Financial sector plays a central role in the growth and development of the economy through mobilization and deployment of financial resources (Dhliwayo, 2014). In this regard, banks accept deposits from individuals, corporations and public institutions and thereby lend these funds by either making loans or buying securities (Pamela and Frank, 2010).
In most countries, banks are the most important financial intermediaries. As to Hana and Petr (2016), banks are financial intermediaries that are engaged in a financial process focused on a maturity transformation from short-term funding to long-term financing. Banks usually collect money from retail customers through standard channels: sight deposits (current accounts), time deposits, and a new channel: Savings accounts. Banks needs to have stable source of funds required to meet credit needs of their customers that sustain their roles in the economic development of an economy.
Time deposit is an investment account and a type of savings account in which money is deposited for a stated period of time and a fixed interest rate usually higher than the going rates is paid at the end of that period. Time deposit account offers the customers the opportunity to invest a fixed amount for a fixed period at a fixed rate of interest. Hence, the funds placed in a time deposit cannot be withdrawn during the term before maturity but can be pre-terminated subject to penalty fees (Jakia, 2015).
Jakia (2015) pointed out the importance of time deposit from customer and bankers perspective. From customers’ perspective, he stated that time deposit encourages savings habit for a longer period of time and enables the depositors to earn a high interest rate which can be used for the purchases of assets at the time of maturity. Moreover, time deposit will help the depositors to get loan facility from the banks. The author also tried to see the importance of time deposit from the banks’ perspective and indicated that banks can get the funds for a longer period of time and they can lend such funds for short term loans to businessmen. Moreover he stated that time deposit is important for banks as they invest such funds in profitable areas. Time deposits indirectly boost economic development of the country.
The history of banking in Ethiopia dates back to the turn of the century, when, in1905, the Bank of Abyssinia was established in Addis Ababa, under the reign of Menelek II. As Mauri (2003) stated, this event marked the introduction of banking in the country. The Bank of Abyssinia was given a 50-years concession and was engaged in issuing notes, collecting deposits and granting loans, but its clients were mostly foreign businessmen and wealthy Ethiopians. “A few years later, disappointed by the behavior of this bank, which was mainly devoted to profit-making rather than promoting economic development, the Emperor supported the establishment of a wholly Ethiopian bank, the Société Nationale d’Ethiopie pour le Dévéloppement de l’Agriculture et du Commerce” (Mauri 2003; 15). Thus, 1931 marked the establishment of a new bank, the Bank of Ethiopia, under Government control and the Italian occupation of 1936 brought the liquidation of the Bank. In 1994, as per the Proclamation of Licensing and Supervision of Banking Business Proclamation No. 84/1994, Awash International Bank S.C was registered as the first private commercial bank in modern Ethiopia banking business. There are 17 commercial banks and one Development Bank that are operating in the country.
In Ethiopia, the banking sector, being the dominant segment within the financial sector, is strictly monitored by the National Bank of Ethiopia and different regulations have been issued at different times in order to guide and monitor the commercial banks. H deposit works is guided by the NBE bill purchase regulation of 2011, which was later amended in 2013 (NBE, 2013). The regulation requires all commercial banks owned by private investors to purchase government treasury bonds amounting to 27% of their loan disbursement each time at a maturity period of 5 years. As per the NBEs’ directive number NBE/INT/11/2010, these bonds pay 3% annual rate while the banks pay 7% on saving deposit. Thus, owing to this NBE bills purchase policy, banks are in need of maximizing their deposits, especially time deposits, as it makes them safe from withdrawal of money by the depositors for a fixed period of time. Time deposit helps banks to freeze their resources for one to five years which would help them minimize the problem of liquidity and maturity mismatch (disparity). This warrants the need for examining the factors that affect time deposit of commercial banks in Ethiopia since it has become an important issue with regard to the NBE bill purchase policy.
1.2 statement of the problem
In Ethiopia, privately owned commercial banks are being affected by the provision to buy a 27% National Bank of Ethiopia’s Bills based on the amount of loans to be disbursed. Due to this, banks’ liquidities positions have been adversely affected. The directive requires private commercial banks to hold 27 percent of the gross loan extension (irrespective of the tenor) in a 5 year NBE bill at an interest rate of 3 percent per annum while deposit rates are around 5 percent (NBE, 2011) and amended in 2013 (NBE, 2013).
The National Bank of Ethiopia (NBE) imposed another regulation in 2013 on private commercial banks regarding limit on portfolio share of short term loans. Thus, private commercial banks are prohibited from extending medium/long term loans above 60% of their total outstanding loans. In other words, of the total outstanding loans and advances, private banks are expected to maintain a minimum of 40% short term loans and advances. This requirement is directly related to the 27% bill purchase requirement, aimed at keeping the frequency of loan disbursement from going down (NBE, 2013).
As per the IMF (2012), private banks collect savings mostly at two to three-year maturity and even shorter in some cases. When banks issue short-term loans (up to 1 year), they may end up with liquidity problem since they will be required to purchase more bonds as per the number of loans disbursed. Thus, as the frequency of loan disbursement is increased, the frequency and amount of resource flow towards the bill purchase will also increase. Moreover, there is a risk that the deposit may be withdrawn by the depositors anytime during the year. However, in case of long-term loans, there is less risk of liquidity since the money is lent for a longer period of time and there is less frequency of purchasing bills.
Fulfilling the NBE bills requirement creates liquidity and maturity mismatch (disparity) for the banks as the bill is bought for five years and there is a 40% cap for short term loans. Thus, in order to create a win-win situation for the stakeholders involved, banks started to maximize their deposit, especially time deposit since there is a need to freeze bank resources for 5 years. As a result, banks will be more advantageous if they shift to maximizing more time deposits rather than savings, as it makes them safe from withdrawal of money by depositors for a fixed period of time. Moreover, from depositors’ perspective, time deposit provides with a higher rate of interest than a regular saving account, until the given maturity date. Thus, as deposit is the most useful liability of the bank, time deposit is a good option for banks with regard to the 27% bill purchase requirement of the NBE.
Even though there are some researches done on banks’ deposit practices, as to the knowledge of the researcher, it seems that no study appears to have been made in Ethiopia that exclusively investigates the factors affecting time deposit of banking sector in Ethiopia. Hence, filling the knowledge gap, this study attempted to examine the factors that affect time deposit of commercial banks in Ethiopia and tried to suggest the possible ways out. The study is intended to identify and evaluate the bank specific, industry and macro factors that affect time deposit of commercial banks in Ethiopia including the NBE 27% bill requirement.
1.3. Research question
This study will generally conduct to determine the factors affecting time deposit in Commercial Banks in Ethiopia. It will address the broader research questions of:
??How do bank specific factors like liquidity and profitability affect time deposit of commercial banks in Ethiopia?
??How do industry factors including lending rate and reserve requirement affect time deposit of commercial banks in Ethiopia?
??How do macro factors of inflation and GDP affect time deposit of commercial banks in Ethiopia?
??How does the implementation of the 27% purchase of government bill at lower interest rate affect time deposit?
1.4 Objectives of the study
1.4.1 General/Main Objectives:
The general objective of the study will examine the factors that affect time deposit of commercial banks in Ethiopia from the year 2003 to 2017.
1.4.2 Specific Objectives study
The specific objectives of the study:
? Will examine the impact of inflation on time deposit of commercial banks.
? Will analyze effects of real GDP on time deposit commercial banks
? Will see the impact of liquidity on time deposit in commercial banks.
? Will examine the impact of profitability on time deposit in commercial banks.
? Will determine effects of lending rate on time deposit of commercial banks.
? Will examine the effect of reserve requirement on time deposit of commercial banks.
? Will determine the impact of NBE bill purchase policy on time deposit.
1.5. Significance of the Study
The study will attempt to examine the factors that affect time deposit in commercial banks in Ethiopia. The study will try to provide information for all stakeholders involved, especially for National Bank of Ethiopia (NBE) and for all commercial banks in Ethiopia, in order to make informed decisions by minimizing the impact of factors affecting time deposit. It will help them in designing effective strategies since there is a tendency of commercial banks to shift to maximizing time deposit. The study will help the regulatory bodies by providing insight to examine the policy measures in banking supervision pertaining to commercial banks. Additionally, the paper will serve as a spring board for other researchers as well as initiate them to conduct further study on this and related issues.
1.6. Scope and Limitation of the study
1.6.1 Scope of the study
The number of banks engaged in operation in Ethiopia has reached 18 which include 17 commercial banks and 1 development bank. Among these, the study will only limited to the selected six commercial banks in Ethiopia since it requires a lot of time and resource to assess all the existing banks. Commercial Bank of Ethiopia will be selected as it is one of the oldest and highly progressed state owned commercial bank and the experience of the private banks will be considered as selection criteria. Hence, the financial statements of the selected banks starting from 2003 to 2017 fiscal years will be analyzed. The researcher will select this consecutive 15 years due to the availability of data of all the selected banks during this period.
1.6.2 Limitation of the study
Banks raise funds by collecting deposits from businesses and consumers via checkable deposits, savings deposits, and time or term deposits and make loans to businesses and consumers. Among the three types of deposits, this research will only focus on time deposit as it is currently important for banks to comply with the NBE bill requirement.
Moreover, the study will only limited to the selected seven factors that will be expected to have a significant impact on time deposit of commercial banks in Ethiopia. In addition, absence of published literatures on time deposit was one of the major limitations of the study.
1.7. Organization of the paper.
The study will be organized into five chapters. The first chapter will provide the introduction part which gives a general introduction about the research issue. It will include background of the study, statement of the problem, significance, scope, limitations of the study and finally organization of the paper. The second chapter will present the review of related literature. It will deal with the theoretical and empirical literatures on time deposit and deposit mobilization respectively and also will show the summary and literature gap. The third chapter will deal with research design and methodologies adopted during the course of the study. The fourth chapter will concern with the findings and discussions of the study. Finally, chapter five will offer the summary, conclusion and relevant recommendations based on the research findings