Ethiopia takes further steps towards opening its financial sector
Ethiopia recently announced two measures that represent hopeful steps towards opening its financial system to greater investment and sophistication. These measures could have positive implications for financial inclusion in the country.
First, the National Bank of Ethiopia’s (“NBE”) passing of a directive on 18 August to allowing local currency banks to borrow from foreign banks.
Ethiopia is one of Africa’s largest countries: its population of 115 million ranks second and its GDP size of USD 105 billion ranking seventh. Annual GDP growth has been one of Africa’s most dynamic, averaging between 8-12% annually since 2010. Potentially fueling future growth is its young population – the median age is currently 19.5 years – and its sizable diaspora.
The banking sector is also significant, with 17 commercial banks totaling USD 25 billion in deposits, 90 000 employees and over 4 700 bank branches as of 2018. However, growth in the banking sector is constrained by one of the tightest sets of state controls in Africa. Most importantly, commercial banks remain closed to foreign investment. All banks, insurance companies and MFIs are fully owned by Ethiopians.
The NBE directive is therefore significant and builds on other recent measures helping to open – slowly – the financial sector. In July 2019, Ethiopia’s Parliament passed a bill allowing the country’s diaspora to buy shares in local banks and start lending businesses. There has also recently been an increase in foreign banks with representative offices, now totaling nine. These measures align with the change in policy and orientation since Prime Minister Abiy Ahmed came to power in April 2018. Other key reform objectives include privatizing state-owned companies in sectors such as telecommunications and transportation.
In the same week, the NBE also announced that MFIs would be allowed to upgrade into full-fledged banks. The directive further laid out eligibility criteria and transformation guidelines; notably, MFIs must continue to serve SMEs and low-income individuals. Currently, there are 38 licensed MFIs in the country with USD 1.1 billion in deposits. Ethiopia’s estimated nationwide gap in access to finance for MSMEs is 7.0% totaling USD 4.2 billion. And the country continues to rank in the lower tier against many other financial inclusion metrics. For example, less than one-quarter of Ethiopian adults were estimated to have a formal bank account in 2017; this compares to 82% in Kenya, 50% in Rwanda and 43% for the entire East African region.
The NBE’s recent directives therefore hopefully motivates continued investment and sophistication of Ethiopia’s financial sector that will improve access to finance for a wider section of its citizens.
Sources: Asoko Insight, IMF/World Bank,Verdant Capital, Worldometer