The functioning of the market, value chaining, wholesale and retail activities, and the provision of loan and credit facilities can be mentioned as a lifeline of the economy and for these to happen finance is inalienable. It is also a key player in creating and accumulating wealth.
In an interview with a local media recently Adilu Shiferaw (PHD), an economist said that monetizing the economy in Ethiopia traced back a hundred years and before that bartering was a common practice which indicated the underdevelopment of the economy.
History tells that in the last quarter of the 19th century Maria Teressa Taller a coin, which had the picture of the queen of the Austro-Hungary empire had been introduced in Ethiopia. The currency had been legal not only in Ethiopia but also in the Horn of Africa and in the Middle- East.
The commodities, supplied to the market, were predominantly agricultural products and domesticated animals. However, there had not been a banking system which deposited the currency or provided loans to the customers. Making a profit through depositing the currency in the bank was unknown. Setting interest rates was impossible.
Later the surplus production of goods and services necessitated the introduction of a monetized exchange system. Setting the value of products and labour also started in its pre-matured beginning.
In the 19th century the modern banking system was introduced at the dawn of the 20th century by the then emperor Menelik II and following this, insurance companies owned by both the public and private sector flourished and reached the public by providing financial services to the emerging small scale businesses.
With regard to the formulation of financial and monetary policies exclusive mandates were given to the National Bank of Ethiopia and the mandate still continues to date. Determining the exchange rate of Ethiopian Bir with other hard currencies, preventing and reducing inflation through various mechanisms such as raising interest rates while depositing money and borrowing, and selling government bonds to private entities have been exercised by the National Bank.
The mandate for the provision of licenses to Import and export traders was that time given to the NBE. On the other hand, the Commercial Bank of Ethiopia and other private banks played pivotal roles by providing financial services which enabled stretching infrastructure, and supplying agricultural products to local and international markets and from time to time they enhanced their service provision activities to various sectors.
The provision of financial services to private companies in the 1960s and 70s enabled the expansion of large-scale mechanized farms which was expected to close the gap between the demand for food demand and supply.
The emergence of large plantation farms in the Rift Valley region which produce sugar and in the northwestern part of Gondar for the cultivation of oil seeds began at that time was unthinkable without the securing of loans from banks. The flourishing of insurance companies also played a pivotal role by providing life and property insurance and helped to channel huge financial resources to other sectors in the form of loans.
Inspired by the emerging modern farming fresh graduates who completed their education from agricultural higher level institutions such Haromaya and Ambo colleges engaged in the farming sector. Banks also play their part by providing loans to them. Food crops also were harvested in the Arsi Bale and Wolayeta areas and had it been not interrupted the nation might have had food self-sufficient at that time.
But as the economy aspired to develop a capitalist system mostly the companies served the few segments of the society who had disposable income.
On the other hand, the expansion of modern irrigation farms in the Awash Valley and other parts of the country posed the eviction of small-scale farmers which resulted in social unrest. These implied its demerits.
As to Shiferaw, after the downfall of the imperial regime in 1974, all private financial institutions were nationalized by the new regime economic activities manifested by self-propelled competition changed into the command one and the role of the private firms in the financial sector curtailed and its growth was also shrunk.
Many investors also shied away from investing in the economy. The economic growth that had been showing progress was slowed down and even registered negative growth.
30 years ago the EPRDF government opened the market for private financial institutions, introduced laws to create an enabling environment for the sector, and began to play their role in the economy. Currently, more than 30 private banks and insurance companies have been operational.
They are functioning in a competitive manner and their paid and un-paid capital is rising and creating jobs for thousands. Their service provision is enhanced from time to time through utilizing digitized technology and because of the lucrative nature of the sector business. The government enabled to earn billions of birr in the form of revenue. Reaching out to the number of people both in rural and urban centres through banking services has increased.
Mobile banking in this regard plays a crucial role. As their asset is part of the nation’s wealth the National Bank strictly supervised the institutions to adhere to its instructions.
Saving is a source of investment and whenever the amount of the savings money is raised the money that could be utilized for investment will be availed but as to some sources, the saving rate compared to other sub-Saharan countries is less than the expected hence, promoting saving culture steadily is essential.
The purchasing of the Hidasie Dam bond and the saving of money for condominium houses are commendable. In addition, savings in credit associations in public institutions must be enhanced. It is understood that the emerging saving culture helped the development and the commercial banks to mobilise huge amounts of money which was utilized for the nation’s economic development. Yet the expansion of the financial institutions is concentrated in urban centers and the rural poor is still marginalized.
In fact, in order to provide service to the rural masses other supportive infrastructures such as electric power, Information, Communication, and Technology are vital and drawing lessons from other developing countries’ experiences in this regard is essential. The other thing that should be mentioned is that reaching the poor through credit is still hard because the collateral system is still taken as a precondition, in getting access to finance.
According to the law farmers only have use rights on the land and as a result, they are not entitled to get loans from banks by putting their plots as collateral. It is understood that 85 per cent of the nation’s population earns its living from subsistence farming and still poverty is rampant. Obviously without eradicating rural poverty achieving development might be a challenge.
Of course finance institutions in the rural part of the country provide service to millions of farmers but because of limited financial amounts, farmers still survive on subsistence living. It is an undeniable fact that microfinance institutions and farmers’ consumer associations still play crucial roles in supplying agricultural inputs to them and in value-chaining their products to the market and this must be enhanced but to do so there must be sufficient money at hand. In addition to enhancing its geographic coverage, widening the service area is necessary.
Currently, the government is dedicating it’s time to poverty reduction and for the expansion of manufacturing and agribusiness but it needs more finance hence, boosting the role of financial sectors should be prioritized.
BY ABEBE WOLDEGIOORGIS
THE ETHIOPIAN HERALD SATURDAY 5 JULY 2025
