Chapter 6

Ethiopian financial markets and institutions

1
 Chapter contents
Ethiopian financial markets
Ethiopian financial institutions
Financial regulation in Ethiopia

2
Ethiopian Financial Markets and Institutions Instructor: Ashenafi Friday, April 27, 2012 2 of 39
B(PhD)
 6.1 Ethiopian financial markets

Money markets
is where short term securities are
traded
securities traded in this market include
 government treasury bills
 time deposits
 interbank loans

3
Ethiopian Financial Markets and Institutions Instructor: Ashenafi Friday, April 27, 2012 3 of 39
B(PhD)
 6.1 Ethiopian financial markets

Government treasury bills

are debt instruments issued by the federal
government.
have maturities of 28 days,91 days and 182 days
are sold at a discount through non-competitive
auction
banks and non-bank firms participate in the treasury
bill market
non-bank firms include insurance companies, social
security agency, corporations and the like

4
Ethiopian Financial Markets and Institutions Instructor: Ashenafi Friday, April 27, 2012 4 of 39
B(PhD)
 6.1 Ethiopian financial markets

Time deposits (CDs)

 issued by commercial banks
 investors include other banks, non-bank
financial institutions, private corporations,
public enterprises, and retail customers
 time deposits are kept with varying maturities
of a few months to more than 2 years

5
Ethiopian Financial Markets and Institutions Instructor: Ashenafi Friday, April 27, 2012 5 of 39
B(PhD)
 6.1 Ethiopian financial markets

Interbank loan Market

• commercial banks borrow from each
other
 it began operation in September 1998
 since then a total of Large amount of
interbank loan has been extended
 the Large amount of interbank loan
was made in 2003 by the amount of
Br 93.43mill

6
Ethiopian Financial Markets and Institutions Instructor: Ashenafi Friday, April 27, 2012 6 of 39
B(PhD)
 6.1 Ethiopian financial markets

Interbank loan…
term of interbank loan ranges from
overnight to 5 years
Interest on interbank loan ranges
between 7% to 11%.
Lenders included CBE, AIB, BoA, and
NIB
Borrowers included NIB, Wegagen and
Awash
7
Ethiopian Financial Markets and Institutions Instructor: Ashenafi Friday, April 27, 2012 7 of 39
B(PhD)
 6.1 Ethiopian financial markets

Interbank
Interbankloan
loanlenders
lendersby
byaggregate
aggregateloan
loansize
size
Bank of Abyssinia
Bank of Abyssinia

Awash International Bank

Awash International Bank

Commercial Bank of Ethiopia

Commercial Bank of Ethiopia

Nib International Bank

Nib International Bank

0 20000 40000 60000 80000 100000 120000

0 20000 40000 60000 80000 100000 120000

8
Ethiopian Financial Markets and Institutions Instructor: Ashenafi Friday, April 27, 2012 8 of 39
B(PhD)
 6.1 Ethiopian financial markets

Interbank
Interbankloan
loanborrowers
borrowersby
byaggregate
aggregateloan
loansize
size

Nib International bank

Nib International bank

Wegagen bank
Wegagen bank

Awash international bank

Awash international bank

0 20000 40000 60000 80000 100000 120000 140000 160000

0 20000 40000 60000 80000 100000 120000 140000 160000

9
Ethiopian Financial Markets and Institutions Instructor: Ashenafi Friday, April 27, 2012 9 of 39
B(PhD)
 6.1 Ethiopian financial markets

Capital Markets

Why Capital Markets?

Enhanced saving mobilization
Help in resource allocation
Promote efficient financial system
Help term transformation and improve
capital structure
Allow deconcentration of ownership

10
Ethiopian Financial Markets and Institutions Instructor: Ashenafi Friday, April 27, 2012 10 of 39
B(PhD)
 6.1 Ethiopian financial markets

Capital markets

Why Capital Markets?...

Improve accounting and auditing
standards
Attract Foreign Direct
Investment(FDI)
Provide effective tools for monetary
and fiscal policy
Help privatization efforts
11
Ethiopian Financial Markets and Institutions Instructor: Ashenafi Friday, April 27, 2012 11 of 39
B(PhD)
 6.1 Ethiopian financial markets

Capital markets…
Ethiopia had a securities market in the 1960s
and 70s. The market was closed because of
change of policy in 1974.
 no capital market in Ethiopia
• despite an intense pressure from
entrepreneurs, academicians and
international financial institutions such as
IMF, and now a day the Ethiopian
government have a plan to establish capital
markets in the country. but capital market
instruments are offered to investors
informally. Eg. Stocks and bonds
Ethiopian Financial Markets and Institutions Instructor: Ashenafi Friday, April 27, 2012
12
12 of 39
B(PhD)
 6.1 Ethiopian financial markets

Bonds
 are issued by public enterprises(EEPCO and
Ethio Telecom), state/regional
governments, and development bank of
Ethiopia(DBE)
E.g. during 2009/10 bonds by the total
amount of Br10.86bill were issued of
which nearly half is by EEPCO Value
of bonds outstanding by June 2010
totaled Br 27.72bill

13
Ethiopian Financial Markets and Institutions Instructor: Ashenafi Friday, April 27, 2012 13 of 39
B(PhD)
 6.1 Ethiopian financial markets

Amount
Amountof
ofbonds
bondsissued
issuedinin2009/10
2009/10by
by
issuer
issuertype
type
Private sector
Private sector

Development
Development
Bank of Ethiopia
Bank of Ethiopia
EEPCO
EEPCO

Regional
Regional
governments
governments

14
Ethiopian Financial Markets and Institutions Instructor: Ashenafi Friday, April 27, 2012 14 of 39
B(PhD)
 6.1 Ethiopian financial markets

Value
Valueof
ofbonds
bondsoutstanding
outstandingby
byJune
June2010
2010
Private sector
Private sector
0%
0%

Development Bank of
Development Bank of
Ethiopia
Ethiopia
15%
15%

Regional governments
Regional governments
25% Public enterprises
25% Public enterprises
60%
60%

15
Ethiopian Financial Markets and Institutions Instructor: Ashenafi Friday, April 27, 2012 15 of 39
B(PhD)
 6.1 Ethiopian financial markets

Stocks

Despite absence of capital markets,

financial institutions and
corporations issue their stocks to
the general public.
Due to absence of a secondary
market, 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,
Ethiopian Financial Markets and Institutions Instructor: Ashenafi Friday, April 27, 2012 16 of 39
16

B(PhD)
 6.1 Ethiopian financial markets

Mortgages

mortgage loans are extended mostly

by construction and business
bank(CBB).
the bank does not have many options
other than keeping the mortgage
loans until maturity

17
Ethiopian Financial Markets and Institutions Instructor: Ashenafi Friday, April 27, 2012 17 of 39
B(PhD)
 6.2 Ethiopian financial institutions
Formal financial institutions

Relative
Relativesize
sizeof
offinancial
financialinstitutions
institutionsby
bycapital
capital
MFI
MFI
Insurance
Insurance 15%
15%
4%
4%

Banks
Banks
81%
81%

18
Ethiopian Financial Markets and Institutions Instructor: Ashenafi Friday, April 27, 2012 18 of 39
B(PhD)
 6.2 Ethiopian financial institutions
Formal financial institutions
Currently there are 16 commercial banks and one Development bank
, 15 insurance companies and 33 Micro finance institutions are
found in the financial system of the country.
Banks
 State owned Vs private
Currently, there are 17 banks, of which
15were private while 2 are state owned
Banks.
 Banks account for more than 81% of capital
of financial institutions in the country

19
Ethiopian Financial Markets and Institutions Instructor: Ashenafi Friday, April 27, 2012 19 of 39
B(PhD)
 6.2 Ethiopian financial institutions
Formal financial institutions

Banks(Brief History)
 Bank of Abyssinia established in 1905
 BoA was dissolved in 1931 and Bank of Ethiopia was set up
 Many private banks were established after the Italians left
 State Bank of Ethiopia was founded in 1943 and splitted into NBE and
CBE in 1963

20
Ethiopian Financial Markets and Institutions Instructor: Ashenafi Friday, April 27, 2012 20 of 39
B(PhD)
 6.2 Ethiopian financial institutions
Formal financial institutions

Banks(Brief History)…
 The Agricultural and Industrial Development
Bank (AIDB) was established in 1970 and
the Housing and Saving Bank(HSB) in 1975.
 Many private banks and insurance
companies were operating in the financial
industry before the 1974 revolution.
 The derg nationalized all private banks
merging them with CBE, and all private
insurance companies with EIC
21
Ethiopian Financial Markets and Institutions Instructor: Ashenafi Friday, April 27, 2012 21 of 39
B(PhD)
 6.2 Ethiopian financial institutions
Formal financial institutions

Banks(Brief History)
 The banks were used as instruments in exercising socialist economic
policy
 The 1994 banking reform reopened the financial industry to
private investors

22
Ethiopian Financial Markets and Institutions Instructor: Ashenafi Friday, April 27, 2012 22 of 39
B(PhD)
 6.2 Ethiopian financial institutions
Formal financial institutions

Micro-finance institutions
 There are around 33 MFIs now a day. The ff. are the five largest
MFIs; namely
 Amhara
 Dedebit
 Oromia
 Omo
 Addis Credit and Savings Institutions

23
Ethiopian Financial Markets and Institutions Instructor: Ashenafi Friday, April 27, 2012 23 of 39
B(PhD)
 6.2 Ethiopian financial institutions
Semi-formal financial institutions

Employee Credit & Saving Associations

 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

24
Ethiopian Financial Markets and Institutions Instructor: Ashenafi Friday, April 27, 2012 24 of 39
B(PhD)
 6.2 Ethiopian financial institutions
Informal financial institutions

Iqqub
 are variants of Rotating Saving and Credit Associations(ROSCAS)
 Established within family and friendship groups

25
Ethiopian Financial Markets and Institutions Instructor: Ashenafi Friday, April 27, 2012 25 of 39
B(PhD)
 6.3 Financial market regulation in Ethiopia
 NBE regulats the financial market
 Issues licenses to Banks, Insurance firms,and Microfinance
Institutions.
 Regulates the financial sector through issuance of directives.
 Supervises banks,Insurance companies and MFIs

26
Ethiopian Financial Markets and Institutions Instructor: Ashenafi Friday, April 27, 2012 26 of 39
B(PhD)
 6.3 Financial market regulation in Ethiopia
 NBE regulates the financial market by the power vested upon it
through
 The Monetary and Banking Proclamation No. 83/1994
 It was issued along with The Licensing and Supervision of Banking
Business Proclamation No. 84/1994

27
Ethiopian Financial Markets and Institutions Instructor: Ashenafi Friday, April 27, 2012 27 of 39
B(PhD)
 6.3 Financial market regulation in Ethiopia
 New Proclamations
 The National Bank of Ethiopia Establishment (as Amended)
Proclamation No. 591/2008
 Banking business proclamation No. 592/2008
WHY a NEW Proclamation?
 In 1994 there were only 3 banks all state-owned but in 2008 there were 12
banks of which 8 were private
 loans amounted to only ETB 1.15bill in 1994 and it reached ETB 26bill
 Deposits were ETB 7.7bill in 1994,and it increased to more than ETB50bill in
2008

28
Ethiopian Financial Markets and Institutions Instructor: Ashenafi Friday, April 27, 2012 28 of 39
B(PhD)
 6.3 Financial market regulation in Ethiopia
WHY a NEW Proclamation?
 Malpractices in the banking sector
 Unavailability of credit information sharing mechanism
 Increased potential for bank failure

29
Ethiopian Financial Markets and Institutions Instructor: Ashenafi Friday, April 27, 2012 29 of 39
B(PhD)
 End of Chapter 6

30
Ethiopian Financial Markets and Institutions Instructor: Ashenafi Friday, April 27, 2012 30 of 39
B(PhD)