Chapter 6

Ethiopian financial markets and institutions

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Chapter contents
Ethiopian financial markets
Ethiopian financial institutions

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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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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

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 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

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 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

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 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
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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

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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

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 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 de-concentration of ownership

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 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
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 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 12
 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

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6.1 Ethiopian financial markets

Amount of bonds issued in 2009/10 by

issuer type
Private sector

Development
Bank of Ethiopia
EEPCO

Regional
governments

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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 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,
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 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

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 6.2 Ethiopian financial institutions
Formal financial institutions

Relative size of financial institutions by capital

MFI
Insurance 15%
4%

Banks
81%

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 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

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 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

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 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
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 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

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 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

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 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

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 6.2 Ethiopian financial institutions
Informal financial institutions

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

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End of Chapter 6

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