Essay Example on National saving in macroeconomic theory is defined as the combination

CHAPTER ONE INTRODUCTION 1 1 Background According to Solow 1956 national saving in macroeconomic theory is defined as the combination of public and private saving rates of a nation It plays very important role in economic growth and development Low national saving is one of the most series obstacles to achieving higher and more sustainable economic growth Positive change in saving rate promotes the growth rate For that reason saving is one of the factors for economic growth accumulated saving is the source for capital stock which leads to increase investment output and more employment cited in Taye 2017 Even though robust and broad based economic growth places Ethiopia among the top performing African and other developing Asian countries the economy is characterized by a low domestic saving rate vulnerability to shocks negative trade balance and others For instance in 2014 15 the gross capital formation Investment was about 40 3 of GDP while the gross domestic saving was only 22 5 for the same fiscal result in 17 8 saving gap NBE 2014 15 and UNDP 2014 Inadequate capital formation to undertake the real investment has adversely affected the output level of the economy through credit Capital formation whether financed from internal domestic saving or from external sources requires the mobilization of economic surpluses Gross investment was 34 6 percent of GDP and domestic saving was 16 5 percent of GDP in FY2011 12 In 2013 14 2014 15 and 2015 2016 the resource gap difference between GDS to GDI were 17 5 17 5 and 21 9 respectively 

The gaps were filled by foreign borrowing and aid Such huge resource gap calls for the mobilization of domestic resources external resources and enhance efficient resource utilization for its growth Tsegabirhan 2009 cited in Tadesse 2015 Microfinance provides a small but significant and expanding role in Ethiopia s developing finance sector According to the National Bank of Ethiopia NBE 2015a the number of banks operating in the country reached 19 in December 2014 of which 16 are privately owned The banks operated 2 502 branches equating to a branch population ratio of 1 35 957 The total capital in the banking system increased by 21 between 2013 and 2014 reaching Birr 30 2 billion The capacity of the conventional banking sector in Ethiopia has been too weak to serve the need of the rural community Few woredas in the country have bank branches Saving and credit cooperatives have been playing a distinct and important role in providing various financial services in rural areas of Ethiopia However the performance of rural financial cooperatives in mobilization of saving and provision of credit has been inadequate There are also 32 microfinance institutions MFIs operating in the country all of which are deposit taking These MFIs mobilized a total saving deposit of around Birr 13 0 billion This has deepened financial outreach bringing services nearer to where clients particularly poor clients reside RUSACCOs are community based member owned and self reliant financial intermediaries in rural areas In the current context of Ethiopia they are being established at kebele level Their basic role as financial institution is mobilization of savings from members and returning the savings to members in the form of loans As per the Amhara Regional State Proclamation No 220 2007 

RUSACCOs are expected to play active role in bringing about broad based development and poverty alleviation They do have a good recognition both by the government of Ethiopia and development partners as one of the key players in the provision of rural financial services Hence RUSACCOs can play significant developmental roles and poverty reduction impacts even in Chronic Food Insecure context Ahmed 2016 RUSACCOs are considered to have massive potential in financing short term loans for agricultural production technologies and undertake off farm income generating activities in areas where both the state and the private sector have miscarried Kifle Hailemicheal 2015 Currently although a lot of microfinance institution and rural saving and credit cooperatives are working in the country they are limited accessibility and limited financial strength As a result these microfinance institutions are not able to mobilize enough resource Despite this fact saving rate of Ethiopia to GDP is 9 5 i e the poorest saving rate in the world as compared to China Bangladesh and South Africa which have a better saving rate in the world Hence Ethiopia is characterized by poor saving culture which results in very small domestic savings available for investment Interestingly Commercial Bank of Ethiopia accounts for almost 2 3rd of the total deposits mobilized while MFIs and SACCOs account for the remaining third Wolday Tekie 2014 This is a disappointing statistic given that MFIs as pro poor financial intermediaries have the greatest opportunity to mobilize a potentially huge volume of voluntary savings from grass roots households and communities Tony Getaneh Anne 2014