DETERMINANTS OF BANK AGRICULTURE CREDIT AND ITS EFFECT ON POVERTY, INCOME INEQUALITY, UNEMPLOYMENT AND ECONOMIC GROWTH IN ETHIOPIA

Abstract

Harshly, the problem of poverty and income inequality overwhelmed a tremendous portion of populations across developing countries like Ethiopia and remains one of the economic curses posing catastrophic consequences on society’s economic as well as social wellbeing. Hence, this study investigated the effects of extending bank agriculture credit on poverty level and income inequality in Ethiopia. The study used unbalanced panel data from 2000 to 2021 collected from 11 regional states in Ethiopia. Additionally, the study determined the effects of bank agriculture credit on unemployment and GDP per capita in Ethiopia using time series data from 1990 to 2021. Moreover, the study identified the main determinants of bank agriculture credit volume injected by commercial banks in Ethiopia using panel data from 2010 to 2021. While figuring out the relationship between bank agriculture credit and poverty level and income inequality; the study adopted Panel Corrected Standard Error (PCSE) basing its robust feature on effectively controlling spatial correlation, heteroscedasticity, and cross-sectional dependence in panel data setting. The time series analysis is conducted using the Auto-Regressive Distributed Lag model (ARDL). Additionally, the Augmented mean group (AMG) model is adopted based on the panel data setting to figure out determinants of bank agriculture volume of commercial banks in Ethiopia. The result from mean difference test reveals that, from the total banks outstanding loan only 14% goes to agriculture while 61% and 25% is granted to service and industry sectors respectively. The regression result also reveals that bank agriculture credit has a significant and negative effect on poverty level, income inequality, and unemployment and has a positive and significant effect on GDP per capita in Ethiopia. Finally, bank-specific and macroeconomic factors such as deposit volume, return on assets, branch network, and economic growth positively and significantly determine the volume of bank agriculture credit provided by commercial banks while interest rate spread, climate change and inflation negatively and significantly determine the credit volume. Therefore, renovating the credit distribution aimed at directing the magnitude towards the agriculture sector is vital to flourishing the society’s economic well-being