459 policy initatives for improved financial services national


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459 policy initatives for improved financial services national

  2. 2. Introduction <ul><li>Top Government Economic policy agenda </li></ul><ul><ul><li>is accelerated and sustained economic growth </li></ul></ul><ul><ul><li>Agriculture playing a leading role </li></ul></ul><ul><li>The role of Finance in bringing accelerated growth </li></ul><ul><ul><li>Finance being an essential catalyst to boost investment by: </li></ul></ul><ul><ul><ul><li>mobilizing scarce financial savings and channelling it to productive investments; </li></ul></ul></ul><ul><ul><ul><li>reducing risk of investors and of course savers; </li></ul></ul></ul><ul><ul><ul><li>lessening the barriers to new entry; and </li></ul></ul></ul><ul><ul><ul><li>facilitating efficient exchange of goods and services </li></ul></ul></ul><ul><ul><li>Thus, there is a need to have vibrant, efficient and strong financial system which is accessible to majority of the population, if not all. </li></ul></ul>
  3. 3. Introduction continued <ul><li>Creating enabling environment is essential to improve accessibility of finance </li></ul><ul><li>Creation of enabling environment for financial systems includes: </li></ul><ul><ul><ul><li>maintaining stable macro-economic condition, </li></ul></ul></ul><ul><ul><ul><li>ensuing soundness of FI, and </li></ul></ul></ul><ul><ul><ul><li>developing stronger underlying infrastructure including in information and legal dimensions. </li></ul></ul></ul>
  4. 4. Introduction continued <ul><li>The objective the paper </li></ul><ul><ul><li>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); </li></ul></ul><ul><ul><li>Section one presents overview of Ethiopian financial system; and </li></ul></ul><ul><ul><li>Section 3 concludes the paper. </li></ul></ul>
  5. 5. I Financial Systems in Ethiopia <ul><li>Financial systems of a country </li></ul><ul><ul><li>Financial institutions; </li></ul></ul><ul><ul><li>Financial markets </li></ul></ul><ul><ul><li>Financial instruments </li></ul></ul><ul><li>Financial systems evolve over time – three distinct periods. </li></ul><ul><ul><li>Pre Derg (1905 - 1974 ): The first bank in Ethiopia was established in 1905 (Bank of Abyssinia). </li></ul></ul><ul><ul><li>Derg (1974 – 1991): Nationalizations of financial institutions, </li></ul></ul><ul><ul><li>Post derg (1991 ---): Reorientation of the financials system to market economy. </li></ul></ul>
  6. 6. Financial Systems in Ethiopia <ul><li>Reforms since 1991 included </li></ul><ul><ul><ul><li>comprehensive restructuring of government owned financial institutions, and </li></ul></ul></ul><ul><ul><ul><li>opening the sector for local private equity participation; </li></ul></ul></ul><ul><li>As a result, nine banks (Zemen Bank), eight insurance companies and 28 MFIs have been created until June 2008. </li></ul><ul><li>Ownership of the newly created institutions: </li></ul><ul><ul><ul><ul><li>Banks and insurers 100% by local private shareholders </li></ul></ul></ul></ul><ul><ul><ul><ul><li>MFIs mixed= regional governments, local NGO, and private . </li></ul></ul></ul></ul>
  7. 7. Financial Systems in Ethiopia <ul><li>Other financial institutions (other than banks, MFIs and insurers) </li></ul><ul><ul><li>Pension fund, and </li></ul></ul><ul><ul><li>saving and credit cooperatives (5,437 of them, September 2006) </li></ul></ul><ul><ul><li>Limited contractual saving services </li></ul></ul><ul><ul><li>Thus financial institutions in Ethiopia constitute: the central bank (NBE), 12 banks, 9 insurers, 28 MFI, the pension fund, and over 5000 SACCOS </li></ul></ul>
  8. 8. Financial Systems in Ethiopia <ul><li>Financial markets in Ethiopia are underdeveloped. </li></ul><ul><ul><li>Inter-bank local money and foreign exchange market is almost non- existent or inactive </li></ul></ul><ul><ul><li>No long term debt securities market or </li></ul></ul><ul><ul><li>No stock exchange market </li></ul></ul><ul><li>Financial instruments </li></ul><ul><ul><li>limited to government papers (mostly Tbs) </li></ul></ul><ul><ul><li>No secondary market (even for gov’t papers). </li></ul></ul><ul><ul><li>Banking products are traditional (saving, time & demand deposits; as well as standard loan products) </li></ul></ul>
  9. 9. Financial Systems in Ethiopia <ul><li>Thus Ethiopian financial systems is thus bank dominated. </li></ul><ul><ul><li>Yet it is not easily accessible to large segment of the population </li></ul></ul><ul><ul><ul><li>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) </li></ul></ul></ul><ul><ul><ul><li>The figure for Ethiopia is about 19% (NBE, Banking Supervision). </li></ul></ul></ul>
  10. 10. Financial Systems in Ethiopia <ul><li>Reason for low access: </li></ul><ul><ul><li>Low geographic and demographic penetration, and </li></ul></ul><ul><ul><ul><li>All banks are headquartered in Addis Ababa (the capital city). </li></ul></ul></ul><ul><ul><ul><li>Ethiopia : Population per bank branch135,404 (June 2008) </li></ul></ul></ul><ul><ul><ul><li>Spain 96 branches per 1000 people (Kunt P.6). </li></ul></ul></ul><ul><ul><ul><li>Thus mainstream bank branches are hardly accessible to rural poor. </li></ul></ul></ul>
  11. 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. 12. Financial Systems in Ethiopia <ul><li>Affordability: </li></ul><ul><ul><li>For a small farm landholder living on subsistence, minimum account opening balance (birr 50) set by banks is relatively high. </li></ul></ul><ul><ul><li>For banks small farmers/the poor are considered unbankable. </li></ul></ul><ul><ul><li>Loans are granted to urban rich who can offer collateral </li></ul></ul><ul><ul><li>Average loan size for the banking sector was birr 728 for March, which was much higher than borrowing capacity of the poor. </li></ul></ul>
  13. 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. 14. Facts on mainstream banking: Deposit mobilization <ul><li>There are 3,403,959 deposit accounts </li></ul><ul><li>Balance maintained in the accounts stood at birr 60,943 million </li></ul><ul><li>A.A. accounted for 66% of the total </li></ul><ul><li>2% deposit account holder contributed for 73% of total deposits; or </li></ul><ul><li>98% of account holder contributed for only 27% of deposits </li></ul>
  15. 15. II. Policy Initiatives <ul><li>Creating enabling environment </li></ul><ul><ul><li>Government has a central role in creating enabling environment for expansion, competition and growth of financial services industry in the country. </li></ul></ul><ul><li>First Maintaining sound Macro-economic condition </li></ul><ul><ul><li>Inter-temporal nature of financial contracts, </li></ul></ul><ul><ul><li>low inflation and stable exchange rate </li></ul></ul><ul><ul><li>until recently, Ethiopia’s macroeconomic system has been stable </li></ul></ul><ul><ul><li>over the last five years, the country grew by about 11% per annum </li></ul></ul><ul><ul><li>inflation rate has been below 10% </li></ul></ul><ul><ul><li>exchange rate continued to be stable </li></ul></ul><ul><ul><li>however the current rise in inflation is worrisome </li></ul></ul>
  16. 16. Creating Enabling Environment <ul><li>Second, Conducive Legal and regulatory Framework </li></ul><ul><ul><ul><li>Banking and insurance laws of 1994 (now being revised) </li></ul></ul></ul><ul><ul><ul><li>MFI law of 1996 (under revision) </li></ul></ul></ul><ul><ul><ul><li>A law that allows for establishment and operation of leasing companies </li></ul></ul></ul><ul><ul><ul><li>Foreclosure law </li></ul></ul></ul><ul><li>Third, Creation of Credit information bureau </li></ul>
  17. 17. Creating Enabling Environment <ul><li>Fourth, expanding modern telecommunication network to rural areas </li></ul><ul><li>Fifth, Payment System Modernization Project </li></ul>
  18. 18. Mitigating market failure <ul><ul><ul><li>Input loans that enable farmers buy agricultural inputs </li></ul></ul></ul><ul><ul><ul><li>Rural Financial Intermediation Program (RUFIP) </li></ul></ul></ul><ul><ul><ul><li>Urban Financial Intermediation Program (UFIP) </li></ul></ul></ul>
  19. 19. The Way Forward <ul><li>The challenge to stabilize the economy (inflation currently is running at doable digit). </li></ul><ul><li>Modernizing the payment and settlement systems </li></ul><ul><ul><li>improve breadth and depth of access to finance </li></ul></ul><ul><ul><li>speed up the implementation of this important program. </li></ul></ul><ul><li>D evelop missing laws and regulations </li></ul><ul><ul><li>On electronic banking/transactions </li></ul></ul><ul><li>Develop securities market particularly, market for long term debt securities. </li></ul><ul><li>Extending application of foreclosure law to MFIs </li></ul><ul><li>Extending credit information sharing system to MFIs, utility service providers, tax authorities and commodity exchange, and </li></ul><ul><li>Expand further appropriate telecommunication infrastructure. </li></ul>