EFFECTS OF INTEREST FREE BANKING ON THE DEPOSIT MOBILIZATION OF COMMERCIAL BANKS IN ETHIOPIA CASE STUDY: - OF SELECTED COMMERCIAL BANKS

Abstract

The study was attempted to investigate the effect of interest free banking on the deposit mobilization of commercial banks in Ethiopian using secondary data. The data were obtained from audited financial statements of eight sampled commercial banks for the period of 2016 to 2019 and National bank of Ethiopia report. The novel features of the study was the analysis of interest free banking which was missed by other researcher; branch networking, nominal GDP, inflation rate, money supply as explanatory variables. The study used banks deposit as dependent variable. Both descriptive statistics and econometrics model specifically fixed effects estimation were used to analyze the relationships of dependent variable with explanatory variables. Different diagnostic tests namely test for zero mean of error terms, homoscedasticity, no autocorrelation; no multicollinearity and normality were conducted to check the appropriateness of the model. The diagnostic results show that none of the classical linear regression model assumption is violated. The Fixed-effect model results show that interest free banking and branch networking were strongly positive and significantly related to bank’s industry deposit performance, while inflation rate has a negative impact on deposits of bank specific drivers. Therefore, in order to aid the progress of Islamic banking in Ethiopia and reap the most benefit for the country, a legislative framework should be instituted to improve the segment’s regulation and commercial banks should open more branches in order to increase their deposit. The government also should keep the inflation rate single by decreasing money supply in the economy.