Title: Determinants of Capital Structure of Oromia International Bank

INTRODUCTION

a. BACKGROUND OF THE RESEARCH

Economists had been arguing regarding the importance of financial sector development for
economic growth. However, a growing literature have been reporting that financial sector of the
economy, by facilitating the flow of funds from surplus units to deficit units, play important role
in nation’s economic growth (Carlson, et al., 2008.

A well-developed financial system reduces information and transaction cost that influence saving
rates, investment decision, technological innovation and long-term economic growth rate. Thus
financial intermediaries like banks collect process and produce information on possible
investments more efficiently than individual savers. By having quality information, financial
institutions invest in more promising firms which in turn is a more efficient allocation of capital
that directs capital toward the more productive investments. Therefore, in countries like Ethiopia,
where banks highly dominate the financial sector, and if the financial sector has to bring growth,
the roles of banks and their efficiency in mobilizing saving and allocating capital becomes crucial
in promoting long-term economic growth.

b. STATEMENT OF THE PROBLEM

As evidenced by many empirical researches, higher savings joined with high levels of capital
formation are prerequisite for long-term economic growth. For this reason, countries search for
internal and external sources of funds necessary to meet their investment needs. Therefore, in this
case, the roles of banks become indispensable in mobilizing savings and efficiently channeling it
to the most productive investment which the economy require for capital formation and growth.

Researches shows that financial sector development flourish economic growth. In this regard,
above all, knowing how well the financial system allocates funds for capital formation, which has
significant effects on long-term economic growth, is so important for developing countries like
Ethiopia, where capital is highly scarce. But there is no sufficient empirical investigation
conducted to ascertain whether or not the roles of banks have significant effect in capital formation
and economic growth of Ethiopia.

c. RESEARCH QUESTION

The research will be conducted with the aim of addressing the following research questions, taking
the case of Ethiopia:

I. Do the roles of Oromia International banks significantly contribute to the capital

accumulation and economic growth?
II. Does capital accumulation role of banks significantly contribute to the economic growth?

d. OBJECTIVE OF THE RESEARCH

The research, in its effort to address the general objective of analyzing the effect of the role of
banks in economic growth, developed the following three specific objectives:

I. To analyze the effect of banks’ deposit and credit on capital accumulation and economic
growth.
II. To analyze the effect of banks’ investment on capital accumulation & economic growth.