* Ethiopia’s growth fuelled by state investment

* Economists say private business has been squeezed

* Banks said investment rule hurt their ability to lend (Adds details from statement, background)

By Aaron Maasho

ADDIS ABABA, Nov 20 (Reuters) – Ethiopia is changing a policy that has required banks to invest the equivalent of 27 percent of their loan portfolio in state bonds in a bid to boost lending and was raising the bank reserve ratio requirement, the government said on Friday.

Ethiopia has one of the fastest econmoic growth rates in Africa, largely driven by state-led investment. Economists have said the state needs to give more space to private business or risk squeezing out a sector that is vital to job creation.

The central bank governor, Teklewold Atnafu, said a new strategy would bolster private banks’ lending capacity, without giving details. Institutions would soon receive proceeds invested under the 27 percent rule, a statement said.

Bankers have said the rule has put severe restraints on their ability to lend to the private sector.

Teklewold said changing the rule was not expected to raise inflation, which stood at 11.8 percent in the year to October.

Under a new five-year economic plan, the central bank, or National Bank of Ethiopia, also planned to raise the reserve requirement ratio by 30 percent a year, from a 375.2 billion birr ($17.98 billion), the government statement said.

The banking sector is still dominated by a state bank. Foreigners are barred from investing in private banks.

($1 = 20.8710 birr) (Writing by Edmund Blair)