THE DETERMINANTS OF BANKING SYSTEM STABILITY IN ETHIOPIA: A PANEL DATA ANALYSIS

This study examines the various bank specific and macroeconomic variables that affect the banking system stability in Ethiopia during the study period ranging from 2000/01 to 2013/14. The main objective of this research article was to assess those factors that affect the Banking System Stability in the country. The method of data analysis employed to estimate the various determinants was Arellano-Bond estimation technique. From the Empirical result of this paper it was concluded that previous year banking system stability, economic growth and lending growth to the private sector were amongst determinants that affect the banking system stability positively; whereas total bank’s asset and real interest rate were found to negatively affect the banking system stability; whilst government budget deficit, exchange rate volatility and treasury bills were found not having any impact on the banking system stability in Ethiopia. The policy implications of these results is so vital to the banking industry in Ethiopia, incase that most of the variables can be maintained and controlled by the National Bank of Ethiopia. The researcher thus finally puts the policy implications based on these results. To maintain the banking system stability in Ethiopia the researcher recommends to uphold: The economic growth of the country, previous year’s banking system stability, bank lending growth and increasing the management’s aptitude especially to lessen the diseconomies of scale in the banking industry; on the contrary the researcher recommends to dwindle the inflation rate and interest rate.