7.2 Financial sector of Ethiopia Course Lecturer Mohamed Guudle (B.A )(M.A )

7.2 Financial sector of Ethiopia

Course Lecturer Mohamed Guudle (B.A )(M.A )

Economic Facts of Ethiopia Financial services in Ethiopia Brief Banking History Ethiopia’s Financial Sector Today Performance across banks Outlooks and Prospects


GDP:$29.72 billion GDP (Real Growth rate): 8% GDP Comparison per sector:

- Agriculture: 50%- Manufacturing: 11%- Services: 39% (2010 est.)

Polulation size : 90,873,739 with growth rate of 3.194% (June 2011)

GDP Per Capita: 1,00o USD

Set by Mohamed O.Guudle Course Lecturer Mohamed Guudle

(B.A )(M.A )

In general, there are broad range of organizations providing financial services including;

- Consumer finance companies(MFIs),

- Stock brokerages, -Banks, - Insurance companies, - Investment funds (shares, bonds and other securities)


Cooperatives and MFIs play an important role in both agricultural and financial sector given the fragmented and widely distributed nature of the population and specifically the agricultural sector services.

Cooperatives and MFIs provide some of the largest networks available in Ethiopia.


Absence of a stock exchange. Ethiopia had a well-functioning stock market during the Imperial regime, but this market stopped operating during the Derg period and there is currently no formal stock market. Shares are traded on an over-the-counter basis which imposes large transaction costs and this, together with few investment opportunities, makes it difficult for companies to easily invest their funds.


Closed nature of the financial sector, together with high levels of financial sector growth, may lead to capital constraints.

Given high economic growth levels, the

Ethiopian economy is characterized by a high demand for credit for various infrastructure and other development projects.

However, since no foreign ownership of formal financial institutions is currently allowed, the demand for credit can only be addressed using domestic resources.

Source: Anja Smith, Doubell Chamberlain, 2010 Opportunities and challenges for MFI in Ethiopia


Source: 1Sofia L.Abrha , Seid H.Yimam; Dashen Bank as an Information Infrastructure, 2005


Ethiopia is characterized by significantly low levels of financial services usage.

Today, banking sector of Ethiopia has 12 private banks with more under formation and 3 government-owned banks

Based on estimates of the financial products used in Ethiopia, it is unlikely that more than 5m adults (about 11% of adults) in Ethiopia use any form of financial products. This figure is based on the existence of 2.9m bank accounts in June 2007, with microfinance institutions (MFIs) serving about 1.7m individuals (2006) and cooperatives serving 0.38m individuals.

Source: Anja Smith, Doubell Chamberlain, 2010 Opportunities and challenges for MFI in Ethiopia


According to Access Capital Research 2010, a thorough analysis made from 12 private banks’ annual reports, the private financial sectors’ overall deposits collected rose by 28% in a single year.

Basically Ethiopia’s banking operations have

always been collecting deposits, providing loans, and dealing in foreign exchange—is what provides the bulk of the income generated by Ethiopia’s private banks.

Source: Access Capital Research, 2010Course Lecturer Mohamed Guudle

(B.A )(M.A )

Taking into account Ethiopia’s history of development and regulatory environment, we find the record of private banks actually quite commendable while being judged by the following aspects which has been and still remains a challenge.

high profits, High cost of credit, Poor lending allocation, non-performing loans, very poor technological sophistication,


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10,000.00

20,000.00

30,000.00

40,000.00

50,000.00

60,000.00

Deposites (millions

ETB)

Loans (millions

ETB)

Total Assets

(millions ETB)

Foreign Assets

(millions USD)

NP after Tax

(millions ETB)

Capital (Birr

millions, end of

period)

FY 08/09

FY 09/10

Summary Indicators for Ethiopian private banks in 2 fiscal years

Despite the challenges and limitation observed , these private banks have shown significant amount of growth as shown in the graph below.


Banks’ Contribution to the Economy

1. Tax: The 12 private banks provide a very sizeable and disproportionately large tax payments as high as 30% .

586ETB million for tax was paid to the government in FY 2009/10. In addition, many other taxes are paid by bank activities, as they distribute dividends (taxed 10 %), pay salaries (taxed 30-35 %), and purchase fixed assets (taxed at 15 %VAT rate).

2. Employment Generation: Banking, as a category of manufacturing sector, goes second place from Textile and Food and Beverages, hiring 14,140 people(about 10 percent of total formal sector manufacturing employment).


Challenges/ problems of Private Banks

Interest rates have remained 4% for the last 5 years

despite inflation rate registered to be 19%. This implies real saving rate of -15.

Long term lending : (loans with maturities of 5year and above): More than 60% of loans are short term.

Poor payment system: Processing checks, transferring funds among banks, or even transferring funds among the branches of a given bank—has been particularly backward; the clearance of checks can take many days without the use of special procedures and movements of funds among banks still rely on manual methods.

However, positive changes are being observed. Course Lecturer Mohamed Guudle

(B.A )(M.A )

Financial Indicators Across Private Banks


Financial Indicators Across Private Banks


Profitability Measures


Proportion of Banking earnings

29%

15%

15%

15%Domestic Trade and services

Exports

Manufacturing

Construction


Agriculture is given the greatest share of total loans at NIB (6 %)

Manufacturing -Dashen (23%)

Domestic trade and services - CBO (77%)

Exports & Personal loans -Zemen (36 % &3% respectively)

Imports -Lion (28%)

Construction - Bunna (23%)

Transport -Wegagen (10 %)

Market share of banks in different sectors


Efficiency Measures Across Banks

Cost structure and efficiency: The cost-to-income ratio and the revenue per employee are key measures of cost-effectiveness and efficiency used in the banking sector.



The broad macroeconomic environment for private banks will be very positive in the coming years if many (or even most) of the targets under the new Five-Year Growth and Transformation plan are realized.

The key drivers of bank operational growth—deposits, loans, and FX activity—are primarily determined by trends in two macroeconomic variables: nominal GDP growth (which in turn reflects real GDP growth plus inflation) and foreign exchange flows.



Despite the considerable growth opportunities identified above, the sector will still face several notable challenges.

First, there will be increasing competition from at least 6 new entrants (Abay, Enat, Hawassa, Debub Global, Noah, Zam-Zam). These entrants will, on the margins, intensify competition for deposits, for loans and especially for foreign exchange.

Second, banks are increasingly being substituted by the general public as a source of funds by new share companies being established in a variety of sectors. Indeed, the compilation made bay the research of new share company formations reveals more than 20 such companies in the pipeline, some already operational, seeking to raise Birr 5.9 billion of capital.

Third, the micro-finance industry continues to show exponential growth. several of the largest MFIs already are bigger than some of the smaller banks, collecting .


Source: Data from companies under formation and press reports (Access Capital Research, 2010 )


End Of Chapter six

Thank you!

Course Instructor: Mohamed GuudleCourse Lecturer Mohamed Guudle

(B.A )(M.A )

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7.2 Financial sector of Ethiopia Course Lecturer Mohamed Guudle (B.A )(M.A )