CHAPTER FIVE

FINANCIAL MARKETS AND INSTITUTIONS IN ETHIOPIA

 The History of Banking and other Financial

Institutions in Ethiopia
 Ethiopian financial markets
 Ethiopian financial institutions
 Financial regulation in Ethiopia
 5.1 The History of Banking and other Financial
Institutions
 Bank of Abysinia was inaugurated in 1906 after the agreement
reached in 1905 between Minilik II and National Bank of Egypt.
 Thus, by 1931, Bank of Abyssinia was legally replaced by Bank of
Ethiopia shortly after Emperor Haile Selassie came to power.
 Bank of Ethiopia took over the commercial activities of the Bank of
Abyssinia and was authorized to issue notes and coins.
 The bank continues successfully until the Italian invasion in 1935.
 During the invasion, the Italians established branches of their main
banks and started.
 Then, in 1943, the State Bank of Ethiopia commenced full
operation, acting as the central bank of Ethiopia.
 Cont’d

 It had a power to issue bank notes and coins as the agent of the
Ministry of Finance.
 The bank was granted the sole right of issuing currency and deal in
foreign currency.
 The bank also functioned as the principal commercial bank in the
country and engaged in all commercial activities.
 The State Bank of Ethiopia ceased to exist by bank proclamation
issued in 1963.
 Then the Ethiopian Monetary and Banking law that came into force
in 1963 separated the function of commercial and central banking
creating National Bank of Ethiopia and commercial Bank of
Ethiopia.
 Cont’d

 More over, it allowed foreign banks to operate in Ethiopia limiting their

maximum ownership to be 49% while the remaining balance should be
owned by Ethiopians.
 Then the National Bank of Ethiopia with more power and duties started its
operation in 1964.
 Following its incorporation in 1963, Commercial Bank of Ethiopia took
over the commercial banking activities of the former State Bank of Ethiopia.
 The first privately owned bank, Addis Ababa Share Company was
established in 1964 in association with London bank which had 40% of the
total share.
 There were other financial institutions operating in the country like the
Imperial Savings and Home Ownership Public Association (ISHOPA),
which specialized in providing loans for the construction of residential
houses and to individuals under the guarantee of their savings.
 Cont’d

 There was also Agricultural Bank that provides loan for agricultural
and other relevant projects in 1945.
 But in 1951 the Investment Bank of Ethiopia replaced it.
 In 1965, the name of the bank hanged to Ethiopian Investment
Corporation Share Company.
 However, proclamation No. 55 of 1970 established the agricultural
and Industrial Development Bank share company.
 Following the declaration of socialism in 1974, the government
nationalized all large corporations.
 Organizational setups were taken in order to create stronger
institutions by merging those that perform similar functions.
 Cont’d

 Then, Addis Bank and Commercial Bank of Ethiopia were merged

by proclamation No. 184 of 1980 to form the sole commercial
bank in the country till the establishment of private commercial
banks in 1994.
 The financial sector that the socialist oriented government left
behind constituted only three banks and each enjoying monopoly in
its respective market.
 The structure of the sector at the end of the era consists of the
National Bank of Ethiopia (NBE), the Commercial Bank of Ethiopia
(CBE) and Agricultural and Industrial Development Bank (AIDB).
 Cont’d

 Modern forms of insurance service, which were introduced by

Europeans, traced their origin as far back as 1905.
 Except Imperial Insurance Company, the rest of the insurance companies
were branches or agents of the foreign companies.
 The government that came to power in 1974 put an end to all private
entrepreneurship and merged them into a single unit called Ethiopian
Insurance Corporation which became the sole operator in the years
following nationalization.
 Following the hang in the political environment in 1991, the
proclamation for licensing and supervision of insurance business heralded
the beginning of a new era.
 Immediately after the enactment of the proclamation, private insurance
companies began to flourish and their numbers have grown year after
year.
 Central Banking System of Ethiopia: Evolution of the
National Bank of Ethiopia

 The National Bank of Ethiopia was established in 1963 by

proclamation 206 of 1963 and began operation in January 1964.
 Prior to this proclamation, the bank used to carry out dual
activities, i.e. commercial banking and central banking.
 The proclamation raised the Bank’s capital to Ethiopia dollar of 10
million and granted broad administrative autonomy and juridical
personality.
 Cont’d

Following the proclamation the National Bank of Ethiopia was

entrusted with the following responsibilities.
 To regulate the supply, availability and cost of money and credit.
 To manage and administer the country’s international reserves.
 To license and supervise banks and hold commercial banks reserves
and lend money to them.
 To supervise loans of commercial banks and regulate interest rates.
 To issue paper money and coins, to act as agent of the government.
 To fix and control the foreign exchange rates.
 However, monetary and banking proclamation no. 99 of 1976 came
into force on September 1976 to shape the Bank‟s role according
to the socialist economic principle that the country adopted.
 Cont’d

 Hence the bank was allowed to participate actively in national

planning, specifically financial planning, in cooperation with the
concerned state organs.
 The Bank’s supervisory area was also increased to include other
financial institutions such as insurance institutions, credit cooperatives
and investment oriented banks.
 Moreover the proclamation introduced the new Ethiopian currency
called “Birr” in place the former “Ethiopia dollar” that eased to be legal
tender thereafter.
 This proclamation was in force till the new proclamation issued in
1994 to reorganize the bank according to the market-based economic
policy so that it could foster monetary stability, a sound financial
system and such other credit and exchange conditions as are
conducive to the balanced growth of the economy of the country.
 Cont’d

Accordingly the following are some of the powers and duties

vested in the bank by proclamation 83/1994.
 Regulate the supply and availability of money and credit and
applicable interest and other changes.
 Set limits on gold and foreign exchange assets which banks and
other financial institutions authorized to deal in foreign exchange
and hold in deposits.
 Set limits on the net foreign exchange position and on the terms
and amount of external indebtedness of banks and other financial
institutions.
 Make short and long term refinancing facilities available to banks
and other financial institutions.
 Functions of National Bank of Ethiopia

 The main functions of National Bank of Ethiopia are summarized as

follows.
I. Bank of Issue (National Bank of Ethiopia has the sole right to
issue bank notes of all denominations coins, prints and issues the
legal tender currency, and regulates the country’s money supply).
II. Banker to Government (act as government banker, agent and
advisor).
[Link]’ Bank and Lender of the Last Resort (Every
scheduled banks are required to maintain with the National Bank a
cash balance and the minimum cash requirements can be changed
by the National Bank of Ethiopia.
 Functions of National Bank of Ethiopia

iv. Controller of credit (it has the power to influence the volume of
credit created by banks).
Regarding on this function the bank has the following power;
 It holds the cash reserves of all the scheduled banks.
 It controls the credit operations of banks through quantitative and
qualitative controls.
 It controls the banking system through the system of licensing,
inspection and calling for information.
 It acts as the lender of the last resort by providing rediscount
facilities to scheduled banks.
 Cont’d

v. Custodian of foreign reserves (It has the responsibility to

maintain the official rate of exchange and act as the custodian of reserve
of international currencies.
vi. Other functions
 Provides short and long term refinancing facilities to banks and other
financial institutions.
 Accepts deposit of any kind from foreign sources.
 Promotes and encourages the dissemination of banking and insurance
services throughout the country.
 Prepares periodic economic studies, together with forecasts of the
balance of payments, money supply, prices and other relevant
statistical indicators of the Ethiopian economy useful for analysis and
for the formulation and determination by the bank of monetary,
 Role of National Bank of Ethiopia

The main roles of National Bank of Ethiopia include the

following:
 Improve service delivery of the Bank.
 Strength IT service and enhance computerization process of the
Bank.
 Enhance the capacity of the Bank.
 Contain annual core inflation (non-food inflation) with in a single
digit.
 Maintain the exchange rate of Birr close to the equilibrium
exchange rate.
 Contain the premium between the official and parallel market
exchange rate to the level below 1.5%.
 Cont’d

 Maintain the premium of respective buying and selling rates of the

USD between the National Bank of Ethiopia and commercial banks
below 2%.
 Ensure that the international reserves of the country are not less
than three and half month of imports of goods and non-factor
services.
 Manage the country’s foreign exchange reserve efficiently and
effectively.
 Ensure and manage the effective use of the country’s foreign
exchange.
 Ensure the average level of NPL (Non-Performing Loans) of
commercial banks is reduced to below 15%.
 Cont’d

 Conduct effective onsite inspection.

 Ensure systematic risk management framework for each bank.
 Finalize the Ethiopian macroeconomic model and start its
application.
 Strengthen the Bank’s research and policy advisory capabilities and
the dissemination of its finding in terms published research papers
and policy discussion forums.
 Create a national payment framework.
 Conduct structural reforms on the existing payment system.
 Ensure the availability and distribution of the Birr notes and coins.
 Ensure the automatic provision of Birr notes exchange services.
 National Bank of Ethiopia Credit Control Mechanism

 In January 1995, the National Bank of Ethiopia introduced the 91-days

treasury bills, and later on added 28 days and 182 day bills, as a means of
reducing the governments dependence on credit from the banking system
and as an open market instrument to mop up excess liquidity in the
economy.
 The National Bank of Ethiopia’s three main tools of monetary policy are;
1. Reserve requirements (Reserve requirements are the portion of
deposits that banks may not lend and have to keep either on hand or on
deposit at the central bank).
2. The discount rate (the interest rate that National Bank of Ethiopia
charge depository institutions for short term loans), and
3. Open market operations (the buying and selling of government
securities)
 National Bank of Ethiopia regulation to financial sector

 The basic regulation of National Bank of Ethiopia includes the following:

 Regulates the applicable interest rate and other cost of money charges.
 Formulating implements and follows-up the country’s exchange rate
policy, and manages and administers the international reserves of the
country.
 Licenses, supervises and regulates the operations of banks, insurances
companies and other financial institutions.
 Sets limits on gold and foreign exchange assets, which banks, and
other financial institutions authorized to deal in foreign exchange an
hold in deposits.
 Sets limits on the net foreign exchange positions and terms, and the
amount of external indebtedness of banks and other financial
institutions
 5.2 Ethiopian Financial Markets

Money markets
 It is a market where short term securities are traded
 Securities traded in this market include
 Government treasury bills
 Time deposits
 Interbank loans
 Cont’d

Government treasury bills

 Government treasury bills are debt instruments issued by the federal
government.
 They have maturities of 28 days,91 days and 182 days.
 They are sold at a discount through non-competitive auction banks and non-
bank firms including insurance companies, social security agency, corporations
and the like.
 In 2023/24, commercial banks held about 45% of the total Treasury Bills stock.
 Within that 45%, the Commercial Bank of Ethiopia (CBE) was by far the
largest holder which alone held about 30% of the total T-bill stock at end of
June 2024.
 The remaining 55% of T-bill stock was held by non-bank institutions (mainly
pension funds) in that period.
 Cont’d

Time deposits (CDs)

 Time deposits (CDs) issued by commercial banks.

 Time deposits (also known as Fixed Deposits or Term Deposits) are a
fundamental product offered by Ethiopian commercial banks
 Investors include other banks, non-bank financial institutions, private
corporations, public enterprises, and retail customers.
 It accounted for 7.9% of total deposit in 2024.
 Time deposits are kept with varying maturities of a few months to more
than 2 years.
 Cont’d

Interbank loans
 It refers to short-term borrowing/lending between banks.
 Instead of relying on deposits or central-bank credit, banks with surplus
liquidity can lend to banks with deficits.
 To facilitate this, NBE has recently established a formal interbank
money-market platform — which allows banks to borrow and lend to
each other for short maturities (e.g. overnight or up to 7 days).
 At the same time, NBE introduced overnight lending and deposit of
interbank trades at ±3% around NBR (which was set at 15%).
 By late 2025, the interbank market has grown rapidly: cumulative volume
since the launch passed 1 trillion Birr.
 As of now, the interbank market includes multiple commercial banks (the
report mentions 26 banks participating)
 Capital Markets

 An intense pressure from entrepreneurs, academicians and international

financial institutions such as IMF, the Ethiopian government established
capital markets in the country as of January 18, 2024.
 Before the time stated above capital market instruments are offered to
investors informally.
 E.g.. Stocks and bonds
 The Ethiopian Capital Market Authority (ECMA) is pleased to announce the
registration of the “Capital Market Service Providers Licensing and
Supervision Directive No. 980/2024” by the Ministry of Justice of the
Federal Democratic Republic of Ethiopia.
 This directive is the first of many in the pipeline for ECMA and will serve as
a comprehensive legal framework, outlining detailed regulations on capital
market activities requiring a license, the prerequisites for obtaining a license,
and the responsibilities and obligations of licensed service providers.
 Cont’d

 According to the Director General of the Ethiopian Capital Market

Authority, Dr. Brook Taye, “this directive is a significant milestone in the
development of the capital market in Ethiopia.
 It provides a comprehensive legal framework that will help to ensure the
integrity and stability of the capital market, while also promoting investor
protection and market transparency.”
 15 different types of licenses are available within this framework.
 These licenses will be issued to capital market service providers who meet
the prerequisites outlined in the directive.
 The Authority will also be responsible for supervising and regulating the
activities of these licensed service providers.
 Cont’d

Bonds
 Are issued by public enterprises (EEPCO and Ethio Telecom),
state/regional governments, and development bank of Ethiopia(DBE).
 During 2009/10 bonds by the total amount of Br10.86 bill were issued
of which nearly half is by EEPCO.
 Value of bonds outstanding by June 2010 totaled Br 27.72bill.
 The Grand Ethiopian Renaissance Dam (GERD) bond, issued through
the Development Bank of Ethiopia (DBE), was created to mobilize
domestic and diaspora funding for the dam’s construction
 The bond has raised significant funds—over 20 billion birr—reflecting
strong national support, though financing gaps still remain.
 Cont’d

Stocks
 Before the establishment of capital markets, financial institutions and
corporations issue their stocks to the general public.
 In previous years due to absence of a secondary market for stocks in the
country, investors seek the help of the original issuers when they want to
sell their stocks.
 Stocks of banks are highly demanded than non-bank financial institutions.
 The Ethiopian Securities Exchange (ESX) is the country’s first formal
securities market, providing a regulated platform for trading stocks and
government securities.
 It is launched in 2025 which aims to boost capital mobilization, improve
market transparency, and support Ethiopia’s private-sector and economic
development.
 Cont’d

Mortgages
 The mortgage market in Ethiopia remains underdeveloped. Formal
mortgage financing is offered by only a few institutions rather than being
widely available across the banking sector
 The first formal mortgage bank in Ethiopia — Goh Betoch Bank — began
operations around 2021, aiming to provide housing loans for construction
and purchase of homes, particularly targeting low- to middle-income
earners.
 Mortgage loans remain costly and inaccessible for many low- and middle-
income households, leaving Ethiopia with a small mortgage market
relative to its large urban housing demand.
 5.3 Ethiopian Financial Institutions

 The financial sector in Ethiopia is diverse and regulated by the National

Bank of Ethiopia (NBE) which mainly includes;
 Formal financial institutions such as Banks, insurance companies and
microfinance institutions
 Semi-formal financial institutions such as Employee Credit & Saving
Associations
 Informal financial institutions like ‘Iqub’ and ‘Idir’
 Cont’d

Formal financial institutions

 Cont’d

Banks
 The banking sector dominates the financial sector — banking assets
account for roughly 84.8% of total financial-sector capital.
 The largest bank by far remains the state-owned Commercial Bank of
Ethiopia (CBE).
 As of 2025, there are about 32 licensed commercial banks operating
across Ethiopia.
 2 state-owned (Commercial Bank of Ethiopia (CBE) and
Development Bank of Ethiopia (DBE), and
 30 private commercial banks.
 As of June 2023, total capital of the banking system reached Birr 246.7
Billion, of which state-owned banks accounted for 32% while private
banks took 68 % share.
 Cont’d

Insurance companies
 As of 2024, there are around 18 licensed insurance companies operating
in Ethiopia: 1 state-owned and 17 private insurers.
 The state-owned insurer is Ethiopian Insurance Corporation (EIC),
established in 1976 which has historically been the dominant insurer in
the country.
 The private insurance market grew after liberalization in the 1990s.
 Many private insurers now operate both general (non-life) and long-term
(life/health) policies.
 Major Private Insurers includes: Awash Insurance Company, NIB
International Insurance, Nyala Insurance Company, Oromia Insurance
Company, Lion Insurance Company, United Insurance Company ….
 Semi-formal financial institutions

Employee Credit & Saving Associations (ECSA)

 ESCAs are a type of savings-and-credit cooperative organized around a common

bond of employees of the same organization or employer.
 Are supervised NOT by the NBE, but by Federal Cooperatives agency
 Attract deposits
 Extend consumer loans
 Invest in shares of companies and run businesses of their own
 Informal financial institutions

 The informal financial sector in Ethiopia is deeply rooted in the country's social
fabric and plays an essential role in providing savings, credit, and social insurance to
the majority of the population, especially those excluded from formal banking.
 The two most prominent and widely practiced institutions across all linguistic,
ethnic, and religious groups are the ‘Iqub’ and the ‘Idir’.

 Iqub
 Are variants of Rotating Saving and Credit Associations(ROSCAS).
 It is commonly established within family and friendship groups.

 Idir
 It is primarily a social insurance and mutual aid institution, though it
involves regular financial contributions.
 5.4 Financial market regulation in Ethiopia

 NBE regulates the financial market

 Banking business proclamation 1994
 Banking business proclamation 2008
 The National Bank of Ethiopia's New Directive on Retention and
Utilization of Foreign Currency Earnings from Export and Inward
Remittance (06 January 2022).