1

Chapter 6

Ethiopian financial markets and

institutions
Chapter contents
 Ethiopian financial markets
 Ethiopian financial institutions
 Financial regulation in Ethiopia
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
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
6.1 Ethiopian financial markets
Government treasury bills
 banks have been the primary investors in
government treasury bills buying 89% of bills in
2006 and 74% in 2007.
 however, non-bank firms became major
investors since 2008 with 93% in 2008 and 67%
in 2009.
 the weighted average yield on treasury bills has
increased from 5.3% in 2006 to 7.9% in 2009
6.1 Ethiopian financial markets
Treasur
Treasuryybill
billpurchases
purchasesby
byinvestor
investortype
type
70,000.00
70,000.00

60,000.00
60,000.00

50,000.00
50,000.00

40,000.00
40,000.00

30,000.00
30,000.00

20,000.00
20,000.00

10,000.00
10,000.00

0.00
0.00
2006 2007 2008 2009
2006 2007 2008 2009
Amount sold Banks Non banks
Amount sold Banks Non banks
 6.1 Ethiopian financial markets
Treasury bill yield
Column1
Column1 2006
2006 2007
2007 2008
2008 2009
2009 Average
Average
Average
AverageWeighted
WeightedYield
Yield 0.53
0.53 0.677
0.677 0.743
0.743 0.786
0.786 0.684
0.684
28-day
28-daybill
bill 0.417
0.417 0.7
0.7 0.636
0.636 0.75
0.75 0.62575
0.62575
91-day
91-daybill
bill 0.574
0.574 0.704
0.704 0.871
0.871 0.976
0.976 0.78125
0.78125
182-day
182-daybill
bill 0.6
0.6 0.628
0.628 0.723
0.723 0.633
0.633 0.646
0.646
 6.1 Ethiopian financial markets
Effective rate of return
Co
Column1
lumn1 2006
2006 2007
2007 2008
2008 2009
2009 Ave
Average
rage
Average
AverageWWeighted
eightedYield
Yield 2.9%
2.9% 4.3%
4.3% 4.3%
4.3% 4.9%
4.9% 4.1%
4.1%
28-day
28-daybill
bill 5.1%
5.1% 8.7%
8.7% 7.9%
7.9% 9.4%
9.4% 7.8%
7.8%
91-day
91-daybill
bill 2.3%
2.3% 2.8%
2.8% 3.5%
3.5% 4.0%
4.0% 3.2%
3.2%
182-day
182-daybill
bill 1.2%
1.2% 1.3%
1.3% 1.5%
1.5% 1.3%
1.3% 1.3%
1.3%
 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
 it accounted for 7.1% of total deposit in 2006
and 4.5% in 2009
 time deposits are kept with varying maturities
of a few months to more than 2 years
6.1 Ethiopian financial markets

Trends
Trendsof
ofreturns
returnson
ontime
timedeposit
deposit
7.00%
7.00%

6.00%
6.00%

5.00%
5.00%
Interets rate
Interets rate

4.00%
4.00% Up
Uptoto11yryr
3.00%
3.00% 1-2
1-2yrs
yrs
Over
Over22yrs
yrs
2.00%
2.00%

1.00%
1.00%

0.00%
0.00%
 6.1 Ethiopian financial markets
Interbank loan
 commercial banks borrow from each other
 it began operation in September 1998
 since then a total of Br 292mill interbank loan
has been extended between November 2000
and April 2008.
 the maximum interbank loan was made in
2003 by the amount of Br 93.43mill
 No interbank loan has been extended since
then
6.1 Ethiopian financial markets

Trend
Trendof
ofinterbank
interbankloans(in
loans(in000)
000)
100,000.00
100,000.00
90,000.00
90,000.00
Interbank loan amount(in 000)

80,000.00
Interbank loan amount(in 000)

80,000.00
70,000.00
70,000.00
60,000.00
60,000.00
50,000.00
50,000.00
40,000.00
40,000.00
30,000.00
30,000.00
20,000.00
20,000.00
10,000.00
10,000.00
-
- 2000 2001 2002 2003 2004 2005 2006 2007 2008
2000 2001 2002 2003 2004 2005 2006 2007 2008
Interbank loan in thousands 7,000. 38,078 28,999 93,343 - 10.60 7.50 30.00 34.00
Interbank loan in thousands 7,000. 38,078 28,999 93,343 - 10.60 7.50 30.00 34.00
 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
6.1 Ethiopian financial markets

Interbank
Interbankloan
loanlenders
lendersby
byaggregate
aggregateloan
loansize
size
Bank of Abyssinia
Bank of Abyssinia

Awash International Bank

Awash International Bank

Commercial Bank of Ethiopia

Commercial Bank of Ethiopia

Nib International Bank

Nib International Bank

0 20000 40000 60000 80000 100000 120000

0 20000 40000 60000 80000 100000 120000
6.1 Ethiopian financial markets

Interbank
Interbankloan
loanborrowers
borrowersby
byaggregate
aggregateloan
loansize
size

Nib International bank

Nib International bank

Wegagen bank
Wegagen bank

Awash international bank

Awash international bank

0 20000 40000 60000 80000 100000 120000 140000 160000

0 20000 40000 60000 80000 100000 120000 140000 160000
 6.1 Ethiopian financial markets
Capital markets
 no capital market in Ethiopia
 despite an intense pressure from
entrepreneurs, academicians and
international financial institutions such as
IMF, the Ethiopian government didn’t want to
establish capital markets in the country.
 but capital market instruments are offered to
investors informally. Eg. Stocks and bonds
 6.1 Ethiopian financial markets
Bonds
 are issued by public enterprises(EEPCO and
Ethio Telecom), state/regional governments,
and development bank of Ethiopia(DBE)
 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
6.1 Ethiopian financial markets
Amount
Amountof
ofbonds
bondsissued
issuedinin2009/10
2009/10by
by
issuer
issuertype
type
Private sector
Private sector

Development
Development
Bank of Ethiopia
Bank of Ethiopia
EEPCO
EEPCO

Regional
Regional
governments
governments
6.1 Ethiopian financial markets
Value
Valueof
ofbonds
bondsoutstanding
outstandingby
byJune
June2010
2010
Private sector
Private sector
0%
0%

Development Bank of
Development Bank of
Ethiopia
Ethiopia
15%
15%

Regional governments
Regional governments
25% Public enterprises
25% Public enterprises
60%
60%
 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 for
stocks in the country, investors seek the help
of the original issuers when the want to sell
their stocks
 Stocks of banks are highly demanded than
non-bank financial institutions,
 6.1 Ethiopian financial markets
Mortgages
 mortgage loans are extended by construction
and business bank(CBB).
 the bank does not have any other option than
keeping the mortgage loans until maturity
 6.2 Ethiopian financial institutions
Formal financial institutions
Relative
Relativesize
sizeof
offinancial
financialinstitutions
institutionsby
bycapital
capital
MFI
MFI
Insurance
Insurance 15%
15%
4%
4%

Banks
Banks
81%
81%
 6.2 Ethiopian financial institutions
Formal financial institutions
Banks
 State owned Vs private
 Development, construction , and Commercial
banks
 By June 2010, there were 15 banks, of which
12 were private while 3 are state owned
 Banks account for 81% of capital of financial
institutions in the country
 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
 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
 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
 6.2 Ethiopian financial institutions
Formal financial institutions
 6.2 Ethiopian financial institutions
Formal financial institutions
 6.2 Ethiopian financial institutions
Formal financial institutions
Insurance companies
SIze
SIzeof
ofinsurers
insurersby
bycapital
capitalas
as of
ofJune
June 2010
2010
Ethiopian Insurance. Co.
Ethiopian Insurance. Co.
National Insurance. Co.
National Insurance. Co.
Nyala Insurance. Co.
Nyala Insurance. Co.
Awash Insurance. Co.
Awash Insurance. Co.
Global Insurance. Co.
Global Insurance. Co.
Nile Insurance. Co.
Nile Insurance. Co.
Nib Insurance. Co.
Nib Insurance. Co.
Africa Insurance. Cc
Africa Insurance. Cc
Oromia Insurance. Co.
Oromia Insurance. Co.
United Insurance. Co.
United Insurance. Co.
Lion Insurance. Co.
Lion Insurance. Co.
Ethio-Life Insurance. Co.
Ethio-Life Insurance. Co.
0 50 100 150 200 250 300 350 400
0 50 100 150 200 250 300 350 400
 6.2 Ethiopian financial institutions
Formal financial institutions
Micro-finance institutions
 The five largest MFIs; namely
 Amhara
 Dedebit
 Oromia
 Omo and
 Addis Credit and Savings Institutions
 6.2 Ethiopian financial institutions
Formal financial institutions
Micro-finance institutions
 The five largest MFIs account for
 87.4 % of the total capital
 93.5 % of deposits
 90.4 % of credit
 90.5 % of total assets of the sector
 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
 6.2 Ethiopian financial institutions
Informal financial institutions
Iqqub
 are variants of Rotating Saving and Credit
Associations(ROSCAS)
 Established within family and friendship groups
 6.3 Financial market regulation in Ethiopia
 NBE regulats the financial market
 Banking business proclamation 1994
 Banking business proclamation 2008
End of Chapter 6