BY STAFF WRITER
The Ethiopian financial sector/policies have evolved through three stylized stages: first, financial repression and fostering state-led industrial and agricultural development through preferential credit (in the socialist regime); second, market-led development through liberalization and deregulation (post 1991); and third, financial inclusion through allowing private banks and microfinance institutions (MFIs) (since second half of 1990s), according to Getent Alemu’s working paper titled ‘Financial Inclusion, Regulation, and Inclusive Growth in Ethiopia.’
Proclamation No. 84/1994 that allows the Ethiopian private sector to engage in the banking and insurance businesses and proclamation no. 40/1996 in 1996 that allows the establishment of MFIs mark the beginning of a new era in Ethiopia’s financial sector and opened the opportunity for an inclusive financial sector in Ethiopia.
Recently, Ethiopia launched a demonetization process in September, issuing fresh banknotes in an effort to curb cash-hoarding and to crack down on illegal activities such as tax evasion.
The move prompted 1.3 million unbanked Ethiopians to hand in their old cash in exchange for a bank account from which they could draw the new notes, providing a boost to the 19 banks operating in a state-controlled banking system, according to a report by Financial Times. The government considered this a huge success in terms of bringing many people to banks.
Yinager Dessie, Governor of the National Bank of Ethiopia (NBE) said that people rushed to the banks because “the trust between the banks and the people is huge. In our history there is no bankrupt bank. So, we have a very aggressive, tight supervision.”
Yet, Ethiopia has taken small steps towards liberalizing its tightly controlled financial sector by granting licenses to foreign-owned banks – such as Kenya’s Equity Bank and KCB-enabling them to create representation offices.
But what is the general state of the financial sector? According to the latest Quarterly Bulletin of the NBE, (Second quarter 2019/20, Volume 36), the number of banks operating in the country remained at 18 of which 16 were private and two state-owned. These banks have opened 96 new bank branches during the review period thereby raising the total number of bank branches to 6,136. As a result, population to bank branch ratio stood at 16,079.7. About 33.1 percent of the total bank branches, the share of state-owned banks reached 69.1 percent. In addition, a number of new banks are also raising capital and selling shares to enter the market.
As to the Bulletin, the total capital of the banking system amounted to 108.95 billion Birr, of which state-owned banks accounted for 52.9 percent and private banks 47.1 percent. The share of Commercial Bank of Ethiopia, the biggest state-owned bank in total capital of the banking system, was 45.9 percent during the time which is covered by the Bulletin.
Total deposits liabilities of the banking system reached 958.9 billion Birr by the close of the second quarter of 2019/20, indicating 21 percent annual growth rate.
Likewise, during the review quarter, 58.7 billion Birr was disbursed in fresh loans, indicating a 27.6 percent annual increase. Of the total new loans disbursed, the share of state-owned banks was 46.9 percent while that of private banks was 53.1 percent.
Of the total new loans, international trade was the major beneficiary, accounting for 13.9 billion Birr (23.7 percent) followed by domestic trade with 13.8 billion Birr, industry 8.3 billion Birr, housing and construction 8.2 billion Birr and agriculture 4.1 billion Birr.
During the review period, the banking system collected loans to the tune of 34.3 billion Birr, about 26.5 percent higher than a year earlier. Of the total loan, 67.4 percent was collected by private banks and 32.6 percent by state owned banks.
Meanwhile, total outstanding credit of the banking system (excluding credit to government) increased to 621.3 billion Birr, revealing a 27.6 percent year-on-year growth. Out of the total outstanding loans and advance of the private banks, 71.5 percent was claims on the private sector compared with 28.5 percent for public sector.
Total deposit liabilities of the banking system reached 958.9 billion Birr by the close of the second quarter of 2019/20, indicating 21 percent annual growth rate. The growth in deposit mobilization was attributed to expansion of bank branches, improved access to finance, growing saving culture of the society and an increase in per capita income.
Demand deposits accounted for 34.8 percent of the total deposits and stood at 333.6 billion Birr showing an 18.7 percent annual growth. Similarly, saving deposits went up 23.1 percent and its share in total deposit reached 55.2 percent. Time deposit, which constituted 10 percent of the total deposit liabilities, increased 17.5 percent over the same period of last year. The share of state-owned banks in total deposits outstanding was 58.6 percent while that of private banks stood at 41.4.
During the review period, the banking system collected loans to the tune of 34.3 billion Birr, about 26.5 percent higher than a year earlier.
Of the total loan collection, the share of private banks was 67.4 percent and that of state-owned banks 32.6 percent. About 97.9 percent of the loan was collected from private enterprises.
During the second quarter, 58.7 billion Birr was disbursed in fresh loans, indicating a 27.6 percent annual increase. Of the total new loans disbursed, the share of state-owned banks was 46.9 percent and that of private banks 53.1 percent.
Total outstanding borrowing of the banking system stood at 71.5 billion Birr, showing a 0.4 percent annual decline. Of the total borrowing, 61.1 billion Birr (85.4 percent) was from domestic and 10.5 billion Birr (14.6 percent) from external sources.
The corporate bond market is confined to big a few public institutions and regional government. The sole purchaser of these bonds has been the solely Commercial Bank of Ethiopia.
On the other hand, currently, the number of insurance companies stood at 17, of which 16 were privately owned. Their branches increased to 585 from 554 a year ago. Of the total branches, about 54 percent were situated in Addis Ababa. Likewise, the total capital of insurance companies reached 8.8 billion Birr, of which 68.5 was that of private insurance companies.
Again, the 38 MFIs operating in the country mobilized 41.6 billion Birr in saving deposit which was 22.7 percent higher than last year same period. Similarly, their total outstanding credit increased 25.9 percent and reached Birr 61.6 billion. Likewise, their total asset grew 20.6 percent and stood at 85.7 billion Birr by the end of December, 2019.
