POLICY INITATIVES FOR IMPROVED FINANCIAL SERVICE PROVISION IN THE RURAL AREAS: THE CASE OF

ETHIOPIA

By Getahun NanaNational Bank of Ethiopia

July 2008

Introduction

1. Top Government Economic policy agenda is accelerated and sustained economic growth Agriculture playing a leading role

2. The role of Finance in bringing accelerated growth Finance being an essential catalyst to boost investment by:

mobilizing scarce financial savings and channelling it to productive investments;

reducing risk of investors and of course savers; lessening the barriers to new entry; and facilitating efficient exchange of goods and services

Thus, there is a need to have vibrant, efficient and strong financial system which is accessible to majority of the population, if not all.

Introduction continued

3. Creating enabling environment is essential to improve accessibility of finance

4. Creation of enabling environment for financial systems includes:

maintaining stable macro-economic condition, ensuing soundness of FI, and developing stronger underlying infrastructure

including in information and legal dimensions.

Introduction continued

5. The objective the paper To outline policy initiatives taken by the GoE

since early 1990s to foster development and accessibility of finance to the rural areas in particular and the country in general (section 2);

Section one presents overview of Ethiopian financial system; and

Section 3 concludes the paper.

I Financial Systems in Ethiopia

6. Financial systems of a country Financial institutions; Financial markets Financial instruments

7. Financial systems evolve over time – three distinct periods. Pre Derg (1905 - 1974 ): The first bank in Ethiopia was

established in 1905 (Bank of Abyssinia). Derg (1974 – 1991): Nationalizations of financial institutions, Post derg (1991 ---): Reorientation of the financials system to

market economy.

Financial Systems in Ethiopia

8. Reforms since 1991 included • comprehensive restructuring of government owned financial

institutions, and• opening the sector for local private equity participation;

9. As a result, nine banks (Zemen Bank), eight insurance companies and 28 MFIs have been created until June 2008.

10.Ownership of the newly created institutions: – Banks and insurers 100% by local private shareholders

– MFIs mixed= regional governments, local NGO, and private .

Financial Systems in Ethiopia

11.Other financial institutions (other than banks, MFIs and insurers)

Pension fund, and saving and credit cooperatives (5,437 of

them, September 2006) Limited contractual saving services Thus financial institutions in Ethiopia

constitute: the central bank (NBE), 12 banks, 9 insurers, 28 MFI, the pension fund, and over 5000 SACCOS

Financial Systems in Ethiopia

12. Financial markets in Ethiopia are underdeveloped. Inter-bank local money and foreign exchange

market is almost non- existent or inactive No long term debt securities market or No stock exchange market

13. Financial instruments limited to government papers (mostly Tbs) No secondary market (even for gov’t papers). Banking products are traditional (saving, time &

demand deposits; as well as standard loan products)

Financial Systems in Ethiopia

14. Thus Ethiopian financial systems is thus bank dominated.

Yet it is not easily accessible to large segment of the population A study by the World Bank showed that only 20% of adult

population have accounts in financial institutions in the median African country (Honohan, P. 57)

The figure for Ethiopia is about 19% (NBE, Banking Supervision).

Financial Systems in Ethiopia

15. Reason for low access: Low geographic and demographic penetration,

and All banks are headquartered in Addis Ababa (the capital

city). Ethiopia : Population per bank branch135,404 (June 2008) Spain 96 branches per 1000 people (Kunt P.6). Thus mainstream bank branches are hardly accessible to

rural poor.

Number and distribution of Bank Branches

Region # of branches

Share in total (%)

Addis Ababa 213 37.9

Oromia 135 24

Amhara 84 15

SNNP* 55 9.8

Tigray 38 6.8

Others (6 of them) 37 6.6

Total 562 100

Financial Systems in Ethiopia

Affordability: – For a small farm landholder living on subsistence,

minimum account opening balance (birr 50) set by banks is relatively high.

– For banks small farmers/the poor are considered unbankable.

– Loans are granted to urban rich who can offer collateral

– Average loan size for the banking sector was birr 728 for March, which was much higher than borrowing capacity of the poor.

Facts on mainstream banking: Loans

Loan range Amount (%)

# of A/c (%)

Birr 1 million & less

16.99 90.38

Over Birr 1 million

83.01 9.62

Total Birr 39,973 million

54,900 (# of A/C)

Facts on mainstream banking: Deposit mobilization

There are 3,403,959 deposit accountsBalance maintained in the accounts stood

at birr 60,943 million A.A. accounted for 66% of the total2% deposit account holder contributed for

73% of total deposits; or98% of account holder contributed for only

27% of deposits

II. Policy Initiatives

1. Creating enabling environment Government has a central role in creating enabling

environment for expansion, competition and growth of financial services industry in the country.

2. First Maintaining sound Macro-economic condition Inter-temporal nature of financial contracts, low inflation and stable exchange rate until recently, Ethiopia’s macroeconomic system has

been stable over the last five years, the country grew by about 11%

per annum inflation rate has been below 10% exchange rate continued to be stable however the current rise in inflation is worrisome

Creating Enabling Environment

3. Second, Conducive Legal and regulatory Framework

i. Banking and insurance laws of 1994 (now being revised)

ii. MFI law of 1996 (under revision)

iii. A law that allows for establishment and operation of leasing companies

iv. Foreclosure law

4. Third, Creation of Credit information bureau

Creating Enabling Environment

5. Fourth, expanding modern telecommunication network to rural areas

6. Fifth, Payment System Modernization Project

Mitigating market failure

• Input loans that enable farmers buy agricultural inputs

• Rural Financial Intermediation Program (RUFIP)

• Urban Financial Intermediation Program (UFIP)

The Way Forward 1. The challenge to stabilize the economy (inflation currently is

running at doable digit).

2. Modernizing the payment and settlement systems improve breadth and depth of access to finance speed up the implementation of this important program.

3. Develop missing laws and regulations On electronic banking/transactions

4. Develop securities market particularly, market for long term debt securities.

5. Extending application of foreclosure law to MFIs6. Extending credit information sharing system to MFIs, utility service

providers, tax authorities and commodity exchange, and7. Expand further appropriate telecommunication infrastructure.