Chapter 6

Ethiopian financial markets and

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

Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 2 of 39

 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

Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 3 of 39

 6.1 Ethiopian financial markets
Government treasury bills
 are debt instruments issued by the federal
government.
 have maturities of 28 days,91 days ,182 days, and
364 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
Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 4 of 39
 6.1 Ethiopian financial markets
Government treasury bills…
 banks have been the primary investors in
government treasury bills buying 89% of bills in
2006 and 74% in 2007.
 however, non-bank firms became major
investors since 2008 with 93% in 2008 and 67%
in 2009.
 the weighted average yield on treasury bills has
increased from 5.3% in 2006 to 7.9% in 2009
Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 5 of 39
 6.1 Ethiopian financial markets
Treasur y bill purchases by investor type

70,000.00

60,000.00

50,000.00

40,000.00

30,000.00

20,000.00

10,000.00

0.00
2006 2007 2008 2009

Amount sold Banks Non banks

Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 6 of 39
 6.1 Ethiopian financial markets
Treasury bill Price Per Br 100 Face Amount
2008/09 2009/10 2010/11
28 Days 99.951 99.943 99.886
91Days 99.783 99.757 99.703
182 Days 99.657 91.352 99.645

Treasury bill Yield

2008/09 2009/10 2010/11

28 Days 0.64% 0.74% 1.49%
91 Days 0.87% 0.98% 1.19%
182 Days 0.69% 18.99% 0.71%

Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 7 of 39

 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
 it accounted for 7.1% of total deposit in 2006
and 4.5% in 2009
 time deposits are kept with varying maturities
of a few months to more than 2 years
Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 8 of 39
 6.1 Ethiopian financial markets

Trends of returns on time deposit

7.00%

6.00%

5.00%
Interets rate

4.00%
Up to 1 yr
3.00% 1-2 yrs
Over 2 yrs
2.00%

1.00%

0.00%

Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 9 of 39

 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 Br 292mill interbank loan
has been extended between November 2000
and April 2008.
 the maximum interbank loan was made in
2003 by the amount of Br 93.43mill
 No interbank loan has been extended since
2008
Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 10 of 39
 6.1 Ethiopian financial markets

Trend of interbank loans(in 000)

100,000.00
90,000.00
80,000.00
Interbank loan amount(in 000)

70,000.00
60,000.00
50,000.00
40,000.00
30,000.00
20,000.00
10,000.00
-
2000 2001 2002 2003 2004 2005 2006 2007 2008
Interbank loan in thousands 7,000. 38,078 28,999 93,343 - 10.60 7.50 30.00 34.00

Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 11 of 39

 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

Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 12 of 39

 6.1 Ethiopian financial markets

Interbank loan lenders by aggregate loan size

Bank of Abyssinia

Awash International Bank

Commercial Bank of Ethiopia

Nib International Bank

0 20000 40000 60000 80000 100000 120000

Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 13 of 39

 6.1 Ethiopian financial markets

Interbank loan borrowers by aggregate loan size

Nib International bank

Wegagen bank

Awash international bank

0 20000 40000 60000 80000 100000 120000 140000 160000

Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 14 of 39

 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
Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 15 of 39
 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

Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 16 of 39

 6.1 Ethiopian financial markets
Capital markets…
 no capital market in Ethiopia
 despite an intense pressure from
entrepreneurs, academicians and
international financial institutions such as
IMF & WB, the Ethiopian government didn’t
want to establish capital markets in the
country. (Go to List of SEs in Africa)
 but capital market instruments are offered to
investors informally. Eg. Stocks and bonds
Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 17 of 39
 6.1 Ethiopian financial markets
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
Br10.86bill were issued of which nearly half is
by EEPCO
 Value of bonds outstanding by June 2011 totaled
Br 40.3 bill compared to 27.7bill in 2010
Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 18 of 39
 6.1 Ethiopian financial markets
Amount of bonds issued in 2009/10 by
issuer type
Private sector

Development
Bank of Ethiopia
EEPCO

Regional
governments

Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 19 of 39

 6.1 Ethiopian financial markets
Value of bonds outstanding by June 2010
Private sector
0%

Development Bank of
Ethiopia
15%

Regional governments
25% Public enterprises
60%

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 6.1 Ethiopian financial markets
Stocks
 Despite absence of capital markets, financial
institutions and corporations directly 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: MEKONNEN M. February 2016 21 of 39
 6.1 Ethiopian financial markets
Mortgages
 mortgage loans are extended by construction
and business bank(CBB), and Commercial
Bank of Ethiopia(CBE).
 CBE has been extending mortgage loans to
condominium owners.
 the banks do not have any options other than
keeping the mortgage loans until maturity

Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 22 of 39

 6.1 Ethiopian financial markets
Foreign Exchange Market
 Foreign currencies are traded through an open
auction between NBE and Banks and among
banks in the country.
 Auction is organized by the National Bank of
Ethiopia
Currencies traded in the forex market include:
- US DOLLAR - JAPANESE YEN - SWIDISH KRONER
 EURO - SOUTH AFRICAN RAND - SWISS FRANC
- UAE DIRHAM - CANADIAN DOLLAR - POUND STERLING
Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 23 of 39
 6.2 Ethiopian financial institutions
Formal financial institutions
Relative size of financial institutions by capital

MFI
Insurance 15%
4%

Banks
81%

Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 24 of 39

 6.2 Ethiopian financial institutions
Formal financial institutions
Banks
 State owned Vs private
 Development, construction , and Commercial
banks
 By June 2010, there were 19 banks, of which
16 were private while 3 are state owned
 Banks account for 81% of capital of financial
institutions in the country
Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 25 of 39
 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
Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 26 of 39
 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
Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 27 of 39
 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

Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 28 of 39

 6.2 Ethiopian financial institutions
Formal financial institutions

Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 29 of 39

 6.2 Ethiopian financial institutions
Formal financial institutions
Insurance companies
SIze of insurers by capital as of June 2010
Ethiopian Insurance. Co.
National Insurance. Co.
Nyala Insurance. Co.
Awash Insurance. Co.
Global Insurance. Co.
Nile Insurance. Co.
Nib Insurance. Co.
Africa Insurance. Cc
Oromia Insurance. Co.
United Insurance. Co.
Lion Insurance. Co.
Ethio-Life Insurance. Co.

0 50 100 150 200 250 300 350 400

Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 30 of 39
 6.2 Ethiopian financial institutions
Formal financial institutions
Micro-finance institutions
 The five largest MFIs; namely
 Amhara
 Dedebit
 Oromia
 Omo and
 Addis Credit and Savings Institutions

Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 31 of 39

 6.2 Ethiopian financial institutions
Formal financial institutions
Pension Funds
 Social Security Agency
• Administers pension programs for public sector
employees
• Private firms used to run their own Provident Fund
• Private sector pension fund has been established
through Regulation No 202/2011

Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 32 of 39

 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

Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 33 of 39

 6.2 Ethiopian financial institutions
Informal financial institutions
Iqqub
 are variants of Rotating Saving and Credit
Associations(ROSCAS)
 Established within family and friendship groups

Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 34 of 39

 6.3 Financial market regulation in Ethiopia
 NBE regulats the financial market
 Issues licenses to Banks, Insurance firms,and
Microfinance Institutions.
 Regulats the financial sector through issuance
of directives.
 Supervises banks,Insurance companies and
MFIs

Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 35 of 39

 6.3 Financial market regulation in Ethiopia
 NBE regulats 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

Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 36 of 39

 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
Ethiopian thanandETB50bill
Financial Markets inMEKONNEN
Institutions Instructor: 2008 M. February 2016 37 of 39
 6.3 Financial market regulation in Ethiopia
WHY a NEW Proclamation?
 Malpractices in the banking sector
 Unavailability of credit information sharing
mechanism
 Increased pottential for bank failure

Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 38 of 39

 End of Chapter 6

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