Financial Sector Overview
Ethiopia's economic growth rate has remained at a relatively high level over the past decade. Its real gross domestic product (GDP) grew at 10.1% per annum between 2010 and 2017 - one of the highest rates in Africa. Significant progress has been made in reducing poverty, which, however, affects more than a quarter of the population (27.3% in 2015 compared to 33.5% in 2010). Through a development model based essentially on domestic demand and more particularly public investment, Ethiopia has made significant progress in infrastructure, energy production, transport, health, and education. However, Ethiopia's strong economic growth has not been accompanied by a real structural transformation. The contribution of the manufacturing sector to GDP remains relatively low (6.4% of GDP) compared to the agricultural sector (36.3% of GDP). Furthermore, the private sector's potential is not sufficiently tapped due to constraints related to the business environment and the resulting distortions. According to the World Bank's Doing Business, Ethiopia is ranked 159th out of 190 countries, a 55-spot drop since 2010. The World Economic Forum's Global Competitiveness ranking puts Ethiopia in 122nd position out of 140 economies. Recent reforms have stabilised the socio-political climate, although the security situation in some parts of the country remains volatile. Frequent droughts due to climate change have also had major fiscal and humanitarian consequences. The government is continuing to pursue its second growth transformation plan aimed at achieving the sustainable development goals and middle-income country status by 2025.
Overview of the Financial Sector
Ethiopia's financial sector includes 18 banking institutions, of which 16 private and 2 public. The total number of bank branches stood at 4,757, with more than a third (35.3%) in the capital Addis Ababa. The country has 37 microfinance institutions (MFIs), 17 insurance companies (16 of them privately owned), and 532 agencies. The Development Bank of Ethiopia (DBE), a non-deposit-taking institution -, runs 107 branches throughout the country. In October 2017, the Central Bank of Ethiopia devalued the local currency Birr (ETB) by 15% against the US dollar in an attempt to reduce its overvaluation and improve economic competitiveness. The Central Bank and the Financial Intelligence Centre are making progress in strengthening the framework to combat money laundering and terrorism financing. An action plan agreed with the Financial Action Task Force on Money Laundering (FATF) is being implemented. The financial sector remains narrow and only open to local investors. This is the case with the banking sector, which is still closed to foreign operators.
The Banking Sector
Banking market structure - The banking sector remains relatively concentrated. The largest commercial bank, owned by the State, represents about 70% of total assets. Geographical distribution of bank branches is uneven, with more than a third located in Addis Ababa. The sector's equity capital reached ETB 85.8 billion in 2019, or USD 3 billion, of which 60.1% held by public banks. Deposits and loans represented 40.4% and 21.8% of GDP in fiscal year 2017/18.
Structure of loans and deposits in the banking sector - Loans and advances to customers are increasing each year and amounted to ETB 394.56 billion (USD 13.7 billion) in 2017/18. Despite progress made by private banks, public sector banks have held their dominance in credit with a 53.8% market share. Financing is largely allocated to the industrial sector, which has averaged 40% of the credit granted over the last 3 years, ahead of external trade (19%), domestic commercial activities (12%) and housing (11%). Thanks to the increase in the number of bank branches, deposits - mainly savings - rose to ETB 730.26 billion (USD 25.3 billion).
Deposit and lending rates - The average interest rate on savings stood at 8% and the average lending rate was 13.5%, after remaining at 11.88% until 2014/15. The weighted average interest rate on term deposits was 8.09%.
Financial strength of the banking sector - Ethiopian authorities have chosen not to systematically adopt the Basel II and III agreements. Instead, the Central Bank has put in place instruments adapted to the country's context. For the most part, Ethiopian banks have remained well capitalised and liquid. The sector's capital adequacy ratio has stood at a level above the regulatory minimum of 8%. The liquidity ratio is also in line with the minimum requirement of 15%. Bank profitability has continued to remain positive, despite the downward trend. The quality of assets has been broadly preserved, with the ratio of non-performing loans below the 5% statutory ceiling. However, the quality of DBE's assets has gradually deteriorated. Its bad debt ratio stood at 39% in 2017/18, well above the maximum threshold of 15% set by the supervisory authorities for development finance institutions. The reasons for this situation include low productivity in agricultural projects, political unrest in some parts of the country and low international competitiveness of textile projects in which the bank is exposed. Although DBE is not a deposit-taking institution (and therefore excluded from the commercial banking system), the high level of non-performing loans could pose a threat to the financial sector and a create significant tax liability for the State. Remediation strategies are being considered by the authorities who have undertaken a financial assessment of the bank.
In 2017, the country adopted a National Financial Inclusion Strategy (NFIS). The NFIS is expected to help fill gaps in credit supply and, by extension, promote investments that would create jobs and ultimately contribute to poverty reduction. According to Global Findex, financial inclusion improved substantially between 2014 and 2017. The share of adults with an account rose by 59.6%, compared to 2014, to stand at 34.8% in 2017. However, this level remains lower than the sub-Saharan average of42.6%. Several factors have contributed to financial inclusion expansion in Ethiopia: the financial sector has grown considerably and the country has made great progress in building an inclusive and modern financial sector; banks rapidly expanded their branches by more than six fold between 2010 and 2018, from 681 to 4,757. As of March 2016, there were 18,000 savings and credit cooperatives across country, mainly in rural areas. In addition, 30.7 million transaction accounts were recorded, including 19.3 million bank accounts and 11.4 million MFI accounts - a ratio of 68 transaction accounts per 100 adults. Some of the initiatives implemented focused on access of credit reference bureaux by microfinance institutions and the establishment of a framework for consumers protection. However, very little progress has been made in mobile money: Only 0.3% of adults have an account with mobile financial service operators - a level well below the African average (20.9%).
The removal of some barriers, especially interventionism in granting credit, could further improve financial inclusion. This is also the case with regard to the obligation imposed on private banks to invest 27% of their new loans in Central Bank securities, as a way of supporting the Development Bank of Ethiopia in financing priority sectors. These Central Bank bonds account for 30 to 40% of the outstanding loans of commercial banks. The supply of financial products remains limited and procedures for setting up guarantees are costly and time-consuming, thus hindering credit expansion. Moreover, the high urban concentration of bank and insurance agencies translates into poor service in rural areas. Although digital financial services have emerged, they remain marginal, given the preponderance of physical payment instruments (cheques, payment orders, etc.). Lastly, the still predominant informal savings culture remains untapped by financial institutions, which themselves are operating in an underdeveloped infrastructural environment.
Thirty-seven (37) microfinance institutions (MFIs) operate in the country. As of 30 June 2018, savings mobilised by the sector amounted to ETB 33.2 billion (USD 1.2 billion), an increase of approximately 26.2% year-on-year. Total outstanding loans also increased by 38.9% to about ETB 45 billion (USD 1.6 billion), suggesting the growing role of these institutions in poverty reduction and wealth creation among low-income groups. Total assets also increased by 35.7% to ETB 67.3 billion (USD 2.3 billion). Since 2003, the total loan portfolio of MFIs has grown steadily and the number of borrowers has tripled. However, MFI penetration rate remains low, with less than 4% of the population served. In addition, MFIs face a number of challenges, including low operational efficiency, lack of long-term resources for small business financing, and weak management and IT capacity, among others.
Digital Payment and Finance System
The Ethiopian national payment system allows commercial banks to use centralised and electronic banking solutions enabling them to interact with the Central Bank. The Ethiopian Automated Transfer System (EATS) launched in May 2011 includes a real-time gross settlement system (RTGS) and an automated clearing house (ACH). The telecommunications sector has only one operator, Ethio Telecom - a public company, with network coverage of 85% for 2G/3G and 15% for 4G.
By 2016, the mobile penetration rate stood at 33% of the population. The main operators in the mobile money sector are M-Birr and HelloCash. Rapid changes are taking place in this segment. This is particularly the case with the launching of the mobile offer (CBE Birr) by the largest public bank in December 2017. It is also worth noting the acquisition of an MFI by a local technology company (Kifiya) to offer integrated digital services, such as G2P/P2G payments and indexed insurance for agricultural products. Banks and microfinance institutions employ contract agents authorized to open accounts and conduct electronic KYC (Know Your Customer) procedures.
Despite a dynamic digital financial subsector, roadblocks persist, including regulatory limits on daily transactions (ETB 6,000 or USD 208) and mobile bank account balances (ETB 25,000 or USD 868). In addition, prohibition of international fund transfers directly to mobile or MFI accounts, and a decade-long monopoly maintained by Ethio Telecom in the telecommunications sector hinder innovation and limit the scope of services offered.
Most small- and medium-sized enterprises (SMEs) and large companies have access to traditional financial services to manage their liquidity. However, access to credit is more limited, particularly for SMEs: only 30% have access, compared to 68% for large companies. In general, large companies are more likely to benefit from loans, lines of credit or overdraft facilities than micro-, small- and medium-sized enterprises (MSMEs). MSMEs are also more likely to avoid applying for loans because of the high guarantee requirements. In Ethiopia, access to finance is a major challenge in the business environment. MFIs are a viable option for SME financing, given the favourable legal and regulatory environment. This is particularly so in light of Proclamation No. 626/2009, which allows MFIs to transform themselves into banks or other financial institutions enabling them to provide financial services to SMEs. The regulatory framework for the maximum loan size has been relaxed to facilitate the provision of loans to SMEs. Leasing, actively promoted by the Ethiopian authorities, is still in its infancy.
The sector has 17 insurance companies, 54 insurance brokers and 1,438 agents. The number of agencies rose to 532, i.e. twice as many as in 2010. Insurance companies' equity increased by 26.4% to ETB 5.5 billion (USD 190.7 million) and total assets in the sector stood at ETB 13.6 billion (USD 472 million) in 2017. Gross written premiums are approximately ETB 7.5 billion (USD 260.3 million), of which 95% or ETB 7.1 billion (USD 246.4 million) is written for non-life insurance and 5% or ETB 0.4 billion (USD 13.9 million) for life insurance. Insurance penetration remains low in Ethiopia, at around 0.4%. Retail insurance is dominated by compulsory vehicle insurance, and potential links with informal insurance mechanisms have not yet been explored. There is a strong informal insurance culture in Ethiopia, including community health or funeral insurance. Micro-insurance could potentially improve access to insurance and better serve the needs of various customer segments. However, its implementation is hampered by several factors, including the lack of cost-effective distribution channels, cumbersome complaints procedures and a low level of awareness, among others. In addition, innovation is limited by the lack of openness in the sector since international insurers are not allowed to do business in Ethiopia.
The financial market is nascent and mainly deals with treasury bills and government bonds. Treasury bills are the main financial instruments traded on the primary market. Government bonds are sometimes issued to finance budgetary operations and/or absorb excess liquidity in the banking system. Treasury bills issued amounted to ETB 210.4 billion (USD 7.3 billion) at the end of June 2017, while those requested on the weekly auction market stood at ETB 225.3 billion (USD 7.8 billion). Treasury bill maturities have been increased from 28 to 365 days. The total outstanding amount of treasury bills was ETB 73.3 billion (USD 2.5 billion) at the end of June 2017. Participants in the treasury bill market include financial institutions and non-bank public institutions. The weighted average yield is down and close to 1.4% in 2016/17.
The equity market is still non-existent but the country has a commodity exchange, established in 2008. It operates through a public auction system and has 346 members, including 33 agricultural cooperatives. The commodity exchange connects about 3.5 million small Ethiopian farmers to markets. Since its inception, more than 3.9 million tonnes of agricultural products have been traded.
The annual ranking of the African Bond Market Development Index published by the African Financial Markets Initiative (AFMI, piloted by the African Development Bank) put Ethiopia at the 39th position in 2017 (40th in 2016). The 2012 Investment Proclamation and the Investment Code (several times revised) constitute the core of the investment regulatory framework. Strict control of foreign currency movements is exercised by the Central Bank.
Social Security and Pension Fund
Social security in Ethiopia consists of two pension schemes: one for civil servants, including employees of state-owned enterprises, the armed forces and the police; and the other for private sector employees. The retirement age for civil servants and private sector employees is 60 years, and 55 years for the military. The pension may be adjusted every 5 years due to indexation for inflation. Contribution rates range from 7% (public and private sectors) of basic salary to 18% of gross income for self-employed workers. In 2016, 3 million employees were covered, including 1.3 million civil servants and 1.7 million private sector workers. The generosity of the system and the limited diversification of the investment portfolio, mandated by restricted regulation, have raised concerns about the financial sustainability of the national pension scheme.
 Payment made by the government to individuals (G2P, Government to persons), and vice-versa.