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Assessment of Why Private Commercial Banks in Ethiopia
Neglected the Agriculture? Evidence from ! "elected Private
Banks

,are-egn .anfure /istana( .ebremic0ael 1regawi( 2ailesellasie 1ron 1bra0a
3olaita Soddo 4niversit5( department of 1ccounting and finance

A#stract
,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 7uestionnaire and semi structured
interview and secondar5 data were used. ,0e collected data were anal58ed t0e b5 &9S regression model.
1ccordingl5( 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.
$ey%ords& &9S( 1gricultural loan( "rivate >an-s( Et0iopia( >an-<s: li7uidit5( profit( si8e( bac-ed collateral(
competition( economic growt0 and credit utili8ation capabilit5

' (ntroduction
1griculture 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$#. ,0e sustainable development of Sub-Sa0aran
1frican !SS1# countries t0us directl5 lin-ed to t0e success of t0e agricultural sector w0ic0 in turn dependent on
sustained investments in t0e sector !?osegrant et al.( 27#. 9i-e ot0er SS1 countries( agriculture is t0e main
sta5 of Et0iopian econom5. ,0erefore( t0e long term economic strateg5 of Et0iopia( 1D9I( is drawn from t0e
e=isting realit5 t0at t0e countr5 is under acute s0ortage of capital( but endowed wit0 large number of wor-ing
age population and vast cultivable land !,adesse( 2)#. ,0e strateg5 0as an intention of mec0ani8ing
agricultural production s5stem. 2owever( modern agricultural tec0nolog5 was capital intensive w0ic0 in turn
increases t0e demand for credit !Jo0nson and ;ownie( 1@+@#.
&n t0e ot0er side( a growing bod5 of evidence suggests t0at financial institutions suc0 as ban-s( insurance
companies and financial mar-ets li-e stoc-( bond and derivative mar-et e=ert a powerful influence on economic
development( povert5 alleviation and economic stabilit5 !9evine et.al. 212#. ,0ere is a strong positive lin-
between t0e level of development( efficienc5 of a financial s5stem and its contribution to economic growt0
!.reenwood A Jovanovic( 1@@: 9evine( 2%#. 1mong financial institutions( ban-s are t0e dominant formal
financial institutions currentl5 operating in Et0iopia !9a-ew( 2: .eta0un( 2$#. 1ccording 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 !1t-ilt and Issac( 21#. ,0e concept of credit in agriculture 0as been -nown since 17
t0

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 7uic-est wa5 for boosting agricultural production
!1bedulla0( 2@#. >ut( in developing countries access to and use of formal finance remains ver5 low in general
and agriculture in particular !;ampaigne A ?ausc0( 21#. Cor instance( in 1@@1( t0e s0are of total ban- loans
for agriculture was %.2 percent in "0ilippines( 1 percent in India !1sian Development >an-( 2)#( $ percent in
1$ countries of 9atin 1merica !,rivelli and 'DnDro( 27# and 1 percent in SS1 countries !;ampaigne A
?ausc0( 21#. ,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( 'iganE !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. 2owever( 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@@*(
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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( 21#. Et0iopian >an-s are forced to 0old 0ig0
amount of li7uid assets in t0eir 0ands to minimi8e li7uidit5 ris-. ,0is suggests inefficienc5 in financial
intermediation and t0is inefficienc5 furt0er create an imbalance between t0e demand for loanable fund and t0eir
suppl5 !3ondafera0u( 21#. 3olda5 and David !21# 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 212 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 7uantit5 of loans from private ban- w0ic0 is( on average( 2.21 percent. Cinall5( t0e
aut0or concluded t0at all private ban-s in Et0iopia neglectedt0e agriculture. >ut t0e reason w05 t0e5 neglected
t0e agriculture is unreciprocated 7uestion. ,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 212. ,0e scope of t0e
stud5 was t0us limited to 1 selected private ban-s in Et0iopia. Namel5( 1was0 International >an- !1I>#( >an-
of 1b5ssinia !>1#( ;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 21 ban-ing review report.

)' *evie%s of +iteratures
1griculture 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( 21#.
1gricultural sector 0ig0l5 influences t0e performances of t0e ot0er sectors !/ibret( 1@@$#. In 2+ economic
growt0 of Et0iopia( agriculture sector 0as contributed + percent of t0e growt0 w0ereas t0e industr5 and t0e
services sectors contributed 1 percent and ) percent respectivel5 !BoCED( 2+#. ,ospeed up t0e economic
development( t0e role of financial institution in development and economic growt0 s0ould not be seen separable.
1 stud5 accompanied on 1% countries noted t0at a well-functioning financial s5stem is critical to long-term
growt0 !9evine A Demirguc-/unt( 2*#. Empirical evidence also confirms a strong and positive lin- between
national savings and economic growt0 !3orld >an-( 2*#. 9iteratures identified urban centers biased
distribution of t0e ban-s( low volume of loan demand b5 farmers( 0ardl5 affordable ban-ing re7uirements-
collateral and scattered settlements of rural borrowers leading to 0ig0 cost of loan management as t0e main
reasons for formal financial institutions 0ave pla5ed little role in financing development efforts in t0e rural area
!1lema5e0u( 2$#.
1mong 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 !1run and ,urner !2*# as cited in 1t0anasoglou 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( 1be !1@$2# reported t0at non-institutional creditors< accounts for 7F of t0e total credits received.
2owever( 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. !27# found t0at in Et0iopia
informal sector was t0e main source of credit in rural areas.
In 2* C1&( 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@$$# found t0at t0e si8e of
t0e parent >an- 2olding ;ompanies 0ad a significant impact on agricultural lending. 9ac- of suitable collateral
and 0ig0 transaction costs related to agriculture were found b5 2off and Stiglit8 !1@@# and >esle5 !1@@*#
respectivel5. >ut( Sacerdoti !2%# found group form borrowers provide ade7uate guarantees to ban-s t0an
individual farmer<s collateral wort0. 4sing a 7uantile regression met0od on commercial ban-<s five 5ears data(
Nam et.al !27# found >an- assets and deposit growt0 rates 0ave a positive impact w0ile population growt0
rate( loan to deposit ratio( e7uit5 to asset ratio and location 0ave a negative impact on t0e agricultural loan
growt0 rate. In addition to t0e five ;<s called c0aracter( capital( capacit5( collateral and conditions( !Bd 1l-
Bamun. et al.( 212# added investment t5pe and purpose of loan as one factor. 3ilson and ;0ristine et.al !2+#
also found t0at t0e t5pe of loan( borrower<s c0aracter( financial record -eeping( productivit5 and credit ris- were
t0e factors t0at s0ould considered before approving an5 loan re7uest. 1ccording to /i5ota !27#( $$F of
Et0iopian ban-s are concentrated in t0e urban centers. ,0eir branc0es too are concentrated in t0e capital cities
!.eta0un( 2$: Ebisa( 212#. 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.
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,' -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 21 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 7uestionnaires 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 !2utc0eson 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: li7uidit5 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:
1glnH IJ I1lobJ I2sob J I)cpbJ I*pobJ I% ;mpbbJ I+ ?gdp J I7bclJ I$cucbr J I@Ecostra JKi
30ere( I

is a constant: I
1
--- to---I
@
is t0e coefficient of eac0 e=planator5 variable and KiH is error term.
,') .ormulation of /ypotheses
25pot0esis 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
9i7uidit5 refers t0e abilit5 of a financial firm to maintain regularl5 e7uilibrium 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( 211#. 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 li7uid
assets t0an illi7uid ma-es an access to fund even more constrained. Cear of li7uidit5 ris- is t0e main reason for
ban-s to 0old 0ig0 deposit or c0ange it to t0e most li7uid assets !Borgan( 2#. ,0ere are two t5pes of
li7uidities called mar-et and funding li7uidit5. 2ence in Et0iopia t0ere is no secondar5 mar-et w0ere t0e mar-et
li7uidit5 is 0ig0l5 practiced( t0is paper deals more wit0 t0e funding li7uidit5 using loan to deposit ratio as a
pro=5 variable.
/&"rivate >an-s< li7uidit5 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( 27#. 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 Nban- lending c0annelO 0as not paid attention to ban- e7uit5: ban- capital is
traditionall5 interpreted as an NirrelevantO balance-s0eet item !Criedman( 1@@1: 'an den 2euvel( 2)#. E7uit5
capital can be t0e ma6or source of funds. >an- capitali8ation( 0owever( influences t0e Nban- 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 e7uit5 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( 21#. ,0erefore( t0e efficienc5 of
ban- in terms of e7uit5 capital is measured b5 ?&E. ?&E is defined as after ta= net income divided b5 total
e7uit5 is ta-en as a pro=5 variable to measure t0e capital efficienc5 of t0e ban- !Nam et.al( 27#. ,0is paper
also used ?&E as a capital efficac5 measurement.
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/,& "rivate >an-s< capital efficienc5 is e=pected to 0ave a positive and significant impact on t0e agricultural
loan.
3.2.! "rofitability of banks
,0ere are man5 sources for ban-s< profit( but profit from loanis t0e ma6or one. The two contradicting idea in
case of bank credit for agriculture sector is;i) the objective to maximize their profit- the basic business model of
banking and ii) the interest to serve the sector of the economy both at urban and rural area.omparatively!urban
settled borrowers are more served as compared to rural area. "erving rural area is characterized by different
operational costs andundiversified risks. 0he amount of loan re1uested also determines the costs of
#orro%ing' "ometimes2 even when banks do make loans! processing costs are higher relative to the size of the
loan.These costs will show the probability to select the less risky sector as compared to others. #ut! we know
that banks earn profit#y charging more for loans than it cost the #ank to make the loan !1ndrew 9ainton(
212#'Banks with high capacity of profit generating strategy may show e$ual willing toward all sectors. #anks%
profitabilit5 in t0is stud5 is measured b5 ?&1 !/osmidou( 2$: Clamini et.al( 2@#. ?&1 is e=pressed as t0e
ban-s< after ta= profit to total t0eir respective assets'
/3M "rofitable private ban-s are e=pected to 0ave a significant and positive effect on agricultural loan
3.2.#Competition $ith public o$ned banks
;ompetition from public owned ban-s mig0t affect t0e private owned ban-s credit to eac0 economic sector. ,0e
effect of competition on access to loan depends on t0e source and level of competition !DinP( 2#. Some
studies used location as e=pression of competition. Cor instance( >onaccorsi di "atti and .obbi !21# found t0at
concentration 0as a positive effect on t0e credit volume to small and medium si8e firms( and a negative impact
on large firms. >ut( DeQoung( .oldberg( and 30ite !1@@@# s0owed concentration affects small business lending
positivel5 in urban mar-ets and negativel5 in rural mar-et. 1s cited in !"odder( 212#( t0e mar-et power of an
individual ban- usuall5 increases wit0 t0e degree ofmonopol5 !2eggested and Bingo( 1@7+#. ,0is paper used
mar-et s0are to e=press competition. ,0e greater t0e mar-et s0are( t0e greater will be its control over its prices
and services it offers. Bar-et s0are is computed as total asset private ban- to t0e total asset of t0e ban-ing
industr5 in t0e countr5.
Competition = 1 [
Total assets of private bank
Total asset of banking industry.
]
/4M ;ompetition of private >an-s wit0 t0e public owned ban- is e=pected to 0ave significant and positive effect
on loan to agriculture
3.2.% &conomic gro$th rate
>an-s accept deposit from individuals and institutions and transfer to t0e deficit units in different sectors of t0e
econom5 !Bis0-in 27#. ?eal .D" growt0 is measured b5 annual .D" growt0 rate and is e=pected to 0ave an
impact on ban- credit. Economic growt0 can en0ance ban-s< profitabilit5. Economic growt0 0as a positive
impact on ban- credit and t0eir performance !>ela5ne0( 211: >i--er A 2u( 22: Demirguc-/unt A 2ui8inga(
1@@@#. During periods of strong economic growt0( loan demand tends to be 0ig0er w0ic0 allow ban-s to provide
more loans and it is also c0aracteri8ed b5 fewer loan defaults. ,o t0e specific( t0oug0 agriculture ta-es t0e
largest s0are of .D" growt0 in Et0iopia( economic growt0 is not t0e onl5 contribution of agricultural sector
alone rat0er t0e w0ole contribution of economic sectors. ,0erefore( t0e stud5 05pot0esi8ed as:
/5&,0e Economic growt0 rate is e=pected to 0ave positive and insignificant impact on agricultural loan
provision
3.2.' Credit utilization capability of the borro$ers
,0ere is a need to increase access of farmers to credit facilities as t0e5 are most li-el5 to utili8e t0e fund for t0e
purpose t0at increases agricultural production !&-woc0e.et.al( 212#. ;redit is a contractual promise between
t0e lender and borrowers. &ne person<s promise is not as good as anot0er. "romises are fre7uentl5 bro-en and
t0ere ma5 be no ob6ective wa5 to determine t0e li-eli0ood t0at promise will be -ept !"isc0-e( 1@@1: 'igano(
1@@): /itc0en( 1@$@#.,0e differences between promised and actual repa5ments of loans are t0e result of
uncertaint5 concerning t0e borrowers< abilit5 or willingness to ma-e t0e pa5ments w0en it matures !Jaffee and
Stiglit8( 1@@#.
,0e credit utili8ation is -nown in two wa5s. Cirst if t0e borrowers 0ave used t0e credit for t0e purpose t0e5 0ave
borrowed and second( even if not used for t0e intended aim but used for ot0er productive purpose and able to
repa5 t0e regular repa5ment as per t0e contract( t0en we can consider t0e utili8ation capacit5 of t0e borrower is
feasible. ,0e regular repa5ment capabilit5 of t0e borrower is as a pro=5 variable for credit utili8ation and t0e
data would be obtained t0roug0 7uestionnaire.
/6& ;redit utili8ation capabilit5 of farmers is e=pected as a positive and insignificant factor for agriculture loan
from private ban-s.
3.2.( )acked (guaranteed collateral
1ccording to Stiglit8 and 3eiss !1@$1# wit0out partial or full collateral first-best allocation of credit are not
possible. ,0us( scarce collateral implies t0at some individuals will be deprived of credit but t0ose w0o 0ave t0e
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collateral will obtain t0e credit. ,0e e=istence of 0ig0 value and insured collateral does not onl5 settle t0e option
to get t0e loan or not. >ut it even will also define t0e amount of loan to be approved. ,0e mar-et value of t0e
insured tangible propert5( e7uipment or building registered in loan contract is as a pro=5 variable to represent t0e
bac-ed collateral. If collateral is insured against uncertain of future losses( it is 0ig0l5 bac-ed and 0as positive
impact on loan to agriculture. ,0ere are also some cases in w0ic0 most food securit5 support organi8ation li-e
4S1ID and IC?S ma5 give a form of guarantee to cover t0e amount loan defaulted as a result of farmer<s
inabilit5 due to undiversifiable ris-s. ,0is paper also considered suc0 cases as if t0e loan is bac-ed loan. >ut(
;iaian and "o-rivca- !211# estimated t0e impact of subsidies from t0e European 4nion<s common agricultural
polic5 on farm ban- loans and found t0at subsidies influence farm loans in a non-linear and indirect fas0ion.
/7M >ac-ed collateral is e=pected as a positive and significant factor of obtaining agricultural loan from private
ban-s.
3.2.* &conomic strategy or policy of the country+
Et0iopia 0as adopted a long term economic strateg5 called 1gricultural Development 9ed to Industr5 !1D9I#
w0ic0 t0e polic5 considered agriculture as a priorit5 sector of t0e econom5. Industrial growt0 will become
t0roug0 agricultural development. Cinance is t0e important instrument to bring large scale investment in t0e
sector. ,0e polic5 b5 itself is a direction for private ban-s credit disbursement to eac0 economic sector. 1s
evidence t0is polic5( *) percent of t0e real .D" growt0 in 212( was from agriculture sector !Ebisa( 212#. ,o
-now t0e impact of t0e economic strateg5 of t0e countr5 on private ban-s credit to agriculture( data was obtained
t0roug0 7uestionnaire b5 considering it as a dumm5 variable.
/8&,0e countr5<s long term economic polic5 or strateg5 t0at depends on agriculture as priorit5 sector is
e=pected to 0ave significant and positive impact for agricultural loan provision.

3' *esults and 9iscussions
3' Analysis of private #ank loan distri#ution to economic sectors
,0e amount of birr given to one economic sector divided to t0e total loan amount for all economic sectors in
portfolio of a given ban- results t0e ratio of t0at sector from t0e total loan given in t0at specified private ban-.
1ccordingl5( t0e portion of t0e agriculture loan is t0e lowest of all as compared to t0e loan s0are t0at goes to t0e
ot0er economic sectors. 1s it is s0own in 0a#le'( ;ooperative >an- of &romia is t0e first in giving agricultural
loan followed b5 Nib International >an- and 1was0 International >an- t0at is %.*F( *.@F and ).+*F of t0eir
loan s0are respectivel5.
3') 0rends of agricultural loan share in private #anks loan portfolio
1s it s0own in 0a#le')2 e=cept 9ion International >an- from 211 to 212 and ;ooperative ban- of &romia
from 21 to 211( t0e trend of agricultural loan 0as s0own a decreasing tendenc5 in t0eir loan portfolio. >ut(
4nited >an- 0as totall5 neglected agriculture. ,0e main reasons for t0e decline of private ban-s< credit to
agriculture were: first( fear of li7uidit5 problem- since t0e 0ig0est portion of deposit were from saving and
demand t5pe- t0at sta5s for s0ort term in ban- account as liabilit5 and agriculture investment is mostl5
c0aracteri8ed b5 long term investment t5pe: t0is imbalance of two due dates furt0er creates t0e li7uidit5 ris-.
Second( private ban-s 0ave profit oriented ob6ective and t0e profit is a multiple effect of leverage !1ccess capital(
212#. 1 single event or factor( suc0 as c0ange in weat0er condition( pest infestation( animal diseases outbrea-(
and une=pected price fluctuation of agricultural products ma5 ups0ot in anot0er effects. Cor e=ample( Das0en
ban- faced a problem from price fluctuation in t0e loan dispersed to floriculture production. ;onse7uentl5( t0e
ban- applied a ta-eover s5stem to get its loan amount due to inabilit5 of t0e borrowers< to repa5 t0e loan. ,0us(
considering agriculture as a ris-5 business is t0e t0irdreason. >ut avoiding agriculture does not naturall5 mean
obtaining t0e best result !'igano( 1@@)#. Court0( in Et0iopia t0ere is no as suc0 mec0ani8ed farming s5stem and
t0e largest population is engaged in small scale farming in w0ic0 ban-ers lac- confidence about t0e repa5ment
of loan.Since( ot0er farmers in t0e communit5 will loo- upon t0em badl5 if t0e5 cannot repa5 a loan !ECSE!
21#( t0is factor 0as its own negative implication even on t0e borrowers w0o unable to repa5 t0e loan. Cift0(
.overnment directions-on t0e be0alf of government( National >an- of Et0iopia( 0as set a directive t0at a portion
of s0ort term loan in given private ban- is not less t0an * percent of t0e total loan portfolio. ,0is directive also
as a one factor on a part of long term loan since most agricultural credit is a part of a long term loan.
4nderdeveloped insurance service in t0e sector isas anot0er reason. In order to secure t0e credit( ban-s mostl5
need insured collateral. 2owever( farmers in Et0iopia 0ave no as muc0 valuable collateral. ,0e valuable
collaterals of most Et0iopian farmers areM residential building( crop( livestoc-( s0eep( goats and camels. >ut( t0e
availabilit5 of crop or livestoc- insurance in Et0iopia is almost ni=. Nile insurance and &romia international
insurance compan5 are t0e onl5 t0at provide crop and livestoc- insurance in t0e countr5.
3', -a:or factors affecting private commercial #anks credit to agriculture ;*egression analysis<
,0e model used * observations w0ic0 provided a base for an econometric anal5sis. ,0e investigator carried out
diagnostic tests to ensure t0e data fits t0e basic assumptions of linear regression models: normalit5(
multicollinearit5 and 0eteroscedasticit5 at %F level of significance.1s it is s0own in 0a#le 3(t0e interpretations
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of result of significant e=planator5 variables are presented below.
3',' "i=e of the #anks ;"o#<'
1ccording to t0e regression result: Si8e of private ban-<s 0ad negativel5 and significantl5 affects t0e agricultural
loan from t0e private ban-s at 1F level of significant. ,0e finding of t0is stud5 is inconsistence wit0 t0e
previous studies t0at statisticall5 found larger ban-s to be less li-el5 to engage in agricultural lending t0an are
smaller ban-s !9evonian( 1@@+ and >erger A 4dell( 1@@$#. 1gain( .ilbert and >elongia !1@$$# also found t0at a
ban-<s lending to farmers declined wit0 ban- si8e. In 27 Nam et.al also 6ustified t0at as t0e si8e of ban-s
increase( t0e5 need to finance t0e urban businesses t0an go to rural communit5 w0ic0 is also t0e main problem
of Et0iopian commercial ban-s !Ebisa( 212#.
,',') Capital performance of the #ank;Cp#<
;apital efficienc5 of t0e private ban- is also t0e second reason t0atpositivel5 and significantl5 affects t0e
agricultural loan at %F confidence level. ,0is is due to t0e fact t0at t0e 0ig0er t0e capital is efficient( t0e more
abilit5 to ta-e ris-s and e7uall5 e=tend t0eir loan for all economic sectors. 9i-ewise( >olton and Crei=as !21#
also found w0en e7uit5 is sufficientl5 low( ban-s reduce lending.
3',', Profita#ility of the #ank ;Po#<
"rofit is measured b5 ?&1 !/osmidou( 2$#. 1ll private commercial ban-s are profit oriented and t0eir
ob6ective is to satisf5 t0e s0are0olders e=pectation t0at is to appreciate t0e initial capital. ,0e impact of private
ban- profit on agricultural loan is also significant at %F but negativel5 correlated. ,0e main reason w05 it is
negativel5 correlated is t0at a 0ig0 profitabilit5 of ban-s in Et0iopia is simpl5 a reflection of multiplicative effect
of leverage( w0ic0 tends to offer s0are0olders of ban-s muc0 0ig0er returns on t0eir investments as compared to
ot0er non-ban-ing businesses !1ccess capital( 212#. ,0is ma-e private ban-s usuall5 searc0 low ris- !ris-less#
investment areas-suc0 as government ,- bills t0an investing in agriculture sector. 2owever( from t0e portfolio
t0eor5 of investment perspective( less ris- investment alternative would generate low return and it indicates
investing below efficient frontier line of portfolio investment. &n anot0er side( stud5 b5 1burime !2$# asserted
t0at t0e profitabilit5 of a ban- depends on its abilit5 to foresee( avoid and monitor ris-s. Bost private ban-s also
c0aracteri8ed b5 lac- of agricultural ris- anal5st e=perts. ,0erefore( t0e desire to generate more profit and fear of
t0e e=isting ris-s in t0e sector ma-es private ban-s in Et0iopia to neglect agriculture.
3','3 Competition %ith the pu#lic o%ned #anks ;Cmp##<
,0e ot0er reason is competition wit0 public owned ban-s. ,0e regression result revealed t0at competition wit0
public owned ban- is significantl5 and positivel5 affect t0e agricultural loan at % percent. ;ompetition ma-es
private ban-s to searc0 unban-ed area of t0e economic sector li-e agriculture. In anot0er term( if t0ere were a
concentration of ban-s in a small area( it ma5 pave t0e wa5 to e=tend t0eir loan to unban-ed class li-e for
farmers. ,0erefore( competition against t0e public sector 0as a positive and significant impact on agricultural
loan.
3','4 Backed collateral ;#cl<
In ban-ing industr5( guaranteed or valuable collateral is t0e ma6or re7uirement to give a loan. In anot0er term(
lac- of collateral implies t0at some individuals will be deprived of credit and t0ose w0o 0ave t0e collateral will
obtain t0e loan. Et0iopian ban-s are generall5 re7uired collateral valued at a minimum of 1 percent of t0e
value of t0e loan plus interest( w0ic0 is unreac0able for most farmers !4S1ID( 212#. Carmers cannot use t0e
farmland to lease as collateral because it is belongs to t0e government and ban-s do not accept crops or ot0er
farm stoc- as collateral since it is not insured.,0ere is a lac- of full5 developed insurance mar-et t0at able to
reduce uncertainties in t0e sector!&S1/I( 2%#. Sometimes donors interfere and order t0e ban-s to give credit
to agriculture. Cor instance( In 212 4S1ID provided % percent credit guarantee to four Et0iopian private ban-s
for t0e loan t0e5 give to farmers. >ut in t0is paper( lac- of bac-ed collateral !measured b5 9og of total net fi=ed
asset# is statisticall5 significant and positivel5 correlated factor of agricultural loan. ,0erefore( lac- of bac-ed
collateral is also one of t0e ma6or reasons w05 agriculture sector is neglected.
3','5 Credit utili=ation capa#ility of the #orro%ers ;cuc#r<
,0ere is a need to increase access of farmers to credit facilities as t0e5 are most li-el5 to utili8e t0e fund for t0e
purpose t0at it increases agricultural production !&-woc0e.et.al( 212#. ,0e credit utili8ation capacit5 of t0e
borrower is feasible if t0e borrowers 0ave used t0e credit for t0e purpose t0e5 0ad borrowed and able to repa5
loan as per t0e contract. ,o measure t0e impact of credit utili8ing capacit5( it is considered as dumm5 variable
!1Hif affect and Hif not affect#. ,0e regressions result finall5 0as s0own moderatel5 significant after running
Nrobust regression.O >ut( in normal regression it is a significant factor at 1F confidence level. Crom t0e
interview result( in evaluating a credit utili8ing capacit5 of t0e borrowers in t0e current 5ear is one of t0e most
important criteria t0at increase or reduce agricultural loan from private ban-s in t0e ne=t period. ,0erefore( t0e
impact of credit utili8ing capacit5 of t0e borrower is somew0at a considerable factor in lending for borrowers in
agriculture sectors.
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4 Conclusion and Policy (mplications
1griculture w0ic0 provides 6ob opportunities for more t0an $%F of t0e population is t0e mainsta5 of t0e
Et0iopian econom5. ,0us( t0e government 0as considered it as a priorit5 sector and long-term economic polic5
to sustain t0e double-digit economic growt0 of t0e nation. 2owever( in credit distribution of private ban-s to
eac0 economic sector( agriculture is t0e least considered economic sector in private ban-s loan portfolio. ,0e
trends of agricultural loan from sampled private ban-s also 0ave s0own a decreasing tendenc5 from 5ear to 5ear.
,0erefore( as compared to ot0er sectors of t0e econom5( agriculture is neglected near private ban-s.
Cear of li7uidit5 problem( e=istence of undiversifiable ris-s in t0e sector( borrowers< lac- of insured collateral(
borrowers< 0esitation regarding t0eir repa5ment abilit5 of t0e loan( lac- of large and mec0ani8ed farms t0at
attracts private ban-s and underdeveloped of insurance industr5 in t0e sectorand operating under t0e directives of
National >an- are t0e main reasons w05 private ban- neglected agriculture in Et0iopia. ,0e econometric
regression anal5sis result also revealed( t0e ob6ective to be large !si8e of t0e ban-#( capital performance(
profitabilit5 of t0e ban-( competition wit0 t0e public owned ban-s and lac- of bac-ed collateral are t0e
significant factors for t0e reason w05 private ban-s in Et0iopia neglected t0e agriculture.
,0e findings of t0is stud5 will offer several insig0ts and polic5 implications. 1ccordingl5( t0e insig0ts of t0is
stud5 0ave two c0ambers. ,0e first c0amber is for private ban-s. Since agriculture is t0e largest sector and t0e
ot0er sectors or subsectors are also 0ig0l5 dependent of t0is sector( private ban-s t0at serve ot0er sectors do not
become as suc0 profitable unless agriculture is become productive. ,0us( designing t0e strateg5 t0at improve
t0eir profit and strengt0en capital-for instance li-e S;&"Einsig0ts in ;ooperative >an- of &romia( emplo5ing
agricultural ris- anal5st( developing cooperation wit0 national and international agricultural development
supportive agencies is more suggested.Even w0en t0ere is no supportive agenc5( it is advisable to avail loan to
t0e sector and appl5 a ta-eover s5stem( for e=ample( in floriculture and poultr5 production. 2owever( t0e
ta-eover s5stem s0ould consider t0e legal rig0t of t0e businessmen and emplo5ees in t0e business. /eeping t0e
ot0er indicators of creditwort0iness( it is also desirable if t0e private ban-<s credit manager and credit anal5sts
will consider t0e ecological c0aracteristics around t0e borrowers t0an neglecting t0e sector as a w0ole. >ecause
neglecting agriculture borrowers mean neglecting t0e largest part of t0e population !demand#. ,0e second
c0amber is for t0e government or its< agents. In Et0iopia( ;rop and w0et0er inde= insurance is also one of t0e
ma6or factors t0at contributes for t0e reason w05 private ban-s neglect t0e agriculture. ,0erefore( it is advisable
if t0e government s0ould encourage insurance companies to e=tend t0eir insurance product or service to
agriculture. Cinall5( it is also advisable if National >an- of Et0iopia put a minimum percent of loan to
agriculture in its directives.

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0ttpMRRwww.bis.orgRbcbsReventsRw-s0op))Rp+gambmis.pdf
'ento 1.( .. and .anga 9.( ".( !2@#. >an- 9i7uidit5 ?is- Banagement and Supervision( 7essons from 2ecent
*arket Turmoil< ?etrieved from 0ttpMRRwww.euro6ournals.comR6mibS1S+.pdf
'iganE 9.( !1@@)#. 1 ;redit Scoring Bodel for Development >an-s( 0n 0frican ase "tudy in "avings and
6evelopment. ?etrieved from
0ttpMRRwww.microfinance.comREnglis0R"apersR.ambiaS?oS;1S1S;?1.pdf
'on "isc0-e( J.D. !1@@1#. ,0e evolution of institutional Issues in rural financeM outreach! risk and
sustainability(#roadening 0ccess and "trengthening 5nput market "ystems in rural area. 3as0ington
D;( 4S1.
3olda5 1.( and David ".( !21#.0gricultural finance potential in )thiopia.;onstraints and opportunities for
en0ancing t0e s5stem. 1ddis 1baba. ?etrieved from 0ttpMRRwww.eap.gov.etRY7Hta=onom5RtermR%+.
3ondafera0u B !21#. The "tructure and 6evelopment of )thiopia%s 4inancial "ector.1nd0ra 4niversit5.
3orld >an- !2*#. TInvestments in ?ural Cinance for 1griculture<M0griculture 5nvestment.3orld >an-(
3as0ington D;( 4S1.
3orld >an-( !2$#.0gricultural investment 4unds for 6eveloping countries-40=. ?etrieved from
0ttpMRRwww.fao.orgRfileadminRuser.uploadRagsRpublicationsRinvestmentSfunds.pdf
Journal of Economics and Sustainable Development www.iiste.org
ISSN 2222-17 !"aper# ISSN 2222-2$%% !&nline#
'ol.%( No.1)( 21*

71
ANNE>E"&
0a#le'& Analysis of private #ank loan distri#ution to economic sectors
Economic
sectors
Name of the selected private #anks and their loan share ;in percentage<
1I> >1 ;>& D> 9I> NI> &I> 4> 3> G>
1griculture ).+* .2)
%.*
2.7%
).%*
*.@ 1.$) 1.)* .%+
;onstruction 21 1%.@$
1.1@
1.2
$.)2
21.%1 %.1 1%.$ 1.$$ 12.2)
Banufacturing 7.% 1).%$ ).2 2%.72 ) 2*.%+ )1.** 1$.$* 2+.2% 1*.+%
E=port 21.@$
1).%% *.2 $.2$
7.7 1%.1 12.1) 17.17 1$.@% )*.1+
Import
1*.*2
1).)%
.+) 1.11
)7.*%
1).1*
).7) 2*.2 )*.7% 1%.@2
,ransport 7.2 ).@7
7.)) .)@ ).% %.%*
%.@$ 1.*$ +.27
,rade A svc ? 2*.*$ )@.)% $+(+7
)@.+ 17.7*
*.2) 1$.1 +.)+ 1+.2 *.2)
K - is to indicate domestic trade and service
Source+ omputed by researcher from the private banks annual report of ,--> to ,-.,/.E

0a#le')& 0rends of agricultural loan share in sampled private #anks loan portfolio
@ears
Name of #anks )!!8 )!! )! )!) 0otal
1I> .1%$)@1 .*1172@7@ .)2%++@2 .2*7%7111 !'47,8
>1 .1)$ .1$$)$2) .1771*+% .111%*72 !'!!!,7
;>& .2)1++2 .%7@*%+$7 .+1%)%$$1 .22$2$+$@ !'),55)
D> .11*))% .)1%$@22 .2)%+7@1$ .2)+*71) !'3,,4
9I> AA .)+2@7+2% .)2*72772 .)%)712+) !'!33)
NI> .2+1@$ .+2)+122+ .*+)1$*%@ .)17@)2 !')!587
&I> .$*7+1 .%)+%+$$ .17*+7+* .111*+7 !'!7365
4> !
3> .+)@7 .172*77 .$*$$)1+ .%+1727 !'!5,86
G> .1@++* .@2)%%7 .*+)$@)2 .%7$@%2% !'!8553
0otal !'88,5 !',34 !'))547 !'5,65 !'88,5
,, sho$s- the researcher has not obtained the 2..* L/) data to compute it
Source+ researcher%s computation from the private annual report of ,--> to ,-.,/.E

0a#le',& Correlation -atriB of "tudy Caria#les
[ agln lob sob cpb pob cmpbb rgdpg
-------------J---------------------------------------------------------------
agln [ 1.
lob [ .%27 1.
sob [ -.71+ -.21@ 1.
cpb [ .12@ -.2@22 .72@1 1.
pob [ -.177 -.227* .+2@@ .$%) 1.
cmpbb [ .*+ .1*%@ -.$2$1 -.%)$ -.)*$2 1.
rgdpg [ .+%1 -.)12 .+2 .22$) .22*+ -.7*+ 1.
logcoll [ .7*+ -.2$71 .%$$ .2@@1 .1)1+ -.*@2$ -.7%1
cucb [ .21)@ -.2)2 .2227 .2)$1 .1+1$ -.2+@ .1@*2
ecostra [ .7%2 -.171 .+) .12%$ .1)) -.1)* .2*7+

[ logcoll cucb ecostra
-------------J---------------------------------------------------------------
logcoll [ 1.
cucb [ .+@1 1.
ecostra [ .12*@ .*22$ 1.
Source+ "T0T0 result for the study variables! ,-.C

Journal of Economics and Sustainable Development www.iiste.org
ISSN 2222-17 !"aper# ISSN 2222-2$%% !&nline#
'ol.%( No.1)( 21*

72
0a#le'3& 0he D+" *egression analysis of private #anks loan to agriculture sector
E *o#ust
agln E Coef' "td' Err' t PFEtE
GGGGGGGGGGGGGHGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGG
lo# E '!!8,8 '!,7334 !')7 !'667
I so# E G'!)!77 '!)77 G'68 !'!73AA
cp# E '7654 '!4),444 )')6 !'!,A
po# E ')6, '333883 )'4) !'!6A
cmp## E '4!4)5)) '),,!)!8 )'6 !'!,7A
rgdpg E G'!!!7,4 '!!))7,4 G!'!7 !'8,5
II logcoll E '!)!) '!!4, '87 !'!46AA
cuc# E '!6856 '!,638 ',5 !'73
ecostra E G'!!768) '!7!6!4 G!'5! !'44)
Jcons E '66743, '37,5) '75 !'!6,
\ p].%: \\ p].1: \\\ p].1
No. of observations H *C! @( )# H 1.%$
"rob ^ C H .1++$?-s7uared H .2%$
_ indicates t0e variable is not measured in percentages but at its natural logarit0m
__ indicates t0e variable is not measured in percentages but at its logarit0m value
Source( "T0T0 regression results based on annual reports of sampled banks! ,-.C



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