BANK AGRICULTURE FINANCING AND ITS EFFECTS ON ECONOMIC DEVELOPMENT OF ETHIOPIA

Abstract

There is a credit market failure in Ethiopia, as evidenced by constraints on banks giving agricultural credit, unbalanced economic sector finance, and worse agricultural credit performance. It is possible to look into the seriousness of these problems using a variety of techniques. The analysis of macroeconomic and bank-specific variables that influence agricultural credit and the performance of agricultural finance, as well as how agricultural finance influenced Ethiopia's export performance with key trading partners and economic development, were the objectives of the study. Secondary Time series data (1981 to 2021) from the World Bank, International Monetary Fund, World Governance Indicators, and National Bank of Ethiopia were collected and used to determine the factors that influence agricultural credit provisions, performance of agricultural credits and the relationship between agriculture credit and economic development of Ethiopia. In addition, panel data from the World Bank, the International Monetary Fund, World Governance Indicators, National Bank of Ethiopia and World Commodities Trade data were gathered from 2000 to 2020 and used to analyze the effects of agriculture credit on Ethiopian export performances with 17 major trading partners. The Autoregressive Distributive Lag (ARDL) approach is used to determine the variables that affect agricultural credit, performances, and its impact on economic development of the country. In addition, the study employed the two-step system generalized moment method to analyze dynamic panel data between agricultural credit and Ethiopian export performance with key trading partners (SGMM). The long-run agriculture credit ARDL model results show that, GDP, number of bank branches, currency out of bank, and trade openness all have significant positive effects on bank agriculture credit. Climate change and foreign direct investment have a long-term negative impact on agricultural credit. Furthermore, in the short run, agriculture credit lag, currency out of bank, number of bank branches, foreign direct investment and trade openness all have significant positive effects on bank agriculture credit disbursement. In addition, the significant adjustment toward Equilibrium Error correction (ECT) confirms the existence of a long-run equilibrium relationship among the variables included. From the agriculture credit nonperforming loan model. Only five variables, Probability of Credit Default, Interest Rate Margin, and Number xv of Branch's, have significant positive effects on bank agriculture credit in the long run, while Real GDP Growth and Institutional Quality have significant negative effects on agriculture nonperforming loans. As expected, there is no significant relationship between bank agriculture credit and agriculture non-performing loan. ECT's short run error correction coefficient is also statistically significant. This demonstrates that the deviation of agricultural credit nonperforming loans from equilibrium values is corrected the following year. Human development index ARDL model result also revealed that agriculture credit, board money supply, life expectancy, and trade openness all have positive long-run effects on HDI. However, in the short run, money supply has a negative significant effect on economic development, whereas life expectancy, saving deposits, and inflation have positive effects. The presence of a significant ECT confirms the existence of a long-run equilibrium relationship among the variables included in the mode. More importantly, the relationship between bank agricultural credits and HDI is unidirectional or agriculture credit induce economic development. Finally, the system generalized moment method (SGMM) was used to capture the effect of agriculture credit on export value with major trading partner. The results show that foreign direct investment, exporter country GDP, agriculture credit, and lag of last year export value have a significant effect on current export value with major trading partner. At end, the policy implication for this study is that adequate attention must also be paid to improving agricultural credit and agriculture credit performance. Stakeholders should develop policies that encourage agriculture finance rather than treating it as a separate strategy from economic development; rather, it should be treated as an integral component of the same strategy.