Banking in Ethiopia A Comprehensive Overview

Banking in Ethiopia is a rapidly growing sector, with a significant increase in the number of banks operating in the country.

Ethiopia has a relatively underdeveloped banking system, with the majority of the population remaining unbanked.

The National Bank of Ethiopia is the central bank of the country, responsible for regulating and supervising the banking sector.

The banking system in Ethiopia is mainly composed of commercial banks, which provide a range of financial services to individuals and businesses.

The history of banking in Ethiopia is a fascinating story that spans several decades. In 1970, the government established the Agricultural and Industrial Development Bank (AIDB), which was 100% owned by the government.

The AIDB took over two earlier development banks, the Development Bank of Ethiopia and the Ethiopian Investment Corporation, which was established in 1963 as the Investment Bank of Ethiopia. This marked a significant milestone in Ethiopia's banking history.

Agricultural and industrial sectors received medium- and long-term loans from the AIDB. The bank was a vital tool for the government's development plans.

The Housing and Savings Bank was created in 1975 through the merger of two earlier housing finance institutions established in 1962 and 1965. One of these institutions was granted by the United States government.

The banking sector in Ethiopia is dominated by state-owned institutions, with the Commercial Bank of Ethiopia (CBE) alone accounting for more than 60% of total bank deposits, loans, and foreign exchange.

The CBE's massive market share creates a competitive environment that stifles private banks, making it difficult for them to access funding and compete effectively against state-backed entities.

This dominance has led to a lack of opportunities for private banks to grow and thrive, limiting the country's financial sector development.

Private banks struggle to compete with state-owned banks, which have a significant advantage in terms of resources and government backing.

The Commercial Bank of Ethiopia (CBE) holds a vast majority of the market share, leaving private banks with limited room to operate and innovate.

The banking system in Ethiopia underwent significant changes under the Derg leadership. The government took control of the entire economy, declaring a socialist policy and nationalizing private sector commercial banks, which were then concentrated into the Commercial Bank of Ethiopia (CBE).

The CBE was responsible for lending to public enterprises, with the government dictating the terms. During the Ethiopian Civil War, foreign exchange shortages led to a decline in profitable public enterprises, but they soon recovered as foreign exchange became more readily available.

The CBE's lending to the private sector was limited, with only 30-40% of loans and advances going to private customers between 1981 and 1993. This was due to a lack of foreign exchange and the fact that potential borrowers were not creditworthy.

Here's a breakdown of the CBE's branch expansion over the years:

The Derg era had a significant impact on the banking sector in Ethiopia. The government took control of the economy, declaring a socialist policy and nationalizing private sector commercial banks.

The Commercial Bank of Ethiopia (CBE) was the result of this nationalization, with its branches and offices expanding from just 2 in 1975 to 11 in 1980. However, this growth was short-lived, and by 1989, the number of branches had dropped to just 3.

Here's a breakdown of the CBE's branch expansion during the Derg era:

The CBE was forced to lend to the government for developmental plans, and money supply grew in real terms and as a proportion of GDP. This led to a situation where the profitable public enterprises reduced due to worsened foreign exchange shortages and bankruptcy issues, but they soon recovered as foreign exchange became more readily available.

Mobile banking in Ethiopia is still in its early stages, with only about 5.2% of the adult population using mobile money.

The first mobile money service in Ethiopia, M-BIRR, launched commercially in 2015, and it's been rapidly developing in sub-Saharan African countries since then.

Mobile money use is widespread in Ethiopia, and there's a huge market opportunity for further expansion despite a lack of awareness among potential customers.

Consumers are willing to pay significantly more than the cost of providing the service for the convenience of making mobile money payments, especially for utility bills.

This is particularly true in secondary cities without one-stop payment centers, and among the better-off, the educated, and those with experience using technology.

Making mobile money payment options available for utility bills could increase consumer welfare, but several institutional factors need to be tackled on both the supply and demand sides to make it possible.

The entry of foreign banks into Ethiopia's market is a significant development that is expected to boost banking competitiveness. This move has been commended by the IMF as part of the Ethiopian central bank's reforms.

Foreign banks are expected to enhance the country's banking industry and improve its competitiveness, according to the Policy Research Institute. The entry of foreign banks is anticipated to address critical issues such as the shortage of foreign currency and improve access to affordable loans.

Only 60 percent of the population in Ethiopia currently holds bank accounts, highlighting the urgent need to improve banking access in the country. To align with global standards, Ethiopia would need to open over 500 new bank branches annually.

The presence of foreign banks is expected to motivate local financial institutions to enhance their services, diversify revenue streams, and adopt innovative strategies. This will push domestic banks to improve their offerings and embrace technology, ensuring their competitiveness in an evolving financial landscape.

The influx of foreign expertise and technology could particularly benefit the retail banking and credit sectors, fostering growth and innovation.

The economic impact of banking in Ethiopia is significant. The country's banking sector has grown rapidly, with the number of commercial banks increasing from 16 in 1996 to 44 in 2020.

Ethiopia's banking sector has also seen a significant increase in foreign investment, with foreign banks holding a significant share of the market. This has brought in much-needed capital and expertise to the sector.

The growth of the banking sector has also led to an increase in access to financial services for the population, with the number of bank branches increasing from 1,000 in 2010 to over 2,500 in 2020.

However, the sector still faces significant challenges, including a high level of non-performing loans, which stood at 10.6% of total loans in 2020.

The government has implemented various policies to address these challenges, including the introduction of a new banking law in 2018, which aims to improve the regulation and supervision of the sector.

The future of banking in Ethiopia is looking bright, with digital banking on the rise.

The Commercial Bank of Ethiopia, the largest bank in the country, has introduced a mobile banking app that allows customers to check their account balances, transfer funds, and pay bills from the comfort of their own homes.

Digital banking is expected to increase financial inclusion in Ethiopia, with over 70% of the population having access to mobile phones.

The Central Bank of Ethiopia has also introduced regulations to promote digital banking, including the requirement for banks to have a mobile banking platform by 2025.

Mobile banking is not only convenient but also cost-effective, with the Commercial Bank of Ethiopia reporting a 30% reduction in transaction costs since the introduction of their mobile banking app.

The future of banking in Ethiopia is indeed digital, with a focus on innovation and customer convenience.

The government plays a significant role in the banking sector in Ethiopia, with the National Bank of Ethiopia (NBE) being the central bank responsible for regulating and supervising commercial banks.

The NBE has set a minimum capital requirement for commercial banks, which is 2.5 billion birr. This ensures that banks have sufficient capital to operate safely and soundly.

The government also has a majority stake in the Development Bank of Ethiopia (DBE), which provides long-term financing to priority sectors such as agriculture and manufacturing.

The FDRE, or Federal Democratic Republic of Ethiopia, made significant changes after the defeat of the Derg in 1991. This led to the establishment of the Ethiopian People's Revolutionary Democratic Front (EPRDF) ruling coalition.

The EPRDF proposed more liberal policies and as a result, the 1994 Monetary and Banking Proclamation was established. This proclamation created the National Bank of Ethiopia as the only judicial entity, independent from the government.

The National Bank of Ethiopia was established under Proclamation No. 83/1994 and the Licensing and Supervision of Banking Business No. 84/1994. These proclamations aimed to regulate the banking sector and attract investment.

Awash International Bank was the first to be established following the proclamation, with 486 shareholders in 1994. Its capital reached 50 million ETB by 1998.

Dashen Bank was also established around the same time, on September 20, 1995, as a share company with a capital of 50 million ETB.

The Ethiopian government has introduced new regulations to modernize the banking sector, allowing foreign banks to partner with local institutions.

This move aims to attract foreign investment and introduce advanced banking technologies and practices.

Foreign banks can own up to 49% of any bank in Ethiopia, with strategic investors allowed to hold as much as 40% individually.

Critics argue that this could lead to a loss of control over national financial resources and potentially destabilize the economy if foreign banks withdraw their investments during crises.

Traditional institutions have played a significant role in Ethiopia's banking history. They date back to the 14th century, with the establishment of the Ethiopian Orthodox Church's monasteries and convents, which served as early banking institutions.

The church's monasteries and convents accepted deposits, made loans, and even issued their own currency in the form of coins. This early banking system allowed the church to manage its wealth and provide financial services to the community.

The church's financial activities were often tied to its charitable work, such as providing loans to farmers and traders. This approach to banking helped to promote economic development in rural areas.

The church's banking activities were also influenced by its relationship with the imperial court. The emperor would sometimes deposit his wealth in the church's monasteries, which would then invest it in trade and commerce.

The church's traditional banking system continued until the 19th century, when European banks began to establish operations in Ethiopia.