Funding Diversification and Bank Stability in Ethiopia: A Panel Data Analysis

Abstract

This study investigates the determinants of bank stability in Ethiopia from 2017 to 2024, using panel data from 13 banks and a Random-Effects model with the Z-score as the dependent variable. The analysis identifies funding diversification as a key driver of stability, while inflation emerges as a destabilising factor, highlighting the importance of broadening funding sources and maintaining macroeconomic stability. Other variables, including loan share, operating costs, bank size, and credit growth, exhibit expected directional effects but are statistically insignificant, suggesting that impact may be indirect or context-dependent. The findings underscore that bank stability is shaped by both internal characteristics and external economic and institutional conditions. Policy implications include promoting diversified funding through capital markets and long-term debt, sustaining macroeconomic stability to safeguard solvency, and maintaining supervisory frameworks that encourage efficiency without incentivising excessive risk-taking. Additionally, credit growth should be monitored through instruments such as countercyclical capital buffers, as unrestrained expansion may increase systemic vulnerabilities despite short-term profitability.

Keywords: Risk Management, Z-Score, Stability Risk, Funding Diversification, Funding Sources

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