FM pptttt.pptx

Chapter 6
Ethiopian financial markets and
institutions

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February 2016
Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M.
Ethiopian financial markets
Ethiopian financial institutions
Financial regulation in Ethiopia
Chapter contents

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February 2016
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

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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, corporations and the

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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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0.00
10,000.00
20,000.00
30,000.00
40,000.00
50,000.00
60,000.00
70,000.00
2006 2007 2008 2009
Treasurybill purchases by investor type
Amount sold Banks Non banks

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Treasury bill Price Per Br 100 Face Amount
Treasury bill Yield
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
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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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

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0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
Interets
rate
Trendsof returnson time deposit
Up to 1 yr
1-2 yrs
Over 2 yrs

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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 made in
2003 by the amount of Br 93.43mill
No interbank loan has been extended
since 2008

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February 2016
-
10,000.00
20,000.00
30,000.00
40,000.00
50,000.00
60,000.00
70,000.00
80,000.00
90,000.00
100,000.00
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
amount(in
000)
Trendof interbank loans(in 000)

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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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0 20000 40000 60000 80000 100000 120000
Nib International Bank
Commercial Bank of Ethiopia
Awash International Bank
Bank of Abyssinia
Interbankloanlenders by aggregate loan size

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February 2016
0 20000 40000 60000 80000 100000 120000 140000 160000
Awash international bank
Wegagen bank
Nib International bank
Interbank loan borrowersby aggregate loan size

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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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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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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 offered
to investors informally. Eg. Stocks and

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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 27.7bill in
2010

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EEPCO
Regional
governments
Development
Bank of Ethiopia
Private sector
Amount of bonds issued in 2009/10 by
issuer type

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Public enterprises
60%
Regional governments
25%
DevelopmentBank of
Ethiopia
15%
Private sector
0%
Valueof bondsoutstandingby June 2010

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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 demanded
than non-bank financial institutions,

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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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February 2016
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
- EURO - SOUTH AFRICAN RAND - SWISS FRANC
- UAE DIRHAM - CANADIAN DOLLAR - POUND STERLING

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Formal financial institutions
6.2 Ethiopian financial institutions
Banks
81%
Insurance
4%
MFI
15%
Relativesize of financial institutionsbycapital

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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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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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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 companies with EIC

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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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Insurance companies
0 50 100 150 200 250 300 350 400
Ethio-Life Insurance. Co.
Lion Insurance. Co.
United Insurance. Co.
Oromia Insurance. Co.
Africa Insurance. Cc
Nib Insurance. Co.
Nile Insurance. Co.
Global Insurance. Co.
Awash Insurance. Co.
Nyala Insurance. Co.
National Insurance. Co.
Ethiopian Insurance. Co.
S
Ize of insurersby capital as of J
une 2010

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Micro-finance institutions
The five largest MFIs; namely
 Amhara
 Dedebit
 Oromia
 Omo and
 Addis Credit and Savings Institutions

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

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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
6.3 Financial market regulation in
Ethiopia

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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
Ethiopia

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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 amounted to only ETB 1.15bill in 1994 and
it reached ETB 26bill
Ethiopia

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WHY a NEW Proclamation?
Malpractices in the banking sector
Unavailability of credit information sharing
mechanism
Increased pottential for bank failure
Ethiopia

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February 2016
End of Chapter 6

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