INTRODUCTION

Accelerated and sustainable economic growth and agriculture led industrialization are the
main agendas of Ethiopians government economic policy. For these policies to be
effectively applied finance is an engine. It will increase investment by mobilizing scarce
financial savings and channeling it to productive investment, by reducing risk of
investors and savers, decreasing scales of economic obstacles of entry and mobilizing
goods and services through consumers and producers. All this indicates that strong
financial system is the backbone of economic growth and everyone should benefit from
it. To develop strong financial system, it is necessary to facilitate the accessibility of
finance. This means macro-economic conditions should be stable and reliable and
building the infrastructures like information and legal dimensions.
Ethiopia's financial system has been evolving over time starting from 1905 when the first
bank (Bank of Abyssinia) was established through Dergs regime to the reorientation of
the financial systems to market economy. Currently 29 commercial banks, one
development bank, 18 insurance companies, one re-insurance company, 40 microfinance
institutions, six capital goods finance or lease companies and eight payment instrument
issuers/system operators are operating in Ethiopia according to the National Bank of
Ethiopia website. Other than those mentioned there are pension funds, saving and credit
cooperatives, and limited contractual saving services.
Financial markets in Ethiopia are underdeveloped. There is no stock or bond exchange
markets. Ethiopia Investment Holdings is working with Ministry of finance and Nairobi
based Financial Sector Deepening Africa (FSDA) to launch securities exchange program-
Ethiopian Securities Exchange (ESX) within two years, but that is just an initiation.
There is still much work to do.
On the next pages we will see the financial institutions and markets of Ethiopia in detail.
We will focus mainly on the financial institutions since the existence of financial markets
in Ethiopia is almost insignificant.
 Financial Institutions in Ethiopia
The Financial Institutions in Ethiopia are relatively more developed. These institutions
consist of different banks, insurance companies, microfinance institutions and other debt
and credit institutions. Generally, we can classify the financial institutions in Ethiopia
into three groups.
 Formal Institutions
 Semiformal Institutions
 Informal institutions
On the next article we see the difference between these institutions and the institutions
they consist under them.
1. Formal Institutions
The formal institutions are regulated and controlled by the National Bank of Ethiopia
which comprises of financial institutions such as banks, insurance companies and
microfinances. At the current period there are 29 commercial banks, one development
bank, 18 insurance companies and 40 microfinance institutions.
 Banks
Since the year 1905(the establishment of the first bank, bank of Abyssinia) the banking
system in Ethiopia has been evolving. But highly structured banking started after the
Italian departure. At the moment there as a state bank of Ethiopia and other branches of
foreign banks until the regime of Derg when all banking system is owned and controlled
by the government. After the government system in 1991 and the return of the country to
market economy, a proclamation number 84/94 was issued out to affect the deregulation
and liberalization of the financial institutions and a number of banks were established.
Despite the improvement in the financial laws and regulations the development of the
country's banking system remains relatively low. On top of that the state-owned banks
dominate the marked. For example, the state-owned Commercial Bank of Ethiopia alone
controls more than half of the branch networks in the country, nearly 40% of the total
capital, and 50% of the loans and advances, and more than 60% of the deposits of the
commercial banks.
The accessibility of banks is at low level that 10% of the household in the country has
access to formal credit. And the geographical distribution of bank branches was highly
skewed to major towns and cities. Nearly 34 percent of bank branches are located in
Addis Ababa.
  Insurance companies
The insurance companies are also underdeveloped and unevenly distributed throughout
the country. This sector consists of private owned companies and Ethiopian Insurance
corporation. The Ethiopian Insurance Corporation alone controls 25% of the total capital
of insurance companies, the rest is divided between the rest 17 privately owned insurance
companies.
 Microfinances
Microfinances provide low-income citizens with a broad range of client responsive
financial services. Microcredit activities in rural and urban Ethiopia were initiated by
local and international NGOs. These NGOs finance innovative ideas by testing the
methodologies. They had a problem of balancing the humanitarian and financial
objectives. Ever since then the government has been the framework of microfinance
operations.
Microfinance have shown rapid growth over the short periods of time. Their total asset,
deposit mobilization and credit provision has expanded. The four largest microfinances
have accounted for more than the 80 % of the capital, saving, credit and assets of MFIs in
the country.
2. Semiformal financial institutions
These institutions consist of saving and credit cooperatives. saving and credit
cooperatives are types of organizations providing financial services to the poor in rural
areas of Ethiopia. They are owned, controlled and capitalized by their members. There
are no regulations and supervision from the NBE. The ministry of cooperatives is
responsible for the coordination of their activities. Their services are limited to their
members. They only lend to members that have deposited enough to make them eligible
for it.
3. Informal institutions
Informal institutions are community-based organizations and their nature varies with the
status of the community. Iddir, Iqqubsa and Mehabers are very common in the country.
Informal institution is popular for they are the oldest financial systems and their provision
of loan process is quick and non-bureaucratic. The capital of these traditional systems
however is limited.
 Financial Markets in Ethiopia
Some history books mention that there was a share market in Ethiopia in the imperial
regime before the nationalization of private properties in 1975. The market was handled
by the National Bank of Ethiopia, department of share exchange, and share dealing
groups that include other financial institutions and some private dealers. Since the
abolishment of Addis Ababa share dealing group in 1974 by the military government, no
capital market has been in place in Ethiopia. For more than forty years, Ethiopia has been
trying to have its own financial market but didn’t succeed. These days Addis Ababa
Chamber of Commerce and Sectorial Association (AACCSA) and National Bank of
Ethiopia are trying to restore the financial markets. All the researches made show in favor
of the establishment of financial markets in Ethiopia.
Currently there is adequate shareholding constituency in Ethiopia allowing the
establishment of share companies. There are more than 1000 share companies in Ethiopia
where there is no share market in the country. This implies that shares in the country have
high illiquidity. If this illiquidity continues for long, the existing shareholders will be
frustrated and future investors will be discouraged to get into share company business
which affects the development of share companies. Ethiopia has considerable unexploited
resources and is considered as one of the largest potentials markets in Africa. Some of the
challenges for not establishing financial markets are low level of awareness about
securities markets, lack of public confidence in share investment, lack of infrastructures
like information.
Despite the challenges there are scholars and other interested parties who evaluated the
potential for stock exchange market in Ethiopia, have recommended the establishment of
stack exchange. This will enable the country to mobilize capital and encourages saving.
the only active primary securtiy market in the counyr now is treasury bills marke,
although seconday markets don’t exist. Long term securities such as shares and bonds are
not traded but sometimes the government issues bonds occasinally to finance public
projects like the GERD and to absorb excess liquidity in the banking system.
Summary
The Ethiopian financial system is at its basic stage. Much of it is covered by the formal
financial institutions such as banks, insurance companies and MFIs that are governed by
the NBE. There are semiformal institutions also known as saving and credit associations
that are not governed by the NBE and also traditional institutions like Eqqub and Iddir.
Much of the mobilization of resources is done by the formal institutions. Last time
Ethiopia had a financial market was in the imperial period. There are no financial markets
in the country currently but there are initiations to start establish the markets within
couple of years.
References
Araya Debessay, Tadewos Haregework, “Towards the development of capital market in
Ethiopia”
Tiruneh Legesse, “Establishing financial markets in Ethiopia: the environmental
foundation, challenges and opportunities”, 2012
Alemnen Abebe, “Is Ethiopia ready to institute a stock exchange market?” 2015
Aderaw Gashaye, Dr. Manjit Singh, “Development of financial sector in Ethiopia:
litreture review” 2016
National Bank of Ethiopia, “Monetary and financial Development”, 2022