Financial Markets and Institutions: Ethiopian

Chapter 6
Ethiopian financial markets and institutions
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Chapter contents
Ethiopian financial markets
Ethiopian financial institutions
Financial regulation in Ethiopia
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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
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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
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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
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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
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Interbank loan…
Interest on interbank loan ranges
between 7% to 11%.
Lenders include CBE, AIB, BoA, and
NIB
Borrowers included NIB, Wegagen and
Awash
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Capital Markets
Why Capital Markets?

Enhanced saving mobilization
Help in resource allocation
Promote efficient financial system
Help term transformation and improve
capital structure
Allow DE concentration of ownership
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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
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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 till recent time
• despite an intense pressure from
entrepreneurs, academicians and
international financial institutions such as
IMF, World bank etc.
• Now a days, Ethiopian government have declared
for the establishment of capital markets in the
country. but still capital market instruments are
offered to investors informally. Eg. Stocks and 10
bonds
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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
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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, 12
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Mortgages
mortgage loans are extended mostly by
construction and business bank(CBB)
before. But, now a day many banks
provide the services to the public in
general and to their Employees in
particular. Besides, some Companies
began to make mortgage loan
arrangement for their Employees in
collaboration with Banks.
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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%
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Currently there are 17 commercial banks and one Development bank
, 17 insurance companies and 33 Micro finance institutions are
found in the financial system of the country.
Banks
 Banks account for more than 81% of capital
of financial institutions in the country
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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
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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
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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
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Micro-finance institutions
 There are around 33 MFIs. The ff. are the five largest MFIs; namely
 Amhara
 Dedebit
 Oromia
 Omo
 Addis Credit and Savings Institutions
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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
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Informal financial institutions
Iqqub
 are variants of Rotating Saving and Credit Associations(ROSCAS)
 Established within family and friendship groups
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6.3 Financial market regulation in Ethiopia
 NBE regulates 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
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 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
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 New Proclamations
 The National Bank of Ethiopia Establishment (as Amended)
Proclamation No. 591/2008
 Banking business proclamation No. 592/2008
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 Regulatory variables
 NBE-Bills: represent amount of forced bill purchase by a bank,

 Reserve Requirement: is a portion of bank’s asset in National Bank of
Ethiopia with no interest
 Credit Cap: this refers a credit ceiling set by NBE
 Financial regulation can be classified into 3 groups according to their
aims and functions
1. Structural regulations: - are boundaries placed on commercial
banks determining the activities in which they can participate.
2. Prudential regulation :- emphasizes the control of systematic risk
through principally balance sheet constrain. Eg. Placing limits on loan
3. Monetary regulation: - is the process of setting monetary policy
directives designed to bring about predetermined macroeconomic
outcomes by focusing on interest rates, credit controls and primary
and secondary reserve requirements.
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End of Chapter 6
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Financial Markets and Institutions: Ethiopian

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Chapter 6

Ethiopian financial markets and institutions

Government treasury bills

Time deposits (CDs)

Interbank loan Market

Why Capital Markets?

Why Capital Markets?...

Employee Credit & Saving Associations

 NBE-Bills: represent amount of forced bill purchase by a bank,

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