Chapter 6

financial markets
Ethiopian
and institutions
 Chapter contents
 Ethiopian financial markets
 Ethiopian financial institutions
 Financial regulation in Ethiopia

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 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

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 6.1 Ethiopian financial markets
Government treasury bills
 are debt instruments issued by the
federal government.
 have maturities of 28 days,91 days ,182
days, and 364 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,
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 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
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 6.1 Ethiopian financial markets

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 6.1 Ethiopian financial markets
Treasury bill Price Per Br 100 Face Amount
2008/09 2009/10 2010/11
28 Days 99.951 99.943 99.886
91Days 99.783 99.757 99.703
182 Days 99.657 91.352 99.645

Treasury bill Yield

2008/09 2009/10 2010/11

28 Days 0.64% 0.74% 1.49%
91 Days 0.87% 0.98% 1.19%
182 Days 0.69% 18.99% 0.71%

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 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
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 6.1 Ethiopian financial markets

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 6.1 Ethiopian financial markets
Interbank loan Market
 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
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 6.1 Ethiopian financial markets

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 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
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 6.1 Ethiopian financial markets

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 6.1 Ethiopian financial markets

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 6.1 Ethiopian financial markets
Capital Markets
Why Capital Markets?
 Enhanced saving mobilization
 Help in resource allocation
 Promote efficient financial system
 Help term transformation and
improve capital structure
 Allow deconcentration of ownership
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 6.1 Ethiopian financial markets
Capital markets
Why Capital Markets?...
 Improve accounting and auditing
standards
 Attract Foreign Direct
Investment(FDI)
 Provide effective tools for monetary
and fiscal policy
 Help privatization efforts
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 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 & WB, the Ethiopian
government didn’t want to establish
capital markets in the country.
(Go to List of SEs in Africa)

 but capital market instruments are

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 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
2011 totaled Br 40.3 bill compared to
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 6.1 Ethiopian financial markets

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 6.1 Ethiopian financial markets

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 6.1 Ethiopian financial markets
Stocks
 Despite absence of capital markets,
financial institutions and
corporations directly issue their
stocks to the general public.
 Due to absence of a secondary
market, investors seek the help of
the original issuers when they want
to sell their stocks
 Stocks of banks are highly
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 6.1 Ethiopian financial markets
Mortgages
 mortgage loans are extended by
construction and business
bank(CBB), and Commercial Bank of
Ethiopia(CBE).
 CBE has been extending mortgage
loans to condominium owners.
 the banks do not have any options
other than keeping the mortgage
loans until maturity
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 6.1 Ethiopian financial markets
Foreign Exchange Market
 Foreign currencies are traded
through an open auction between
NBE and Banks and among banks in
the country.
 Auction is organized by the National
Bank of Ethiopia
Currencies traded in the forex market
include: - US DOLLAR - JAPANESE YEN -
SWIDISH KRONER
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
 6.2 Ethiopian financial institutions
Formal financial institutions

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 6.2 Ethiopian financial institutions
Formal financial institutions
Banks
 State owned Vs private
 Development, construction , and
Commercial banks
 By June 2010, there were 19 banks,
of which 16 were private while 3 are
state owned
 Banks account for 81% of capital of
financial institutions in the country
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 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
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 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
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 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

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 6.2 Ethiopian financial institutions
Formal financial institutions

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 6.2 Ethiopian financial institutions
Formal financial institutions
Insurance companies

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 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
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 6.2 Ethiopian financial institutions
Formal financial institutions
Pension Funds
 Social Security Agency
• Administers pension programs for public
sector employees
• Private firms used to run their own
Provident Fund
• Private sector pension fund has been
established through Regulation No
202/2011
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 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

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 6.2 Ethiopian financial institutions
Informal financial institutions
Iqqub
 are variants of Rotating Saving and
Credit Associations(ROSCAS)
 Established within family and friendship
groups

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 6.3 Financial market regulation in
 Ethiopia
NBE regulats the financial market
 Issues licenses to Banks, Insurance
firms,and Microfinance Institutions.
 Regulats the financial sector through
issuance of directives.
 Supervises banks,Insurance
companies and MFIs

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 6.3 Financial market regulation in
 Ethiopia
NBE regulats the financial market by
the power vested upon it through
 The Monetary and Banking
Proclamation No. 83/1994
 It was issued along with The Licensing
and Supervision of Banking Business
Proclamation No. 84/1994

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 6.3 Financial market regulation in
 Ethiopia
New Proclamations
 The National Bank of Ethiopia
Establishment (as Amended)
Proclamation No. 591/2008
 Banking business proclamation No.
592/2008
WHY a NEW Proclamation?
 In 1994 there were only 3 banks all state-
owned but in 2008 there were 12 banks of
which 8 were private
 loans
Ethiopian amounted
Financial Markets to MEKONNEN
and Institutions Instructor: only M.ETB February
1.15bill2016 in 371994
of 39
 6.3 Financial market regulation in
Ethiopia
WHY a NEW Proclamation?
 Malpractices in the banking sector
 Unavailability of credit information sharing
mechanism
 Increased pottential for bank failure

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 End of Chapter 6

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