Missing Financial Institutions and

Markets in Ethiopia

By: Yohannes Ayalew

Vice Governor and Chief Economist
National Bank of Ethiopia
 What is a financial institution?

It is an institution that provides financial services

There are three broad categories of financial institutions
1. Depository institutions that accepts and manages deposits and make loans:
- Banks, building societies, credit unions, trust companies, and mortgage loan
companies

2. Contractual institutions that raises long term finance

- Insurance companies and pension funds

3. Investment institutions that facilitate investment financing

- Investment banks, underwriters, brokerage firms
3 What is a financial market?

 A financial market is a market platforms in

which people trade financial securities and other
fungible items:
 It is usually associated with:
 low transaction costs and
 prices reflect supply and demand
 Types of Financial markets
4

1. Capital markets: primary and secondary

markets
a. Equity markets
b. Bond markets (Debt markets)
2. Money markets: primary and secondary
3. Foreign exchange markets
4. Derivative markets
5. Foreign exchange markets
5

Why do we need financial institutions and markets?

For their own sake?

Or
To fulfil other economic objectives?
 The roles of financial institutions and
6 markets in the economy

1. Capital accumulation and technological

progress
2. Saving mobilization
3. Facilitate monetization of economic
transactions and creating access to finance
4. Delivering information about investment
5. Optimizing allocation of financial resources
7 The Role of Ethiopian Financial
Institutions in Economic development

Five Perspectives
1. Economic Growth and Macroeconomic
Stability Perspective
a. Macroeconomic stability
b. Saving and investment
2. Financial Deepening Perspective
a. Increased role of money in economic transactions
b. Availability of credit
8

 3. Financial Inclusion
a. Access of financial services to all households at a
reasonable cost
b. Ensure continuity and certainty of investment
c. Ensure choice and affordability for clients
 4. Financial sector stability perspective
 Return on Assets
 Return on Capital
 Non-performing loans (NPls)
 Liquidity
 5. Poverty Reduction and Financial Inclusive
Growth perspective
9
Economic Growth and Macroeconomic Stability
Perspective

 Macroeconomic Stability

 Saving and Investment

10 Macroeconomic Stability

Money market:
 Have primary market for
government Short-term securities
 The effort to introduce an active secondary market for
short-term securities was not successful
 Excess reserves
 Lack of alternative financial instruments
 Limited access to financial services
 Prices played little role in deposit mobilization of
banks
11
So, Monetary Policy relied on direct control on
money supply aggregates until 2010
 Minimum deposit rate
 Reserve requirement
 T-bills sales in the primary market played
little role
 Occasionally resorting to credit ceilings
12
Was a secondary market for short-term
securities missing?
Ans. Not at least until 2013

Is it a missing market now? Yes

Because:
 Excess reserve is down to the required minimum
 The demand for short-term securities is increasing
 Access to financial services has grown significantly
 Prices start to play increasing role in deposit mobilization
 Deposit rates are spreading according to maturity
structure
13 Since 2011
 Monetary Policy has now resorted to indirect
control
 Reserve money is an anchor for monetary
policy
 T-bills sales in the primary market has
started to play a prime role in monetary
policy
 Minimum deposit rate plays limited role
 Reserve requirement
 No need to resorting credit ceilings
Table 1: Interest Rate per Annum (%)
Particulars 20102011 2012 2013 2014 2015
Lending 12.25 11.88 11.88 11.88 11.88 11.88
Deposit 4.15 5.38 5.38 5.38 5.38 5.38
Ethiopia Spread 8.10 6.50 6.50 6.50 6.50 6.50
Lending 14.37 15.05 19.72 17.31 16.51 16.09
Deposit 4.56 5.63 11.57 8.64 8.37 9.19
Kenya Spread 9.81 9.42 8.15 8.67 8.14 6.90
Lending 16.94 16.73 16.49 16.93 17.66 17.03
Deposit 7.10 7.96 10.04 8.58 7.76 7.59
Rwanda Spread 9.84 8.77 6.45 8.35 9.90 9.44
Lending 14.55 14.96 15.46 15.83 16.26 16.10
Deposit 6.57 6.78 9.51 9.82 9.86 9.90
Tanzania Spread 7.98 8.18 5.95 6.02 6.41 6.21
Source: NBE and World Bank Country Data (WDI)
 Table 1 (Cont’d): Interest Rate per Annum (%)

Particulars 20102011 2012 2013 2014 2015

Lending 20.17 21.83 26.31 23.25 21.53 22.60
Deposit 7.69 13.02 16.23 11.84 10.81 12.77
Uganda Spread 12.49 8.81 10.08 11.41 10.72 9.83
Lending 9.83 9.00 8.75 8.50 9.13 9.42
Deposit 6.47 5.67 5.44 5.15 5.80 6.15
South Africa Spread 3.37 3.33 3.31 3.35 3.32 3.26
Lending 11.01 11.03 12.00 12.29 11.71 11.63
Deposit 6.23 6.74 7.64 7.68 6.92 6.91
Egypt, Arab Rep. Spread 4.77 4.29 4.36 4.61 4.79 4.72
Lending 5.81 6.56 6.00 6.00 5.6 4.35
Deposit 2.75 3.5 3.00 3.00 2.75 1.5
China Spread 3.06 3.06 3.00 3.00 2.85 2.85
Source: NBE and World Bank Country Data (WDI)
Table 2: Annual Headline Inflation
Particulars 2010 2011 2012 2013 2014 2015
Ethiopia 7.3 38.0 20.8 7.4 8.5 10.4
Kenya 4.0 14.0 9.4 5.7 6.9 6.6
Rwanda 2.3 5.7 6.3 4.2 1.8 2.5
Tanzania 6.2 12.7 16.0 7.9 6.1 5.6
Uganda 4.0 18.7 14.0 5.5 4.3 5.2
South Africa 4.3 5.0 5.7 5.4 6.4 4.6
Egypt, Arab Rep. 11.3 10.1 7.1 9.4 10.1 10.4
China 3.3 5.4 2.6 2.6 2.0 1.4
India 12.0 8.9 9.3 10.9 6.4 5.9
Source: NBE and World Bank Country Data (WDI)
17
Saving and Investment

 One of the growth constraints in developing

countries is raising enough financing for
investment
 At the early stage of development,
 Capital accumulation is the main driver of
growth
 Private and public capital accumulation
 Productivity growth and innovation play
limited role
 Raising the rate of growth domestic saving ratio is
the main challenge
 What did we do to raise the rate of growth of gross domestic
18
savings?

 Enhance the role of financial institutions

 Banks
 Strengthen banks in capital and reserves
 Encourage banks to branch out throughout the
country
 Transform maturity structure of loans from
dominantly short-term to medium and long term ones
 Eliminate undesired excess reserves
 MFIs
 Strengthen MFIs in capital and reserves
 Encourage them to branch out in the rural area
19
 Enhance the role of financial institutions (cont’d)
 Strengthen the Pension scheme
 Introduce private pension scheme
 Reform the Public pension scheme
 Insurance institutions
 Strengthen in terms of capital and reserves
 Housing Savings
 Introduce various low cost housing scheme
 GRD Bond: In primary market
 Introduce GRD pond
Table 3: Financial Institutions in Savings Mobilization (In Billions of Birr)
Annual
No. Particulars Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Average
Growth

1 Bank Deposit 98.1 140.1 186.5 236.4 291.8 366.8 436.7 28.5

  o/w Housing Scheme - - - 0. 4 9.4 16.3 21.0 770.3

2 Social Security 3.8 4.2 6.7 10.2 18.3 26.2 41.7 50.6

  PSSSA 3.8 4.2 6.3 8.5 14.6 19.4 30.6 42.9

  POESSA - - 0.4 1.7 3.7 6.8 11.2 144.6

3 Microfinance 2.7 3.8 5.5 7.6 11.8 14.8 18.4 38.5

4 GERD Bond     3.3 4.8 5.5 6.7 7.6 24.3

5 Total Financial Saving 104.5 148.1 202.0 259.1 327.4 414.6 504.5 30.2
Percentage Contribution to Total Financial Savings  
1 Banks 93.8 94.6 92.4 91.3 89.1 88.5 86.6  

2 Non-Banks 6.2 5.4 7.6 8.7 10.9 11.5 13.4  

  O/w Social Security 3.6 2.8 3.3 3.9 5.6 6.3 8.3  

100.0 100.0 100.0 100.0 100.0 100.0  

3 Total Financial Saving 100.0
Source:NBE
 Capital Market in Ethiopia
21
 What is a capital market?
 It is a market where funds are raised through issuance
of shares and debt instruments to finance long-term
investment
 Capital market consists of primary and secondary
markets
 Primary market a market where investors raises investment
finance by selling for the first time to those who have surplus
funds
 Although in rudimentary form it exists in Ethiopia
 Eg. banks are raising capital by selling shares to the public
 The market directly affects the level of domestic savings and
investment
22
 Secondary market is a market where the
existing shares and debt instruments are traded
 This market affects the level of savings and
investment only indirectly by:
 Creating liquidity
 Ensuring the continuity of the primary market
 This market does not exist in Ethiopia
 Is the capital market a missing market in Ethiopia?
23 Preconditions for the Development A Capital
Market

 The literature outlines several preconditions for the

successful development of equity and debt markets. Below
are some of the key ones:
1. Share of the private sector in the economy
2. Deregulated interest rates
3. Well developed government securities market that can
provide the benchmark yield curve for bond pricing
4. Up to date clearing and settlement systems in terms of both
infrastructure and investor protection
 Preconditions for the Development of A Capital
Market (Cont’d)
24

5. A regulatory framework that provides for

adequate
 disclosure,
 accounting standards,
 proper corporate governance and the like
6. Enactment of laws to provide for regulatory oversight
and investor protection
7. A credible system of experienced rating agencies in
order to get opinions about debt issues into the public
domain
25 Has Ethiopia lost because of the absence of a
capital markets?

The answer inclines more to the ‘no’

Why?
1. There are only few potential listed companies who
can fulfil the listing requirements.
a. The private sector is not yet developed
- Potential listed companies are in the financial sector
b. Poor accounting standards and discourse culture
of companies
26
2. The overarching problems so far have been:
a. Access to finance and financial inclusion
 A significant section of the rural population has limited
access to financial services
b. Quantity (availability) not price has so far been the
major player in the market for credit
- The level of domestic savings is the major constraint
- The primary market is playing an important role
27

 Access to finance and financial inclusion

Table 4: Access to Commercial Banking Services

Absolute Percentage
Indicators 2009/10 2015/16 Change Change
A B C=B-A D=B/A
Number of Banks 15 18 3 20.0
Number of Bank Branches 680 3187 2,507 368.7
Number of Bank Accounts (In Million) 3.5 20.3 16.8 480.0
Total Deposits (In Billions of Birr) 98.6 438.2 339.6 344.3
Capital and Reserves (In Billion of Birr) 12.4 46.3 33.9 273.4
  As percentage of GDP (%)
Total Deposits 26.0 34.7 8.7 33.3
Capital and Reserves 3.3 3.7 0.4 12.1
Source: NBE and CBs
Table 6: Access to Microfinance Services
%
Indicators 2010 2016 Growth
Number of Microfinance Institutions 30 35 16.7
Number of Branches 1,034 1,680 62.5
Number of Deposit Account (In
millions) 2.4 4.3 79.2
Asset (in billions of Birr) 8.0 36.7 358.8
Total Loan (in billions of Birr) 5.8 25.2 334.5
Total Deposit (in billions of Birr) 2.7 18.4 581.5
Total Capital (in billions of Birr) 2.4 8.9 270.8
Source:NBE
Table : Access to Financial Services in Selected Countries
Bank branches per 100,000 adults ATMs per 100,000 adults
Particulars 2010 2014 2015 2016 2010 2014 2015 2016
Africa
Ethiopia 1.4 4.5 5.1 6.0 0.3 1.9 2.4 3.2
Kenya 4.7 5.8 5.9  8.9 10.2 10.2 
Ghana 5.4 6.1 7.2  3.9 8.2 10.3 
Nigeria 6.5 5.6 4.9  11.1 16.1 16.7 
South Africa 9.9 10.9 10.5  55.8 66.2 69.3 
Egypt 4.8 4.8 4.7  9.0 12.7 13.8 
Sub-Saharan
Africa 3.6 4.1    2.9 6.0   
Asia
China n.a 8.1 8.5  24.8 55.0 76.4 
Thailand 11.2 12.7 12.6  83.0 111.9 113.5 
South Korea 18.3 17.4 16.9  266.6 290.7 278.8 
Malaysia 10.9 10.7 10.7  53.2 51.9 51.1 
India 10.1 13.0 13.6  7.3 18.1 19.7 

Source: IMF Financial Access Survey (2016) and NBE

 Will capital market be considered a missing market in the near future?
31

 Yes. Because,
 The private sector is developing
 The number of potential listed companies could
emerge from the production sector
 The economy is getting complex
 The problem of access to finance is receding
 Price starts to play important role in the financial
markets
32

Achievements without a capital market

 Table 5፡ Gross domestic savings
33
(percentage of GDP)
2005 2014
Ethiopia 10.3 22.5
Nigeria 18.0 19.8 1/
Uganda 11.7 19.6
Ghana 3.7 10.8 1/
China 46.4 50.4 1/
India 31.5 29.0
South Korea 34.6 34.5
Source World Economic Indicator
1/ Latest data refers 2013
 Table 6፡ Gross Domestic Investment (% of
34
GDP)
1995 2014
Ethiopia 23.6 40.3
Kenya 21.8 21.4
Nigeria 7.1 14.7 1/
Uganda 12.4 28.9
Ghana 20.0 23.8 1/
China 41.7 47.7 1/
India 26.1 31.4
South Korea 34.8 29.2
Source: World Development Indicators
1/ The latest figure for 2013
 Table 7: Real GDP Growth in Selected Countries

Particulars 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 Average

Ethiopia 10.5 13.5 8.7 9.9 10.3 10.4 10.5

Kenya 8.4 6.1 4.6 5.7 5.3 5.6 6.0
Rwanda 7.3 7.8 8.8 4.7 7.0 6.9 7.1
Tanzania 6.4 7.9 5.1 7.3 7.0 7.0 6.8
Uganda 7.7 6.8 2.6 4.0 4.9 4.8 5.2
South Africa 3.0 3.3 2.2 2.3 1.6 1.3 2.3
Egypt 5.1 1.8 2.2 2.1 2.2 4.2 2.9
China 10.6 9.5 7.9 7.8 7.3 6.9 8.3
India 10.3 6.6 5.6 6.6 7.2 7.6 7.3
Source: NBE, NPC, IMF-WEO and World Bank Country Data (WDI)
36

Financial Deepening Perspective

a. Increased role of money in economic
transactions
b. Availability of credit
Table 8: Financial Deepening Indicators of Selected Countries (In Percent)
Particulars 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16

M2/ GDP
Ethiopia 27.54 28.22 25.34 27.14 28.07 28.61 29.14
Kenya 40.3 40.9 40.9 41.4 42.6 42.2  
Tanzania 25.1 24.7 23.9 22.7 23.4 24.7  
Uganda 22.9 22.4 20.4 20.8 22.3 22.9  
South Africa 75.8 74.6 72.7 71.1 71.0 74.6  
Egypt 80.7 75.8 70.5 75.3 76.5 78.4  
China 177.5 175.9 182.4 188.2 193.2 205.7  
India 76.2 78.8 76.9 77.9 77.8 79.2  
Domestic Credit/GDP
Ethiopia 27.54 26.32 25.30 26.92 28.28 30.31 32.08
Kenya 41.1 41.7 42.2 42.9 44.3 45.2  
Tanzania 15.5 17.2 18.0 18.2 20.2 22.8  
Uganda 14.6 16.1 13.8 14.2 16.8 17.9  
South Africa 185.5 171.5 180.7 182.2 185.7 180.1  
Egypt 69.4 74.6 73.9 82.0 88.2 95.8  
China 143.6 142.1 150.8 157.6 169.4 196.9  
India 71.9 76.1 77.1 77.6 75.8 76.8  
Source: NBE, NPC and World Bank Country Data (WDI)
Table 9: Financial Deepening Indicators of Selected Countries (Cont’d)
Particulars 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16

Credit to Non-Government/GDP
Ethiopia 18.8 20.8 22.4 24.4 25.7 27.9 29.0
Kenya 27.2 30.6 29.5 31.7 34.2 34.9  
Tanzania 11.9 12.6 13.0 12.9 13.8 15.4  
Uganda 13.3 15.4 13.7 13.5 14.4 15.2  
South Africa 149.0 139.5 146.1 149.5 151.5 150.0  
Egypt 33.1 31.2 27.7 26.5 25.9 26.5  
China 127.6 124.1 130.0 135.4 141.9 155.3  
India 49.6 51.3 51.9 52.2 51.8 52.7  
Source: NBE, NPC and World Bank Country Data (WDI)
39

 Financial sector stability perspective

 Return on Assets
 Return on Capital
 Non-performing loans (NPls)
 Liquidity
Table 10: Ratio of Non Performing Loans to Total Loans
Particular 2010 2011 2012 2013 2014 2015 2016
Ethiopia 3.47 2.06 1.36 2.49 2.02 2.07 2.85
Kenya 6.29 4.43 4.59 5.05 5.46 5.99 
Rwanda 11.27 8.22 6.00 7.00 5.22 5.84 
Tanzania 7.84 5.40 6.40 5.12 6.58 6.26 
Uganda 1.86 2.03 4.06 5.76 4.01 5.13 
South Africa 5.79 4.68 4.04 3.64 3.24 3.12 
Egypt, Arab Rep. 13.60 10.90 9.80 9.30 8.50 7.20 
China 1.13 0.96 0.95 1.00 1.10 1.50 
India 2.39 2.67 3.37 4.03 4.35 5.88 
Source: NBE and World Bank Country Data (WDI)    
41

Poverty Reduction and Inclusive Growth

perspective

 Financial inclusion and access to financial

services play significant role
42 Table 11 Gini Coefficient)

Particulars 2000 2013

Sub-Saharan Africa
Ethiopia 29.8 (2004) 30.0 (2013)
Kenya 46.3 (1997) 48.5 (2013)
Rwanda 48.6 (2000) 51.3 (2011)
South Africa 57.8 (2000) 63.4 (2011)
Egypt 32.8(2000) 30.8 (2008)
Emerging Countries
China 39.2 (1999) 42.1 (2009)
India 33.4 (2005) 33.9 (2010)
Developed Countries
USA 40.5 (2000) 41.1 (2013)
Source: WB WDI
Conclusion
44

 1. Identifying the missing financial institutions and

market must be defined in the context of
 The countries of level of development
 The development strategy
 2. There is a need for sequencing and ordering of
financial sector reform
 Access to finance and financial inclusion needs first
be addressed
 Macroeconomic stability must be ensured
 3. Debt market should come before the equity market
 Sets benchmark for the equity market
 Relatively easy to regulate
45

Thank You