Determinants of bank deposit growth in Rwanda

Abstract

The paper empirically examined the relationship between selected variables and bank deposits growth in Rwanda. Empirical results imply that both macroeconomic and bank-specific factors play a role in determining bank deposits growth in Rwanda. The study used quarterly time series data spanning the period 2005Q1-2019Q4, to estimate the long run and a short-run relationship. Results confirm a long run and a short-run relationship between bank deposits and its expected determinants. The relationship between selected variables and bank deposits in Rwanda has been empirically studied, and results of the model imply that macroeconomic factors and bank-specific factors play a role in determining the growth of bank deposits in Rwanda. The study used quarterly time series data spanning from 2005Q1 to 2019Q4, to estimate a long run and a short-run relationship. Results confirm a long run and a short-run relationship between bank deposits and its expected determinants. Empirical results show that gross domestic product, government expenditure, number of bank branches and deposit interest rate have a long run influence on bank deposit growth in Rwanda. In the short-run, findings also revealed that government expenditure and gross domestic product prove to be the main determinants of bank deposit growth. The number of bank branches and deposit interest rate were correctly signed albeit insignificant, implying that they have no short-run impact on bank deposits. Based on the study findings, the paper recommends thus, at the macro level, policy makers must ratify policies to improving the overall macroeconomic environment, particularly policies to enhancing economic growth. In addition, banks should fix the deposit interest rate based on the level of customer’s deposits such that customers who deposit more of their surplus income should earn higher interest rate, and this will encourage people to save. Furthermore, banks must invest in viable projects to yield higher returns to be able to pay high interest on customers ‘deposits. Finally, since branch expansion negatively affects bank deposits in the long run, banks may limit branch expansion and shift their focus to advancing more sophisticated electronic platforms to allow customers to transact easily.

Keywords:

Unit root test, OLS, bank deposits, Rwanda