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459 policy initatives for improved financial services national

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  • 1. POLICY INITATIVES FOR IMPROVED FINANCIAL SERVICE PROVISION IN THE RURAL AREAS: THE CASE OF ETHIOPIA By Getahun Nana National Bank of Ethiopia July 2008
  • 2. Introduction
    • Top Government Economic policy agenda
      • is accelerated and sustained economic growth
      • Agriculture playing a leading role
    • 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.
  • 3. Introduction continued
    • Creating enabling environment is essential to improve accessibility of finance
    • 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.
  • 4. Introduction continued
    • 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.
  • 5. I Financial Systems in Ethiopia
    • Financial systems of a country
      • Financial institutions;
      • Financial markets
      • Financial instruments
    • 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.
  • 6. Financial Systems in Ethiopia
    • Reforms since 1991 included
        • comprehensive restructuring of government owned financial institutions, and
        • opening the sector for local private equity participation;
    • As a result, nine banks (Zemen Bank), eight insurance companies and 28 MFIs have been created until June 2008.
    • Ownership of the newly created institutions:
          • Banks and insurers 100% by local private shareholders
          • MFIs mixed= regional governments, local NGO, and private .
  • 7. Financial Systems in Ethiopia
    • 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
  • 8. Financial Systems in Ethiopia
    • 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
    • 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)
  • 9. Financial Systems in Ethiopia
    • 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).
  • 10. Financial Systems in Ethiopia
    • 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.
  • 11. Number and distribution of Bank Branches 100 562 Total 6.6 37 Others (6 of them) 6.8 38 Tigray 9.8 55 SNNP* 15 84 Amhara 24 135 Oromia 37.9 213 Addis Ababa Share in total (%) # of branches Region
  • 12. 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.
  • 13. Facts on mainstream banking: Loans 54,900 (# of A/C) Birr 39,973 million Total 9.62 83.01 Over Birr 1 million 90.38 16.99 Birr 1 million & less # of A/c (%) Amount (%) Loan range
  • 14. Facts on mainstream banking: Deposit mobilization
    • There are 3,403,959 deposit accounts
    • Balance maintained in the accounts stood at birr 60,943 million
    • A.A. accounted for 66% of the total
    • 2% deposit account holder contributed for 73% of total deposits; or
    • 98% of account holder contributed for only 27% of deposits
  • 15. II. Policy Initiatives
    • Creating enabling environment
      • Government has a central role in creating enabling environment for expansion, competition and growth of financial services industry in the country.
    • 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
  • 16. Creating Enabling Environment
    • Second, Conducive Legal and regulatory Framework
        • Banking and insurance laws of 1994 (now being revised)
        • MFI law of 1996 (under revision)
        • A law that allows for establishment and operation of leasing companies
        • Foreclosure law
    • Third, Creation of Credit information bureau
  • 17. Creating Enabling Environment
    • Fourth, expanding modern telecommunication network to rural areas
    • Fifth, Payment System Modernization Project
  • 18. Mitigating market failure
        • Input loans that enable farmers buy agricultural inputs
        • Rural Financial Intermediation Program (RUFIP)
        • Urban Financial Intermediation Program (UFIP)
  • 19. The Way Forward
    • The challenge to stabilize the economy (inflation currently is running at doable digit).
    • Modernizing the payment and settlement systems
      • improve breadth and depth of access to finance
      • speed up the implementation of this important program.
    • D evelop missing laws and regulations
      • On electronic banking/transactions
    • Develop securities market particularly, market for long term debt securities.
    • Extending application of foreclosure law to MFIs
    • Extending credit information sharing system to MFIs, utility service providers, tax authorities and commodity exchange, and
    • Expand further appropriate telecommunication infrastructure.

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