The Impact of Financial Institution on House Hold Saving Behavior in Addis Ababa

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Table of Contents pages 1. Introduction1

1.1. Statement of the problem1

1.2. Objective of the study2

1.3. Research questions3

1.4. Scope of the study3

1.5. Methodology of the study3

2. Literature review4

2.1. Conceptual definitions4

7.2. Theories of Motives of saving4

7.3. Theoretical relationship between financial institution and saving in Brief5

7.4. Empirical relationship between financial institution and saving in Brief6

Reference

1. Introduction

1.1. Statement of the problem

Many sub-Saharan African countries introduced financial sector reforms to improve the performance of the financial sector in general, and financial savings levels in particular, in the 1980s and 1990s. Yet, despite these reforms, for many countries, the expected increase in financial savings levels was short lived.

The financial institution in which the banking sector occupies the largest part is complex in structure and plays a decisive role in the financial and economic stability and growth of a nation. Due to underdevelopment or the non-existence of securities markets in most of developing countries including Ethiopia, banks are the major players and they are the most important financial intermediaries.

Many financial institutions in developing countries offer savings products. Yet, little has been done to assess systematically and quantitatively the relative merits of different instrument designs. Savings is critical to households in developing countries; it allows households to smooth consumption in the face of volatile income and supports investments in human and physical capital. Savings mobilization typically is considered low in developing countries, but creating and implementing policies to raise it is difficult. Low savings is a consequence of merely poor access to safe, flexible, convenient, and affordable savings products. Until recently, most financial institutions in developing countries did not offer appropriate savings options for the poor.

The financial sector in Ethiopia mainly consists of banking system, insurance and micro finance institutions. Ethiopia’s financial sector remains closed and is much less developed than other sub Saharan African countries. Ethiopia has no capital market and very limited informal investing in shares of private companies. Since 1994 financial sector reforms has been introduce in Ethiopia, number of financial institutions are increasing dramatically, especially in urban areas like Addis Ababa. One of the major functions of this institutions is to mobilize saving and divert in to productive investments. In doing so, they will reduce poverty and achieving better living standard. However, Ethiopia still registered very low level of saving mobilization. The Gross domestic savings (% of GDP) in Ethiopia was last reported at 1.82 in 2011, according to a World Bank report published in 2012.

According to NBE report of 2010/11, there are 17 banks with 970 branches. In terms of ownership, 14 were private commercial banks and the remaining 3 state-owned, 14 insurances with 221 branches and 31 microfinance institutions operating in the country. Among these 17 banks with 349 branches, 14 insurance with 112 branches and 14 financial institutions are concentrated only in Addis Ababa.

In Ethiopia over 80% of the population lives in rural, and banks are found almost exclusively in the larger urban centers. About 23 percent of the public banks and 49 percent of private bank branches were concentrated only in Addis Ababa. However, the portion of the population near urban centers makes strikingly limited use of formal financial institutions.

Many literatures suggest that the reason for low saving in developing countries is concentration of...
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