It is obvious that, enhanced financial sectors’ service plays pivotal role in stimulating a nation’s economy. The functioning of market, value chaining, whole sale and retail activities, the provision of loan and credit facilities can be mentioned as a life line of the economy and to the presence of all these, finance is inalienable. It is also a forefront player in the creation and accumulation of wealth.
Adilu Shiferaw (PhD) is an economist and an instructor in Edmonton Canada. While making an interview with local media recently, he said that monopolizing the economy in Ethiopia traced back to a century and before that bartering was a common practice which indicated the economic under development.
The modern banking system was introduced to Ethiopia at the dawn of the 20th century during the reign of emperor Menelik II. Subsequently to the introduction of the banking system, insurance companies owned by both public and private sectors had begun to flourish and reached the public by providing financial services. With regard to the formulation of financial and monetary policies exclusive mandates was provided to the National Bank of Ethiopia (NBE) and the mandate continues to these days.
Determining exchange rate of Ethiopian Birr with other hard currencies; preventing and reducing inflation through various mechanism; such as raising interest rate while depositing money and borrowing; selling government bond to the private entities have been exercised by the National Bank.
On the other hand, the Commercial Bank of Ethiopia (CBE) and other private banks played pivotal role by providing financial service which enabled for stretching infrastructure, supplying agricultural products to local and international markets. Besides, they stretched their activities to reach various sectors from time to time.
The provision of financial service to the private companies in the 1960s and 70s enabled the expansion of largescale mechanized farms which were expected to close the gap between demand and supply of basic food items. The flourishing of insurance companies also played pivotal role by providing life and property insurances and helped to channel huge financial resources to other sectors in the form of loan but because of various reasons the companies’ service still confined to few segments of the society who have disposable income.
As to Adilu, after the down fall of the imperial regime, all private financial institutions were nationalized by the new regime, the Derg, and the economic system that was characterized by competition was coerced to change in to the command system. As a result, the prevalent role of the private sector in the financial sector was curtailed and the sector’s growth also shrunk. As a result, many investors shied away from investing in the economy.
However, up on the coming to power of the Ethiopian Peoples’ Revolutionary Democratic Front (EPRDF) government 30 years ago, the private financial institutions began to reestablish and to play their role in the economy following the green light given. Currently, more than a dozen of private banks and insurance companies are established and being operational in a competitive manner and their paid and unpaid capital has been rising.
In line with this, they are able to create job for thousands of citizens. Their service provision is enhancing from time to time and because of the lucrative nature of the sector’s business, the government enabled to earn billions of birr from them per annum in the form of revenue. As their asset is part of the nation’s wealth, the National Bank is strictly supervising their financial transactions and the institutions are submissive to the directives set by NBE.
From the business point of view, saving is a source of investment and whenever the amount of the saving money is raised, the money that could be utilized for investment will be available but as to some sources, the saving amount of Ethiopia is less than the expected amount when compared to other sub Saharan African countries. Hence, upgrading the saving culture among the community is essential.
Currently, the purchasing bond of the Renaissance Dam and the saving of money for condominium houses are commendable in this regard. In addition, saving in credit associations underway in public institutions has to be acknowledged though they must be enhanced.
It is understood that, the emerging saving culture helps the development and the commercial banks are able to mobilize huge amount of money which can be utilized for the nation’s economic development. Yet, the expansion of the financial institutions is concentrated in urban areas and the rural poor are still marginalized. In fact, in order to provide these services to the rural mass, other supportive infrastructures such as roads, electric power supply, Information Communication Technology and telecom service are vital but drawing lesson from other developing countries experience in this regard is essential.
The other thing that should be mentioned is that reaching the poor through credit is remaining hard because the collateral system is still on the table as a precondition in getting access to finance. According to the legal framework, farmers have only the rights to use on their land. As a result, they are not entitled to get loan from banks by putting their land as collateral.
It is crystal clear that, 85 percent of the nation’s population earns its living from subsistence farming and still poverty is rampant. Therefore, without eradicating rural poverty, achieving the intended development might be a challenge. Of course micro finance institutions in the rural parts of the country provide service to millions of farmers but because of limited financial service, farmers survive with subsistence living.
It is undeniable fact that, micro finance institutions and farmers’ and consumers’ associations still play crucial role in supplying agricultural inputs to them and in value chaining their products to the market as well. Hence, this must be enhanced but to do so, there must be sufficient money at hand that implies the farmers’ livelihood must surpass from hand to mouth income.
In addition, to enhance accessibility of the financial service, widening its service area is necessary. Fortunately, at the moment, the government is dedicating it’s time for the poverty reduction scheme which takes into consideration the expansion of manufacturing and agribusiness that are finance hungry sectors. Having in mind this reality, boosting the role of financial sectors should be prioritized, he stressed.
BY ABEBE WOLDEGIORGIS
The Ethiopian Herald May 2/2021
