public banks in Ethiopia)--------32

Figure 4: Year on year % change of total deposit volume of banks in Ethiopia--------------33

Figure 5 The Rate of change in money supply (Narrow Money) ------------------------------- 33

Figure 6 Ratio of Deposit Related Costs to total deposit volume of six private banks-------34

Figure.7 The yearly weighted deposit rate trend of banks in Ethiopia-------------------------35

Figure.8 Scatter plots of the residuals ------------------------------------------------------------40

Figure.9 Histogram to show normality test ------------------------------------------------------40

Figure.10 P-P plot of normal distribution. -------------------------------------------------------41

 VI
List of Tables page
Table 1. Descriptive Statistics-------------------------------------------------------------------------35

Table 2. Variables Entered/Removed (b) ------------------------------------------------------------37

Table 3 ANOVA(b) ------------------------------------------------------------------------------------37

Table 4. Model Summary (b) --------------------------------------------------------------------------38

Table 5. Coefficients (a) --------------------------------------------------------------------------------39

Table 6. Correlations -----------------------------------------------------------------------------------42

Table 7. Age of respondents----------------------------------------------------------------------------43

Table 8. Work experience of the respondents in the bank------------------------------------------43

Table 9. Position of the respondents in the bank---------------------------------------------------- 44

Table 10. Besides being employee, are you the customer of a bank?-------------- --------------44

Table 11. Level of income of respondents------------------------------------------------------------44

Table 12. What is the ownership status of your bank?----------------------------------------------45

Table 13. Who are the most significant depositors of your bank?---------------------------------45

Table 14. Which deposit types is with the significant volume in your bank?--------------------45

Table 15. How many branches does your bank possess?------------------------ ------------------46

Table 16. Is the number of branches increasing every year?------------------------ --------------46

Table 17. What is the main cause branch expansion?-----------------------------------------------46

Table 18. Is the volume of deposit mobilized by your bank growing year after year?-- ------47

Table 19. Does the volume of deposit mobilized by each of your branches differ?------------47

Table 20. Is cost of mobilizing deposits increasing year after year?------------------------------47

Table 21. Do you think that there is stiff competition among banks over deposits? ------------47

Table 22. Do you believe that awareness creation increases deposit volume?--------------------47
Table 23. What special services does your bank give for its depositors?--------------------------47
 VII

List of acronyms and abbreviations

AIB --------------------------Awash International Bank S.C.
BBR------------------------- bank branches of commercial banks
BOA-------------------------Bank of Abysinia S.C.
CBE--------------------------Commercial Bank of Ethiopia
CGAP------------------------Consultative Group to Assist the Poorest(a group supported by GTZ)
CSA--------------------------Central Statistics Authority
DB –-------------------------Dashen Bank S.C.
DEP-------------------------- Deposit value of all commercial banks
DWRD-----------------------Deposit rate weighted against saving and fixed deposits
ETB--------------------------Ethiopian Currency (Birr)
EXBRUSD------------------Average annual rate of exchange of Birr to US Dollars
GDP------------------------- Gross Domestic Product
GINF------------------------ General Annual Inflation
GTP------------------------- Growth and Transformation Plan
IMF--------------------------International Monetary Fund
MOFED---------------------Ministry of Finance and Economic Development
M1-------------------------- Money Supply in terms of Narrow Money
NBE--------------------------National Bank of Ethiopia
NIB-------------------------- Nib International Bank S.C.
RPGDP----------------------Real per capital Gross Domestic Product Growth Rate
SPSS------------------------Statistical Program for Social Science
CAP-------------------------Total Capital of banks
TD---------------------------Volume of Total Deposit
UB---------------------------United Bank S.C.
USD-------------------------United States Dollar
VIF---------------------------Variance Inflation Factor
WB--------------------------Wegagan Bank S.C.
YOYPC----------------------Year on Year percentage change
 VIII

Abstract
The objective of commercial banks in Ethiopia is to make profits and thus satisfy the needs of
their respective owners. The making of profits and even staying on board of these conventional
banks depend on the strategies adopted by each bank to mobilize deposits from the public that is
an input to earn income for most conventional banks. In order to make good strategies, however,
the banks should know what factors determine the deposit mobilization activity in the real world.

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

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

Key Words: deposits mobilization, customers, banks, financial institutions

Note: The word Savings and deposits are interchangeably used in this research.
 Chapter One

INTRODUCTION

1.1 Background of the study

Strong ,well developed and diversified financial systems have a positive impact on the devel-
opment and economic growth of countries. The financial system in every economy is com-
posed of the bank-based system where provision and monitoring of investments funds are
made through the banks on one hand and/or the stock market on the other where investors
(surplus units) enter directly through ownership of securities. Traditionally, banks play an in-
termediary role of mobilizing funds from savers and subsequently lending them to investors.

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

In a modern economy, the important activity of the commercial banks is to mobilize deposits
from the public. The people with surplus income and savings find it convenient and safe to
deposit the amounts with banks. Thus, deposits with the bank grow along with the interest
earned. Granting of loans and advance and channeling households’ savings to corporate sector
is mostly possible if the banks have accumulated sufficient deposit from the available market.

Recently the government of Ethiopia has devised strategies that enable it to mobilized private
funds through the state banks by way of increasing accessibility to the far remote areas, in-
creasing operational efficiency of the existing banks, designing forms of mobilization such as
through issuance of bonds and aggressive promotional campaigning. These measures are tak-
en by the state in order to mobilize funds that would be used for huge development projects
such as in Great Renaisance Dam, Condominium housing projects and sugar industries etc.

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia

Page 1
The deposit mobilization activity is the focus area for both the state and private banks in Ethi-
opia, there is increasingly stiff competition among the domestic banks to snatch deposits from
the public. Most crucially the infant private banks have to compete with the huge Commercial
Bank of Ethiopia which is holding the lion share of the total market for deposits.

This research work will thus make critical assessment of the determinant factors impacting
deposit attraction activity of commercial banks in Ethiopia and analyze the costs related to the
deposit mobilization activity.

1.2 Statement of the problem

The total investment required for implementation of Ethiopian Growth and Transformation
Plan is estimated at ETB1.26 trillion (US$77 billion). About 54.8% of this will be funded di-
rectly from the budget, out of which 11% is expected from development partners while 45.1%
will be contributed by state enterprises. Given the financing challenge, the government of
Ethiopia plans to expand tax revenues and domestic savings mobilization, to reach 15% of
GDP, respectively. In order to increase domestic sources of capital, the Ethiopian government
is in dire need of savings from the public to effectively implement GTP plans (African Devel-
opment Bank Group, Country Strategy Paper 2011-15,pp 18-24).

The state banks are the main instruments that facilitate the mobilization effort of such deposits
escalating the competition among banks in attracting deposits. Hence, the state banks are cur-
rently under pressure to collect deposits on behalf of the state to finance the huge develop-
mental activities of the country. Likewise the private Commercial Banks of Ethiopia have to
compete with the state banks to get enough loanable funds to stay competitive, become profit-
able and generally fulfill the business objectives of their respective shareholders by increasing
their deposit base.

Thus the banking sector in Ethiopia must increase their deposits by overcoming the existing
challenges; hence they need to know the factors that determine deposit or financial savings.
This study empirically investigates determinants of mobilizing financial savings for banks in
Ethiopia and which of those factors are influential and what are the related costs of mobilizing
deposits.

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 2
 1.3 Objectives of the Study
The main objective of the study is to investigate the factors that determine deposit mobiliza-
tion activity and identify and analyze associated costs.

The specific objectives of the study therefore achieve the following:

 To identify and analyze factors that significantly affecting deposits collection activities
of commercial banks
 To identify the significant costs that are incurred by commercial banks in Ethiopia as-
sociated with mobilizing deposits.
 To analyze the trend of deposit market for public versus private banks and identify the
current challenges in sourcing deposits?

1.4 Research questions

The research raises and provides answer to the following research questions regarding the top-
ic.

 What factors are significantly affecting the deposit mobilization activities of commer-
cial banks of Ethiopia?
 What are the costs dominantly influencing the deposit mobilization activity of com-
mercial banks and the level of their significance?
 What does the trend of deposit market look like for public versus private banks includ-
ing the current challenges in sourcing deposits?

1.5 Research Methodology

The study used both primary and secondary data sources. For primary data collection method,
sample of seven oldest Commercial Banks –six of which is owned by private individuals and
organizations and one is CBE that is state-owned commercial bank established mainly for
making profits to their owners. Questionnaires are distributed to selected staff of branch man-
agement of each bank branch. The questionnaires are both open-ended and close-ended.

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 3
For secondary sources, twelve years of Annual Reports from 2001/2-2012/13G.C. of all
commercial banks in Ethiopia are collected and the data reports issued by National Bank of
Ethiopia, articles, journals, books and previous research works relevant to this topic.

1.6 Limitations of the study

The deposit mobilization activity in Ethiopia is made by the entire nineteen commercial banks
and other financial institutions such as microfinance institutions. However, the study used da-
ta of only seven oldest commercial banks with respect to gathering qualitative data. This is
because one can acquire long periods of data for research that can be used to analyze trends
and make reasonable comparison. Further, these banks are presumed to have been able to mo-
bilize largest volume or share of deposit. For instance, in the year 2012/3, these sampled
banks held 89.7% of the total deposit volume of all commercial banks in Ethiopia (NBE an-
nual report, 2012/3).

With respect to the quantitative method of investigation, the scope of the study is limited to
twelve years of financial and macro-economic data as well due to unavailability of sufficient
data.

1.7 Significance of the study

Banks play an important role in economic development through mobilization of funds from
within and outside the country and channeling such funds to various needy and viable sectors
of the economy.

Corollary to the above fact, the availability of deposits ensures the provision of the ever de-
manding loans and facilities for investment thereby enhancing profits for commercial banks.

Hence, most of the banks in Ethiopia are in dire need of these resources (deposits) to satisfy
these demands more than ever and they are engaged in stiff competition to acquire these re-
sources.

However, there are factors which have an impact on deposit mobilization and knowing these
factors and their level of significance help banks to design and implement effective deposit
attraction strategies. Further, the banks pay attention to the increasing costs of deposit mobili-
zation.

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 4
 1.8 Organization of the study
The study was organized into five chapters. Chapter one dealt with the Introduction of the
study. Chapter two reviews literature on both theoretical and empirical studies regarding the
bank deposits and the factors that determine deposit mobilization activity. It contains an as-
sessment of researches done on savings and the variables that influence its mobilization. The
methodology employed for the study involving both the quantitative and qualitative approach-
es for assessing the significant factors of savings mobilization is presented in Chapter three.
Chapter four presents the results of analysis done and discusses findings made. Chapter five,
finally, draws some summary and conclusions from the empirical findings of Chapter four and
suggests recommendations for policy consideration.

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 5
 Chapter Two

Literature Review
2.1 Introduction
This chapter discusses about the theoretical as well as empirical review. In this topic the re-
searcher has reviewed related literature regarding the role of financial sector for economic de-
velopment of a country and included certain explanations as to what deposits are and the types
of deposits. The researcher also picked out the major factors identified by other researchers
that have an impact on deposit mobilization activity and associated costs.

2.2 The Role of financial sector for Economic Development of a country:

Theoretical View

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

Financial institutions can be divided into:

1. Depository institutions (e.g. commercial banks, savings institutions, credit unions) that
obtain funds mainly through deposits from the public; and,
2. Non-depository institutions (e.g. finance companies, mutual funds, securities firms, in-
surance companies, pension funds) that finance their investment activities from the
sale of securities or insurances.
Commercial banks are the most dominant depository institution. They serve investors by of-
fering a wide variety of deposit accounts, and they transfer deposited funds to deficit units by
providing direct loans or purchasing debt securities. Commercial banks serve both the private

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 6
and public sectors, as their deposit and lending services are utilized by households, business-
es, and government agencies.

In the context of African continent, financial institutions in particular the banking industry
carries the greater share of the financial system (Sheku, 2005). Most of the businesses rely on
banking sector as a source of financing (Medhat, 2004). It is no exception to Ethiopia where
the others like insurance companies and microfinance institutions (MFI) are led by banks in
terms of capital size, total assets ,employment capacity and profits(NBE Report,2011/12).

There has been a debate in the academic world as to whether the efficiency of financial sector
really plays a role in economic development in the country. A great number of authors such as
(Baghehot, 1873: Schumpeter, 1912: Hicks, 1969 and Miller, 1998) have concluded that fi-
nance is the strong contributor to growth. Arrests et al. (2001) use both bank and stock market
to assess the finance and growth relationship using quarterly data on a sample of developing
countries. They find a positive and significant association between finance and growth, with
the larger impact from banking sector measures. However, for few such as Robinson (1952)
suggest that growth leads to financial development and Lucas (1988) show that finance is
overstressed in explaining growth.

It is being forwarded by (Llewellyn, 1995) that the capital market has become a more formi-
dable competitor to banks in many developed countries and this is likely to develop further in
an increasing number of countries. Even though in some developed countries banks are losing
their predominant role as deposit-takers and lenders ,the traditional banking business of sup-
plying funds to the economy is still of importance(Haron et al., 2006). For example, most
business organizations especially in developing countries are highly dependent on bank loans
as a source of capital and the ability of banks in giving loans depend much on their ability to
attract deposits.

Ethiopia’s rate of domestic saving has been very low even by sub-Saharan African standards.
(IMF 2009a:72 and 2009b:216). From 1997 to 2010, the average saving rate in low-income
countries of the region was about 9 per cent, while it was about 19 per cent for middle –
income countries. In the same period, the average saving rate of “fragile” sub-Saharan African

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 7
states was 11.5 per cent, still significantly higher than Ethiopia’s rate of 4 per cent (IMF
2009a:72 and 2009b:216). According to the International Monetary Fund (IMF 2009b), sav-
ings as a percentage of GDP was 34 per cent for 1987-97, 32 per cent for 1995-2008 and both
are higher than 29 per cent in 2009-10.

The fact that Ethiopia is low income country has been the reason for reliance on foreign debt
and aids from international community. In view of the severe development deficits in the
country, in general, the rate of investment in Ethiopia has remained very low.

Recently, the government has recognized the importance of mobilizing domestic savings for
the huge investments like Renaissance Dam that is thought to pursue development efforts. The
measures taken to mobilize deposits by the state include issuance of the new type of financial
instrument i.e. bonds to the public and also by taking strategic moves in revitalizing the effi-
ciency and increasing the outreach of the state banks. However; the implementation of public
sector-led growth policy (of Ethiopia) requires large public sector borrowing and domestic
resource mobilization and at the current negative real interest rates, mobilizing additional re-
sources through the financial sector to facilitate GTP financing will be difficult to achieve
(IMF Country Report, 2012).

2.3 Commercial Bank Deposit Forms and costs of deposits

According to Keynes’s Liquidity Preference Theory of demand for money, there are three
main motives as to why people save or deposit their money i.e. transactional, precautionary
and speculative motives.
1. Transactional motive can be looked at from the point of view of consumers who want
income to meet their household expenditure and from the viewpoint of businessmen
who require money and want to hold it in order to carry out their business activities.
2. Precautionary motive for holding money refers to the desire of people to hold cash
balances for unforeseen contingencies.
3. Keynes took the view that money is a store of wealth and called this reason for holding
money the speculative motive. The speculative motive relates to the desire to hold
one’s resources in liquid form in order to take advantage of market movements regard-
ing the future changes in the rate of interest (Mishkin, 2004)

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 8
In order to cater for the above three motives of depositors -transactional, precautionary and
speculative needs, commercial banks offer three categories of deposit facilities that are de-
mand, savings and time deposits respectively.

The three types of deposits, namely saving, demand deposit and term or fixed time deposits
accounts services, are provided by all the commercial banks in Ethiopia. Although the forms
of the three deposits and how they are being opened and used differ, they are all installed to
mobilize deposits to the banks. The definitions of the three deposit typos are mentioned as fol-
lows.

 Saving accounts: These accounts are opened by many people who need to save
their wealth usually beyond current consumption and in anticipation of future in-
vestment such as building own house, buy car and to self sponsor education etc. In
doing so the account holder earns interest on the saving balance. Saving accounts
are the most favored deposit account for commercial banks as they are cheap and
are usually stable in nature. They are the services with which banks reach out the
broad mass of people.
 Demand or current accounts: These deposits are generally used by business per-
sons to settle debts usually through use of cheques. They are most often ready for
payment upon demand anytime and usually no interest are paid on these accounts.
 Time or Term Deposits: These deposits are kept by the bank for specified period
of time per the agreement between the bank and depositor. Higher interest rate are
paid by the banks for such kinds of deposits depending upon the amount of deposits
and the length of period for keeping the deposits provided there is no breach of the
agreement.

According to the Interest Rate Directive No.NBE/11/2010 issued on December 1, 2010, banks
are allowed to freely determine the interest rate on demand deposits but for saving and time
deposits it set the minimum interest rate to be used by banks as 5% per annum. For the later
types each bank can have the option of paying interest rate beyond the required minimum if it
wants to. Practically, however, most banks pay the minimum 5 per cent per annum on saving
accounts and set no interest for current accounts.

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 9
The majority of microfinance institutions interviewed perceived deposits as the cheapest form
of funding available, as well as stable, plentiful, and a valuable service to clients (CGAP
Brief, August 2007).

Research works on costs of deposit mobilization by banks are not sufficiently available to re-
fer and explore the case at hand. However; the Consultative Group to Assist the Poorest
(CGAP) of the microfinance institutions on its December 2010 has reviewed and published a
report on the true cost of deposit mobilization revealing that a significant contributor to total
deposit cost was financial cost, or the interest paid to depositors. Other costs included in the
survey are administrative costs such as account opening related one, account service costs,
handling costs of cash transaction and account sustaining costs that are indirect costs related
to audit or risk management issues. However, the study do not say about the office rent, pro-
motional and advertising costs usually incurred for attracting deposits at the time that there
deposit shortages in banks.

2.4 The necessity of Deposits for Banks

Banks get their funds from two sources .i.e. from capital contribution and from debt/deposit
liabilities. Depositors’ money is the core funding source for many commercial banks. Kelvin
(2001) said that deposits of commercial banks account for about 75% of commercial bank lia-
bilities. The banks are using the deposits so collected with costs to channel them to those de-
manding loans at a profit margin. In the process of being used as intermediaries between de-
positors and loanees, the banks are facing risks of default in doing so. Deposits are crucial for
commercial bank’s profitability and sustainability.

Through financial intermediation, deposit is far more convenient and efficient for a bank,
which has ongoing relations with thousands of depositors, to raise the funds from them, and
then lend the money to the company (Brealey, 2007). Funds acquired from deposit sources are
cheaper than those from capital sources.

In a study made by Harvey and Spong (2001) on bank funding sources and their effects on
community banks in the Tenth District of Kansas City, it is learnt the deposit is shifting away
from community banks and maintaining and attracting retail deposits would be a significant
problem.

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 10
A bank’s success in finding depositors consequently plays a critical role in its ability to satisfy
customer credit demands and perform other banking functions. Moreover, much of a bank’s
profitability is derived from gathering deposits at one set of interest rates and then lending or
investing these funds at higher rates. These key roles that deposits play in overall bank per-
formance have thus drawn much attention to bank funding practices and the ability of individ-
ual banks to maintain or expand their deposit base.

2.5 Determinants of Deposits and related costs-An Empirical Review

The process of financial liberalization has intensified competition among financial institu-
tions, thus forcing commercial banks to compete for deposits in various forms (Sudin et al,
2006).This is because deposits are the major raw materials for provision of loans on which
banks make the intended profits to the owners. Besides, the deposit volume of commercial
banks in Ethiopia totals Br.136.3 billion which constitutes about 75.5 % of total assets of the
banks for the year ended 2010/11. This indicates the significance of deposits liabilities to the
Ethiopian banks and factors that affect deposit mobilization have a huge impact on the per-
formance of commercial banks.

Therefore, banks should make an all out effort to mobilize deposits. However, as N. Desinga
(1975) indicates deposit mobilization is a very difficult task.

Though deposits have great significance to the banks in developing world, few have been
studied as the factors that have an impact on it. Study made by Kose et al (1999) indicates that
developing economies are characterized by unstable macroeconomic environments such as
inflation, inappropriate fiscal and monetary policies, interest rate controls. The net effect is the
change in liquidity which affects savings and capital formation. Where the macroeconomic
environment is favourable to savings then the commercial banks are in a better position to in-
crease savings. On the contrary, where macroeconomic policies erode liquidity from the hands
of the people then deposits reduce and may negatively impact on capital growth and invest-
ment in the country.

In order to increase the quantity of deposits in the banking industry (Schmidt et al, 1999) rec-
ommends the dissemination of a banking habit. From the works of Finger et al, 2009 it is

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 11
found out that there are macro-level and micro-level factors that have significant influence on
deposits. Domestic factor such as economic activity, prices, and the interest differential be-
tween the Lebanese pound and the U.S. Dollar are found to have significant impact in explain-
ing deposit demand at macro level. At the micro level, they found that in addition, bank-
specific variables, such as the perceived riskiness of individual banks, their liquidity buffers,
loan exposure, and interest margins, bear a significant influence on the demand for deposit
(Finger et al., 2009).

Based on the research (Venkatesan,2012) made on the overall deposit mobilization perfor-
mances of all the scheduled commercial banks of India during the period 1985-98 and con-
cluded that the GDP and Branch expansion were among the significant factors of time depos-
its mobilization during the period under consideration.

Another study Siyanbola et al. (2012) found that there is a positive relationship between the
interest rate (the dependent) has a major influence on deposit mobilization (the independent).

In Caribbean and Sub-Saharan African public banks tend to have a much larger share of de-
mand deposits than private and foreign banks (Alejadro et al, 2004). Ethiopian commercial
banks have 33.3% of their branches located in the capital city.46.7% of the total branches of
private commercial banks in Ethiopia are located in Addis Ababa whereas the per cent is 21.2
% for public banks (NBE Annual Report 2011/12). Increasing accessibility to rural areas is
thought to be the solutions for attracting stable deposits for private banks.

From the findings of the research work (Wubitu, 2012) on Factors determining commercial
bank deposit on Commercial Bank of Ethiopia, it is learnt that branch expansion, inflation rate
and deposit rate have significant effects on the total deposits of Commercial Bank of Ethiopia
for the years under review covering 12 years from 2000GC to 2011GC. Whether these factors
identified for the state bank i.e. Commercial Bank of Ethiopia are the only factors for the pri-
vate banks here in Ethiopia is the aim to be found out in this work.

In general, various research works are reviewed and the following factors are identified to in-
fluence deposit mobilization activity of commercial banks in general and private banks in par-
ticular. For ease of understanding they are classified in to two-bank specific factors and non-
bank specific factors.

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 12
 2.5.1 Bank Specific Factors for Deposit Mobilization

Deposit Rate or Interest rate on deposits

Banks usually pay interest on money collected from depositors. Particularly, saving deposits
commonly earn interest for savors at a rate determined by individual banks whereas it must be
above the minimum per the directive issued by the regulatory body of the country. Savings or
deposit, according to classical economists, is a function of the rate of interest. The higher the
rate of interest, the more money will be saved, since at higher interest rates people will be
more willing to forgo present consumption.

The study by Siyanbola et al, 2012 on Effect of Interest Rate Deregulation on Bank Deposit
Mobilization in Nigeria found that there is a positive relationship between the deposit interest
rate and the volume of deposits and that interest rate has a major influence on deposit mobili-
zation. The study recommends that Nigerian Banks should increase the interest rate on sav-
ings so as to encourage people to save more and to spread their investment rather than to keep
money under their pillows.

Low interest rates on savings forced depositors to take their money out of banks and seek out
higher-yielding investments. At the same time, attempts to get around deposit rate ceilings and
reserve requirements led to the financial innovation of money market mutual funds, which put
the banks at an even further disadvantage because depositors could now obtain checking ac-
count–like services while earning high interest on their money market mutual fund accounts
(Mishkin, 2004)

Liquidity of the Bank

Liquidity can be defined as the ability of a financial institution to meet all legitimate demands
for funds (Yeager and Seitz 1989). It is also defined as the ability of bank to fund increases in
assets and meet obligations as they come due, without incurring unacceptable losses (Bank for
International Settlement 2008).It follows that depositors has to make sure that they get their
money back when they have demand for it.

Therefore; bankers are always sensitive to the issue of liquidity and liquidity risk and the cen-
tral bank is also there to monitor that banks are liquid enough to meet their respective obliga-
tions when the public demands. The more liquid the banks are, the better they attract deposits.

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 13
Higher liquidity buffers tend to signal greater bank soundness, which could be a factor favoring
deposit demand (Herald and Hesse, 2009).

Service provision and convenience of bank’s office

As banks are service providers- the bank that has the best service quality to its customers at-
tract many more depositors. As Mols defined service quality is a measure of how well the ser-
vice level delivered matches customer expectations (Mols et al. 1997). Understanding the in-
spirations, expectations and requirements of both provide a foundation in how to provide best
services to the customers. It may even provide information on making improvements in the
nature of business (Haque et al, 2009).

Service quality for a bank could be efficiency and speed, friendliness of bank personnel, value
adding technology of the bank to the customer, proximity and convenience of the bank to cus-
tomer and extra services provided for minimal costs.

Competition among the banks and transaction costs

Prior to 1994, the Ethiopian financial sector was owned, controlled and monopolized by the
state mainly meant for fulfilling the objective of the state. There was minimal or insignificant
competition among the three state-owned banks i.e. Commercial Bank of Ethiopia, Construc-
tion and Business Bank and Development Bank of Ethiopia as the purposes of their estab-
lishment were somewhat different. However, consequent to the issuance of a proclamation
(No. 84/94) (currently proclamation no. 592 /2008) that allowed for introduction of privately
owned domestic banks, the number of privately owned banks flourished and stood at 16 as at
June 30, 2014.

The addition of private banks to the banking sector of Ethiopia coupled with their presence to
serve most dominantly the retail commercial banking function and the bank branches are con-
centrated in major cities and towns, it is clearly noticeable that commercial banks in Ethiopia
are nowadays operating under stiffer competition to each other than before for resource mobi-
lization. The huge technological investments they are making on core banking softwares sup-
plied from internationally known vendors, on purchases of Automatic Teller Machines and the
rapid branch expansion by many commercial banks in the country to capture customers are
few of the evidences.

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 14
In an effort to fulfill the government’s development agenda, the biggest and strongest bank of
Ethiopia- CBE is making aggressive promotional campaign to attract customers aiming depos-
its and foreign currency resources. The campaign comprises coupon prizes for depositors,
providing a condominium housing loans through periodic savings and increasing accessibility
to customers.

In addition to the promotional costs that are ever increasing by each of the banks in Ethiopia
to catch the eyes and ears of public, costs associated with renting branch offices for expansion
are also skyrocketing. Salary expenses are also increasing to acquire bank professionals with
only little experience. Different banks are reducing commission charges associated with ad-
ministering deposit accounts from time to time and they are providing favorable interest rates
to customers with stable and huge deposits.

Bank profitability, size, and security and number of bank branches

Herald and Heiko (2009) state that higher bank profits would tend to signal increased bank
soundness, which could make it easier for these banks to attract deposits. Erna and Ekki
(2004) find that there is a long run relationship between commercial banks deposits and the
profitability of the banks. One of the reason as to why people deposit in banks is to ensure a
feeling of security of their money. Larger banks in terms of total assets or capital attract better
deposit amounts than smaller ones in absolute terms (Herald and Heiko, 2009). This is largely
because of the bigger banks have many branches, huge capital and or assets and provide a bet-
ter sense of security to savers apart from their low transaction costs due to economies of
scale.

According to the study made by CGAP, 2010, Financial Access 2010, Ethiopia has low geo-
graphic and demographic penetration of bank branches in the sub-Saharan Africa. The popula-
tion is hugely unbanked and there is only 1.39 branches open for every 100,000 adults where-
as 5.11, 4.38 and 2.25 for Ghana, Kenya and Uganda respectively. Most banks are head quar-
tered in Addis Ababa and their branches too are concentrated in the capital (Muluneh, 2012).

Degree of Financial Intermediation (Proxied by the loans-to-asset ratio)

Rodrik and Subramanian (2008) argue that an improvement in financial intermediation, which
raises domestic saving and enhances access of firms to domestic finance in an investment-

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 15
constrained economy. A higher degree of intermediation may signal a bank’s success in gen-
erating income as well as a need for it to attract more deposits to support its increased lending
activities.

2.5.2 Non-Bank Specific Factors for Deposit Mobilization

Non-bank specific factors are defined for this research as factors that have an impact on de-
posit mobilization that are beyond the control of the banks themselves.

Cardenas and Ecsobar (1998) studied the savings behaviour in Colombia and found that high-
er government expenditure led to the decreasing national savings and saving and investment
were perfectly correlated and savings caused growth. This study also indicated that higher
taxation; urbanization and age dependency had negative effect on savings. Loayza and Shan-
kar (2000) used co-integration approach in measuring the relationship between savings in In-
dia and factors such as real interest rate, per capita income, the dependency ratio, financial
development, the government saving rate, and the share of agriculture in gross domestic prod-
uct (GDP). They found that real interest rate, per capita income and the share of agriculture in
GDP had a positive relationship with savings, whereas, inverse relationship were found for
variables such as financial development, inflation and dependency ratio.

Another study which used India as a case study was conducted by Athukorala and Sen (2003)
and they found that with the exception of the changes in the external trade, factors such as rate
of growth, real interest rate on bank deposits, spread of banking facilities and inflation had
significant positive relationship with savings. Kiiza and Pederson (2001) presented evidence
to show that factors such as the availability of information, the accessibility of the saving fa-
cilities, level of education of the head of the household and the density of financial institution
could influence customers to start savings with the financial institution in Uganda.

Loayza et al. (2000a) examined the effects of policy and non-policy variables on savings and
reported several interesting findings: (1) private saving rates are highly serially correlated, (2)
positive saving rates with the level and growth rate of real per capita income and the influence
of income is larger in developing than in developed countries, (3) life cycle hypothesis is sup-
ported by the negative relationship between dependency ratio and saving rate, (4) inflation
was found to have a positive impact on saving thus supporting the precautionary motive for

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 16
saving, (5) fiscal policy is a moderately effective tool to raise national saving, and (6) finan-
cial liberalization is detrimental to private saving rates because greater credit availability re-
duces saving rate and similarly larger financial debt and higher real interest rate do not in-
crease saving.

From the above, we can see that macroeconomic policy of a country, inflation, per-capita in-
come, economic growth (as measured by GDP) are among the many other factors influencing
deposit mobilization.

2.6 Empirical Review

From among the articles written on the subject, the researcher has selected the study made by
Wubitu(2012) on the title ‘Factors Determining Commercial Bank Deposit: An Empirical
Study on Commercial Bank of Ethiopia’ .
The article used data from Commercial Bank of Ethiopia in doing the research through mixed
methodologies of the investigation. The data of total deposit of CBE for 12 years regressed
against three independent variables namely deposit rate, number of branches and inflation
rates.
 Deposit rate (DR) had positive insignificant effect on the commercial bank deposits.
 Inflation rate (INFRATE) had positive insignificant effect on the commercial banks
deposit.
 The branches of commercial bank (LNBR) had positive coefficient estimates and sig-
nificant at 5% significant level, therefore branch expansion has positive significant ef-
fect on commercial banks deposit.
The R2 and the Adjusted R2 values are 84% and 70% respectively, that shows 84% of the
variation of the dependent variable is explained by the variation of the independent variable.
Given the summary result of descriptive and empirical analysis, the study had concluded the
following to commercial banks by taking CBE as evidence of the study. The major ones are
adopted here:
 The main source of capital for commercial banks is deposit and saving deposit is the
most used kind of deposit in banks

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 17
  Deposit rate improvement, service excellence, good will of the bank, branch expan-
sion, promotional effort, awareness creation and coupon prize can be an opportunities
for deposit attraction and mobilize more deposits.

However, this study needs to explore more by fairly taking more samples from both the state
and private banks i.e. seven banks as samples for the study including CBE, AIB, DB, NIB,
BOA, WB and UB. The questionnaires distributed and responded are about double of what is
previously taken. Further; more than three independent variables are also included beyond
what was used by Wubitu(2012) in the quantitative part. The researcher also needs further fo-
cus on the costs of deposit mobilization and its impact on commercial banks of Ethiopia.
The main objective of the research is to fill these gaps and their impacts on the results of the
study and to add more about the current situation of the subject.

Another study by Sudin et al. (2006) on ‘Deposit Determinants of Commercial Banks in Ma-
laysia’ investigates the structural determinants of deposits level of commercial banks in Ma-
laysia, using co-integration techniques. This study classified the variables for saving mobiliza-
tion into two, namely financial and economic variables. Financial variables consist of interest
rates on savings account (RSCV) and fixed deposit accounts (ARFDCV), rates of profit for
Islamic savings account (RSIS), and Islamic investment accounts (ARIIS) (fixed deposit ac-
counts are normally known as investment account at Islamic banks). Whereas, based lending
rate (BLR), composite index of Malaysian Bourse (KLCI), consumer price index (CPI), mon-
ey supply (M3), and gross domestic product (GDP) are economic variables.

The data for this study are taken from the monthly statistical bulletin of Bank Negara Malay-
sia (www.bnm.gov.my). The study used monthly data covering the period January 1990 to
December 2003. In examining the determinants of deposit levels of both Islamic and conven-
tional banks, the paper employed recent advances in time series econometrics. These tech-
niques are cointegration and error correction framework, which are conducted within the vec-
tor autoregression (VAR) framework.

The results of the study suggested that determinants such as rates of profit of Islamic bank,
rates of interest on deposits, Base Lending Rate, Kuala Lumpur Composite Index, Consumer

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 18
Price Index, Money Supply and Gross Domestic Product have significant impact on deposits.
It is also found out that in most cases, customers of conventional system behave in conformity
with the savings behavior theories.

2.7 The conceptual framework of the study

The research is going to reveal that there are independent factors impacting on the total depos-
it value of the commercial banks in Ethiopia (the dependent variable). The factors are drawn
from the environmental players such as the actions and policies drawn by the government re-
garding the general macro-economic situations of the country. Specifically, it is related with
monetary policies and inflation control mechanisms, the performance of the economy as a
whole in the country as reflected on GDP, inflation and exchange rate and the society and its
awareness on deposits at large. There are also banks’ own policy factors and their strategies
and capacities on issues like branch expansion, excellence in service, bank size, deposit rate
and security having an impact on deposit collection.

Banking Environment

Money supply
Commer-
GDP, cial Banks Total Deposit
in Ethiopia Base of Com-
Inflation,
mercial banks
Exchange rate in Ethiopia
of Birr to USD

Public Aware-
ness Branch expansion

Bank size (capi-

tal)

Service Excel-
lence

Deposit rate

Security
Fig. 1 Conceptual framework of the study

Source: Developed by the researcher

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 19
 Chapter Three

Research Methodology
The main objective of the study as pointed out in chapter one is to identify the factors that de-
termine deposit mobilization activity and identify and analyze associated costs. In order to
fulfill this objective and thus answer the research questions, the researcher utilized a mixed
method (quantitative and qualitative) of investigation.

3.1 Data Types

3.1.1 Quantitative Data

The researcher used annual reports of all commercial banks of Ethiopia as the secondary data
sources, data from the regulatory body of banks in Ethiopia-National Bank of Ethiopia (NBE)
and from Central Statistical Authority (CSA). Data of thirteen years was gathered including
the year from 2001/2 to 2012/3(both inclusive) of the commercial banks and used here for the
study. The data includes the following:

a) Year-end total volume of deposits in all commercial banks in Ethiopia,

b) Average annual year on year general inflation rates,
c) Average annual exchange rate of Ethiopian Birr to USD,
d) Real per capita GDP growth rate,
e) Weighted annual deposit rate (saving and time deposit volume and their deposit rates
are taken in to account)
f) Money supply(Narrow money)
g) Year-end total number of branches of all banks

Then the above data is computed to find the percentage change of the values of the variables
year on year basis from 2001/2 to 2012/3.The average annual year on year general inflation
and the real per capita GDP growth rates are excluded from this computation as they initially
have a nature year on year change data.

The narrow money is taken as a factor and it indicates the money in circulation and demand
deposit balances each year of the country as a whole.

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 20
3.1.2 Qualitative Data
Questionnaires allocated to the bankers will tell the bankers’ view of the existing reality about
the current deposit collection activity of banks and also show us list of significant factors that
attract deposit customers to banks or not at all.

3.2 Data Sources

The researcher used the annual reports of the banks, the reports from the regulatory body of
banks in Ethiopia i.e. the National Bank of Ethiopia (NBE), the reports of the Central Statist i-
cal Authority and from Ministry of Finance and Economic Development were obtained as
secondary data sources and used in quantitative analysis. The responses from the question-
naires and interview questions were also included as primary data source used for qualitative
aspects.

3.3 Data Collection Instruments

Twelve years of annual data were collected to explore the significance of the quantitative fac-
tors through time series analysis.

The questionnaires were also distributed to senior bankers to know what factors determine the
deposit mobilization activity, the significance of the factors and related costs as primary data
sources. Further, interviews were made to senior branch managers of banks to understand the
reality in depth.

3.4 Population and sampling strategy

Population of the study

The study population/participants were all commercial banks in Ethiopia including private as
well as public that exist in the fiscal year 2012/13. According to NBE (2012/13), there are
eighteen commercial banks(excluding the specialized Development bank of Ethiopia) in the
year 2012/13 such as Commercial Bank of Ethiopia (CBE), Construction and Business Bank
(CBB), Dashen Bank S.C (DB), Awash International Bank S.C (AIB), Wegagen Bank S.C
(WB), United Bank S.C (UB), Nib International Bank S.C (NIB), Bank of Abyssinia S.C
(BOA), Lion International Bank S.C (LIB), Cooperative Bank of Oromia S.C (CBO), Berhan
International Bank S.C (BIB), Buna International Bank S.C (BUIB), Oromia International
Bank S.C (OIB), Zemen Bank S.C (ZB), Enat Bank S.C(EB),Addis International Bank and

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 21
ebub Global Bank S.C.. The first two are publicly owned and the remaining twelve are pri-
vately owned commercial banks.

Sampling frame
The frame for drawing sample included those commercial banks having at least twelve years
working experience in Ethiopia (i.e. from 2001/2 to 2012/13). The researcher selected six pri-
vate banks and one state bank as a sample to distribute the questionnaires and make interview
questions The banks included in the survey are Commercial Bank of Ethiopia, Awash Interna-
tional Bank, Dashen Bank, Bank of Abyssinia, Nib International Bank, Wegagan Bank and
United Bank.. The banks are selected based on the purposive sampling methodology taking
the criterion of seniority of establishment from among the existing population. Therefore, the
matrix for the frame is 12*7 that includes 84 observations.

Sample
Seven banks are selected to circularize the questionnaires and interview questions. The sam-
ples are made as it is not feasible to cover all banks cost wise or convenience to the research-
er.

With respect to the quantitative data collection and analysis, the researcher has collected data
for all total banks and the population as a whole that existed within the years covered by this
study. Simply, the researcher did not take sample from the frame and rather used the data of
the population as a whole. Therefore, the sampling frame and the sample was the same. Ac-
cording to Brooks (2008, p 105), while there is no definitive answer for an appropriate sample
size for model specification, it should be noted that most testing procedures in econometrics
rely on asymptotic theory. This theory says that as the sample size approaches to the popula-
tion, the results from the sample estimates are more appropriate for generalizing to the general
population. Thus in this case the sample size is equal to the population which could enable the
researcher to make appropriate generalization to the overall population.

The researcher distributed 84 questionnaires to the bank staffs distributing 12 questionnaires

to one branch of each of the banks stated. The branches were selected based on convenient
sampling methods based on proximity and personal convenience to the researcher.

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 22
 3.5 Validity and Reliability of the Data

The validity is concerned with the accuracy or truthfulness of the data. That is, the validity
refers to the extent to which the data obtained is accurate for the purpose. The researcher ex-
ercised validity by soliciting published annual reports of National Bank of Ethiopia and from
each of the banks for the years under review. This has helped the researcher to get relevant
information for the purpose of the study.

Reliability of data is related to its consistency and it refers to the extent to which the data is
the same irrespective of their source. That is, the data for the study is specifically taken from
the annual reports of the banks and were found in agreement with some of the data found on
publications of National Bank of Ethiopia and therefore were reliable.

3.6 Determinants of Deposit Mobilization and Variables Descriptions

Few studies made on the determinants or factors of deposit mobilization activity of commer-
cial banks show that the factors revealed are categorized differently. For instance, the study
made by Wubitu(2012) divides the factors in to two namely-the country specific factors and
the bank specific factors whereas the study by Sudin et al (2006) on the deposit determinants
of the commercial banks in Malaysia categorizes the factors as financial factors and economic
factors. Another study by Ozcan et al. (2003) outlined six groups of potential saving determi-
nants, namely government policy variables, financial variables, income and growth variables,
demographic variables, uncertainty variables and external variables. Yet again the other study
by N. Desinga( 1975) groups the factors under exogenous and endogenous factors to the bank-
ing system.

This study categorizes the variables in to two, namely bank specific and non-bank specific
variables. The bank specific factors are those factors that are manipulated and controlled by
the Ethiopian commercial banks themselves where as the non-bank specific factors are factors
operating beyond the control of banks, macro-economic and policy issues. The bank specific
variables for this study include deposit rates, bank size, and branch expansion and service ex-
cellence whereas the non-bank specific factors are factors such as inflation, GDP, monetary
supply and exchange rate of Birr to USD. Some of the factors may have both the bank specific

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 23
and the non-bank specific nature in which case the researcher categorizes those factors based
on subjective judgment as to where they incline in the Ethiopian context.

The expected relation of the independent variables against the dependent variable (total depos-
it of commercial banks) is summarized below from the past empirical studies done on the sub-
ject.

Though many factors can be raised under this category that have influence on deposit mobili-
zation activity of banks as illustrated in the literature review part, the researcher has focused
on the following major bank specific and non-bank specific factors for analysis.

3.6.1 Bank Specific Factors

Deposit Rate
The increase in deposit rate on deposits is expected to improve the deposit volume in com-
mercial banks as people are better attracted to get the advantage of higher interest payments
on the deposits they held in banks. Herald and Heiko(2009) stated interest rate 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.
Wubitu(2012) stated that there is a positive insignificant relationship between the two taking
Commercial Bank of Ethiopia’s deposit trend on her study. Hence, the deposit rate and depos-
it volume at banks have a positive relationship

Branch expansion
The increase in the number of bank branches will have an effect on getting many customers
particularly those in far remote areas who are unbanked society. According to the article on
NBE’s magazine (Birritu No.113, February 2012), Ethiopia has low geographic and demo-
graphic penetration of bank branches. Although the expansion of banks in terms of branching
since 1994 is significant, most rural people have to travel very long distance to access bank
branches. Many of the bank branches in Ethiopia are concentrated in the capital city. The
number of bank branches went up from 215 in 1995 to 970 as at June 30, 2011 and as at De-
cember 31, 2011, grew to 1129. As a result the ratio of bank branch to total population stood
at 82,474. This compares with 63000 and 26000 for Kenya and Egypt, respectively. Out of the

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 24
total of branches, 36% are located in Addis Ababa, making mainstream branches hardly ac-
cessible to the rural area.

More recently the branch expansion by the existing banks is fast increasing to reach out re-
mote locations too to seize the resources available particularly deposits. This practice shows
that branch expansion has positive and significant relation with deposit volume.
Wubitu’s(2012) study shows that the number of branches available has positive and signifi-
cant effect on total deposit of CBE.

Bank Size
Among the factors prominently identified as affecting deposit variability one is bank size. Ev-
idence 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.

Bank size usually denotes the bank’s total asset volume and its total capital. This study took
the total capital of private banks to study its relation with the total deposit volume expecting
they have positive relation. Bank size for this study is proxied with the total capital of the
banks.

Service Excellence
Banks are service giving institutions and thus the way the service is provided is expected to
highly affect the overall activity of the bank including the deposit mobilization activity. M. A.
Baqui et al.(1987) stated that there is some empirical evidence demonstrating the positive in-
fluence of services rendered to depositor. The study by Goiteom(2011), on the Bank selection
decision-factors influencing the choice of banking services, indicates that customers place
more emphasis on factors like convenience, service provision, employers influence and bank
image. Therefore, such factors should be considered seriously by the commercial banks in de-
signing their marketing strategies by widening their branches and providing good customers
services to customers. The data collection and analysis of the commercial banks with this fac-
tor is done through qualitative aspect.

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 25
3.6.2 Non-Bank Specific Factors
These are macroeconomic conditions or sometimes policy factors that are not under the con-
trol of the commercial banks categorized for the purpose of the study.

Inflation
Inflation may influence saving through several reasons. Theory postulates that greater uncer-
tainty should raise saving since risk-averse consumers set resources aside as a precaution
against possible adverse changes in income and other factor. Hence, when inflation raises un-
certainty regarding future income growth, risk-adverse consumers may increase their precau-
tionary saving (Sandmo, 1970). Secondly, savings may rise in inflationary environment if
consumers mistake an increase in the general price level for an increase in some relative pric-
es and refrain from buying (Deaton, 1991). Inflation could also influence saving through its
impact on real wealth. If consumers attempt to maintain target level of wealth or liquid assets
relative to income, saving will rise with inflation.

During inflation, central banks employ monetary policy that would increase the cost of debt
and decrease the availability of funds in banks. When the cost of borrowing increases and bor-
rowing slows, the banks demand for fund decreases obviously the deposits will decrease.
Hence, the direction of the relation between inflation and deposit volume is situational.

Different studies show varying results regarding the directional relationship between inflation
and deposit volumes. For instance, inflation is found to have negative relation with deposit in
a study made in India by Sudin et al. (2006) whereas another case study in the same country
by Athukorala et al.(2003) has shown the reverse direction.

Gross Domestic Product (GDP)

GDP is one of the explanatory variables commonly used as determinants of economic growth.
According to Jim(2008), the level of GDP divided by the population of a country or region is
what is known as per capita income. Changes in real GDP per capita over time are often inter-
preted as a measure of changes in the average standard of living of a country. Thus the rela-
tion between income of the society and deposit volume is expected to be positive and signifi-
cant. Studies by Mahendra (2005) and M. A. Baqui et al, (1987) both reveal that growth in
income have a positive effect on deposits.

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 26
Money Supply
Money supply is one of the tools used by the government in the conduct of its monetary poli-
cy. Hence, any changes in money supply can have a major impact on economic conditions.
An increase in money supply makes loanable funds cheaper, thus reducing cost of borrowing
for corporate and individual customers. In this case, it is expected that people will increase
consumption and reduce savings and thus money supply will have an inverse relationship with
deposits. On the other hand, it could also be argued as well that as more money is supplied to
the economy, more deposits could put in banks accumulating the fund for transactional and
investment purposes.

Exchange rate of Ethiopian Birr to USD

For the major net importing country like Ethiopia, variability of the exchange rate of the local
Ethiopia money (Birr) to foreign currency values is enormous. As the exchange rate of Birr to
USD ratio grows, local deposits will deplete in the process of importing goods and services.
This means as the country does by far more imports than exports and the exchange rate of Birr
to USD grows, then local deposits in banks will reduce showing that there is inverse relation-
ship. There are also cases where it shows the opposite trend by increasing the foreign direct
inflows. However, the study by Ngula(2012) on the ‘Determinants of deposit mobilization
and its role in economic growth in Ghana has demonstrated that a deterioration in the Ghana-
ian currency with respect to the US currency resulting in a higher deposit mobilization.

3.7 Dependent and independent variables

The total deposit volume of commercial banks in Ethiopia is the dependent variable and the
rest of the factors outlined above are the explanatory or independent variables as used for this
research.

3.8 Data Analyzing Instruments and Descriptive Analysis

The researcher utilized multiple regressions to analyze the quantitative data which are collect-
ed from annual reports of the National Bank of Ethiopia for twelve years (from the year
2001/2-2012/3). Multiple regression analysis is conducted using SPSS data analysis software
to determine the exact nature of the relationship that exist between deposits, real per capita
GDP, inflation, exchange rates, money supply (M1) and deposit rates in Ethiopia over the pe-

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 27
riod under study. There is one dependent variable, total deposit volume of private banks, re-
gressed with the independent variables (explanatory variables) such as branch expansion, in-
flation rate, real per capita GDP, deposit rate, exchange rate and money supply. This shows
that the research is more of descriptive and explanatory in nature.

The qualitative data from the questionnaires and interview are also described and summarized.
The researcher summarized the information gained through questionnaires and interview re-
sponded from the bank staffs in the manner that gives the necessary information. The ques-
tionnaires are also analyzed using descriptive analysis techniques. The researcher had used
SPSS software to analyze the questionnaires and describe the result.

Multiple Regression Model

The type of the data for this study is time series including the 12 years of data in the regres-
sion analysis from 2001/2-2012/13. The model is multiple regression models with one de-
pendent variable and seven independent variables:

DEP=α + β2 DRWD + β3 GINF+ β4 RPGDP+ β5 MI+β6 BBR+ β7 CAP+ β8EXBRUSD + ε

The dependent variable of this multiple regression is the year on year percentage change
(YOYPC) total deposit value of banks that is indicated by the symbol DEP. whereas the inde-
pendent variables are symbolized and enumerated here below:

 DRWD – YOYPC weighted average deposit rate

 GINF-- year on year annual average general inflation rate,
 RPGDP-- real per capita GDP growth rate,
 M1------ YOYPC Money supply in terms of narrow money
 BBR------ YOYPC of the number of branches of local banks
 CAP –----- YOYPC of the amount of capital of the banks in Ethiopia.
 EXBRUSD- YOYPC on average annual exchange rate of Birr to USD

The symbol alpha (α) represents the constant term and betas (β1, β2, β3, β4, β5, β6, β7, β8,
β9) represent the coefficient of the independent variables. The null hypothesis is rejected at

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 28
5% significant level. The relevant data is collected regarding each single variable and ana-
lyzed.

For multiple regression models, the following basic assumptions are held:

3.9 Diagnostic Testing Methods

The econometric estimation technique that is used by this study is ordinary least square
(OLS). There are five assumptions made in relation to the classical linear regression model
(CLRM). The researcher has tested if there are violations of these assumptions. The method
used to test these assumptions by the researcher is described as follows:-

The average value of the error is zero (Non-zero variance)

This assumption is not violated if the regression line does not intercept through the origin.
This assumption is violated if the model does not have constant term since the line intercepts
through the origin; however in our case the model have constant term which will prove that
the line did not pass through the origin and the first assumption of CLRM is not violated.
Therefore the variation in the dependent variable, total deposit of commercial banks, is ex-
plained by the independent variables.

No perfect multicollinearity
There should be no any perfect linear relationship between two or more of the predictors. So,
the predictor variables should not correlate too highly. If there is perfect collinearity between
predictors it becomes impossible to obtain unique estimates of the regression coefficients be-
cause there are an infinite number of combinations of coefficients that would work equally
well.

To test this researcher has used VIF values. SPSS produces various collinearity diagnostics,
one of which is the variance inflation factor (VIF). The VIF indicates whether a predictor
has a strong linear relationship with the other predictor(s). Although there are no hard and fast
rules about what value of the VIF should cause concern, Myers (1990) suggests that a value
more than 10 is a good value at which to worry seriously.

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 29
  Homoscedasticity Test
At each level of the predictor variable(s), the variance of the residual terms should be con-
stant. This just means that the residuals at each level of the predictor(s) should have the same
variance (homoscedasticity); when the variances are very unequal there is said to be
heteroscedasticity and it can lead to the distortion of the findings and overall conclusion.

Homoscedasticity can be checked by visual examination of a plot the standardized residuals

by the regression standardized predicted value (Osborne & Waters, 2002), specifically, statis-
tical software scatter plots of residuals with independent variables are the method for examin-
ing this assumption (Keith, 2006). Thus the researcher uses same plots to investigate this as-
sumption.

The Assumption of Autocorrelation

For any two observations the residual terms should be uncorrelated (or independent). This
eventuality is sometimes described as a lack of autocorrelation. The researcher used and tested
this with the Durbin–Watson test, which tests for serial correlations among errors. Specifical-
ly, it tests whether adjacent residuals are correlated. The test statistic can vary between 0 and 4
with a value of 2 meaning that the residuals are uncorrelated.

Linearity:
Linearity defines the dependent variable as a linear function of the predictors or the independ-
ent variables (Darlington, 1968). The mean values of the outcome variable for each increment
of the predictor(s) lie along a straight line.. If we model a non-linear relationship using a line-
ar model then this obviously limits the generalizability of the findings.

The study uses histogram, P-P plots and scatter diagrams to test homoscedasticity, linearity
and normality problems if they exist in the model.

In the preceding chapters, we are going to see the result of this quantitative analysis that is the
effect of each independent variable on the dependent variable.

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 30
 Chapter Four

Data Analysis and Presentation

4.1 Descriptive Data Analysis

The researcher presented the analysis quantitative and qualitative analysis in the following
pages. Firstly, the quantitative data obtained from the National Bank of Ethiopia for twelve
years is analyzed through the ordinary excel sheet form and then multiple regression is con-
ducted using data on the year on year percentage change in total deposit (the dependent varia-
ble) is regressed against the seven independent variables identified .Testing of the regression
assumptions are included. Secondly, the qualitative analysis and presentation follows from the
responses obtained from the questionnaires and interview questions. Thirdly, the summary of
both are included at the end of the chapter.

4.1.1 Analysis of quantitative Data

Ordinary Excel Sheet Analysis and its outputs

Total Deposit of local banks in Ethiopia

Total deposit volume data of twelve years (from fiscal year 2001/2 to 2012/3) were taken for
all private versus all public banks and is graphically presented as figure 2 below.

500,000
450,000
400,000
350,000
300,000
Total Deposits of
250,000
banks(in Millions) Total
200,000
150,000 Private
100,000 Public
50,000
-

For the Year

Fig. 2 Total Deposit of Private versus public banks (in millions of Birr)

Source: Researcher’s computation

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 31
Figure 2 shows that the deposit balances of both the private banks and the state banks are
growing every year which coincides with the opinion received from the responses of the ques-
tionnaires as detailed in the qualitative part. From the year 2009/10 onwards; however, it
seems that the gap between the total volume of deposit collected by public banks and that of
private banks is widening. The reason for the widening of the gap has something to do with
the researcher’s findings from the interviews that the government policy changes and there is
intense competition from the huge size of public banks have made an impact on deposit col-
lection of private banks.

The following graph is presented to show the clearer view of the performance private banks
versus the public banks in deposit market.

Public Vs Private Banks Deposit Share

100
80
60
Market Share in
% 40
20
0

Public Banks Share Private Banks Share

Fig. 3 Market share of deposits for private versus public banks in Ethiopia

Source: Researcher’s computation

Over the initial seven years, it is visible that the private banks were gaining increasing share
of the deposit market from public banks but after 2009/10 the later is regaining its position.

Only the few public banks has been enjoying the lion share of the deposit market in the coun-
try for many years even though the numbers of private banks has been increasing and reached
sixteen during the fiscal year ended 2012/2013.

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 32
The following figure shows the direction of the deposit volume in all commercial banks in
Ethiopia for the period under study.

Year on Year Change in % of TDB

50
40
30
20 Year on Year Change in %
10 of TDB

Fig. 4 The year on year percentage change of total deposit volume of commercial banks in Ethiopia

Source: Researcher’s computation

Figure 4 shows the year-on-year percentage change of total deposit in banks is declining in the
final years of the study revealing even though there is a growth in absolute value of deposit
across banks the rate of increase is showing a decline slope from the middle of the year
2010/11. Paradoxically, the timing of the downward decrease of the graph coincides with the
time when the supervising authority of banks, NBE, raised the minimum saving deposit rate
from 3 per cent per annum to 5 per cent(September 2011).

Rate of change in money

supply(Narrow Money)
50
40
% change year on
30
year of narrow
20
money Money
10
supply change
0
2001/2
2002/3
2003/4
2004/5
2005/6
2006/7
2007/8
2008/9
2009/10
2010/11
2011/12
2012/13

Figure 5 Rate of change in money supply (broad Money)

Source: Researcher’s computation

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 33
The money supply in terms of broad money constitute both narrow money (currency outside
banks and demand deposits) and quasi-money (saving and time deposits available in
banks).The above figure shows the trend in total aggregate money supply of the country for
twelve years. This trend is similar to the rate of change of deposits at banks for similar period
indicating that the monetary policy has attributes to the deposit trend.

Costs Related to deposit mobilization

From the responses obtained through the interviews made, it has been demonstrated that costs
of making deposit is growing year after year. The researcher has tried to support this fact with
the figure showing the growth of ratio of cost to deposit amounts for six private banks includ-
ing AIB, DB, BOA, NIB, WB and UB over the years from 2008/9 to 2012/13. CBE is exclud-
ed from this analysis as its major deposits are obtained from government offices whose costs
are assumed to be minimal.

The costs most related to the deposit mobilization activity are interest payments, salary and
benefits, rental costs and advertisement costs. The deposit balances include the sum of saving,
demand and time deposit balances of each bank at the year end. These costs are collected from
each bank and ratio of their total to the respective deposit figures as at each year end is com-
puted.

7.0

6.0

5.0 DB
BOA
4.0
NIB
3.0 AIB
UB
2.0
WB
1.0

-
2008/9 2009/10 2010/11 2011/12 2012/13 2013/14

Fig. 6 Ratio of Deposit Related Costs to total deposit volume of six private banks

Source: Researcher’s computation

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 34
Thus it can be drawn that the costs of deposit mobilization is increasing from year to year and
making the activity successful is becoming very expensive.
The significant cost of deposit mobilization as the finding of the qualitative approach reveals
later in this study is the deposit interest payment and most banks hold the major share of their
deposit in the form of saving that earns interests to their customers but costs them much. The
following figure shows the trend of weighted (saving and fixed deposits) deposit rates over
the years of the study.

Yearly Weighted Deposit Rate Trend

6.00
5.00

Annual 4.00
weighted 3.00 Yearlt Weighted
deposit rate 2.00 Deposit Rate
1.00
0.00
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Fig.7 The yearly weighted deposit rate trend of banks in Ethiopia
Source: Researcher’s computation

Descriptive analysis of the dependent and independent variables

The SPSS software is used for the purpose to view the minimum, maximum, mean and stand-
ard deviation of the included variables that depicted the following. The average deposit value
of all commercial banks in Ethiopia that existed within the twelve years period is Br.85.6 bil-
lion. During the same period, the weighted average of deposit rate is 4.04 slightly lower than
the current minimum of 5 percent per annum. See table 1 for the other values.

Table 1. Descriptive Statistics

Minimum Maximum Mean Std. Deviation

    
    
    
    
    
    
    
    
    
Source: SPSS output

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 35
Multiple Regressions, testing assumptions, analysis and results
To make the regression analysis, the researcher computed the year on year percentage changes
of each variable to simplify the numbers. Then year on year change of percentage (YOYPC)
in deposit value of all commercial banks in Ethiopia which is the dependent variable is re-
gressed against six independent variables that are YOYPC deposit rate, real GDP per capita
growth rate, annual average general inflation growth rate, YOYPC money supply, YOYPC
the number of private bank branches, YOYPC total capital and YOYPC exchange rate of
Ethiopian Birr to USD.

The regression analysis is used to test if an independent variable influences a dependent vari-
able and whether this effect is positive or negative. For that to be applied and workable, diag-
nostic testing has to be done. The model chosen has taken the common classical regression
model (CLRM) as depicted below:
Y= α+ β1X1+ β2X2+ β3X3…. + ε
Where’ y’ is the dependent variable
α is the constant term
β are coefficients of each of the independent variables
X1,X2 and X3 are the independent variables.
ε - the error term
Our model for this study can simply be put as follows
DEP=α + β2 DRWD + β3 GINF+ β 4 RPGDP+ β5 M1+β6 BBR+ β7 CAP+ β8 EXBRUSD + ε
 DRWD – YOYPC weighted average deposit(interest) rate
 GINF-- year on year annual average general inflation rate,
 RPGDP-- real GDP per capita growth rate(proxy to income growth per person),
 M1------ YOYPC Money supply in terms of narrow money(currency outside circulation
and demand deposits)
 BBR------ YOYPC of the number branches each local bank
 CAP –----- YOYPC total capital values of the banks in Ethiopia(proxy for bank size.
 EXBRUSD- YOYPC on average annual exchange rate of Birr to USD
Note: YOYPC (Year on year percentage change) of the variables is used in the regression
computation.

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 36
The SPSS software is an instrument selected to provide the results of the regression and other
testing issues.
Table 2. Variables Entered/Removed (b)

Variables Variables
Model Entered Removed Method
1
EXBRUSD,
CAP, GINF,
RPGDP,
. Enter
BBR,
DRWD,
M1(*)

a All requested variables entered.

b Dependent Variable: DEP

Source: SPSS regression out put

Table 2 displays the variables entered or variables removed from the study at any point in
time from the beginning till the end of the work. As it is indicated in variables entered column
there are seven independent variables entered for the study, those are year on year percentage
changes of the weighted annual exchange rate of Birr to USD, the mean number of branches
of banks, the real per capita GDP growth rate, weighted annual general inflation rate, the
mean value of total capital of banks, the weighted average deposit rate of banks, and the mon-
ey supply (narrow money).

Does the Model Fit?

Table 3 ANOVA(b)

Sum of
Model Squares df Mean Square F Sig.
1 Regression 938.187 7 134.027 8.613 .027(a)
Residual 62.241 4 15.560
Total 1000.428 11
a Predictors: (Constant), EXBRUSD, CAP, GINF, RPGDP, BBR, DRWD, M1
b Dependent Variable: DEP
Source: SPSS regression out put

The ANOVA table summarizes the output of the analysis of variance. In regression row, the
output for regression displays information about the variation accounted for by the existing
model. Residual displays information about the variation that is not accounted for by the mod-
el. And total in the table shows the sum of regression and residual. Mean square is the sum of

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 37
squares divided by the degrees of freedom. And F statistics is the regression mean square di-
vided by the residual mean square. If the significance value of the F statistics is small then the
independent variable does a good job in explaining the variation in the dependent variables
Hypothesis
Ho = the fit is NOT good
H1 = the fit is good
The model is not fit if the sig value is higher that p value (0.05) favouring the null hypothesis.
As the sig value then is 0.027 which is not higher that p value the researcher rejects the null
hypothesis and fail to reject the alternate hypothesis H1 meaning the model is fit.

How good is the model in explaining the relation?

Table 4. Model Summary (b)

Adjusted Std. Error
Mo R R of the Es- Durbin-
del R Square Square timate Change Statistics Watson
R
Square F Sig. F R Square F Sig. F
Change Change df1 df2 Change Change Change df1 df2 Change
1 .968(a) .938 .829 3.9446422 .938 8.613 7 4 .027 1.936
a Predictors: (Constant), EXBRUSD, CAP, GINF, RPGDP, BBR, DRWD, M1
b Dependent Variable: DEP
Source: SPSS regression out put

Table 4 demonstrates about large R, which shows the multiple correlation coefficients and
the correlation between the observed and predicted values of the dependent variables. And the
value of R for models produced by the regression procedure range from 0 to 1. The larger the
value of R and R2 display that there is strong relationship among observed and predicted val-
ue. In our case R is 0.9680 and R2 is 0.938 indicating there is strong relation of the dependent
variable and the independent variables.

Adjusted R2 attempts to correct R square to more closely reflect the goodness of fit of the
model in the population. It can be seen from the table that the adjusted R2 is 0.829 indicating
that the model is 82.9 % fit for the purpose.

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 38
 Table 5. Coefficients (a)

Unstandard- Standard-
Model ized Coeffi- ized Coef- 95% Confidence Collinearity
cients ficients t Sig. Interval for B Correlations Statistics
Std. Lower Upper Zero- Toler- Std.
B Error Beta Bound Bound order Partial Part ance VIF B Error
1 (Constant) 7.685 4.348 1.768 .152 -4.386 19.757
DRWD -.033 .117 -.064 -.285 .790 -.359 .292 .484 -.141 -.036 .310 3.231
GINF .046 .148 .063 .309 .773 -.365 .456 .515 .153 .039 .372 2.689
RPGDP .373 .342 .175 1.090 .337 -.576 1.321 .458 .479 .136 .602 1.661
M1 .051 .253 .056 .200 .851 -.652 .753 .811 .100 .025 .197 5.086
BBR .437 .165 .607 2.651 .057 -.021 .895 .878 .798 .331 .297 3.368
CAP .002 .073 .003 .021 .984 -.201 .204 .086 .010 .003 .706 1.416
EXBRUSD .423 .191 .380 2.218 .091 -.107 .953 .729 .743 .277 .530 1.888

a Dependent Variable: DEP

Source: SPSS regression out put

The average value of the error is zero (Non-zero variance)

The predictors should have some variation in value different from zero (i.e. they should not
have variances of 0). In the model the independent variables(the predictors) have constant
terms which will prove that the line did not pass through the origin and the first assumption of
CLRM is not violated.

No perfect multicollinearity
There should not be any perfect linear relationship between two or more of the predictors. So,
the predictor variables should not correlate too highly as it becomes impossible to obtain
unique estimates of the regression coefficients because there are an infinite number of combi-
nations of coefficients that would work equally well.

To test this researcher has used VIF (variance inflation factor) values from the output of
SPSS indicated above. Large VIF values are an indicator of multicollinearity.In our case,, all
the VIF value results are less than 10 and multi-collinearity is not a concern as suggested by
Myers(1990)..

Homoscedasticity, linearity and normality tests

At each level of the predictor variable(s), the variance of the residual terms should be con-
stant. This just means that the residuals at each level of the predictor(s) should have the same

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 39
variance (homoscedasticity); when the variances are very unequal there is said to be
heteroscedasticity and it can lead to the distortion of the findings and overall conclusion.

The researcher used SPSS statistical software scatter plots of residuals with independent vari-
ables are the method for examining this assumption (Keith, 2006).

Scatterplot

Dependent Variable: DEP

1.0

0.5
Regression Standardized Residual

0.0

-0.5

-1.0

-2 -1 0 1 2 3

Regression Standardized Predicted Value

Fig.8 Scatter plots of the residuals

Source: SPSS output
The scatter plot sub command to plot standard residuals by the predicted values show that re-
siduals are saturated initially in a linear shape showing that they are relatively homogeneous.
One can also recheck same results with a histogram depicted below.

Histogram

Dependent Variable: DEP

3
Frequency

Mean =9.16E-16
Std. Dev. =0.603
0 N =12

-1.0 -0.5 0.0 0.5 1.0

Regression Standardized Residual

Fig.9 Histogram to show normality test

Source: SPSS output

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 40
 Normal P-P Plot of Regression Standardized Residual

Dependent Variable: DEP

1.0

0.8

Expected Cum Prob

0.6

0.4

0.2

0.0
0.0 0.2 0.4 0.6 0.8 1.0

Observed Cum Prob

Fig.10 P-P plot of normal distribution.

Source: SPSS output
The straight line in the above plot represents a normal distribution of the residuals, and the
points represent the observed residuals. Therefore, in a perfectly normally distributed data set,
all points will lie on the line. The above figures tell us that the three assumptions are well met.

The Assumption of Autocorrelation

For any two observations the residual terms should be uncorrelated (or independent). This
eventuality is sometimes described as a lack of autocorrelation. The researcher used and tested
this with the Durbin–Watson(DW) test, which tests for serial correlations among errors.
Thus the DW test shows Sig. F Change 1.936 which virtually means the observations are un-
correlated.

Correlation results

Correlation is a way to index the degree to which two or more variables are associated with or re-
lated to each other. The most widely used bi-variant correlation statistics is the Pearson product-
movement coefficient, commonly called the Pearson correlation which was used in this study.
Correlation coefficient between two variables ranges from +1 (i.e. perfect positive relationship) to
-1 (i.e. perfect negative relationship).

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 41
 Table 6. Correlations

DEP DRWD GINF RPGDP M1 BBR CAP EXBRUSD

Pearson Correla- DEP
1.000 .484 .515 .458 .811 .878 .086 .729
tion
DRWD 1.000 .659 .497 .600 .416 -.005 .348
GINF 1.000 .283 .358 .516 -.130 .294
RPGDP 1.000 .454 .289 .352 .248
M1 1.00
.750 .169 .619
0
BBR 1.000 .125 .453
CAP 1.000 -.148
EXBRUSD 1.000
Source: SPSS output adjusted to show only the correlation part.

From the correlation table we see that the most significant factors for deposit volume growth
is the branch expansion, the money supply, the exchange rate of Birr to USD and general in-
flation. Deposit rate and real per capita GDP growth rate have also their influences at a lesser
magnitude.

All factors are found to have positive relations with the deposit volume except the deposit rate
having a negative relation with deposit volume.

Finding of the regression and correlation analysis

 It is found out that the seven explanatory variables, inflation, deposit rate, real per
capita growth rate, money supply, number of branches, total capital of each bank (a
proxy for bank size in the study),exchange rate of Birr to USD, are factors that would
influence the deposit volume at 93%(R2) of the time. Hence, the factors are found to
be influential with this study. Similar study by Wubitu (2012) taking three factors on-
ly in an analysis found out that inflation, bank branches and deposit rate are the fac-
tors influencing deposit volume at 83.9 %( R2).

 This study has shown that the branch expansion, the money supply, the exchange rate
of Birr to USD and general inflation are the most significant factors of deposit vol-
ume. Besides, the other variables-deposit rate and real per capita GDP growth rate
have insignificant power to influence the dependent variable. In study by
Wubitu(2012) the branch expansion is the most significant factor which this result has
also assured.

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 42
  The deposit rate is having a negative relation with deposit volume per this study result
however, the result of Wubitu(2012) disagree with this fact showing that it has a posi-
tive insignificant relation. The negative relation of the deposit rate and deposit volume
is unexpected but can also be evidenced from the excel analysis as the deposit rate is
increasing the rate of increase for the deposit volume in the country has been showing
decline in the previous topic.

4.1.2 Analysis of qualitative Data

The researcher has used questionnaires and interview to collect data regarding the qualitative
aspect of deposit mobilization activity. In total 84 questionnaires were distributed and 14 sen-
ior bank staffs were interviewed. The response rate was 80.9% for the questionnaires. In the
process seven branches of the seven banks namely, Commercial Bank of Ethiopia, Awash In-
ternational Bank, Dashen Bank, Bank of Abysinia, Wegagan Bank, United Bank, Nib Interna-
tional Bank were involved. Accordingly, the written responses from both the questionnaires
and the open ended interview questions are analyzed as follows using SPSS software.

A. Respondents’ personal information

Table 7. Age of respondents

Valid Cumulative
Frequency Percent Percent Percent
Valid Below 25 2 2.9 2.9 2.9
26-35 years 39 57.4 57.4 60.3
36-45 years 26 38.2 38.2 98.5
Greater than 46 1 1.5 1.5 100.0
Total 68 100.0 100.0

From respondents who responded in the research, 57.4% of them were aged from 26-35 years.
Cumulatively 87.1% of the respondents are aged 26 years and above.

Table 8. Work experience of the respondents in the bank

Valid Cumulative
Frequency Percent Percent Percent
Valid Below 5 years 19 27.9 27.9 27.9
6-15 years 38 55.9 55.9 83.8
16-25 years 10 14.7 14.7 98.5
Greater than 26 1 1.5 1.5 100.0
Total 68 100.0 100.0

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 43
The majority of the respondents (72.1%) have worked in the bank for over 6 years which the
researcher believes that the experience would earn them sufficient knowledge in the area of
this study.

Table 9. Position of the respondents in the bank

Valid Cumulative
Frequency Percent Percent Percent
Valid Branch Manager 8 11.8 11.8 11.8
Accountant 3 4.4 4.4 16.2
Auditor 6 8.8 8.8 25.0
Customer Service of- 23 33.8 33.8 58.8
ficer
Others 28 41.2 41.2 100.0
Total 68 100.0 100.0

The position of the respondents included 11.8% branch managers, 4.4%accountants, 8.8% au-
ditors and 33.8% customer service officers/supervisors and the rest 41.2% held other positions
currently.

Table 10. Besides being employee, are you the customer of a bank?

Valid Cumulative
Frequency Percent Percent Percent
Valid YES 64 94.1 94.1 94.1
NO 4 5.9 5.9 100.0
Total 68 100.0 100.0

The respondents were asked whether they are also deposit account holders in any bank in or-
der for them to look ideas from outside-in perspective as customers. Thus, the lion share of
respondents i.e. 94.1% of them are found to be account holders of a bank enabling this study
to get wider view of the bank staffs and only 5.9% are not.
Table 11. Level of income of respondents

Valid Cumulative
Frequency Percent Percent Percent
Valid Less than 3,000 1 1.5 1.5 1.5
3,001-6000 9 13.2 13.2 14.7
6001-9000 15 22.1 22.1 36.8
Greater than 9,000 43 63.2 63.2 100.0
Total 68 100.0 100.0

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 44
The level of income of the respondents was also asked as income is usually taken as a domi-
nant factor for deposit mobilization. Thus 63.2 % of the respondents are paid a salary greater
that Br.9, 000 whereas 22.1% of them are paid between Br.6,000 to Br.9,000.

Table 12. What is the ownership status of your bank?

Valid Cumulative
Frequency Percent Percent Percent
Valid PRIVATE 56 82.4 82.4 82.4
STATE 12 17.6 17.6 100.0
Total 68 100.0 100.0

82.4% of the respondents of this survey were working in the privately owned banks where as
the remaining 17.6% were from state-owned bank which is Commercial Bank of Ethiopia.
B. Respondents Views on Deposit mobilization

Table 13. Who are the most significant depositors of your bank?

Valid Cumulative
Frequency Percent Percent Percent
Valid INDIVIDUALS 27 39.7 39.7 39.7
BUS ORGANIZATION 27 39.7 39.7 79.4
GOV'T 14 20.6 20.6 100.0
Total 68 100.0 100.0

From the views of the respondents it is learnt that individuals and business organizations are
the major depositors of the selected bank branches with equal percentages 39.7% each where-
as government depositors hold only 20.6%.

Table 14. Which deposit types is with the significant volume in your bank?

Valid Cumulative
Frequency Percent Percent Percent
Valid SAVING 42 61.8 61.8 61.8
CURRENT 25 36.8 36.8 98.5
FIXED TIME DE 1 1.5 1.5 100.0
Total 68 100.0 100.0

From among the three common type deposits namely saving, current and time deposit ac-
counts, saving account is found to have the significant volume of deposits as viewed by 61.8%
of the respondents. On the other hand, 36.8% of the respondents answered that current ac-
counts hold the significant volume of deposits in their branches.

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 45
The next three questions were raised to know the status of the selected banks about the branch
expansion and solicited the respondents about the main reasons why the branch expansion is
done by the banks.

Table 15. How many branches does your bank possess?

Valid Cumulative
Frequency every
Is the number of branches increasing Percent
year Percent Percent
Valid 51-100 BRANCHES 23 33.8 33.8 33.8
101-150 BRANCHES 24 35.3 35.3 69.1
151-200 1 1.5 1.5 70.6
>200 BRANCHES 20 29.4 29.4 100.0
Total 68 100.0 100.0

35.3% of the respondents’ work in banks that possess 101-150 branches whereas 33.8 % of
the respondents operate with banks having 51-100 number of branches range. 29.4% respond-
ents’ claim that their bank or banks have more than 200 branches in the country.
Table 16. Is the number of branches increasing every year?

Valid Cumulative
Frequency Percent Percent Percent
Valid YES is the main
What 67 cause branch
98.5 expansion?
98.5 98.5
NO 1 1.5 1.5 100.0
Total 68 100.0 100.0

98.5% of the respondents believe that their banks have been increasing
the number of branches year after year and only 1.5% of the respondents
believe otherwise.

Table 17. What is the main cause branch expansion?

Valid Cumulative
Frequency Percent Percent Percent
Valid Deposit mobiliza-
54 79.4 79.4 79.4
tion
Loan availing 1 1.5 1.5 80.9
Market share 3 4.4 4.4 85.3
all the above are the
main causes 9 13.2 13.2 98.5

Others 1 1.5 1.5 100.0

Total 68 100.0 100.0

This research has found out that the main cause for the branch expansion by the selected
banks is for the purpose of deposit mobilization as shared by the views of 79.4% of the re-

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 46
spondents. The combinations of the listed reasons i.e. deposit mobilization, loan availing and
market share expansion are claimed to be the main reasons by 13..2% of the respondents who
participated in the survey.

From the above results one can infer local banks are engaged in branch expansion as venue for
sourcing deposits and even competing with each other.

Table 18. Is the volume of deposit mobilized by your bank growing year after year?
Valid Cumulative
Frequency Percent Percent Percent
Valid Yes 68 100.0 100.0 100.0

Table 19. Does the volume of deposit mobilized by each of your branches differ?

Valid Cumulative
Frequency Percent Percent Percent
Valid Yes 64 94.1 94.1 94.1
No 1 1.5 1.5 95.6
I do not 3 4.4 4.4 100.0
know
Total 68 100.0 100.0

The above two tables show us that all the respondents perceived that the volume of deposit by
their individual banks are increasing from year to year and the great majority i.e. 94.1% of
them also believed the deposit level at each of their branches differ.

Table 20. Is cost of mobilizing deposits increasing year after year?

Valid Cumulative
Frequency Percent Percent Percent
Valid Yes 67 98.5 98.5 98.5
No 1 1.5 1.5 100.0
Total 68 100.0 100.0
A significant number of respondents (98.5%) feel that the cost of mobilizing deposits is grow-
ing from year to year. They also responded that the main costs spent by banks go to interest
payments for depositors, costs of renting offices for branches and other purposes , system
modernization costs and advertisement and publicity costs.

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 47
 Table 21. Do you think that there is stiff competition among banks for deposits mobilization?

Valid Cumulative
Frequency Percent Percent Percent
Valid Yes 63 92.6 92.6 92.6
No 5 7.4 7.4 100.0
Total 68 100.0 100.0

The majority of respondents (92.6%) believe that the competition over deposit mobilization is
becoming stiff and some of the reasons cited for that are:
 Achieving the required profitability these days is a challenge for many banks due to
shortage fund to disburse loans,
 the branch outlets are densely populated in the capital city,
 the risk averse strategies pursued by most banks by not trying to stretch to potential
remote areas,
 the increase in the request of huge loans by business organizations and the increasing
number of investments in the country.

Table 22. Do you believe that awareness creation increases deposit volume?
Cumulative
Frequency Percent Valid Percent Percent
Valid Yes 66 97.1 97.1 97.1
No 1 1.5 1.5 98.5
I do not know 1 1.5 1.5 100.0
Total 68 100.0 100.0

97.1% of the respondents perceive that commercial banks should engage in the area of aware-
ness creation as doing so boosts the deposit volume in banks. The current intensive promo-
tional campaign by many local banks seems to go along with the responses of the participants.
Table 23. What special services does your bank give for its depositors?
Valid Cumulative
Frequency Percent Percent Percent
Valid Prize/award 9 13.2 13.2 13.2
Priority for other
bank facilities as 7 10.3 10.3 23.5
foreign currency
Loan facility 7 10.3 10.3 33.8
All 43 63.2 63.2 97.1
Others 2 2.9 2.9 100.0
Total 68 100.0 100.0

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 48
The majority of the respondents’ (97.1%) banks are giving one or a combination of the special
services to attract deposits such as prize, priority for other bank facilities like foreign currency
allocation(if the customers are importers) and for loan facilities for depositors.

C. Views summarized from interview

The researcher has made interview with senior branch officials of the selected banks as well
and summarized the main findings as follows.

1 All the interviewees agree that deposit is the most preferred source of fund to their banks
from other types of debts and/or raising of capital through issuance of shares in the coun-
try. For this same reason, the ratio of deposit in most private banks is higher than that of
other fund sources. With regard to the question as to which source of fund (deposit or
capital source) is expensive, the interviewees were equally divided.

2 The NBE directive, policy of the bank, attractiveness of the source of the fund in terms
of cost, availability, simplicity and shareholders‘ need and capacity are mentioned by the
interviewees as basic criteria to develop a strategy on which sources of fund has to be se-
lected and searched.

3 With regard to whether the task of deposit mobilization is becoming easing or challeng-
ing, all interviewees have agreed on the latter year over year. This goes with the stiffness
of the competition for deposits by local banks as responded in the questionnaire part.

4 All interviewees have the same opinion that the banks they represent are not having suf-
ficient deposit that could satisfy the level of loans demanded by their borrowers. In other
words, though local banks are making an all out effort in raising their deposit balances,
they are still far away in narrowing the gap between the demand for loans from increas-
ing number of businesses and the deficit of supply side-the volume of deposits in their
respective coffers.

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 49
5 A significant number of the interviewees (70.6%) believe that there are no equal oppor-
tunities and challenges to private banks versus state banks with searching and obtaining
deposits where as the rest believe otherwise. The reason mentioned by the former group
is summarized as follows:

6 Government offices are implicitly or explicitly urged to use state banks for placing their
deposits. This also extends to certain international non-governmental organizations.

7 Various government policies are designed in a way that could benefit the state banks to
collect much deposits from the public on the presumption to undergo developmental ac-
tivities such as condominium projects,

8 The imposition by the government on private banks to purchase government bonds (for
Renaissance Dam) i.e.27% of the loan they avail at lower interest rate (3%) below the
minimum saving rate is challenging their liquidity.

9 The huge bank size, significant number of branch outlet and capital would make the state
bank-CBE almost a monopoly over the deposit market by playing with pricing such as
setting charges, giving gifts, advertising and expending relatively huge costs to modern-
ize its services. Following a counter marketing on these issues would not be a disad-
vantage to many small private banks in this regard.

10 The interviewees all agree that their respective banks did not face any financial, econom-
ic, political and social shocks that could have affected the deposit volume at any time in
their working experience.

11 The growth per capita income is claimed to be the most significant factor in affecting the
bank deposits followed by inflation, fiscal policy, investment, external trade and global
economy and growth in population per the interview responses obtained. Further, prox-
imity and convenience of the bank branches, service provision, the branch size of the
bank and security were also mentioned as important factors in attracting many customers
to the bank to make deposits.

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 50
12 The interviewees further pointed out that the current deposit rates are not attractive to
depositors and depositors have better opportunities to invest the money elsewhere than
making deposits in the bank if they think about it.

13 All interviewees agreed that the costs incurred for mobilizing deposit has been increas-
ing year after year with the following order of significance i.e. interest on deposits, rent,
system related costs, advertising and publicity and staff costs from high to low order.

4.2 Summary of the findings from both methods of investigation

The following are presented as the summary of the research findings entitled’ Determinants of
Deposit Mobilization and Related costs of commercial banks in Ethiopia:

 Though deposit volume is seemingly increasing every year, the rate of deposit growth
for Ethiopian commercial banks is declining recently whereas the cost of deposits is
escalating.
 The branch expansion, the money supply, the exchange rate of Birr to USD and gen-
eral inflation are the most significant factors of deposit volume. Besides, the other var-
iables-deposit rate and real per capita GDP growth rate have insignificant power to in-
fluence the dependent variable
 It is surprising that the quantitative study reveals the deposit rate as having a negative
relation with the deposit volume unlike the qualitative responses summarized later in
next section. Savings, according to classical economists, is a function of the rate of in-
terest. The higher the rate of interest, the more money will be saved, since at higher in-
terest rates people will be more willing to forgo present consumption. Studies results
by Syanbola T. et al (2012) on the ‘Effect of interest rate deregulations on banks de-
posit mobilization in Nigeria’ and Wubitu’s(2012) here in our country agree with the
economic theory. However, practically both the researcher’s excel computation and
the regression results in this research show the opposite relation of the two.

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 51
  The major sources of deposits for the commercial banks are individuals and business
organizations. As compared to other sources such as capital contribution and plough
back of earnings, deposit is the most preferred source of fund for the banks in Ethio-
pia.

 In order to grant loans demanded by the public and thus stay profitable to the share
holders, commercial banks prefer deposit as sources of fund. From three common
types of deposits namely saving, current and fixed deposit accounts, saving account
balance constitutes significance balance in many accounts of the banks studied.

 Branch expansion is found out to be the major strategy of many banks to secure better
sources of deposit base. However, dense population of bank branches in the capital
city is creating stiff competition among them.

 As securing comfortable deposit base is the question for survival of the banks, many
banks are also engaged in modernizing their services to excel the others.

 It is also learnt that the deposit volume of the commercial banks are growing year after
year, however, recently the share of private banks’ deposit market is declining after the
year 2009/10 and that of the public banks is surging up to regain the lost market share
in the prior years. Contrary to what the bankers feel about the trend of deposit year af-
ter year, the quantitative analysis shows that deposit is not increasing at an increasing
rate from year to year

 Corollary to the increasing volume of deposits at commercial banks, the costs of ob-
taining such deposits is also increasing by way of interest costs, office rental costs, and
system related costs and advertizing and publicity costs.

 Saving and fixed time deposit accounts are the only accounts on which interest is paid
in most of the banks but the interest rate on saving accounts is considered to be low as
agreed by the interviewees compared to the earning from the fixed asset value appreci-
ation with the same magnitude of money. In spite of the privilege given to the individ-
ual banks to determine their own higher interest on saving and time deposits beyond

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 52
 the minimum limit set by NBE i.e. 5 per cent per annum, many banks are not happy to
pay more than that. Current accounts do not bear interest on many banks though the
banks are free to pay any rate without the limit.

 The major factors contributing to the growth of deposits are branch expansion, growth
in per capita income of the population, the impact of changing of awareness of the so-
ciety and the money supplied to the economy. Further, proximity and convenience of
the bank branches for the public and the growing competition among banks and its ef-
fect on service modernization were also mentioned as causes.
 Number of branches, real per capita GDP, total capital and money supply are the sig-
nificant factors explaining the total deposits whereas deposit rate and general inflation
has insignificant relation.
 Government policies are also impacting the competitiveness of private banks on de-
posit mobilization activity favoring the public banks. Besides, the latter ones have also
the size advantage to risk themselves to utilize potential deposit areas.

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 53
 Chapter Five

Summary, Conclusion and Recommendations

5.1 Summary and Conclusion
The study revealed that deposit mobilization is the main focus of many banks. However, find-
ing deposit is becoming a challenging job for the banks in Ethiopia compatible with the grow-
ing need of loans. Owing to the growing need for finances from new and existing businesses
of the country coupled the banks own desire to make profits from those finances, deposit mo-
bilization is becoming the critical success factor for banks. The fast increasing number of
branches, the service modernization activities and the growing competition among banks all
justify this fact.

There are limited types of deposit products mainly three namely saving, current and fixed time
deposits services commonly sold to the customers by the local banks. The great majority of
customers are saving account holders.

The total deposit volume of banks is growing year after year whereas their deposit market
share is declining beyond the fiscal year 2009/10.

The cost of deposit mobilization is increasing year after year with the deposit growth. The
study shows that the annual ratio of costs to deposit volume has been increasing over the past
six years.

The main factors for deposit growth are the changing awareness of the people for savings,
growth in the number of branches of banks, in per capita income, in money supply and in the
exchange rate to USD. Service excellence and proximity and convenience of bank branches to
the public were also mentioned.

Most banks pay the minimum interest rate on saving accounts set aside by the regulatory
body. The rates are not attractive to the public particularly for those who are saving aiming the
interest income.

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 54
The deposit volumes of private commercial banks are also found to be impacted by the poli-
cies of the government. The competition over the deposit marker favors the public banks due
to their size.

5.2 Recommendations
Based on the findings and conclusion of the study, the researcher is going to recommend the
following to the commercial banks:

 As deposits are the critical resource for the banks to stay profitable, the banks have to
give more emphasis than ever to the activity.

 To increase their deposit base banks have to intensify branch expansion to areas where
there are potential deposit sources even to remote locations even cross border branches
where potential deposits in form of foreign currencies is obtained.

 The commercial banks should also provide competitive deposit interest rates on select-
ed stable deposits keeping sufficient margin of profitability. The issue of paying fair
interest rates to selected demand deposit customers could also be considered.
 The banks should also try to introduce new deposit product types that are appealing to
the public to increase market share. There are areas that have to be looked at like
online account opening and account maintenance to attract foreign depositors and in
the process the legal requirements for account opening has to be comfortable.

 The banks have to also search for other alternative fund sources such as sale of their
shares, bonds and loan securitization and sales during the severe liquidity problems.
Inter-bank lending could be other sources if the market warrants.

 The government has to give equal playing ground for all banks and its policies should
be impartial to all banks operating in the country. The existing institution of the banks,
Ethiopian Bankers Association, has to broaden its authorities and responsibilities and
instigate fair practices among individual banks.

 Banks should use cost effective use of mobilizing deposit as much as possible such as
agent and mobile banking service to reach out potential resource areas. These cost sav-

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 55
 ing strategies could include systematic sharing of infrastructure costs among banks
such as ATMS and POS terminals.

 Collective awareness creation strategies about the advantages of savings have to be in-
tensified to reach the unbanked society by all banks. The Bankers Association still has
to do much in this regard as saving plays great role not only for the individual banks
but also for the economic development of the country as a whole.

5.3 For Further Research

This study has covered come of the factors that determine deposit mobilization activity of
banks and identified related costs in mobilizing deposits and some recommendations are made
based on the findings and conclusions. Yet there are factors such as the level of education and
the dependency ratio of the population identified by some literatures to have impact on saving
mobilization. Thus a study has to be further strengthened on the significance of these factors
on deposit mobilization of commercial banks.

Determinants of Deposit Mobilization and Related costs of commercial banks in Ethiopia Page 56
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Regression .

Notes .

Output Created 25-JAN-2015 21:20:18

Comments
Input Data C:\Program Files\SPSS
Evaluation\THE last option.sav
Active Dataset DataSet1
Filter <none>
Weight <none>
Split File <none>
N of Rows in
12
Working Data File
Missing Value Definition of Missing User-defined missing values are
Handling treated as missing.
Cases Used Statistics are based on cases with
no missing values for any variable
used.
Syntax REGRESSION
/DESCRIPTIVES MEAN STDDEV
CORR SIG N
/MISSING LISTWISE
/STATISTICS COEFF OUTS CI
BCOV R ANOVA COLLIN TOL
CHANGE ZPP
/CRITERIA=PIN(.05) POUT(.10)
/NOORIGIN
/DEPENDENT DEP
/METHOD=ENTER DRWD GINF
RPGDP M1 BBR CAP EXBRUSD
/SCATTERPLOT=(*ZRESID
,*ZPRED )
/RESIDUALS DURBIN
HIST(ZRESID) NORM(ZRESID)
/CASEWISE PLOT(ZRESID)
OUTLIERS(3) .
Resources Elapsed Time 0:00:01.33
Memory Required 3532 bytes
Additional Memory
Required for 864 bytes
Residual Plots
Processor Time 0:00:02.17

[DataSet1] C:\Program Files\SPSS Evaluation\THE last option.sav .

Page 1
 Descriptive Statistics .

Mean Std. Deviation N

DEP 21.729417 9.5366671 12
DRWD 1.001250 18.2239366 12
GINF 14.191667 13.1853540 12
RPGDP 6.283333 4.4861065 12
M1 20.274583 10.6018373 12
BBR 15.870083 13.2338977 12
CAP 22.781083 19.4227194 12
EXBRUSD 7.290250 8.5608995 12

Correlations .

DEP DRWD GINF RPGDP M1 BBR

Pearson Correlation DEP 1.000 .484 .515 .458 .811 .878
DRWD .484 1.000 .659 .497 .600 .416
GINF .515 .659 1.000 .283 .358 .516
RPGDP .458 .497 .283 1.000 .454 .289
M1 .811 .600 .358 .454 1.000 .750
BBR .878 .416 .516 .289 .750 1.000
CAP .086 -.005 -.130 .352 .169 .125
EXBRUSD .729 .348 .294 .248 .619 .453
Sig. (1-tailed) DEP . .056 .043 .067 .001 .000
DRWD .056 . .010 .050 .020 .089
GINF .043 .010 . .186 .127 .043
RPGDP .067 .050 .186 . .069 .181
M1 .001 .020 .127 .069 . .002
BBR .000 .089 .043 .181 .002 .
CAP .395 .494 .343 .131 .300 .349
EXBRUSD .004 .134 .177 .219 .016 .070
N DEP 12 12 12 12 12 12
DRWD 12 12 12 12 12 12
GINF 12 12 12 12 12 12
RPGDP 12 12 12 12 12 12
M1 12 12 12 12 12 12
BBR 12 12 12 12 12 12
CAP 12 12 12 12 12 12
EXBRUSD 12 12 12 12 12 12

Page 2
 Correlations .

CAP EXBRUSD
Pearson Correlation DEP .086 .729
DRWD -.005 .348
GINF -.130 .294
RPGDP .352 .248
M1 .169 .619
BBR .125 .453
CAP 1.000 -.148
EXBRUSD -.148 1.000
Sig. (1-tailed) DEP .395 .004
DRWD .494 .134
GINF .343 .177
RPGDP .131 .219
M1 .300 .016
BBR .349 .070
CAP . .323
EXBRUSD .323 .
N DEP 12 12
DRWD 12 12
GINF 12 12
RPGDP 12 12
M1 12 12
BBR 12 12
CAP 12 12
EXBRUSD 12 12

Variables Entered/Removedb .

Variables Variables
Model Entered Removed Method
1
EXBRUSD,
CAP, GINF,
RPGDP, . Enter
BBR, a
DRWD, M1

a. All requested variables entered.

b. Dependent Variable: DEP

Model Summaryb .

Adjusted R Std. Error of

Model R R Square Square the Estimate
1 .968a .938 .829 3.9446422

Page 3
 Model Summaryb .

Change Statistics
R Square Durbin-
Model Change F Change df1 df2 Sig. F Change Watson
1 .938 8.613 7 4 .027 1.936
a. Predictors: (Constant), EXBRUSD, CAP, GINF, RPGDP, BBR, DRWD, M1
b. Dependent Variable: DEP

ANOVAb .

Sum of
Model Squares df Mean Square F Sig.
1 Regression 938.187 7 134.027 8.613 .027a
Residual 62.241 4 15.560
Total 1000.428 11
a. Predictors: (Constant), EXBRUSD, CAP, GINF, RPGDP, BBR, DRWD, M1
b. Dependent Variable: DEP

Coefficientsa .

Unstandardized Standardized
Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) 7.685 4.348 1.768 .152
DRWD -.033 .117 -.064 -.285 .790
GINF .046 .148 .063 .309 .773
RPGDP .373 .342 .175 1.090 .337
M1 .051 .253 .056 .200 .851
BBR .437 .165 .607 2.651 .057
CAP .002 .073 .003 .021 .984
EXBRUSD .423 .191 .380 2.218 .091

Page 4
 Coefficientsa .

95% Confidence Interval for B

Model Lower Bound Upper Bound
1 (Constant) -4.386 19.757
DRWD -.359 .292
GINF -.365 .456
RPGDP -.576 1.321
M1 -.652 .753
BBR -.021 .895
CAP -.201 .204
EXBRUSD -.107 .953

Page 5
 Coefficientsa .

Correlations Collinearity Statistics

Model Zero-order Partial Part Tolerance VIF
1 (Constant)
DRWD .484 -.141 -.036 .310 3.231
GINF .515 .153 .039 .372 2.689
RPGDP .458 .479 .136 .602 1.661
M1 .811 .100 .025 .197 5.086
BBR .878 .798 .331 .297 3.368
CAP .086 .010 .003 .706 1.416
EXBRUSD .729 .743 .277 .530 1.888
a. Dependent Variable: DEP

Coefficient Correlationsa .

Model EXBRUSD CAP GINF RPGDP BBR

1 Correlations EXBRUSD 1.000 .321 -.142 -.093 .099
CAP .321 1.000 .132 -.390 -.080
GINF -.142 .132 1.000 -.040 -.561
RPGDP -.093 -.390 -.040 1.000 .080
BBR .099 -.080 -.561 .080 1.000
DRWD .183 .130 -.644 -.268 .383
M1 -.493 -.157 .443 -.100 -.699
Covariances EXBRUSD .036 .004 -.004 -.006 .003
CAP .004 .005 .001 -.010 -.001
GINF -.004 .001 .022 -.002 -.014
RPGDP -.006 -.010 -.002 .117 .005
BBR .003 -.001 -.014 .005 .027
DRWD .004 .001 -.011 -.011 .007
M1 -.024 -.003 .017 -.009 -.029

Page 6
 Coefficient Correlationsa .

Model DRWD M1
1 Correlations EXBRUSD .183 -.493
CAP .130 -.157
GINF -.644 .443
RPGDP -.268 -.100
BBR .383 -.699
DRWD 1.000 -.556
M1 -.556 1.000
Covariances EXBRUSD .004 -.024
CAP .001 -.003
GINF -.011 .017
RPGDP -.011 -.009
BBR .007 -.029
DRWD .014 -.017
M1 -.017 .064
a. Dependent Variable: DEP

Collinearity Diagnosticsa .

Condition
Model Dimension Eigenvalue Index
1 1 5.546 1.000
2 1.122 2.224
3 .522 3.259
4 .321 4.158
5 .220 5.022
6 .137 6.370
7 .109 7.138
8 .023 15.429

Page 7
 Collinearity Diagnosticsa .

Variance Proportions
Model Dimension (Constant) DRWD GINF RPGDP M1
1 1 .00 .00 .00 .01 .00
2 .00 .19 .01 .00 .00
3 .00 .07 .00 .03 .00
4 .01 .04 .24 .04 .00
5 .04 .01 .04 .20 .01
6 .00 .01 .17 .36 .01
7 .23 .19 .12 .35 .07
8 .71 .49 .42 .00 .91

Page 8
 Collinearity Diagnosticsa .

Variance Proportions
Model Dimension BBR CAP EXBRUSD
1 1 .00 .01 .01
2 .00 .04 .00
3 .01 .15 .27
4 .02 .06 .20
5 .24 .12 .02
6 .11 .59 .27
7 .06 .03 .07
8 .56 .00 .16
a. Dependent Variable: DEP

Residuals Statisticsa .

Minimum Maximum Mean Std. Deviation N

Predicted Value 9.715448 42.564743 21.729417 9.2352458 12
Residual -3.598620 3.7963903 .0000000 2.3787087 12
Std. Predicted Value -1.301 2.256 .000 1.000 12
Std. Residual -.912 .962 .000 .603 12
a. Dependent Variable: DEP

Charts .

Page 9
 .

Histogram

Dependent Variable: DEP

3
Frequency

Mean =9.16E-16
Std. Dev. =0.603
0 N =12
-1.0 -0.5 0.0 0.5 1.0
Regression Standardized Residual

Page 10
 .

Normal P-P Plot of Regression Standardized Residual

Dependent Variable: DEP

1.0

0.8
Expected Cum Prob

0.6

0.4

0.2

0.0
0.0 0.2 0.4 0.6 0.8 1.0
Observed Cum Prob

Page 11
 .

Scatterplot

Dependent Variable: DEP

1.0
Regression Standardized Residual

0.5

0.0

-0.5

-1.0

-2 -1 0 1 2 3
Regression Standardized Predicted Value

Page 12
DESCRIPTIVES .
VARIABLES=TDB DRWD GINF RPGDP MSM2 BBR TCB EXBRUSD
/STATISTICS=MEAN STDDEV MIN MAX .

Descriptives .

Notes .

Output Created 21-JAN-2015 23:43:13

Comments
Input Data C:\Program Files\SPSS
Evaluation\13 years data qua.sav
Active Dataset DataSet1
Filter <none>
Weight <none>
Split File <none>
N of Rows in
12
Working Data File
Missing Value Definition of Missing User defined missing values are
Handling treated as missing.
Cases Used All non-missing data are used.
Syntax DESCRIPTIVES
VARIABLES=TDB DRWD GINF
RPGDP MSM2 BBR TCB
EXBRUSD
/STATISTICS=MEAN STDDEV
MIN MAX .
Resources Elapsed Time 0:00:00.02
Processor Time 0:00:00.03

[DataSet1] C:\Program Files\SPSS Evaluation\13 years data qua.sav .

Descriptive Statistics .

N Minimum Maximum Mean Std. Deviation

TDB 12 25030.900 237146.20 85605.283 68600.441843
DRWD 12 3.14391 5.41462 4.0393742 .98221687
GINF 12 -7.20000 36.40000 14.475000 12.62898002
RPGDP 12 136.00000 359.00000 215.83333 76.47796276
MSM2 12 27322.000 235313.60 88291.050 68062.669933
BBR 12 320.00000 1724.0000 682.00000 436.54448904
TCB 12 2529.0000 23070.000 9901.4083 6641.6177124
EXBRUSD 12 8.57000 18.74000 11.674167 4.00331103
Valid N (listwise) 12

Page 1
 Addis Ababa University
College of Business and Economics
Executive Master of Business Administration

This questionnaire is prepared to gather data from the employees of commercial banks of
Ethiopia to be used as an input for the accomplishment of EMBA Master’s Thesis on the title
‘The determinants of deposit mobilization and related costs by commercial banks in
Ethiopia: The case of private banks in Ethiopia’. The aim of the thesis paper is to explore
the factors that have significant influence on the deposit mobilization activity by the
banks. Your genuine and well thought response to this questionnaire will greatly help
foster the aim. Any information provided will only be used for academic purpose and it will
be kept confidential and utmost anonymity.

Thank you so much for giving me your valuable time in responding the issues raised below.

I. Personal Information
1. Sex (optional) Female Male
2. Marital status (optional) Married Single Divorced Other
3. Age Below 25 years 26-35 years 36-45 years 46 and above
4. Level of your monthly income Less than Br.3,000 From Br.3,001-6,000
From Br.6,001-9,000 Beyond Br.9,000

5. Position in the bank Branch manager Accountant

Auditor Customer service officer
Other positions, please specify--------------------------

6. Work experience in the bank: Below five years 6-15 years

16-25 years 26 and above years

7. Besides your position as employee of the bank, are you the customer of the bank or
do you deposit your money in the bank. Yes No

II. General Information

8. What is the ownership status of the bank you are employed at?
Privately owned Government owned
9. Which group of customers are the most significant depositors of your bank in terms
of magnitude of deposits?
Individual customers Business organizations
Government entity NGOs*
If others specify -------------------------
10. Which deposit type has the most significant deposit volume?
Savings account deposits
Current account deposits
Fixed time deposits
If others, specify --------------------------------

*Non-government organizations

1|P ag e
 11. How many branches does your bank have as of the year ended June 30, 2014?
Less than 50 branches 51-100 branches
101-150 branches 151-200 branches
More than 200 branches
12. Is your bank increasing the number of its branches every year?
Yes No
13. If your answer for Number 12 above is ‘Yes’ what do you think is the main cause for
the branch expansion?
Deposit mobilization Loan availment
To lead the banking sector by having greater number of branches
To reach out foreign currency sources
Other reasons (specify)---------------------------------------------------------
14. Does the volume of deposit mobilized by respective branches of your bank differ?
Yes No I do not know
15. What do you think is the cause for the difference in deposit mobilization among
branches?
Convenience of bank office (type of building) Proximity
Service provision Awareness of the society
General appearance office & materials
Other reasons (specify)--------------------------------------------------
16. Does the volume deposit mobilized by your bank grow year after year?
Yes No
If your answer is ‘yes’, what could be the reason?
Interest rate is attracting & depositors favor it than other investments
The secure feeling of the depositors growing
The service given by the bank Location and convenience
Branch expansion Other reasons, specify----------------------
17. Which of the following transaction or intermediation costs affect the volume of
deposit in the bank?(Multiple answers could be given)
The interest rate paid on deposits
Cost of time spent by banker to search new depositors or mobilize deposit
The cost of stationery and office supplies
The advertising and publicity cost
Cost of renting offices
Others, please specify------------------------------------------
18. Is the cost of mobilizing deposits increasing year after year?
Yes No
19. Please assign the following costs in order of their magnitude from number one to
five. If your bank is expending highest cost that hugely impacts its profitability,
then assign the number one(1) to mean ‘Most significant’; otherwise, assign number
2 for ‘Moderately Significant’ or number 3 for ‘Less significant’; number 4 for
‘Does not affect’.
Interest expenses paid for deposits
Rental costs for offices
Costs related to recruiting, placing and training bankers for deposit purpose
Costs related to publicity, promotion such prizes and gifts
Service related costs such system and fixed assets purchases and process
improvement costs
20. Which of the following factors do you think affect the volume of deposits of the
bank? (Multiple answers could be given)
Economic environment of the country
The money demanded by Government for infrastructure developments
The volume of business transactions of the country
The confidence of the people on the bank
The banking habit of the people

2|P ag e
 21. Do you think there is stiff competition among local banks for deposit mobilization
currently? Yes No
22. If your answer for Number 21 above is ‘Yes’, what are the possible reasons?-------------
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------

23. What mechanisms are being used by the bank to promote awareness of the society
pertaining to banking services such as making savings in banks?-----------------------------
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
--------------------
24. Do you believe that the volume of deposits grow after the awareness creation?
Yes No
25. What special services does the bank provide for depositors?
Prize/award for the depositors
Offering bonus, paying lesser commission or premium over normal interest
Rate payment
Special consideration on foreign currency allocation
Loan facility for future investment
If others, please specify---------------------------------------------------------------------
26. Are there any services given by the bank for the depositors other than services
mentioned in question number 25?
Yes No
If yes, please specify---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
-----------------------------------
27. Does the volume of deposit grow as a result of special services provided for the
customers? Yes No

Thank You for Your Cooperation to Fill the Questionnaire!

3|P ag e
 College of Business and Economics
Executive Master of Business Administration
Interview Questions

1. In which of these categories of commercial banks you are currently employed?

Privately owned banks State banks
2. Which sources of mobilizing funds (equity, debt or deposit) is preferred by your
bank?
Equity Debt or Deposit
3. What are the basic criteria for the selection between the sources/equity versus
debt/? -----------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
4. In terms of magnitude or proportion, which one is higher in your bank -equity,
debt/deposit?
Equity Debt or Deposit

5. Which one of the two do you think is much more expensive?

Equity Debt or Deposit

6. What is your perception on the deposit mobilization activity of your bank year after
year?
Easing challenging task
7. What is the direction regarding the rate deposit volume growth of your bank in the
past two to three years?
growing rate decreasing rate of growth it remains stagnant

Please mention the reasons for either increase or decrease in rate of deposit growth-
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
8. Do you think that the volume of deposit trend under No.7 above will continue in
future particularly for the banks like yours/private or state banks/?
Yes No

9. Do you think your bank has attained the required level of deposits to fill the
demanded magnitude of loans?
Yes No
10. What are the approaches used by your bank to attract deposits?------------------------------
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
11. Do you think that the approaches used by the bank to attract deposits are effective
in attracting the needed magnitude of deposits?
Yes No
Please indicate if there are limitations on the approaches, if any------------------------------
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
12. In what respect do you think your bank’s methods of attracting deposits excel the
other competitive banks? --------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
13. Do you believe there are equal opportunities and challenges to attract deposits by
all banks-private versus state banks in Ethiopia?
Yes No if ‘no’, indicate your opinion?---------
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------
14. Was there a time when your bank faced financial, economic, political and social
shocks that affected the volume of deposits of the bank?
Yes No
What were the shocks and how did they affect the volume of the deposit?----------------
---------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------- --------------
-------------------------------------------------------------------------------------------------
15. Is your bank’s deposit activity the function of macroeconomic factors such as
inflation, growth of per capita income, fiscal policy, investment, growth rates of
population , external trade and global economy?
Yes No

16. If your answer for number 15 is ‘yes’, order them (the factors) inflation, growth of
per capita income, fiscal policy, investment, growth rates of population, external
trade and global economy) according to their level of their significance to affect
the deposit mobilization in your perception.
1. -----------------------------------------------------------------------
2. ------------------------------------------------------------------------
3. -----------------------------------------------------------------------
4. -----------------------------------------------------------------------
5. ----------------------------------------------------------------------
6. -----------------------------------------------------------------------
7. -----------------------------------------------------------------------
8. -----------------------------------------------------------------------

The end!