Contemporary issues of financial intermediaries (Institutions) and markets in Ethiopia ,

for example, related to:

1. Introduction

The major financial intermediaries in Ethiopia include banks such as the Commercial Bank of
Ethiopia, Development Bank of Ethiopia, Addis Ababa Bank, and Ethiopian Investment
Corporation. Additionally, microfinance institutions and savings and credit cooperatives
(SACCOs) also play a significant role in the Ethiopian financial sector. Financial
intermediaries contribute to economic growth in Ethiopia by facilitating the flow of funds
from savers to borrowers, thereby enabling businesses to invest in productive activities and
individuals to access credit for consumption and investment purposes. By providing financial
services and credit, intermediaries help stimulate economic activity, create employment
opportunities, and foster entrepreneurship, ultimately contributing to overall economic
development. Microfinance institutions in Ethiopia play a crucial role in providing financial
services, including credit, savings, and insurance, to low-income individuals and small
businesses that may not have access to traditional banking services. By offering these
services, microfinance institutions contribute to poverty reduction, financial inclusion, and
the development of small-scale enterprises, thereby supporting economic growth and stability
in Ethiopia.

2. Historical background

The history of financial intermediaries in Ethiopia dates back to the early 20th century.
Modern banking began with the Abyssinian Bank in 1905, later nationalized and renamed the
Bank of Ethiopia in 1931. This marked the first nationally owned bank on the African
continent. Following the socialist revolution in 1975, privately-owned financial institutions
were nationalized. However, in 1994, financial reforms led to the re-establishment of private
banks, marking a significant shift in the country's financial system. Today, Ethiopia's
financial sector includes public and private banks, insurance companies, microfinance
institutions, and saving and credit cooperatives, reflecting a transition from a state-controlled
to a more diversified market.

Before modern banks, informal moneylenders and traditional savings and credit associations
were the main financial intermediaries. After the socialist revolution, all privately-owned
financial institutions were nationalized. However, in 1994, financial reforms led to the re-
establishment of private banks, marking a significant shift in the country's financial
landscape. The Ethiopian financial sector now includes public and private banks, insurance
companies, microfinance institutions, and saving and credit cooperatives, all playing a crucial
role in the country's financial system. This historical development reflects the country's
transition towards a more liberalized and diversified market.

Key milestones in this process include financial sector reforms in 1994, the establishment of
the National Bank of Ethiopia (NBE) in 1997, the enactment of the Banking and Finance
Institution Proclamation in 2001, the implementation of the Microfinance Proclamation in
2006, the establishment of the Addis Ababa Chamber of Commerce and Sectoral Association
(AACCSA) in 2008, and the development of a roadmap for the financial sector in 2012.
These milestones reflect ongoing efforts to establish a financial market in Ethiopia, support
financial liberalization, and enhance access to financial services for the population.

When financial intermediaries and markets were first established in Ethiopia, there were
several issues. These included a lack of access to financial services, limited physical access to
these services, a small and underdeveloped financial sector, and low coverage of financial
services. The Ethiopian financial market was mainly dominated by short-term bank finance,
and securities were only traded informally. Financial instruments and services were not
widely available, diverse, or modernized, and there was little insurance and pension coverage.

The regulatory environment was highly controlled and closed off from foreign competition,
which hindered the growth and diversification of financial services. Additionally, the
financial sector was not diverse in terms of the institutions providing financial services, with
only a few dominating the market. Efforts have been made to improve the situation, with
scholars, the Addis Ababa Chamber of Commerce and Sectoral Association, and the National
Bank of Ethiopia working towards institutionalizing the financial market. There is a growing
consensus on the need for financial markets as the next step in the ongoing financial
liberalization, and various efforts are being directed towards addressing the challenges and
opportunities of establishing financial markets in Ethiopia.

Contemporary issues in Ethiopia's financial intermediaries and markets include limited access
to financial services, physical access challenges, a shallow financial sector, and low coverage
of financial services. Efforts have been made to institutionalize the financial market, with
various stakeholders working towards this goal. The need for financial markets as the next
step in ongoing financial liberalization is gaining consensus, and various efforts have been
directed towards addressing the challenges and opportunities of establishing financial markets
in Ethiopia

3. Establishment

Financial intermediaries in Ethiopia are overseen by the National Bank of Ethiopia (NBE),
which is tasked with supervising and regulating the banking, insurance, and microfinance
industries. The NBE's responsibilities include ensuring that financial intermediaries follow
prudent regulations, implement effective risk management practices, and comply with
international standards. This regulatory framework is designed to promote the stability and
health of the financial sector, as well as to encourage financial inclusion and economic
expansion. The NBE plays a critical role in monitoring the activities of financial
intermediaries and upholding a strong regulatory framework to foster the growth of Ethiopia's
financial sector. The primary objective of the NBE is to ensure the stability and soundness of
the financial system. In order to achieve this goal, the NBE establishes regulations and
guidelines that financial intermediaries are required to follow. These regulations encompass a
wide range of areas, including capital adequacy, liquidity management, risk management,
corporate governance, and consumer protection.

Through the implementation of prudent regulations and the supervision of their enforcement,
the NBE aims to reduce risks within the financial sector and prevent activities that could
potentially jeopardize the stability of the system. This serves to safeguard depositors' funds,
uphold public confidence in the financial system, and promote the overall health of the
economy. In addition to its supervisory role, the NBE also plays a crucial part in advancing
financial inclusion and economic expansion. It encourages financial intermediaries to expand
their services to underserved areas and populations, thereby enhancing access to financial
products and services. This can contribute to driving economic growth, alleviating poverty,
and fostering inclusive development. Furthermore, the NBE endeavours to harmonize
Ethiopia's regulatory framework with international standards. This effort helps to boost the
country's appeal to foreign investors, facilitate cross-border financial transactions, and
promote economic integration. By adhering to international best practices, the NBE aims to
fortify Ethiopia's financial sector and facilitate its integration into the global economy.
In summary, the NBE's oversight and regulatory functions are pivotal in upholding a stable
and healthy financial sector in Ethiopia, promoting financial inclusion, and supporting
economic growth

4. Accounting report

Financial intermediaries in Ethiopia are required to follow the International Financial

Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB).
This ensures that financial statements are transparent and comparable across different
institutions. The National Bank of Ethiopia (NBE) is responsible for supervising and
regulating financial intermediaries to ensure they follow prudently regulated practices, risk
management standards, and comply with international financial standards. The regulatory
framework aims to ensure the stability and soundness of the financial sector, as well as
promote financial inclusion and economic growth. The NBE enforces these regulations to
ensure that financial intermediaries maintain a robust regulatory environment that supports
the development of the financial sector in Ethiopia

Financial intermediaries in Ethiopia are required to adhere to the International Financial

Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB).
This requirement is in place to guarantee that financial statements are transparent and can be
compared across different institutions. The National Bank of Ethiopia (NBE) is tasked with
overseeing and regulating financial intermediaries to ensure that they adhere to prudently
regulated practices, meet risk management standards, and comply with international financial
standards. The regulatory framework is designed to uphold the stability and integrity of the
financial sector, as well as foster financial inclusion and economic growth. The NBE enforces
these regulations to ensure that financial intermediaries maintain a strong regulatory
framework that bolsters the advancement of the financial sector in Ethiopia

5. Restrictions on Assets and Activities

Financial intermediaries in Ethiopia are subject to a variety of restrictions on their assets and
activities, with the National Bank of Ethiopia (NBE) primarily responsible for regulating
these limitations. These restrictions encompass several key areas:

 Capital Adequacy: As mandated by the NBE, financial intermediaries must uphold a

minimum capital adequacy ratio, currently set at 8 percent. This ratio is designed to
 ensure that financial intermediaries maintain sufficient capital to withstand potential
losses and sustain efficient operations.
 Interest Rate: Central banks, like the National Bank of Ethiopia (NBE), typically
have a significant influence in formulating and executing monetary policy, which
involves establishing benchmark interest rates. As the regulatory body, the NBE may
create rules for interest rate determination by financial intermediaries to maintain
stability and adhere to national monetary policy goals. For precise details on the
process of setting interest rates for financial intermediaries in Ethiopia, it is essential
to consult official regulatory documents and guidelines issued by the NBE and other
pertinent regulatory authorities in Ethiopia. Lending rates in Ethiopia are unrestricted,
while deposit rates are subject to a floor established by the NBE. Over time, this floor
rate has fluctuated, from 6% in 2000/01 to 3% in 2007, and then increased to 4% in
2007. In 2011/12, the actual minimum interest rate on saving deposits was 5%, and
the maximum was 5.75%. As a result, the average interest rate on savings deposits
remained at 5.4%.
 Portfolio Investment: Ethiopia has faced restrictions on equity financing, but with
growing interest in equity financing, this situation may change in the future.
 Foreign Entry: The banking industry in Ethiopia has limitations on foreign entry.
Foreign banks can enter the domestic banking market through acquisition, subsidiary,
or branch expansion.
However, the government restricts foreign citizens or foreign-owned banks from fully
or partially owning domestic banks. Activities: The Ethiopian financial sector is
characterized by a cash-based system, with no stock market or interbank money
market. The financial market consists of the interbank money market and foreign
currency market. These restrictions are in place to uphold the stability and integrity
of the financial sector, while also fostering financial inclusion and economic growth
in Ethiopia
6. Insurance to safeguard their customers

In Ethiopia, state-owned banks dominate the financial market, and the insurance industry is
underdeveloped and non-competitive, relying on the banking sector. The financial sector is
characterized by small banking, limited services, and the absence of capital markets, with
foreign investment mostly restricted. Microfinance institutions have grown rapidly but are
still unable to meet the demand for microfinance, leading to informal finance sources being
the primary means of financing for many Ethiopians.

The Ethiopian government has taken a cautious approach to financial sector reform, gradually
opening up private banks and insurance companies, and gradually liberalizing the foreign
exchange market. However, the insurance industry is still in its early stages, and the country
faces challenges in meeting legal obligations to protect all business-related information
collected and stored. As the financial market in Ethiopia continues to develop, insurance
companies can adopt international best practices to protect their customers. These practices
include encrypting data at rest and in transit, implementing access control policies and
procedures, monitoring data activities and incidents, educating and training staff and
customers on data security, and appointing a data protection officer. By adopting these best
practices, insurance companies in Ethiopia can better protect their customers and contribute
to the stability and growth of the country's financial sector

CONCLUTION

In conclusion, the main points of the given text are that financial intermediaries in Ethiopia,
such as banks, microfinance institutions, and savings and credit cooperatives, play a crucial
role in facilitating economic growth, employment opportunities, and entrepreneurship. The
history of financial intermediaries in Ethiopia dates back to the early 20th century, with
significant reforms in 1994 leading to the establishment of private banks and a more
diversified financial sector. The National Bank of Ethiopia (NBE) oversees and regulates
financial intermediaries, ensuring compliance with international standards and promoting
financial inclusion and economic expansion. However, there are still challenges in terms of
limited access to financial services, a shallow financial sector, and the underdevelopment of
the insurance industry. Efforts are being made to address these issues and establish a strong
financial market in Ethiopia.
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