Table of Contents

Introduction ............................................................................................................................................ 1
Objectives ............................................................................................................................................... 1
Theories of bank competition ................................................................................................................. 1
Concentration-stability theory............................................................................................................ 1
Competition-fragility hypothesis ........................................................................................................ 2
Concentration- fragility theory ........................................................................................................... 2
Identification of competitors .............................................................................................................. 2
Checklists and outline indicators ............................................................................................................ 2
Porter’s five forces framework ........................................................................................................... 2
1. Threat of new entrants ............................................................................................................... 2
2. Bargaining power of suppliers .................................................................................................... 3
3. Bargaining power of customers .................................................................................................. 3
4. Threat of substitutes ................................................................................................................... 3
5. Competitive rivalry ...................................................................................................................... 3
SWOT analysis for direct competitors in the sector ........................................................................... 3
Marketing strategies of the direct competitors.................................................................................. 5
Data types and sources for competitor analysis on banks ..................................................................... 5
Type and Source of Data ..................................................................................................................... 5
Data collection approach .................................................................................................................... 5
Data analysis and Interpretation ............................................................................................................ 5
The Banking Industry Concentration Ratios ....................................................................................... 6
Concentration ratio ............................................................................................................................. 6
Profitability Ratios................................................................................................................................. 13
The competitive position of the CBE in E-banking ............................................................................ 16
Contestability of the Banking Sector .................................................................................................... 17
Legal framework for free entry and exit in Ethiopian banking industry ............................................... 18
Indirect competitors ............................................................................................................................. 18
Major Findings ...................................................................................................................................... 19
Recommendations stipulated from CBE’s perspective ......................................................................... 20
Conclusion ............................................................................................................................................. 20
References ............................................................................................................................................ 22
 List of Acronyms

CBE Commercial bank of Ethiopia

CR Concentration ratio

GTP Growth and Transformation Plan

NBE National bank of Ethiopia

AB Awash Bank

DB Dashen Bank

BOA Bank of Abyssinia

ATM Automate Teller Machine

POS Point Of Sale

MFI Micro finance institutes

SACCO Saving and Credit Cooperative Organizations

FCY Foreign Currency

Introduction
The banking industry is witnessing intense competition due to large number of players in the market.
As a result, conducting a competitor analysis is crucial for banks to understand their competitive
position and formulate effective business strategies.

Economies like Ethiopia need efficient financial institutions to ensure overall economic development.
Banks, insurance companies, and microfinance institutions make up the financial sector in the
country. The banking sector is the largest component of the financial system. The main competitors in
the banking industry include traditional banks, online banks and credit unions. Traditional banks have
an established brand and a large customer base, but are facing strong competition from digital banks
that offer convenient and efficient services and credit unions that offer personalized services and
lower fees. According to National bank of Ethiopia report there are 29 commercial banks, one
development bank, 18 insurance companies, 40 microfinance institutions and 8 payment system
operators are operating in Ethiopia.

With the increasing competition in the banking sector, it is essential for the banks to conduct a
competitor analysis to identify their strengths, weaknesses, opportunities and threats.

Objectives

The main objective of the research is to uncover the competition set in the Ethiopia banking industry
as well as to show its implication to the CBE. It has the following specific objectives:
 To assess the trends and the degree of the competition in the banking industry of Ethiopia;
 To examine the competitive position of the CBE; and
 To find out the implication of bank competition to the overall banking industry in Ethiopia.

Theories of bank competition

Concentration-stability theory
There is an interrelationship between banking competition and financial stability, considering the
experience even from the recent global crisis (OECD, 2011). Competition can be both good and bad
for stability. Intense competition in a banking industry may lead banks’ asset quality to deteriorate in
terms of increased doubtful loans unless banks pursue a safe lending policy.

1
Competition-fragility hypothesis
Competition “erodes banks’ pricing power, increases banks’ risk-taking behaviour which
may be detrimental to financial stability”. This means that the raising of competition among
banks will destabilize the banking industry.

Concentration- fragility theory

Other scholars argue that less competition also increases the non-performing loan (NPL)
position of banks. In a less competitive market, a bank is encouraged to increase the interest
of loan portfolios that will decrease the ability of business entities to repay the loan, which in
turn causes financial instability by increasing the NPL position of banks. This creates a weak
investment arena with fragile lending and spending and slower economic activities.

Identification of competitors
Competitors in general can be categorized into two main categories, direct and indirect.

Direct competitors are those companies that offer similar products or services to the same
target market. In this case these are other private banks that operate in the banking industry.

Indirect competitors, on the other hand, are companies that offer similar or substitute
products or services but not necessarily to the same target market. For example, Non-bank
financial institutions like Micro finances, Savings and credit cooperative organizations and
Fin-techs.

Checklists and outline indicators

To conduct a comprehensive competitor analysis banks need to consider key factors such as financial
performance, Product portfolio and regulatory compliance. By analyzing these factors banks can
identify areas of improvement.

Porter’s five forces framework

1. Threat of new entrants

The threat of new entrants is relatively low in the Ethiopian banking industry. This is due to
the high capital requirement for setting up a bank, strict regulations and tough competition
from well-established banks. Furthermore, acquiring banking licenses takes a considerable
amount of time, which can also deter new entrants from joining the market.

2
 2. Bargaining power of suppliers
The bargaining power of suppliers is low in the banking sector as most of the inputs required
for banking operations, including technology; human resources and infrastructure are widely
available in the market. As such, banks have the power to dictate the price and quality of their
inputs.

3. Bargaining power of customers

The bargaining power of customers in Ethiopia’s banking sector is moderate. Customers have
several banking options to choose from, which can hinder the banks’ ability to impose high
fees or charges on customers. However, most customers ultimately remain loyal to their
existing banks due to the convenience of their services and this strengthens the banks’
bargaining power.

4. Threat of substitutes
The threat of substitutes in the Ethiopian banking industry is moderate. Customers have
several options available to them, including mobile money services, cooperatives and
microfinance institutions. However, the majority of Ethiopians still prefer to use banks for
their financial transactions since they offer a greater variety of services, higher interest rates
and more security.

5. Competitive rivalry
Competitive rivalry amongst Ethiopian banks is high. The industry is dominated by a few
major players and this hassled to intense competition, resulting in banks offering increasingly
innovative products and services. This also creates price competition, which can reduce
profits for smaller banks.

Overall, the Ethiopian banking industry is relatively stable, with low threat of new entrants
and suppliers, moderate bargaining power of customers and substitutes and high competitive
rivalry amongst existing players.

SWOT analysis for direct competitors in the sector

Strengths:
1. Growing economy: Ethiopia has been one of the fastest-growing economies in Africa,
which creates opportunities for private banks to grow as the demand for banking services
increases.
2. Large and growing population: With a population of over 100 million, there is a
3
significant market for banks to serve.
3. Experienced management teams: Several banks in Ethiopia have experienced
management teams that have successfully navigated the country's unique market challenges.
4. Increasing adoption of digital banking: As more Ethiopians gain access to smartphones
and the internet, there is a growing trend towards digital banking, creating new opportunities
for private banks.

Weaknesses:
1. Limited infrastructure: One of the biggest challenges facing private banks in Ethiopia is
the limited infrastructure, making it difficult to reach rural areas and expand services.
2. Low financial literacy: Many Ethiopians still lack basic financial literacy, making it
challenging for private banks to educate their customers and grow their customer base.
3. Limited product offerings: Most private banks in Ethiopia offer limited services, with a
primary focus on deposits and loans.
4. Dependence on government policies: Government policies play a significant role in the
banking sector, and private banks may be vulnerable to adverse policy changes.

Opportunities:
1. Rising consumer income: As disposable income increases, there is an opportunity for
banks to offer new and innovative financial products.
2. Expansion into rural areas: With Ethiopia's large rural population, expanding bank
services to these communities could provide significant growth opportunities.
3. Collaboration with international banks: Banks may be able to leverage partnerships
with international banks to offer new products and services.
4. Investment in technology: Investing in innovative technology could help private banks
differentiate themselves and gain a competitive advantage.

Threats:
1. Political instability: Political instability in Ethiopia could lead to economic uncertainty
and affect the banking industry.
2. Competition from state-owned banks: State-owned banks in Ethiopia have a significant
market share, and private banks may struggle to compete with their vast resources.
3. Economic shocks: External economic shocks such as commodity price fluctuations,
droughts, or global economic downturns could affect the profitability of private banks.
4. Cyber security threats: With the increasing adoption of digital banking, there is a
growing threat of cyber security attacks, which could damage the reputation of private banks
and erode customer trust.

4
Marketing strategies of the direct competitors
Majority of the direct competitors in the industry use two main marketing strategies to reach
into their customers.

 Targeted advertising: They use the common legacy Medias such as, television and
radio to reach to their target market. In addition they use targeted advertising through
social media platforms, search engines, and other online platforms to reach their target
customer base. They use data analytics to determine customer behaviours,
preferences, and demographics to create personalized ads that are relevant to their

customer base.

 Community involvement: They engage with their local communities by sponsoring

local events, supporting charitable organizations, and volunteering. This will help

them to build a positive brand image and create goodwill among customers.

Data types and sources for competitor analysis on banks

Type and Source of Data

Both qualitative and secondary quantitative data are used to meet the major objective of the
research. Data used in the analysis were collected from respective banks operating in the
country and the NBE. The audited annual reports of banks are used except for the year
2020/21. The period covered by this study was from 2004/05 to 2020/21 that represents
annual time-series data for 17 years.

Data collection approach

We use a direct data collection approach to get the data directly from the banks through their
official websites and annual reports. In addition we collect data online from publicly
available sources such as NBE. We also collect useful data from previously conducted
researches relate to the subject matter.

Data analysis and Interpretation

In this section, the results of structural measures of bank competition are discussed.

5
The Banking Industry Concentration Ratios

Market/industry concentration is a function of the number of firms and their respective shares
of total production in a market. This study assesses the banking industry concentration in the
branch network, deposit, asset, capital & reserve, profit before tax, and loan.

I. Banks’ Branch Network

Opening branches is one of the means used by banks to be accessible to their customers. The
bank that has better access to the customer (with more branches) is deemed to mobilize
resources easily which can be readily available for loans and advances and augment the
associated interest margin the bank earns out of it. Thus, such a bank has a better chance of
being the leading bank in the industry.

The number of bank branches of the industry has been increasing for the last decade. At the
end of 2020/21, the number of bank branches in the country reached 6,719 that rose by more
than 9 folds within a single decade, which indicates the aggressive engagement of the
banking industry in expanding branches. The post-2010 yearly branch expansion rate of the
banking industry was about 22.5% on average that grow by 12.5% in 2020/21.

Concerning CBE, the numbers of branches were 380 and 1,700 for the year 2010/11 and
2020/21, respectively, which indicates a more than 7-fold growth. CBE has been expanding
its branches on average at a rate of 21.8% over the last decade since 2011 in which the
highest branch expansion was registered in the years 2011(72%) followed by 2012 (44%).
However, recently, the branch opening share of CBE has had downward trends.

Concentration ratio
The concentration ratio is the measure of the percentage market share in an industry held by
the largest firms within that industry. Likewise, the share of the largest bank, two bank, three
banks, and four banks with the highest branch network in the banking industry are discussed
using CR1, CR2, CR3, and CR4, respectively as follow.

The CR1 ratio designates the share of the CBE with respect to the overall branch network of
banks in the country. The share of the CBE is declining from 2007 to 2010, increasing in
2011(42%) and 2012(46%) and declining from 2013 to 2021. The increasing trend registered

6
 in the years 2011 and 2012 could be due to the aggressive branch expansion by the bank in
line with its Deposit Mobilization Strategy that aligned with GTP I. In the period under
consideration, CBE took about 37% of the branch networks in the country, on average. The
share of branch network of CBE was the highest in 2012 (46%) and took its lowest share in
2021 which is 25%. Nevertheless, regardless of the decline in its share, CBE is still the
dominant bank in the country (Table 1).

The CR2 describes the joint branch network share of the CBE and Awash bank (AB). The
share of these two large banks is 34% at the end of 2020/21 which dropped from year to year.
On the other hand, the CR3, which is the share of the CBE, AB, and Dashen Bank (DB), was
41% in 2020/21. Similarly, the branch network share of the four largest banks (in terms of the
number of branches in the specific year considered) the CR4, which is the share of the CBE,
AB, DB, and Bank of Abyssinia (BOA) was 49% in 2021. The share of branch networks of
the largest four banks has shown relatively a declining trend except in 2011, 2012, and 2016.
This implies that, despite efforts of branch expansion by dominant banks, the cumulative
share of other small banks has started to affect the share of dominant banks in terms of
branch network which could imply the rise in the competition in the Ethiopian banking
industry in terms of branch expansion.

Table 1: Branch Concentration Ratio (%)

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021
Description

CR1 50 47 44 40 34 33 42 46 42 40 37 37 32 29 28 27 25

CR2 60 57 55 51 44 43 50 53 49 47 45 44 40 37 36 35 34

CR3 70 67 65 60 53 52 57 59 56 53 51 51 48 46 44 42 41
CR4 76 74 71 68 61 59 63 64 61 58 56 57 54 52 50 50 49

II. Deposit Concentration Ratio

Deposit mobilization is one of the major activities of commercial banks. Thus, banks play
their intermediary role by collecting a deposit from the surplus area and disbursing loans to
resource-scarce areas. Among the three types of deposits, saving deposits is the largest,

7
followed by demand and time deposit. The total deposit of the banking industry has been
tremendously grown during the considered period. The total deposits of the banks in the
industry at the end of 2020/21 became 14 times higher than what it was in 2010 and more
than 36 times from the balance in 2005. Generally, the total deposit of the industry in the last
sixteen years has grown by 25% on average, mainly driven by saving deposits that increased
by the annual average growth rate of 28%.

Table 2: Amount of Deposit of the Ethiopian Banking industry by Type (million Birr)

Saving Deposit Demand Deposit Time Deposit Total Deposit

Year Amount Growth Rate Amount Growth Rate Amount Growth Amount Growth
(million) (%) (million) (%) (million) Rate (%) (million) Rate(%)

2005 17,495 20.0 16,919 19.0 3,241 105.0 37,655 23.0

2006 20,597 17.7 19,534 15.0 2,420 (25.3) 42,551 13.0
2007 23,790 15.5 24,427 25.0 3,274 35.3 51,491 21.0
2008 30,056 26.3 28,100 15.0 5,450 66.5 63,606 23.5
2009 33,352 11.0 33,797 20.3 6,655 22.1 73,804 16.0
2010 47,721 43.1 43,833 29.7 7,912 18.9 99,466 34.8
2011 63,586 33.2 69,684 59.0 4,848 (38.7) 138,118 38.9
2012 79,846 25.6 86,604 24.3 12,122 150.0 178,572 29.3
2013 103,756 29.9 116,354 34.4 13,833 14.1 233,943 31.0
2014 141,415 36.3 129,633 11.4 19,660 42.1 290,708 24.3
2015 184,496 30.5 156,085 20.4 24,834 26.3 365,415 25.7
2016 230,797 25.1 175,728 12.6 27,565 11.0 434,090 18.8
2017 310,176 34.4 217,458 23.7 35,935 30.4 563,569 29.8
2018 394,052 27.0 277,164 27.5 46,441 29.2 717,657 27.3
2019 505,764 28.3 314,416 13.4 61,051 31.5 881,230 22.8
2020 561,689 11.1 347,544 10.5 70,607 15.7 1,045,456 18.6
2021* 857,711 52.7 438,703 26.2 64,903 (8.1) 1,361,316 30.2
Average 212,135 27.5 146,823 22.8 24,162 30.9 386,979 25.2

Source: Annual report of banks and own computation; *unaudited report

It is known that the CBE has been aggressively mobilizing deposits by designing and
implementing a deposit mobilization strategy that enables its capacity of deposit
mobilization. This in turn helped CBE to meet the growing financial need of the public sector
and private projects. Hence, the deposit balance of the bank post-2010 rose by an average

8
 annual growth rate of 27% and reached Birr 735.2 billion as of June 2021 from Birr 54.6
billion as of June 2010.

Table 3 below indicates the share of total deposit for the largest bank (CR1), the two largest
banks (CR2), the three largest banks (CR3) and the four largest banks (CR4) in the banking
industry.
 The share of the CBE from the total deposit of the industry (CR1) at the end of
2020/21 was about 54%, which showed a bit lower than CBE’s share in recent years
but remains the dominant bank in the industry in deposit mobilization.
 The CR2(CBE and AB) for the year 2020/21 was about 61% and declined by 3
percentage points from the previous year. The level of CR2 increased between 2010
and 2016 but declined after then.
 The CR3 (share of CBE, AB & BOA) was 68% by 2020/21 that fall year to year,
which indicates the compromised share of the three largest banks in recent periods.
 Similarly, the CR4, which is composed of CBE, DB, AB, and BOA, for the year
2020/21, was 73% that fall by 0.12 percentage points in a year.
Thus, the lion share of the total deposit of the banking industry was taken by four banks
which indicates the existence of concentration with respect to deposits in the industry.
But, the table shows that concentration ratios (from CR1 to CR4) have somewhat
declined since 2013/14 which could indicate the relative increase in competition for
deposit by the remaining banks.

Table 3: Deposit concentration Ratio of the Banking Industry (%)

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021
Description

CR1 67 67 65 59 56 55 62 65 66 67 66 67 65 63 61 57 54
CR2 75 76 74 69 66 66 71 73 73 73 72 72 71 69 68 64 61
CR3 81 82 81 77 75 73 76 78 78 78 77 77 76 74 73 69 68
CR4 87 88 86 84 81 79 81 82 82 81 80 81 79 78 77 74 73

III. Asset Concentration Ratio

Asset is another measure that detects the size of a bank. It can be explained by asset
concentration ratio which can give a clue about the competition behaviour of the industry. It

9
is assumed that as the size of a few banks operating in the industry is large relative to others,
competition among banks becomes weak and competition is expected to become high when
the size of the banks operating in the industry is more or less similar.

The asset shares of the CBE (CR1) rose between 2010 and 2016 which however start to
decline after then and reached 56% as of June 2021 from a peak of 67% in 2016. However,
CBE still maintains its leading position in the industry. About 64%, 59%, and 75% of the
asset of the banking industry as of June 2021 was held by two (CR2), three (CR3), and four
(CR4) largest banks, respectively. The remaining 13 banks operating in the industry took
only a quarter of the assets of the industry.
Table 4: Asset Concentration Ratio (%)

IV. Loan and Advance Concentration Ratio

Loan disbursement is one of the core activities of banks. Banks’ share of loans and advances
indicate their capacity of meeting the financial needs of customers and projects. Competition
for the provision of loans and advances is not an issue for countries with a less developed
financial sector like Ethiopia as banks do not worry about accessing customers for loans and
advances. Banks in Ethiopia give more emphasis to deposit and competition for deposit is far
higher than that of lending.

The concentration ratio of loan and advance shows that (Table 5)

 The share of the largest bank, CBE (CR1), from the total loan and advances was 61% as of
June 2021. Even though the CBE still maintains its dominant position in the loan market, its
share is declining which in turn indicates the existence of competition in the market.

 The CR2 (the share CBE and AB ) was 68% as at June 2021 from a peak of 82% in June
2016;

10
  The CR3 (the share of CBE, AB, and BOA) was 73% as at June 2021 from a peak of 85% in
June 2016;

 The CR4 of the banking industry as at June 2021 was 78% from a peak of 87% in June 2012,
June 2014 and June 2016

Table 5: Loan & Advance Concentration Ratio

Descrip
2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021
tion

CR1 58 50 50 61 61 63 70 74 74 76 75 78 75 73 69 66 61

CR2 69 62 63 71 70 71 76 80 79 80 79 82 79 78 75 72 68

CR3 77 72 71 77 76 76 81 84 83 84 83 85 83 81 79 76 73

CR4 83 79 78 83 81 81 84 87 86 87 85 87 85 84 82 80 78

V. Capital and Reserve Concentration Ratio

The concentration ratio of capital and reserve shows that

 The CR1 (CBE) was 35% as of June 2021. Its share is declining which in turn indicates the
existence of competition in the market.

 The CR2 (the share CBE and AB) was 47% as at June 2021 from a peak of 63% in June
2017.

 The CR3 (the share of CBE, AB, and BOA) was 54% as at June 2021 from a peak of 69% in
June 2017.

 The CR4 of the banking industry as at June 2021 was 60% from a peak of 74% in June 2017,
which indicates the more than half percent share of the four largest banks in the entire
periods.

11
 Table (6): Capital & Reserve Concentration Ratio
2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021
Description
CR1 51 43 61 53 49 46 42 40 39 37 38 37 56 52 47 41 35
CR2 60 53 68 61 57 53 50 48 48 46 46 47 63 59 56 50 47
CR3 68 64 76 70 65 63 59 58 56 55 55 57 69 65 62 57 54
CR4 77 75 78 75 70 67 64 62 61 60 60 63 74 70 67 62 60

VI. Profit before Tax Concentration Ratio

The profit before tax share of the CBE (CR1) rose between 2011 and 2016 which however
start to decline after then and reached 47% as of June 2021 from a peak of 72% in 2016.
However, CBE still maintains its leading position in the industry. About 58%, 64%, and 70%
of the profit before tax of the banking industry as of June 2021 was held by two (CR2), three
(CR3), and four (CR4) largest banks, respectively. The remaining 13 banks operating in the
industry took only 30% of the profit before tax of the industry.

Table (7): Profit before Tax Concentration Ratio

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021
Description
CR1 64 59 55 62 69 57 59 68 68 67 71 72 62 49 53 47 47
CR2 72 69 67 73 78 66 67 76 74 73 76 77 68 58 64 58 58
CR3 77 77 76 80 78 73 74 81 79 79 81 82 74 64 68 63 64
CR4 84 83 80 80 82 77 81 84 83 82 83 84 77 68 72 67 70

Conclusion: The concentration figures above indicate that the banking market is still
concentrated but has a declining degree of concentration. Thirteen banks other than the
largest 4 banks (CBE, AB, DB & BoA) contributed only for 25% of the asset, 27% of
deposit, 22% of loan, 40% of capital & reserve, and 30% of profit before tax. But these banks
cover half of the industry’s branch network in 2021.

12
 Table (8): Share of CBE

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021
Description

Branch 50 47 44 40 34 33 42 46 42 40 37 37 32 29 28 27 25
Deposit 67 67 65 59 56 55 62 65 66 67 66 67 65 63 61 57 54
Asset 69 65 64 60 58 58 62 65 64 65 65 67 65 62 61 59 56
Loan and
58 50 50 61 61 63 70 74 74 76 75 78 75 73 69 66 61
advances
Capital and
51 43 61 53 49 46 42 40 39 37 38 37 56 52 47 41 35
Reserve
Profit before
64 59 55 62 69 57 59 68 68 67 71 72 62 49 53 47 47
tax

Profitability Ratios
Profitability and efficiency ratios allow measuring the ability of the bank to earn an adequate
return on assets and invested capital. Among the various variables used to measure
profitability, Returns on Asset (ROA); Returns on Equity (ROE), and Net Interest Margin-to-
Total Asset ratios were used in this study to measure the profitability of the banks.

A. Return on Asset (ROA)

ROA measures how properly the assets of the banks are used by the management so that
profit (surplus) will be generated from operations. ROA is a key profitability ratio that
indicates how profitable a bank is relative to its total assets (amount of profit made per Birr of
its assets). Unlike other profitability ratios, ROA includes all of a bank's assets – including
those which arise from liabilities to creditors as well as those which arise from contributions
by investors.

 The ROA of the banking industry and CBE are averaged about 3.3%, which means
that banks on average earn 0.33 Birr per every one birr asset.
 The ROA trend of CBE and the whole industry follows a more or less similar
trajectory that rose until 2011/12 and decline after then except for a moderate
recovery in 2020/21.
 The ROA of all banks, except CBE, fluctuated at times and had an increasing trend
between 2008/09 and 2011/12 and remain constant since 2016 around 3%.

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  In 2020/21, while CBE earned 0.02 Birr per each one Birr Asset, the whole industry
earned 0.024 Birr. Zemen bank collected 0.053 Birr per a Birr asset which is the
highest followed by Addis and Debub Global banks that collected 0.049 Birr and
0.042 Birr, respectively.
B. Return on Equity (ROE)

ROE is a measure of how efficiently shareholders capital is being used to generate profit and
is the most widely used metric to assess banks’ profitability. It measures the return a bank
obtains from the total equity capital it has employed and measures the profit a bank generates
with each Birr of shareholders' equity.

 The average ROE of the CBE for the last seventeen years considered was 58% which
implies the bank earned Birr 0.58 profits before tax for each one Birr of equity.
 The seventeen years average for the banking industry was about 40.1% and it is 28%
excluding CBE.
 The lowest ROE of both the CBE and the banking industry was registered in 2017/18.
This could be due to an increase of the CBE’s capital during the year that had a
declining effect on both the CBE’s and the industry’s ROE.
 In 2020/21, CBE’s and total industry’s ROE were 38.1% and 28.6%, respectively.
Among private banks, the highest ROE ratio belongs to Awash (28.2%), Zemen
(27.2%), and Abysinia (26.6%) while the lowest ROA was registered by Lion International
(5.8%), Wogagen (10.7%), and Enat (17.5%).

C. Net Interest Margin-to-Total Asset Ratio

The Net Interest Margin captures the spread between the interest costs and earnings on banks’
liabilities and assets and indicates how well the bank manages its assets and liabilities. Thus,
the net interest margin-to-total asset ratio measures the efficiency of assets and liability
management. It is a measure of the difference between the interest income generated by
banks and the amount of interest paid out to their lenders relative to the amount of their
assets. The average net interest margin to Asset ratio of CBE was 3.0% while other
commercial banks in aggregate made 3.6% during the period 2004/05 to 2020/21.
 The interest rate margin to asset ratio of both CBE and the industry more or less had
an increasing trend during the period under consideration. However, all banks, except

14
 CBE, experienced a downfall of the ratio until 2010/11 that however rose since and
surpassed CBE’s relative return in the recent periods.
 In 2020/21, the net interest margin to Asset ratio of CBE was 3.2% while other banks'
ratio was 4.9% in aggregate. Bank wise, the highest and lowest ratios were by Bunna
bank (6.5%) and Enat bank (2.9%), respectively.

Table(9): ROA, ROE and Interest rate Margin to Asset ratio of CBE and Industry (%)

ROA (Exc CBE) ROE Net Interest margin to asset

(Exc CBE)

(Exc CBE)
Year

Industry

Industry

Industry

Industry

Industry

Industry
CBE

CBE

CBE
2005 2.4 2.6 3.0 55.0 43.8 32.1 1.1 1.6 2.8
2006 3.1 3.4 4.0 72.2 52.2 37.1 1.4 2.2 3.7
2007 2.7 3.1 3.8 27.7 30.8 35.7 1.6 2.4 3.7
2008 3.7 3.6 3.4 40.8 34.7 27.8 2.0 2.5 3.3
2009 4.6 3.8 2.8 53.7 41.0 26.7 2.9 2.9 2.9
2010 3.8 3.9 4.0 50.4 40.6 32.4 2.7 2.5 2.3
2011 3.7 3.9 4.3 66.6 47.2 33.5 2.6 2.5 2.3
2012 5.0 4.7 4.3 102.6 59.7 31.4 3.2 3.1 2.9
2013 4.4 4.1 3.7 93.1 53.5 28.2 3.7 3.4 3.0
2014 4.1 4.0 3.8 89.7 50.1 26.5 3.5 3.4 3.3
2015 4.2 3.9 3.4 95.4 51.3 24.9 3.9 3.8 3.6
2016 3.6 3.4 3.1 85.2 44.4 20.9 3.9 3.9 3.9
2017 2.6 2.7 3.0 28.1 25.4 21.9 3.5 3.6 4.0
2018 1.8 2.2 3.0 21.2 22.5 23.8 4.0 4.2 4.5
2019 2.5 2.7 3.1 35.8 30.5 25.6 3.6 4.0 4.7
2020 1.8 2.3 3.0 30.0 26.2 23.5 3.6 4.3 5.3
2021 2.0 2.4 2.9 38.1 28.6 23.5 3.2 4.0 4.9
Ave. 3.3 3.3 3.4 58.0 40.1 28.0 3.0 3.2 3.6

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The competitive position of the CBE in E-banking

The use of E-Banking services in the banking industry is growing and thus, commercial
banks which are operating in Ethiopia are increasingly using and applying e-banking to be
more accessible and convenient to their customers.

 The number of ATMs installed by all commercial banks at the end of June 2021
reached 6,343 that rose by more than 4 fold in just five years. Likewise, the number of
POS machines installed by all banks reached 9,208 with average annual growth of
26% since 2015.
 The share of CBE from the total number of ATMs was 40% in 2013 which declines to
38% in 2014 and increased onwards and reached 49% by 2021. Similarly, the share of
CBE out of the distributed POS machines was 14% in 2013 dropped to 10% in 2014,
and tremendously increases to reach 77% in 2017 that slightly dropped to 47% as of
June 2021. Thus, CBE is the leading bank in both ATM and POS machines.
 There is also improvement in the banking sector in terms of mobile & internet
banking users. More specifically, the number of Mobile banking users increased from
38,404 in 2013 to 11.9 million in 2021 and the number of internet banking users
increased from 1,078 in 2013 to 2.3 million in 2021. The share of CBE in mobile
banking has been increasing since 2013 to peak at 81% in 2017 that fall to 49% in
June 2021. Similarly, the CBE's share of internet banking users has been increasing
and reached its peak in 2018 (43%) and then significantly dropped to 5% in 2021.
Uptake of both mobile and internet banking has shown notable growth mainly in
2019/20 due to COVID -19 induced measures. However, the share of CBE in internet
banking was lower compared with other e-banking services that demand due
attention.
 The number of agents of Mobile money contracted by banks reached 15,964 in June
2021 of which 25% are agents of CBE.

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 Table (10): The position of the CBE in E-banking services

E-Banking
products/service Description 2015 2016 2017 2018 2019 2020 2021
s
CBE 644 889 1,501 1,708 3,081 3,952 3,108
Total No. of
Banking Industry 1,355 1,689 2,743 3,131 4,896 6,259 6,343
ATM Machines
% share of CBE 48% 53% 55% 55% 63% 63% 49%
CBE 1,886 5,937 6,883 7,251 5,519 6,071 4,291
Total No. of POS
Banking Industry 5,870 8,127 8,895 9,689 8,936 9,780 9,208
Machines
% share of CBE 32% 73% 77% 75% 62% 62% 47%
Total No. of CBE 458,909 716,000 1,974,243 2,043,404 2,380,784 5,705,221 5,824,621
Mobile Banking Banking Industry 1,002,578 1307071 2430697 2,688,007 4,526,434 9,139,498 11,927,778
Users % share of CBE 46% 55% 81% 76% 53% 62% 49%
Total No. of CBE 7,838 15,000 26,000 52,418 77,470 90,501 122,774
Internet Banking Banking Industry 36,133 48,383 79,082 120,577 547,691 1,457,416 2,252,150
Users % share of CBE 22% 31% 33% 43% 14% 6% 5%
CBE - - 1,502 3,211 6,193 14,012 4,069
No. Agents of
Banking Industry 370 2,228 4,627 9,739 12,863 22,725 15,964
Mobile Money
% share of CBE - - 32% 33% 48% 62% 25%

Contestability of the Banking Sector

A market is contestable when barriers to bank entry and exit are low. The threat of bank entry
and exit can exert pressure on incumbent banks and keep the sector competitive even if the
banking sector concentration is high. By facilitating bank entry, operations and promoting
transparency, the regulatory framework of the sector has a significant impact on banking
sector contestability and competition. Regulations that enable bank entry and operations and
foster bank disclosure can bring about greater contestability to the banking sector and
promote competition.
An analysis of competition in the banking sector requires a closer examination of the
regulations regarding bank entry and transparency in the banking sector. The less-severe
entry restrictions, the presence of foreign banks, non-restrictions on branch network, better
use of technological advancement, few restrictions of new private banks and activities that
banks can perform, and well-developed financial systems are expected to improve
contestability

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Legal framework for free entry and exit in Ethiopian banking industry

The National Bank of Ethiopia (NBE) has been given the power and duty to license,
supervise, and regulate banks and other financial institutions by the Monetary and Banking
Proclamation No. 83/1994. Emphasis is generally given to promoting stability than
promoting competition. Subsequent to the recent reforms of the government, a series of
directives are introduced by the NBE that promote competition and encourage new entrants.
Some MFIs obtained licence to transform into bank including Amhara Credit and Saving
Institution (Tsedey Bank), Somali MFI (Shebelle Bank), Oromia Credit and Saving
Institution (Sinqe Bank), and Omo MFI (Omo Bank).

Indirect competitors
Non-bank financial institutions (MFIs, SACCOs, Lease companies), innovative/
contemporary financing platforms such as P2P, venture capital crowd funding and other
funding sources such as bond and external finance are potential alternatives for banking
business.

Tele birr: as per the NBE directive on mobile money and agency banking, Ethio-telecom
started Tele birr mobile money service by registration customers without physical presence
and aggressive marketing activity. This will lead similar mobile money service providers to
compete and creates partnership opportunities.

MFIs: more than 35 MFIs are in the market with a wide rural presence and few (ACSI,
ADCSI, OCSI, Dedebit) with potential to grow to a bank.

Lease companies: About 5 quasi-public and one private leasing company are currently in the
market. More may join the market as it is open for foreign investors and demand relatively
low capital requirement of Birr 400 million.

Fin-techs: Following the recent NBE’s directives tech start-ups and incumbents (such as
Hello cash, M-Birr) in mobile wallet, e-payments, e-commerce could compete with existing
digital services of the existing banks with partnership opportunities.

New Funding Sources: The start of the stock market and bond market is likely to be an
alternative source of finance mainly for big companies. It brings competition as well as
business opportunities for the banks. FCY generating companies have now an option to

18
borrow from foreign banks through the intermediary role of local counterparts, which could
be a potential source of long-term financing and hard currency.

Post bank: the century-old Post office of the country is now a legal contender to provide
financial service that could be a potential competitor for incumbent banks as the former has
already grass root level presence.

Major Findings
 The concentration figures indicate that the banking market is still concentrated but
having a declining degree of concentration. Thirteen banks except the largest four banks
(CBE, AB, DB, & BoA) contributed only about 25% of the asset, 27% of deposit, and
22% of loans and advances. But these banks cover almost half of the branch network of
the industry in 2021 that shows low concentration in terms of branch network. The
concentration in Ethiopian banking industry rose in between 2009/10 and 2015/16 but
have a declining trend since 2016/17. CBE still maintains a dominant share in all
performance indicators except branch network.
 Profitability measured in ROA of CBE was comparable with the Industry, however
dropped in recent years and reached 2.0% in 2020/21 while the industry’s and private
banks’ ROA were 2.4% and 2.9%, respectively. However, the ROE of CBE is larger
than the industry’s average in the last couple of years that reached 38% in 2021. In
2020/21, the net interest margin to Asset ratio of CBE was 3.2% while the other banks
ratio was 4.9% in aggregate.
 With regard to productivity of employees, the CBE has the higher Net income before
tax-to-staff expense ratio and Net income before tax-to- number of employees
(permanent) ratio than the industry average in the past ten years.
 The contestability assessment made on banking industry shows that barriers to entry into
the Ethiopian banking sector are reduced that promote the formation of new conventional
and specialized banks and non-bank institutions with substitutable offerings. The
emergence and development of non-bank institutions (MFIs, SACCOs, Lease companies,
Post bank, tele-birr), Fintechs, and new funding source (such as stock exchange, Foreign
FCY lending) likely bring both an opportunities and threats as far as competition is
concerned.

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 The banking industry in Ethiopia operates in a monopolistic competitive market
structure, which however become less of monopolistic during post 2010.

Recommendations stipulated from CBE’s perspective

 The need to exert additional efforts to expand the E-banking services considering the
declining share of CBE from branch network;
 The need to pay attention to increase digital banking uptake;
 The need to increase the efficiency and productivity of its human resource by
maintaining its effort of providing various training and development programs and by
motivating employees;
 The need to work hard in terms of using latest technologies and develop differentiated
products, improve service quality, launch various programs to strengthen customer
loyalty (award, recognition, giveaway) and reinforce key stakeholder’s management
before it getting late - considering the heightening magnitude of competition and waning
barriers to entry into the banking industry.
 The need for forging the link and partnership with emerging Fintechs and non-bank
financial that may place the bank at the advantageous position to win the growing
competition in the banking industry.
 The need to proactively identify opportunities and threats from the emergence of new
funding source such as the stock market and bond market and foreign borrowings (for
FCY generating companies).

Conclusion

Analysing and measuring the market power and competition of banks has always been crucial
for the efficient production of financial services, the quality of financial products and the
degree of financial innovation. If there is either anti-competitive behaviour or too much
competition, the banking industry can impose severe costs on an economy, leading to
inefficiency along with financial and economic instability. The Ethiopian banking industry is
characterized by a kind of monopolistic competitive market structure, though the competition
atmosphere is at its infant phase. Thus, there prevails a stable/safe banking industry in the
country due to the presence of still high level of concentration and barrier to entry of foreign

20
banks. An improvement in competition intels further improvement in the stability of the
banking industry as the above models varified.

21
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and Its Regulation: What is New after a Decade and Half Strategy of Gradualism in Reform, 2001-
2017.

Belda, H. J. (2016). Ethiopian Banking Sector Development. Research Journal of Finance and
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FEDERAL NEGARIT GAZETA OF THE FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA.

(25th Year No 88. ADDIS ABABA 9th September 2019).

Cetorelli, N. (2001). Competition among banks: Good or bad? Economic Perspectives

Claessens, S., & Laeven, L. (2004). What drives bank competition? Some international evidence.
Journal of Money, Credit, and Banking , 563–584.

OECD. (2011). Banking competition and financial stability.

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