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Assessment of ‘Why Private Commercial Banks in Ethiopia Neglected the Agriculture’ Evidence From 10 Selected Private Banks

Assessment of ‘Why Private Commercial Banks in Ethiopia Neglected the Agriculture’ Evidence From 10 Selected Private Banks

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Published by Alexander Decker
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The International Institute for Science, Technology and Education (IISTE). Science, Technology and Medicine Journals Call for Academic Manuscripts

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Published by: Alexander Decker on Aug 11, 2014
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Journal of Economics and Sustainable Development www.iiste.org ISSN 2222-17 !"aper# ISSN 2222-2$%% !&nline# 'ol.%( No.1)( 21*
Assessment of ‘Why Private Commercial Banks in Ethiopia Neglected the Agriculture?’ Evidence from ! "elected Private Banks
,areegn anfure /istana( ebremic0ael regawi( ailesellasie ron bra0a 3olaita Soddo 4niversit5( department of ccounting and finance
,0e stud5 used ten selected private bans to investigate t0e reasons w05 private bans in Et0iopia neglected agriculture. ,0e private bans t0at 0ave been serving at least four 5ears in t0e baning business were purposivel5 selected for t0e stud5. ,o ac0ieve t0e desired ob6ectives( primar5 data- using uestionnaire and semi structured interview and secondar5 data were used. ,0e collected data were anal58ed t0e b5 &9S regression model. ccordingl5( t0e result of t0e regression reveals t0at: si8e( profitabilit5( capital efficienc5( competition wit0 t0e  public owned bans and baced collateral were t0e most significant factors for t0e reason w05 private bans in Et0iopia neglected agriculture. ;redit utili8ing capabilit5 of t0e borrower is also a moderatel5 significant factor.Since(agriculture is t0e largest lion s0are sector in contributing to D" growt0 and priorit5 sector in Et0iopia( eeping t0e ot0er indicators of creditwort0iness constant( it is enviable if private bans consider t0e ecological c0aracteristics around borrowers< business t0an to be generall5 reluctant toward t0e sector. Improving t0eir profit generating or capital appreciation strategies t0an 0us0ed for t0e sector is t0e ot0er better assignment of Et0iopian private bans. 4nder developed crop and weat0er inde= insurance is also one of t0e ma6or reasons. ,0erefore(it is also advisable if t0e government encourages t0e insurance companies( to e=tend t0eir insurance  products or services to agriculture sector.
&9S( gricultural loan( "rivate >ans( Et0iopia( >an<s: liuidit5( profit( si8e( baced collateral( competition( economic growt0 and credit utili8ation capabilit5
griculture pla5s a vital role for economic growt0 and sustainable development. Evidence suggested t0at gross domestic product !D"# growt0 originating from agriculture is twice as effective in reducing povert5 as D" growt0 lined to t0e non-agricultural sectors !3orld >an( 2$#. ,0e sustainable development of Sub-Sa0aran frican !SS# countries t0us directl5 lined to t0e success of t0e agricultural sector w0ic0 in turn dependent on sustained investments in t0e sector !?osegrant et al.( 27#. 9ie ot0er SS countries( agriculture is t0e main sta5 of Et0iopian econom5. ,0erefore( t0e long term economic strateg5 of Et0iopia( D9I( is drawn from t0e e=isting realit5 t0at t0e countr5 is under acute s0ortage of capital( but endowed wit0 large number of woring age population and vast cultivable land !,adesse( 2)#. ,0e strateg5 0as an intention of mec0ani8ing agricultural production s5stem. owever( modern agricultural tec0nolog5 was capital intensive w0ic0 in turn increases t0e demand for credit !Jo0nson and ;ownie( 1@+@#. &n t0e ot0er side( a growing bod5 of evidence suggests t0at financial institutions suc0 as bans( insurance companies and financial marets lie stoc( bond and derivative maret e=ert a powerful influence on economic development( povert5 alleviation and economic stabilit5 !9evine et.al. 212#. ,0ere is a strong positive lin  between t0e level of development( efficienc5 of a financial s5stem and its contribution to economic growt0 !reenwood A Jovanovic( 1@@: 9evine( 2%#. mong financial institutions( bans are t0e dominant formal financial institutions currentl5 operating in Et0iopia !9aew( 2: eta0un( 2$#. ccording to 9aew( on average( bans cover @+ percent of gross of financial assets and non-bans account onl5 for * percent. ,0erefore( it is reasonable to e=pect t0eir participation in t0e process of availing financial services to t0e development of agricultural sector !tilt and Issac( 21#. ,0e concept of credit in agriculture 0as been nown since 17
 centur5 w0en t0e peasant in ;0ina used rural credit for farm production in order to improve t0eir living standards !Bing-te( 1@@*#. Eas5 and c0eap credit is t0e uicest wa5 for boosting agricultural production !bedulla0( 2@#. >ut( in developing countries access to and use of formal finance remains ver5 low in general and agriculture in particular !;ampaigne A ?ausc0( 21#. Cor instance( in 1@@1( t0e s0are of total ban loans for agriculture was %.2 percent in "0ilippines( 1 percent in India !sian Development >an( 2)#( $ percent in 1$ countries of 9atin merica !,rivelli and 'nro( 27# and 1 percent in SS countries !;ampaigne A ?ausc0( 21#. ,0e agriculture<s relative use of formal credit is muc0 lower t0an t0at of non-agriculture sector w0ic0 absorbs muc0 0ig0er level of credit !>uc0enau( 2)#. In 0is stud5( 'igan !1@@)# stated t0at commercial  bans management usuall5 asserts t0at agriculture is a too ris5 sector and t0e5 prefer to avoid 0eav5 involvement in it rat0er t0e5 invest in trade or ot0er safer industrial activities. owever( avoiding t0e agricultural sector does not naturall5 mean obtaining t0e best result. In Et0iopia( t0oug0 t0e number of private bans and insurance companies are consistentl5 growing since 1@@*(
Journal of Economics and Sustainable Development www.iiste.org ISSN 2222-17 !"aper# ISSN 2222-2$%% !&nline# 'ol.%( No.1)( 21*
+) t0e relative weig0t of agriculture in t0eir loan portfolio is currentl5 s0rining and private commercial bans  provide 0ardl5 an5 credit to t0e sector !3olda5 and David( 21#. Et0iopian >ans are forced to 0old 0ig0 amount of liuid assets in t0eir 0ands to minimi8e liuidit5 ris. ,0is suggests inefficienc5 in financial intermediation and t0is inefficienc5 furt0er create an imbalance between t0e demand for loanable fund and t0eir suppl5 !3ondafera0u( 21#. 3olda5 and David !21# too found financial sector pla5ers in Et0iopia 0ave sill gaps in most e5 baning processes( especiall5 in ris-management and t0is leads t0e lending practices 0ig0l5 depend on collateral. Crom t0is finding we can understand( t0e reason w05 bans are reluctant toward agriculture is not agricultural sector side problems onl5. Boreover( in 212 Ebisa undertoo 0is stud5 on t0e effects of post 1@@1 era financial sector deregulations in Et0iopia and found t0at t0oug0 t0e agriculture sector contributes *)F to t0e D"( it got smaller uantit5 of loans from private ban w0ic0 is( on average( 2.21 percent. Cinall5( t0e aut0or concluded t0at all private bans in Et0iopia
t0e agriculture. >ut t0e reason w05 t0e5 neglected t0e agriculture is unreciprocated uestion. ,0erefore( t0e purpose of t0e stud5 is to assess w05 private commercial bans in Et0iopia neglected agriculture using four 5ears data from 2@ to 212. ,0e scope of t0e stud5 was t0us limited to 1 selected private bans in Et0iopia. Namel5( was0 International >an !I>#( >an of b5ssinia !>#( ;ooperative >an of &romia!;>E#( Das0en ban!D>#( 9ion International >an!9I>#( Nib International ban!NI>#( &romia International >an!&I>#( 4nited >an!4>#( 3egagen >an !3># and Gemen >an !G>#. ,0ese private bans are selected based on t0e 21 baning review report.
*evie%s of +iteratures
griculture pla5s t0e critical role in broadening t0e productive and e=port base of t0e econom5 b5 creating emplo5ment( providing industrial raw materials( ensuring food securit5 and output growt0 !Elbadawi( 21#. gricultural sector 0ig0l5 influences t0e performances of t0e ot0er sectors !/ibret( 1@@$#. In 2+ economic growt0 of Et0iopia( agriculture sector 0as contributed + percent of t0e growt0 w0ereas t0e industr5 and t0e services sectors contributed 1 percent and ) percent respectivel5 !BoCED( 2+#. ,ospeed up t0e economic development( t0e role of financial institution in development and economic growt0 s0ould not be seen separable.  stud5 accompanied on 1% countries noted t0at a well-functioning financial s5stem is critical to long-term growt0 !9evine A Demirguc-/unt( 2*#. Empirical evidence also confirms a strong and positive lin between national savings and economic growt0 !3orld >an( 2*#. 9iteratures identified urban centers biased distribution of t0e bans( low volume of loan demand b5 farmers( 0ardl5 affordable baning reuirements-collateral and scattered settlements of rural borrowers leading to 0ig0 cost of loan management as t0e main reasons for formal financial institutions 0ave pla5ed little role in financing development efforts in t0e rural area !lema5e0u( 2$#. mong financial institutions( t0e importance of ban is more pronounced in developing countries because financial marets are usuall5 underdeveloped and bans are t5picall5 t0e onl5 ma6or source of finance for t0e ma6orit5 of firms !run and ,urner !2*# as cited in t0anasoglou et al.( 2+#. Similarl5( in India( /o0li !1@@7# observed and identified t0e e=istence of significant linages between ban credit and investment in bot0 agriculture and industries. ;redit 0as been discovered to be a ma6or constraint on t0e intensification of bot0 large and small scale farming !'on-"risciee( 1@$+: &gunfowora et al( 1@72: >uc0enau( 2) A 3orld >an( 2*#. In Nigeria( be !1@$2# reported t0at non-institutional creditors< accounts for 7F of t0e total credits received. owever( wit0 t0e present situation t0ese sources could 0ardl5 meet t0e increasing demand for credit b5 farmers. ,0e same is true in "0ilippines !;orpu8 et al.( 2%#. 9iewise Ibra0im et al. !27# found t0at in Et0iopia informal sector was t0e main source of credit in rural areas. In 2* C&( stated general be0avioral riss of borrowers( nature of t0e agricultural production and t0e "olitics of t0e countr5 as t0e t0ree main reasons for t0e constraints of agricultural credit. 4sing a "robit model( 9evonian !1@@+# found t0at bans wit0 more branc0es are willing to engage in agricultural lending in muc0 smaller amounts t0an similar bans wit0 fewer branc0es. Similarl5( ilbert and >elongia !1@$$# found t0at t0e si8e of t0e parent >an olding ;ompanies 0ad a significant impact on agricultural lending. 9ac of suitable collateral and 0ig0 transaction costs related to agriculture were found b5 off and Stiglit8 !1@@# and >esle5 !1@@*# respectivel5. >ut( Sacerdoti !2%# found group form borrowers provide adeuate guarantees to bans t0an individual farmer<s collateral wort0. 4sing a uantile regression met0od on commercial ban<s five 5ears data(  Nam et.al !27# found >an assets and deposit growt0 rates 0ave a positive impact w0ile population growt0 rate( loan to deposit ratio( euit5 to asset ratio and location 0ave a negative impact on t0e agricultural loan growt0 rate. In addition to t0e five ;<s called c0aracter( capital( capacit5( collateral and conditions( !Bd l-Bamun. et al.( 212# added investment t5pe and purpose of loan as one factor. 3ilson and ;0ristine et.al !2+# also found t0at t0e t5pe of loan( borrower<s c0aracter( financial record eeping( productivit5 and credit ris were t0e factors t0at s0ould considered before approving an5 loan reuest. ccording to /i5ota !27#( $$F of Et0iopian bans are concentrated in t0e urban centers. ,0eir branc0es too are concentrated in t0e capital cities !eta0un( 2$: Ebisa( 212#. Curt0ermore( Ebisa e=plained private bans could not serve agriculture sector due to t0eir urban biased polic5 of branc0 e=pansions especiall5 focusing on volume of business in t0e urban areas.
Journal of Economics and Sustainable Development www.iiste.org ISSN 2222-17 !"aper# ISSN 2222-2$%% !&nline# 'ol.%( No.1)( 21*
-aterials and -ethods
Cor t0e purpose of investigating t0e reason be0ind w05 private commercial bans neglected t0e agriculture( 1  private bans were purposivel5 selected. ,0e ten private bans were selected based on number of private bans t0at were included in t0e 21 baning performance review report and t0ose w0o 0ad at least four 5ears< e=perience in baning business
Cour 5ear was purposivel5 taen b5 t0e investigator because t0e fastest double digit economic growt0 in Et0iopia is registered for t0e last four 5ears. ,o collect data uestionnaires were distributed for loan officers eac0 sampled private commercial bans at 0ead office level and semi-structured interview was for t0e credit managers of eac0 sampled private bans. ,0e stud5 also used secondar5 data. ,0e collected data were summari8ed and presented using te=t( table and anal58ed using descriptive inferential statistics. >esides( econometric anal5sis tool( specificall5( &9S regression model was used to test t0e literature driven 05pot0esis and finall5 to mae conclusion.
,' Econometric model
&9S regression is particularl5 powerful as it relativel5 eas5 to c0ec t0e model assumption suc0 as linearit5: constant variance and t0e effect of outliers using simple grap0ical met0ods !utc0eson and Sofroniou( 1@@@#. ,o empiricall5 investigate t0e ma6or c0allenges affect to agricultural loan( agricultural loan is considered as dependant variable. ,0e e=planator5 variable t0at were studied in t0is paper are: liuidit5 of t0e ban !lob#( si8e of t0e ban !sob#( capital efficienc5 or performance of t0e ban !;pb#( profitabilit5 of t0e ban !"ob#( competition wit0 t0e public owned ban !;mpbb#( real economic growt0 rate of domestic product !?gdp#(  baced collateral !bcl#( credit utili8ing capabilit5 of t0e borrowers !cucbr#( long term economic strateg5 of t0e countr5 !Ecostra#. Specificall5( t0us( t0e model 0as been specified as:
glnH  1lob 2sob  )cpb *pob % ;mpbb + ?gdp  7bcl $cucbr  @Ecostra Ki 30ere( 
 is a constant: 
--- to---
is t0e coefficient of eac0 e=planator5 variable and KiH is error term.
.ormulation of /ypotheses
5pot0esis of t0e stud5 stand on t0eories and empirical findings related to agricultural loan and ban credit t0at 0as been developed over t0e 5ears b5 different sc0olars.
3.2.1 Liquidity of the banks
9iuidit5 refers t0e abilit5 of a financial firm to maintain regularl5 euilibrium between t0e financial inflow and outflow over time !'ento and anga( 2@#. ,0e most important factor affecting banersL preference for a certain t5pe of loan seemed to be t0e level of loan to deposit ratios !S0ip0o( 211#. Deposit growt0 rate for eac0  ban reflect c0anges in an availabilit5 of loanable funds in a ban. ,0erefore( 0olding of 0ig0 deposit in t0e ban affects t0e amount of loan granted to t0e borrowers. Similarl5( Niolau !2@# declared 0olding more liuid assets t0an illiuid maes an access to fund even more constrained. Cear of liuidit5 ris is t0e main reason for  bans to 0old 0ig0 deposit or c0ange it to t0e most liuid assets !Borgan( 2#. ,0ere are two t5pes of liuidities called maret and funding liuidit5. ence in Et0iopia t0ere is no secondar5 maret w0ere t0e maret liuidit5 is 0ig0l5 practiced( t0is paper deals more wit0 t0e funding liuidit5 using loan to deposit ratio as a  pro=5 variable.
"rivate >ans< liuidit5 position are e=pected to significantl5 and positivel5 affect lending to agriculture
 Size of the bank
9arger bans tend to 0ave more diverse lending opportunities( but also more opportunities to raise deposit funds for lending to agriculture!Nam et.al( 27#. In contrast( ilbert and >elongia !1@$$# found t0at a ban<s lending to farmers as a percent of total loans declined wit0 ban si8e. Small firms( suc0 as famil5 farms( tend to obtain t0eir credit from smaller ban offices located wit0in t0e communit5 !>erger and 4dell( 1@@$M /oenig and Dodson 1@@%#. Statisticall5 9evonian !1@@+# found t0at larger bans are less liel5 to engage in agricultural lending t0an are smaller bans. In t0is stud5( total assets of a ban reflect ban si8e used b5 Nam.et.al is considered as t0e pro=5 variable to measure t0e ban si8e.
 9arge si8ed private bans are e=pected to significantl5 and negativel5 affect t0e lending to agriculture
3.2.3 Capital efficiency (performance of banks
,0e traditional interpretation of t0e ban lending c0annelO 0as not paid attention to ban euit5: ban capital is traditionall5 interpreted as an irrelevantO balance-s0eet item !Criedman( 1@@1: 'an den euvel( 2)#. Euit5 capital can be t0e ma6or source of funds. >an capitali8ation( 0owever( influences t0e ban lending c0annelO owing to imperfections in t0e maret for debt. In particular( ban capital influences t0e capacit5 to raise uninsured forms of debt and t0erefore bans< abilit5 to contain t0e effect of a deposit drop on lending.9ow-capitali8ed bans( perceived to be more ris5 b5 t0e maret and 0ave greater difficult5 in issuing bonds and t0erefore are less able to s0ield t0eir credit relations0ips !/is0an and &piela( 2#. 30en euit5 is sufficientl5 low !and it is too costl5 to issue new s0ares#( bans reduce lending because prudential regulations establis0 t0at capital 0as to be at least a minimum percentage of loans !>olton and Crei=as( 21#. ,0erefore( t0e efficienc5 of  ban in terms of euit5 capital is measured b5 ?&E. ?&E is defined as after ta= net income divided b5 total euit5 is taen as a pro=5 variable to measure t0e capital efficienc5 of t0e ban !Nam et.al( 27#. ,0is paper also used ?&E as a capital efficac5 measurement.

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