College of Business and Economics

DEPARTMENT OF ACCOUNTING AND FINANCE

Financial institution and market assignment on the

overview of financial institution and market in Ethiopia
Section - 3
Name…............…………………………. ID Number
1.Nuhamin Aklilu UGR/1960/13
2.Sintayehu Hilu UGR/2943/13
3.Temesgen Nigusu UGR/1613/13
4.Yonas Bamlaku UGR/5974/13
5.Wonde Gibo UGR/7642/13
6.Yoseph Delie UGR/5265/13
7.Nigussie Ayenew UGR/3718/13
8.Workie Melkamu UGR/3128/13
 The Ethiopian Financial
institutions and Market
 History and development of financial institutions and capital Markets in
Ethiopia
 Contribution to Ethiopian Economy
 Structure of financial institutions and capital Markets
 Money market, Bond Market, Stock Market and derivatives market
 Recommendations based on review

OBJECTIVES
 Those financial institutions are included as
 Domestic banks(24)
 Foreign subsidiary banks (40)
 Credit unions(59)

FINANCIAL INSTITUTIONS
HISTORY AND DEVELOPMENT OF FINANCIAL INSTITUTIONS AND FINANCIAL MARKET IN
ETHIOPIA

 The evolution and development of financial sector in Ethiopia can be classified in

to three periods
1. The imperial period
2. The socialist period
3. The post-reform period
 The agreement that was reached in 1905 between Emperor Minilik II and Mr. Ma
Gillivray, representative of the British owned National Bank of Egypt marked the
introduction of modern banking in Ethiopia. 
 Following the agreement, the first bank called Bank of Abyssinia was inaugurated in
Feb.16,1906 by the Emperor
 The Bank was totally managed by the Egyptian National Bank and the following rights
and concessions were agreed upon the establishment of Bank of Abyssinia:-
 The capital of the Bank was agreed to be Pound Sterling 500,000 and one-fifth was
subscribed and the rest was to be obtained by selling shares in some important cities
such as London, Paris and New York.
 Land was given to the Bank free of charges and permitted to build offices

THE IMPERIAL PERIOD

 Within the first 15 years of its operation,  Bank of Abyssinia opened branches in different areas of
the country. I.e Harar, AA,Diredawa,gorre, desse and Djibouti in 1920.
 Since the society was new for banking the bank faced great difficulty. For this reason it did not
earn profit till 1914. and profit were recorded in 1914,1919,1920 and 1924 onwards.
 BoA carried out keeping government account, export financing.
 Legally it was replaced by bank of Ethiopia in 1931.
- the first indigenous bank in Africa
- with capital of £750,000
- 60% of the share were owned by Ethiopian government
 During the invasion, the Italians established branches of their main Banks namely
 Banca d’Italia,
 Banco di Roma,
 Bancodi Napoli and
 In1941 another foreign bank, Barclays Bank, came to Ethiopia with the British
troops and organized banking services in Addis Ababa, until its withdrawal in
1943.
 Then on 15th April 1943, the State Bank of Ethiopia commenced full operation
after 8 months of preparatory activities.
 It acted as the central Bank of Ethiopia and had a power to issue bank notes and
coins as the agent of the Ministry of Finance
 Then the Ethiopian Monetary and Banking law that came into force in 1963
separated the function of commercial and central banking creating National Bank
of Ethiopia and commercial Bank of Ethiopia.
- it also allowed foreign bank to operate by having 49% ownership right.
 The National Bank of Ethiopia with more power and duties started its operation
in January 1964.
 Following the incorporation as a share company on December 16,
1963 ,Commercial Bank of Ethiopia took over the commercial banking activities
of the former State Bank of Ethiopia.
The
 The first privately owned bank, Addis Ababa Bank share company, was established on Ethiopians
initiative and started operation in 1964 with a capital of 2 million in association with National and
Grindlay Bank, London which had 40 percent of the total share.
 There were other financial institutions operating in the country like the Imperial Savings and
Home Ownership public Association (ISHOPA) which specialized in providing loans for the
construction of residential houses and to individuals under the guarantee of their savings. 
 There was also the Saving and Mortgage Corporation of Ethiopia whose aims and duties were to
accept savings and trust deposits account and provide 
loans for the construction, repair and improvement of residential houses, commercial and
industrial buildings and carry out all activities related to mortgage operations.
 Following the declaration of socialism in 1974 the government extended its
control over the whole economy and nationalized all large corporations,
including banks and insurance companies
 Accordingly, the three private owned banks, Addis
Ababa Bank, Banco di Roma and Banco di Napoli Merged in 1976 to form the
second largest Bank in Ethiopia called Addis Bank with a capital of Eth. birr
20 million and had a staff of 480 and 34 branches.
 Then Addis Bank and Commercial Bank of Ethiopia S.C . were merged by
proclamation No.184 of August 2, 1980 to form the sole commercial bank in
the country till the establishment of private commercial banks in 1994.

SOCIALIST PERIOD
 All insurance companies operating were nationalized and from January 1,1975
onwards the government took over the ownership and control of these companies
& merged them into a single unit called Ethiopian Insurance Corporation.
 The Savings and Mortgage Corporation and Imperial Saving and Home
Ownership Public Association were also merged to form the Housing and Saving
Bank with working capital of Birr 6.0 million and all
rights, privileges, assets and liabilities were transferred by proclamation No.60,
1975 to the new bank.
 The financial sector that the socialist oriented government left behind
constituted only 3 banks and each enjoying monopoly in its respective market. The
following was the structure of the sector at the end of the era.
 The National Bank of Ethiopia (NBE)
 The Commercial Bank of Ethiopia (CBE)
 Agricultural and Industrial Development Bank (AIDB)
 Ethiopian Insurance corporation (EIC)
 Following the change in the economic policy, financial sector reform also took
place.
 Monetary and Banking Proclamation of 1994 established
the National Bank of Ethiopia as a judicial entity, separated from the
government and outlined its main functions
 It is only since 1994, when the central bank was re-established that the
Government has permitted activities and services of private banks and
insurance companies.
 These services are strictly limited to domestic entities as foreign firms are
prohibited from investing in the banking and insurance sectors.

THE POST-REFORM PERIOD

 Currently the Formal Ethiopian financial sector comprises
 One Central bank (NBE),
 One development bank (DBE),
 One state-owned commercial banks, namely, Commercial Bank of Ethiopia (CBE) and More than
16 private commercial banks,
 More than 17 insurance companies
 More than 30 Micro Finance Institutions and
 More than 5500 Savings and Credit Cooperatives
 The Ethiopian financial system is bank dominated. Yet it is not easily accessible to
a large segment of the population.
 Ethiopian banking system has limited size of coverage and unbalanced
distribution.
 The Monetary and Banking Proclamation No. 83/1994 empowered the National
Bank of Ethiopia (NBE) to license, supervise and regulate financial institutions
such as banks, insurance companies, microfinance institutions and savings and
credit cooperatives
Since the issuance of Proclamation 40/1996, which provides the establishment of
microfinance institutions, more than thirty microfinance institutions (MFIs), have been legally
registered by the National Bank of Ethiopia (NBE) and started delivering services.
. According to the Proclamation, any institution that needs to engage in microfinance activity
should fulfill the following:
 Obtain license from the National Bank of Ethiopia;
 Formed as a company governed by the commercial code of 1960 (a share company owned
fully by Ethiopian nationals and having its head office in Ethiopia); and
 Deposit the minimum capital required, i.e., 200,000 Birr in a bank.
 Micro Finance Institutions are owned by regional governments, local Nongovernmental
Organizations, and private owners

THE ETHIOPIAN MICROFINANCE

INDUSTRY
 Traditional saving and credit institution with a rotating fund. System of saving
where by people form groups and pay periodically a fixed amount of money,
which will be collected in a common pool, so that, in rotation, each member of
the group can receive one large sum, i.e., the sum of money paid by all in one
period.
 Formed for various purposes such as; starting or expanding business ventures,
consumption purposes that need expending large sum of money at one time or
simply for saving
 Membership in Iqqub can be held as collateral to borrow from individuals
outside the group

IQQUB- TRADITIONAL FINANCIAL

INSTITUTION
  An Iddir is the most common informal institution in Ethiopia, common in both rural and
urban areas. It is an association made up by a group of persons united by ties of family and
friendship, by living in the same district, by jobs, or by belonging to the same ethnic group
and as an object of providing mutual aid and financial assistance in certain circumstances.
 It is primarily a burial society whereby savings are made to cover the cost of funerals.
Whenever a death occurs among its members, the organization raises an amount of money to
handle the burial and other related ceremonies. It further aims to address different community
concerns and provides various services to its members. Membership is regularly by residence,
whereby members pay a small monthly fee.

IDDIR
 Financial institution and markets provide the following contribution to the overall
economy of the state.
 Promotes private sector development
 Liquidity function
 Helps mobilize local savings and makes resources available for local decision making
 Enhances competition among financial institutions
 Increases remittances and facilitate their use
 Leads to improved corporate governance and promotion of specialized
financial institutions and services

CONTRIBUTION TO THE ECONOMY

 Rewards sound economic policies and create tools to conduct monetary policy
 Help in resource allocation
 Allow deconcentrating of ownership
 Improve accounting and auditing standards
 Promote efficient financial system

CONT’D
 The Ethiopian financial sector/policies have evolved through three stylized
stages
1. financial repression and fostering state-led industrial and agricultural
development through preferential credit (in the socialist regime);
2. market-led development through liberalization and deregulation (post 1991);
3. financial inclusion through allowing private banks and MFIs (since second half
of 1990s).

STRUCTURE OF FICM
 Currently the Ethiopian financial institution consists of
 18 banks
 Above 14 insurance companies
 Above 31 micro finance institution
 And over 8200 SACCOs

CONT’D
 The financial service is dominated by a cash based system. Moreover, there is
no stock market and the financial market comprising the interbank money and
foreign exchange markets as well as the bond and TBs market is at an infant
stage accommodating limited amount of transactions.

CONT’D
 is where short term securities are traded
 securities traded in this market include
 government treasury bills
 time deposits
 interbank loans
1. 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

MONEY MARKET
 include insurance companies, social security agency, corporations and 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.
 T-bill; in Ethiopia all of this items are issued to non-bank institutions
2. 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
 3. 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.
 Inter bank loan; There had been no inter-bank money market transaction during
the quarter under review
 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
BOND MARKET

 Bonds are promissory notes (“IOUs”) issued by companies to borrow money from buyers through
investment banks
 October 7, 2017 - The National Bank of Ethiopia (NBE) will begin trading bonds in the secondary
market this Ethiopian fiscal year (2017/18), reports FBC.The plan was delayed by two years
because of failure to conclude the necessary studies at the required time
 As the system is new to Ethiopia, the preparation period took more time than Ethiopia will
introduce a secondary market in government and corporate bonds next fiscal year to expand
the country’s fund raising options, a central bank official said. In 2014 Ethiopia sold one billion
worth of bonds in a very short time
 Government bonds are an effective way of raising much needed investment money to fund mega
projects.
 In December 2014 for the first time ever, the Ethiopian government sold one billion dollars worth
bonds
 It was one of the largest first time bond sales from Africa.
 Long–term securities such as bonds are not widely used and traded, however, government bonds
are occasionally issued to finance government expenditure and / or to absorb excess liquidity in
the banking system.
 bonds were issued during 2002/ 3-2003/4 period to commercial Bank of Ethiopia (CBE) and the
Development Bank of Ethiopia ( DBE ) out side the auction for the purpose of transferring bad
debts of former public enterprises
 Although some organizations (from the public sector) like Ethiopian Telecommunication
Corporation (ETC) and Ethiopian Electric power corporation (EEPCO) are legally permitted to
raise funds through bond issues, little is known about their success. Like the treasury bills market,
there is no secondary market for bonds.
 Ethiopia has set itself a tight timetable for economic reform, including
privatization of telecoms by the end of 2019 and a domestic stock exchange by
2020.
 A World Bank team was due to arrive in Addis Ababa in December to provide
technical help to develop the capital market.
 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
 So, in near future our country will open stock market but currently there is no
stock market in the country.

STOCK MARKET
 The Ethiopia Commodity Exchange (ECX) is a commodities exchange
 established April 2008 in Ethiopia. In Proclamation 2007-550, which created
the ECX, its stated objective was "to ensure the development of an efficient
modern trading system" that would "protect the rights and benefits of sellers,
buyers, intermediaries, and the general public
 The Ethiopia Commodity Exchange (ECX) is a national multi-commodity
exchange in Ethiopia that brings together buyers and sellers of agricultural
commodities. Participants on the ECX trade spot contracts that standardize the
quality, quantity, payment and delivery of agricultural goods.

DERIVATIVE MARKETS
 SPOT is a contract of buying or selling a commodity, security or currency for
immediate settlement (payment and delivery) on the spot date, which is normally
two business days after the trade date.
 The ECX has an octagonal trading pit where trading takes place via “open outcry.”
In this method of trading, a trader announces his/her intention to buy (bid) or sell
(offer) a particular contract and the quantity he/she wants to buy and price he/she
is willing to pay. Other market participants can make a counter bid or offer or
accept the terms offered by the trader.
 The different banks, both government and private owned, give the rates they are willing to sell
currency on daily basis to NBE. The banks quote these prices by taking the currency demand
of their customers as a yard stick.
 Based on the rates proposed by the banks, NBE computes a weighted average rate to be
applied.
 The banks sell the currency within a 2% deviation from the first agreed upon rate while the
NBE itself uses a 1.5% deviation from the original rate. But the buying rate is more or less
equivalent to the inter bank market.
 NBE then follows up on any fluctuation from this 2% and regulates the rate by buying or
selling currency as the situation commands it.
 In general, the exchange rate mechanism used in Ethiopia is referred to as managed floating
rate

FOREX MARKET
 NBE intervenes to regulate extreme fluctuations in the exchange rates. Thus, it
is a managed float exchange rate system
 In the Ethiopian foreign exchange market, parallel markets also do exist.
These are the unofficial markets commonly known as black markets who sell
currency by rates that often differ from the official rate. The number of parallel
(black) markets is increasing from time to time. This market, although
seasonal in nature, has a great influence on the flow of currency from and to
the country. But its influence on the exchange rate is found to be minimal.

CONT’D
 In Ethiopia, only spot rates are available and forward rates are not applied.
This implies that there are no forward contracts such as hedging and option
contracts because of government policy
 Currently Ethiopian Birr is not accepted outside of Ethiopia. Some boarder
countries, like Somalia and Djibouti, use birr in barter trade but it is not
accepted by their banks and there isn’t any kind of birr rate given.
 There are about 18 countries’ currency accepted by Ethiopian banks

CONT’D
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