Collage of business and economics

Accounting and finance department

Financial Markets and Instutions
Group Assignment
Section=1
Group members name ID.NO
1,Abebech Mulat . .UGR/ 5527/ 15
2,Abereham Gashaw . ...UGR/4783 /15
3,Alemu Tsehaye ..UGR/ 4529/15
4,Balkachew Mulgata UGR/ 2516 /15
5,Bereket Terfasa .. ..UGR/7105 /15
6,Betsega Masresha .. .UGR/1185/15

Submit to=Ins. Asamenew

Submission date=Jan, 2025

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 Chapter 6

Overview Ethiopian Financial System

Introduction

Ethiopia's financial system has undergone significant transformation over the past few decades,
evolving from a predominantly state-controlled framework to a more diversified landscape that
aims to support economic growth and development. The financial system plays a crucial role in
facilitating investment, promoting savings, and providing essential services such as payment
systems and credit allocation. This system is composed of various financial institutions,
including banks, insurance companies, microfinance institutions, and capital markets, which
collectively work to mobilize resources and allocate them efficiently across the economy.

The banking sector, dominated by state-owned enterprises, has been pivotal in fostering financial
inclusion and extending services to underserved populations. However, private banks have also
emerged, contributing to competition and innovation within the sector. The financial markets in
Ethiopia are still in their nascent stages, with limited activities in securities trading and capital
mobilization compared to more developed economies.Regulation is another critical aspect of the
Ethiopian financial system, as it ensures stability, protects consumers, and promotes fair
competition among financial entities. The National Bank of Ethiopia (NBE) plays a central role
in overseeing the financial system, implementing monetary policy, and regulating financial
institutions to mitigate risks and enhance transparency.

Additionally, the Ethiopian Commodity Exchange (ECX) has become a vital platform for trading
agricultural products, aiming to improve market efficiency and empower farmers by providing
them with better access to markets and prices. This overview of Ethiopia's financial system will
delve into the structure and functions of its financial institutions.

6.1 Ethiopia's Financial Institutions

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Over time, Ethiopia's financial sector has experienced substantial growth and transformation,
especially when viewed in light of its more extensive economic reforms. important elements and
characteristics of Ethiopia's financial system:

1. Banking Sector

• Commercial Banks: State-owned banks dominate Ethiopia's banking market, while a number
of private banks also operate there. The Development Bank of Ethiopia (DBE) and the
Commercial Bank of Ethiopia (CBE) are two significant state-owned banks. The quantity and
services offered by private banks have been increasing.

• Microfinance Institutions: These are essential for offering low-income households and small
companies, particularly in rural areas, financial services.

• Cooperative Banks: These were founded with a local development aim to cater to certain
communities or groups.

2. Insurance Sector: Although it is still in its infancy, Ethiopia's insurance market is expanding. It
comprises commercial and state-owned insurance firms that provide a range of insurance
products, including as health, life, and property insurance.

3. Capital Markets: The capital market in Ethiopia is still in its infancy and sees few activities.
Although the market is still in its infancy, the government has been trying to set up a stock
exchange to make trading in securities easier.

4. Regulatory Framework The main regulatory body in charge of the banking and financial
industry is the National Bank of Ethiopia (NBE). It is in charge of licensing banks, setting
monetary policy, and maintaining financial stability. In order to improve the regulatory
environment, advance financial inclusion, and stimulate foreign investment, the government has
put in place a number of measures.

5. Financial Inclusion • In Ethiopia, financial inclusion is still a problem, especially in rural

areas with restricted access to banking services. Nonetheless, efforts like microfinance and
mobile banking have advanced the availability of financial services.

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6. Payment Systems: With the advent of mobile banking apps and electronic payment systems,
Ethiopia's payment system has changed. In order to improve accessibility and efficiency, the
NBE has been advocating for digital payment alternatives.

7. Foreign Investment: In the financial sector, particularly in banking and insurance, the
Ethiopian government has been promoting foreign investment. Foreign ownership is still
restricted in some places, though.

8. Difficulties Notwithstanding advancements, the financial sector still faces a number of

obstacles, such as: • Limited financing options for small and medium-sized businesses (SMEs).
• Capital markets that are not well-developed. • Restrictions from regulations that could
impede innovation. • Economic elements like currency devaluation and inflation.

9. Recent Developments: To liberalize the economy and draw more capital to the financial
sector, the Ethiopian government has been enacting reforms. The goal of these reforms is to
fortify the financial sector and increase its role in fostering economic expansion. In conclusion,
Ethiopia's financial system is developing and has room to expand. Supporting the nation's
economic goals requires initiatives to expand capital markets, strengthen regulatory frameworks,
and increase access to financing.

Financial intermediaries are a particular kind of financial institution that "obtain funds by issuing
claims to market participants and use these funds to purchase financial assets."

A financial institution is a business that deals with financial and monetary transactions like
deposits, loans, investments, and currency exchange. Non-depository institutions are financial
institutions that offer other financial services but do not accept traditional deposits from
customers. They are essential to the financial system because they offer products like insurance,
investment, leasing, and microfinance.

Types of Ethiopian Financial Institutions:

Formal Institutions, Informal and Semi-formal institution

Formal institutions are legally recognized organizations that follow laws and rules set forth by
the government. They are controlled by contracts and a system of incentives.

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Banks

Banks Over the years, Ethiopia's financial industry has undergone tremendous change. Ethiopia's
first modern bank was the Bank of Abyssinia, founded in 1905.In 1963, the Commercial Bank of
Ethiopia (CBE) was founded. State-owned banks once controlled the banking industry, but since
the early 1990s, Ethiopia has progressively liberalized its financial system to welcome private
banks and microfinance organizations.

Contribution to the financial sector

Contribution to the Financial Industry With 96% of the sector's total assets, the banking industry
plays a vital role in Ethiopia's financial system. Private banks, interest-free banks, and
microfinance organizations are all part of this industry. Nearly 2 trillion Birr is the total value of
the CBE's assets alone.

To put this into perspective, the total assets of the Ethiopian banking industry are approximately
2.5 trillion Birr. This indicates that over 80% of the total assets in the Ethiopian banking industry
are held by the CBE alone.

Regulations in Ethiopia

Founded in 1963, the National Bank of Ethiopia (NBE) is the primary regulatory agency in
charge of the banking industry. To maintain the integrity and stability of the financial system, the
NBE publishes rules and directives. Modernizing the regulatory framework, improving
supervision, and advancing financial inclusion have been the main goals of recent reforms.

Private banks

With 78% of the total assets in the financial sector, private banks play a big part in Ethiopia's
financial system. The National Bank of Ethiopia (NBE), which regulates their operations, keeps
an eye on their liquidity, profitability, and performance. Ethiopia's private banking history began
in 1963 with the founding of Addis Ababa Bank, the country's first private bank. This signaled
the start of private banking in the nation and permitted foreign banks to operate with up to 49%
ownership. The number of private banks has increased over time, making a substantial
contribution to the nation's financial industry.

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Regulations on private Banks

The NBE regulates private banks in a number of ways, such as:

Minimum Capital Requirements: In order to function, private banks need to keep a certain
amount of capital on hand.

Credit Caps: To maintain financial stability, private banks are limited in the amount of credit
they can offer.

Reserve Requirements: A specific proportion of deposits must be held by banks as reserves.

Standards for Profitability and Liquidity: Banks must adhere to certain standards for
profitability and liquidity.

Insurance Companies

In 1905, Ethiopia's first insurance business was founded with an emphasis on fire insurance.
Imperial Insurance Company, the first domestic insurance provider, was founded in 1951. With
the publication of Proclamation No. 281/1970, which established the Insurance Council and the
Insurance Controller's Office1, the industry has expanded throughout time1. As a result,
numerous domestic insurance companies were granted licenses.

Contribution to the Financial Sector

Despite being smaller than the banking industry, Ethiopia's insurance market has been expanding
gradually. According to recent studies, the insurance industry has a 0.1% penetration rate and
provides approximately 0.41% of the GDP. Even though these figures might not seem like much,
the industry is vital to both consumers and organizations' financial stability and risk
management.

Regulations on Incurance Companies

Ethiopia's insurance industry is governed by the National Bank of Ethiopia. The NBE establishes
tough rules and procedures to ensure the sector's integrity and stability. Key regulations include:

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 Licensing Standards: Insurers must meet specific capital criteria and provide extensive
documentation, such as company strategies and management structure data.

Insurance:Motor third-party liability insurance and professional indemnity insurance for

intermediaries are required.

Foreign Direct Investment (FDI) is prohibited in the insurance industry.

Government Agencies

Government agencies in Ethiopia play a crucial role in regulating various sectors, including the
financial sector.

History of Government Agencies in Ethiopia

Early Development

Under Emperor Tewodros II, Ethiopian government institutions were first established in the
middle of the 19th century. Emperor Tewodros, who is credited for modernizing Ethiopia,
instituted a number of reforms, one of which was the establishment of a civil service to oversee
administrative duties.

20th Century

Emperor Menelik II progressively structured the administration as the nation advanced into the
early 20th century. He set up a number of ministries to manage diverse areas, including justice,
foreign policy, and finance. The foundation for a more centralized and organized administration
was established by these early institutions.

A lot of work was done to modernize the nation's government under Emperor Haile Selassie.
With distinct functions for ministries and agencies, the Imperial Ethiopian Government was
formally established. The first constitution, which further organized the governing system, was
also introduced during this time in 1931.

Post-1974 Era

After overthrowing Emperor Haile Selassie in 1974, the Derg administration nationalized several
industries, including the financial sector, and implemented socialist policies. During this period,

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numerous government agencies were established to manage various nationalized industries and
services.

Modern Era

A new era of government began in 1991 with the establishment of the Federal Democratic
Republic of Ethiopia following the overthrow of the Derg regime. Decentralization was the main
goal of the new administration, which established more independent regional governments. The
economy was also liberalized during this time, enabling the involvement of the private sector and
the creation of regulatory agencies to monitor various industries.

For example, the Ministry of Finance and Economic Development (MoFED) is essential to the
management of public funds, the coordination of development initiatives, and the formulation of
Ethiopia's economic policies. In order to maintain stability and regulatory compliance, the
National Bank of Ethiopia (NBE) regulates the financial industry.

Governmental organizations are always altering to meet the nation's shifting needs while
pursuing economic expansion and environmental development.

Financial Sector Coverage

Ethiopia's financial sector, which is greatly impacted by government organizations, is essential to

the nation's economic growth. Although precise coverage percentages by government agencies
are not easily accessible, their supervision and regulatory roles guarantee a sound and stable
financial system. In order to shape regulations, encourage financial inclusion, and boost
economic growth, the government plays a critical role.

Regulation of the Financial Sector in Ethiopia

The Ministry of Finance and Economic Development (MoFED) and the National Bank of
Ethiopia (NBE) are the main regulators of Ethiopia's financial industry. These organizations use
a thorough system of rules and regulations to guarantee the financial sector's stability, integrity,
and expansion.

National Bank of Ethiopia (NBE)

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All Ethiopian financial institutions are subject to central regulation by the NBE. Among its
regulatory framework are:

Licensing and Supervision: Banks, insurance providers, microfinance organizations, and other
financial organizations are granted licenses by the NBE. To make sure that national and
international standards are being followed, it regularly audits and inspects.

Monetary Policy: To manage the money supply, keep inflation under control, and keep the value
of the currency stable, the NBE develops and executes monetary policies. This involves
controlling the economy's money flow and determining interest rates.

Prudential Regulations: To guarantee the financial stability of institutions, the NBE establishes
prudential regulations. This covers the specifications for risk management procedures, liquidity
management, and capital adequacy.

Consumer Protection: The NBE upholds laws to shield customers from deceptive business
practices and guarantee financial transaction transparency. This includes requiring financial
products and services to have their terms and conditions disclosed in a transparent and
understandable manner.

Combating the Financing of Terrorism (CFT) and Anti-Money Laundering (AML): The NBE
has put rules in place to stop the funding of terrorism and money laundering. Strong AML/CFT
procedures, such as customer due diligence, reporting suspicious transactions, and record-
keeping, must be put in place by financial institutions.

Ministry of Finance and Economic Development (MoFED)

Ethiopia's entire fiscal policy and economic planning are under the jurisdiction of the MoFED.
Among its regulatory duties are:

Fiscal Management and Budgeting: MoFED oversees the effective distribution of resources,
develops the national budget, and administers public finances. Additionally, it creates and
administers tax laws to bring in money for the government.

Planning and Development of the Economy: MoFED creates long-term economic plans and
strategies to support economic growth and sustainable development. To carry out development

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initiatives, it collaborates with other governmental bodies, global organizations, and the
commercial sector.

Public Debt Management: The MoFED is in charge of overseeing the nation's public debt, which
includes negotiating loans with foreign financial institutions and issuing government bonds.

Foreign assistance and Investment: MoFED oversees the coordination of foreign assistance and
investment, making sure that outside funds are utilized efficiently to further the nation's
development objectives.

Informal Institutions
Ethiopia's social and economic fabric is heavily reliant on informal institutions, which are
frequently community-based and offer a range of services and support networks that are not
officially governed by the state.

Important unofficial organizations in Ethiopia include

 Iddir, a long-standing mutual aid organization that offers its members support and social
security. It frequently participates in health care, funeral planning, and other social
services.
 Mahber is a neighborhood-based company that emphasizes group investing and saving.
Members make contributions to a shared fund, which is used to support members in need
and for a variety of community programs.
 Members of the rotating savings and credit association (ROSCA) Eqqub regularly
contribute a set amount of money, and one member receives the entire amount at the end
of each cycle. This makes it easier for users to access large sums of money for a variety
of uses.
The effectiveness of these institutions depends on strong social cohesiveness, trust, and respect
to community norms and agreements, despite the fact that they are not officially governed by the
government. They are essential to the provision of financial services, social security, and
community conflict resolution.

Semi-Formal Institutions

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In Ethiopia, semi-formal institutions, such as Savings and Credit Cooperatives (SACCOs),
Microfinance Institutions (MFIs), and Community-Based Organizations (CBOs), serve as a link
between the official and informal financial systems, offering vital services to communities,
particularly in rural areas. Associations for Rotating Savings and Credit (ROSCAs)

Savings and Credit Cooperatives (SACCOs)

Savings and Credit Cooperatives (SACCOs) in Ethiopia have a rich history that dates back to the
mid-20th century. Here's an overview of their development:

Early Beginnings

1960s: In Ethiopia, SACCOs were first established in the middle of the 1960s. In 19641,
Ethiopian Airlines personnel were the first to create a SACCO. Between 1964 and 1973, 28
SACCOs were established, and these organizations united to become the Ethiopia Thrift and
Cooperative Societies, the country's highest authority.

Growth and Expansion

2006–2014: Ethiopia had a substantial increase in the number of SACCOs, from 5,437 in 2006
to 14,453 in 2014, representing a 28% compound annual growth rate. Additionally, their capital
climbed from one billion birr to 5.2 billion birr1, and its membership grew from 0.38 million to
1.7 million.

Support and Development: To increase their capital base and service offerings, SACCOs have
benefited from assistance from the government and other organizations. They are essential in
providing short-term loans for both off-farm revenue-generating ventures and agricultural
production.

Challenges and Future Prospects

Problems: In spite of their expansion, SACCOs still have to deal with issues such a lack of a
specialized financial cooperatives policy, a lack of institutional strength, and a small selection of
products. The regulatory environment is being improved and these problems are being
addressed1.

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Prospects for the Future: It is recommended that a cooperative bank be established in order to
address these issues and strengthen the position of SACCOs in Ethiopia's financial industry.

Financial Regulations for Savings and Credit Cooperatives (SACCOs) in Ethiopia

The Ministry of Trade and Industry and the National Bank of Ethiopia (NBE) oversee SACCOs
in Ethiopia. Among the components of the regulatory framework are:

Proclamation No. 147/1998 of Cooperative Societies: The formation and functioning of

cooperatives, including SACCOs, are governed by this law. It lays down the legal specifications
for financial management, governance, and registration.

SACCOs are required to abide by the National Bank of Ethiopia's (NBE) guidelines regarding
risk management, capital sufficiency, and financial reporting.

Offices of General Cooperatives: Although they are in charge of the general cooperative sector,
which includes SACCOs, these offices are not technically equipped to regulate SACCOs.

Microfinance Institutions (MFIs)

Microfinance Institutions (MFIs) in Ethiopia have a relatively recent history, emerging as a

response to the need for financial services for the rural and urban poor. Here's an overview of
their development:

Early Beginnings

1990s: In Ethiopia, the idea of microfinance became popular in the early 1990s. The government
launched experimental microcredit programs in cities in partnership with global institutions such
as the International Development Association (IDA).

The Licensing and Supervision of Microfinance Institution Proclamation, issued by the

Ethiopian government in 1996, established the legal foundation for MFI creation and operation.
This declaration made it lawful for MFIs to offer microfinance services, diversify their funding
sources, and take deposits.

Growth and Expansion

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The 2000s saw a sharp increase in the number of microfinance institutions (MFIs) in Ethiopia,
with Amhara Credit and Saving Institution (ACSI), Dedebit Credit and Saving Institution
(DECSI), and Oromia Credit and Saving Share Company (OCSSCO) setting the standard. These
institutions catered to rural households and offered credit and savings products.

The 2010s saw a further expansion of the MFI sector, emphasizing sustainability and Ethiopian
ownership. By this point, MFIs had established themselves as an important component of the
financial system, offering vital services to people deemed "high-risk" by traditional banks.

Challenges and Future Prospects

Obstacles: In spite of their expansion, MFIs in Ethiopia still have to contend with issues such a
lack of institutional capacity, regulatory limitations, and the demand for a wider range of
financial products.

Prospects for the Future: The regulatory environment for MFIs is being improved and these
issues are being addressed. One possible way to strengthen the position of MFIs in Ethiopia's
financial industry is to form a cooperative bank.

Regulatory Framework

The National Bank of Ethiopia (NBE) oversees microfinance institutions (MFIs) in Ethiopia in
accordance with the Licensing and Supervision of Microfinance Institution Proclamation No.
40/1996. Licencing: In order to conduct lawful business, MFIs need to acquire a license from the
NBE. This includes fulfilling particular standards pertaining to operating rules, governance
frameworks, and capital requirements.

Supervision: To guarantee adherence to legal requirements, the NBE keeps an eye on MFIs.
This covers routine inspections, audits, and reporting obligations.

Financial Reporting: MFIs must keep correct financial records and provide the NBE with reports
on a regular basis. This aids in keeping an eye on their financial situation and guaranteeing
openness.

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Risk management: In order to reduce financial risks and guarantee stability, MFIs must put risk
management procedures into place. This entails sustaining sufficient cash buffers and
proficiently controlling credit risks.

The NBE implements regulations to safeguard consumers from unjust acts and to provide
transparency in financial transactions. This entails requiring explicit disclosure of terms and
conditions for financial products and services.

Community-Based Organizations (CBOs)

Community-Based Organizations (CBOs) in Ethiopia have a rich history of addressing local

needs and improving the well-being of communities. Here's an overview of their development:

Early Beginnings

Grassroots Movements: In Ethiopia, CBOs frequently started as grassroots initiatives to solve

certain environmental, social, and economic problems. Usually non-profit, these groups
depended on community support and volunteer labor.

Local Initiatives: Early CBOs concentrated on giving impoverished communities access to

social services, healthcare, and education. They were essential in bridging the gaps created by
official institutions and government initiatives.

Growth and Development

Cooperation with NGOs: By collaborating with non-governmental organizations (NGOs) and

foreign donors, CBOs were able to increase their reach and influence over time. Through these
partnerships, CBOs were able to expand their programs and serve more people.

Government Support: After realizing how crucial CBOs are to community development, the
Ethiopian government started to assist them with a number of projects and programs. CBOs were
able to increase their effectiveness and capacity because to this support.

Modern Era

Diverse Services: CBOs in Ethiopia today offer a variety of services, such as environmental
preservation, women's empowerment, healthcare, and education. By providing grassroots

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insights and carrying out projects that are more responsive and successful than centralized
government programs alone, they provide as a link between governments and citizens.

Community Mobilization: CBOs are able to organize people in the community around common
objectives and projects. They are essential in encouraging community development and civic
engagement.

As they support the growth and well-being of local communities, CBOs remain a crucial
component of Ethiopia's social fabric. Their history shows a path of development, cooperation,
and persistent attempts to meet the requirements of the community.

Regulations for Community-Based Organizations (CBOs)

In Ethiopia, community-based organizations, or CBOs, are usually non-profit organizations that

work locally to meet the needs of the community. Although CBOs are not subject to a particular
regulatory framework, they frequently follow broad rules and principles established by national
and international authorities. These rules guarantee that CBOs conduct their business in an open,
moral, and consistent manner with their community service objective.

Rotating Savings and Credit Associations (ROSCAs)

Rotating Savings and Credit Associations (ROSCAs) have a long-standing tradition in Ethiopia,
known locally as equb. Here's an overview of their history:

Early Origins

Traditional Practice: With origins in long-standing, community-based financial traditions,

ROSCAs have been a part of Ethiopian society for millennia. These organizations were
established by teams of people who combined their resources and alternated access to the money.

Community Support: Originally, ROSCAs were employed to help members of the community
during important occasions like weddings and agricultural cycles.

Modern Adaptation

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Formalization: Although ROSCAs were initially informal, they have since evolved to
accommodate contemporary financial procedures. Members routinely donate a set amount of
money, and one member receives the entire amount at the end of each cycle1.

Social Capital: Mutual trust and social capital among members are essential to ROSCA success.
Since failing on obligations would lower one's position in the group3, this guarantees
commitment and repayment.

Role in Financial Inclusion

Access to Funds: ROSCAs give people, particularly those without access to official financial
institutions, a way to obtain large sums of money for a variety of uses. This covers personal
necessities, small company endeavors, and investments in agriculture.

Empowerment of the Community: ROSCAs encourage economic development and individual

empowerment by encouraging financial collaboration and support within the community.
ROSCAs are a vital component of Ethiopia's unofficial financial system, supporting local
economies and giving communities vital assistance.

Regulations for Rotating Savings and Credit Associations (ROSCAs)

Informal financial organizations known as Rotating Savings and Credit Associations (ROSCAs)
function on the basis of social capital and reciprocal trust among their members. Since ROSCAs
are community-based and informal, formal financial authorities usually do not control them.
However, they frequently follow internal norms and agreements created by the group members
to ensure equal participation and payback.

6.2 Ethiopia's Financial Market

Over the past few decades, Ethiopia's financial landscape has seen tremendous changes, making
it one of Africa's fastest-growing economies. Banking, insurance, capital markets, and micro
finance are just a few of the industries that make up Ethiopia's financial economy.

The Financial Market's Structure

1. The Banking Industry

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The core of the financial industry and the foundation of the Ethiopian financial market is the
banking sector. The National Bank of Ethiopia (NBE), the state-owned Development Bank of
Ethiopia (DBE), and thirty other commercial banks comprise Ethiopia's banking industry.

The NBE seeks to preserve monetary stability and a healthy financial system. The NBE regulates
banks' minimum deposit rates. The central bank and regulatory body in charge of the banking
sector is the NBE.

At the moment, Ethiopia has 30 commercial banks, 28 of which are private.

Due to the growing need for financial services from a youthful and growing population, the
banking industry has grown quickly. Because of government prohibitions on international banks
and the dominance of state-owned banks, the industry is characterized by little competition
despite its expansion.

2. The Insurance Industry

In Ethiopia, the insurance industry plays a significant role in both the overall economy and the
financial sector in particular. Its contribution to helping the nation reach its goal of
macroeconomic stability and growth cannot be denied. Proclamation 99 of 1976 granted NBE
the first-ever authority to oversee and regulate the insurance industry in Ethiopia. By issuing
proclamation 83 of 1994, NBE continued to oversee and control Ethiopia's insurance market,
upholding the market-oriented economic policy that the nation had embraced in 1992. NBE is
once again designated by Proclamation 591 of 2008 as the policymaker, regulator, and
supervisor of Ethiopia's insurance industry. The biggest participant in the market, offering a
variety of insurance products, is the Ethiopian Insurance Corporation (EIC).

The penetration rate of insurance in Ethiopia remains low, primarily due to a lack of awareness
and understanding of insurance products among the population. However, there is potential for
growth as more people become aware of the importance of risk management and financial
protection.

3. The Capital Markets

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The capital market in Ethiopia is somewhat undeveloped. Although there isn't a legal stock
exchange for stocks, the Ethiopian Commodity Exchange (ECX) was founded in 2008 to make
trading in agricultural commodities easier. In order to improve investment prospects and capital
mobilization, the government has stated its aim to create a stock exchange.

Businesses' access to funding and individuals' investment options are restricted in the absence of
a strong capital market. Nonetheless, the government's recent efforts to set up a stock exchange
indicate a step in the right direction for the growth of this industry.

4. Micro finance Organizations

The decree that allows for the establishment of micro finance institutions was published in July
1996, making the development of MFIs in Ethiopia a relatively recent phenomena. The demands
of marginalized groups without access to traditional banking services are met by micro finance,
which has become an essential part of Ethiopia's financial industry. Numerous organizations
providing micro loans, savings plans, and other financial services are part of the NBE-regulated
micro finance industry.

In low-income communities, micro finance institutions (MFIs) have been instrumental in

fostering business and raising standards of living. By giving small loans to people without
collateral or credit history, they have helped to reduce poverty and promote economic growth.

Key Players in the Financial Market

The financial market in Ethiopia comprises various key players, including:

National Bank of Ethiopia: The central bank that regulates the country's monetary
policies and the currency market, also known as the foreign exchange market (Forex).
Ethiopian Capital Markets Authority (ECMA): An autonomous federal government
regulatory authority that is accountable to the Prime Minister of Ethiopia. The ECMA's
mission is to build a transparent and efficient capital market.
Ethiopian Securities Exchange (ESX): A public company that trades equities,
derivatives, financial and debt securities, and FX contracts.
Other players in Ethiopia'sfinancial markets include:

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Commercial Banks: A state-owned bank with a market share of more than 70% of the
commercial bank system.

Private banks: Allowed to operate in Ethiopia since 1994.

Private Insurance Companies: Allowed to operate in Ethiopia since 1991.

Authorized foreign exchange bureaus: Participants in the Forex market.

Micro finance Institutions: MFIs focus on providing financial services to low-income

individuals and small enterprises.

Regulatory Bodies: The National Bank of Ethiopia oversees the banking and insurance
sectors, while the Ministry of Finance plays a role in fiscal policy and economic
planning.
Regulatory Environment

Ethiopia's regulatory framework has changed to accommodate the expansion of the financial
industry. Monetary policy and financial stability are the responsibilities of the National Bank of
Ethiopia. The goal of recent changes has been to increase accountability and openness in the
financial industry.

Nonetheless, there are still issues with enforcement and compliance with regulations. To
safeguard consumers and encourage fair competition among financial institutions, the
government has been attempting to fortify regulations.

Challenges Facing the Financial Market

Despite its growth potential, Ethiopia's financial market faces several challenges:

1. Limited Access to Finance: A significant portion of the population remains un-banked or

under-banked due to limited access to financial services, particularly in rural areas.

2. Low Financial Literacy: Many Ethiopians lack understanding of financial products and
services, hindering their ability to make informed decisions.

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3. Regulatory Constraints: While reforms are underway, bureaucratic hurdles and regulatory
constraints can stifle innovation and competition in the financial sector.

4. Underdeveloped Capital Markets: The absence of a formal stock exchange limits

investment opportunities for individuals and businesses.

Possibilities for Development

Notwithstanding these obstacles, Ethiopia's financial market offers a plethora of potential

prospects:

1. Technological Advancements: Through digital payment platforms and mobile banking, the
emergence of fin tech solutions offers chances to improve access to financial services.

2. More Investment: Ethiopia has the potential to grow in a number of industries, which might
increase demand for financial services as long as it continues to draw foreign direct investment
(FDI).

3. Growth of Capital Markets: Setting up a stock exchange may give companies access to
funding and present investors with fresh chances to build wealth.

4. Financial Inclusion Initiatives: More people can be incorporated into the official financial
system with the support of initiatives to increase micro finance services and financial literacy.

There are plenty of chances for development. To fully realize Ethiopia's financial market's
potential, however, issues like restricted access to financing, insufficient financial literacy, and
undeveloped capital markets must be resolved. Ethiopia can set the path for sustainable
economic growth and higher living conditions for its people by utilizing technology and creating
an inclusive financial ecosystem.

6.3 Regulation of financial sector in Ethiopia

In Ethiopia, the financial sector has traditionally lagged behind that of other East African
countries, yet in recent years, considerable progress has been made toward modernization and
expansion. The Ethiopian government, acknowledging the vital importance of this sector for
economic progress, has implemented a prudent yet strategic method for financial sector reform.

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This method is marked by a gradual approach, where reforms are rolled out step by step to
maintain stability and reduce disruptions.

A fundamental component of Ethiopia's strategy for developing its financial sector is the
incremental introduction of private banks and insurance firms. By permitting private
organizations to enter the market, the government seeks to stimulate competition, enhance
service provision, and increase financial inclusion. This gradual liberalization applies to the
foreign exchange market as well, which is being gradually opened to prevent abrupt disruptions
to the economy.

In addition to fostering competition, the Ethiopian government has concentrated on enhancing

the competitive capacity of the domestic financial sector. This involves improving the regulatory
and supervisory functions of the National Bank of Ethiopia (NBE), which is crucial for
maintaining the stability and integrity of the financial system. By granting banks greater
independence and reinforcing the interbank money market, the government seeks to establish a
more resilient and efficient financial sector. Despite these initiatives towards liberalization, the
Ethiopian government continues to uphold a strong position on privatization. There are no
indications of diminishing its influence or control over the financial sector, which reflects a
careful approach to ensure that the advantages of financial sector reforms are fully achieved
without jeopardizing economic stability.

Financial regulation in Ethiopia has traditionally been marked by financial repression,

characterized by government control over interest rates and considerable intervention in the
financial system. However, the transition towards gradual liberalization signifies a shift in
policy, which seeks to reconcile the need for economic growth with the necessity of maintaining
macroeconomic stability. This strategy involves tackling issues such as elevated collateral
demands for loans, negative real interest rates, and restricted access to credit. As Ethiopia
advances in its financial sector development, the emphasis continues to be on enhancing
regulatory capacity, promoting local ownership, and fostering a favorable environment for both
domestic and international investment. The ongoing journey towards a more advanced and
liberal financial sector holds significant potential to aid in achieving the country’s broader
economic development objectives.

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Characteristics of financial system regulation

Negative real interest rates

Ethiopia's financial system exhibits several important traits that greatly affect its economic
landscape. A prominent aspect is the occurrence of negative real interest rates. When the interest
earned on savings falls below the inflation rate, it leads to a decrease in the purchasing power for
those saving money. This creates a disincentive for saving, as the actual value of deposited
money diminishes over time. As a result, the availability of funds for lending is impacted, which
can hinder investment and economic advancement. Therefore, negative real interest rates present
a challenge for both savers and borrowers, influencing the overall efficiency and stability of the
financial system.

Collateral requirements

Another important consideration is the high collateral requirements for loans, which are among
the highest in Sub-Saharan Africa. These severe standards make it difficult for individuals and
businesses to obtain credit, especially small and medium-sized organizations (SMEs) that do not
have significant assets to pledge. High collateral requirements might stifle entrepreneurship and
innovation since potential borrowers may be unable to get the necessary funding for their
ventures. This impediment to credit availability exacerbates economic inequality and stifles
inclusive progress.

Economic stability

To overcome these issues, Ethiopia's government has implemented a plan of progressive

financial liberalization. This strategy seeks to achieve a compromise between opening up the
financial sector and maintaining macroeconomic stability. The government hopes to improve the
competitiveness and efficiency of the financial sector by gradually implementing reforms such as
the cautious opening of private banks and the step-by-step deregulation of the foreign currency
market. This approach also includes strengthening the National Bank of Ethiopia's (NBE)
regulatory and supervisory capacity, as well as improving bank autonomy. These policies aim to
build a more resilient and robust financial system capable of supporting long-term economic
growth and development.

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Financial regulation in Ethiopian commercial banks is overseen by the National Bank of Ethiopia
(NBE), which plays a pivotal role in ensuring the stability and soundness of the financial system.

All commercial banks must obtain a license from the NBE to operate. This involves submitting a
completed application, paying an investigation fee, and meeting various preconditions such as
having a minimum paid-up capital and fulfilling security arrangements.

The Banking Business Proclamation No. 592/2008 and its amendment No. 1159/2019 govern the
operations of commercial banks. These regulations outline the requirements for obtaining a
banking license, shareholding restrictions, and other operational guideline.

Financial regulation in Ethiopian insurance companies is also overseen by the national bank of
Ethiopia.

 Risk Management Guideline: The NBE has compiled a risk management guideline for
insurers, addressing inherent and significant risks in the insurance sector. This guideline
provides practical guidance on managing risks and ensuring the safety and soundness of
insurance companies.

 Ongoing Risk Management: Risk management is an ongoing process, requiring

continuous monitoring and management of risks to maintain a stable insurance sector.

 Supervision: The NBE conducts regular on-site examinations and off-site analysis to
ensure that insurance companies comply with regulatory standards and maintain financial
stability.

 Compliance: Insurance companies are required to develop comprehensive risk

management policies and procedures, which are reviewed and approved by the NBE.

 Regulatory Inefficiencies: The insurance sector faces regulatory inefficiencies and

emerging trends that necessitate reforms in the regulatory and supervisory framework.

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  Separate Regulatory Body: There are calls for the establishment of a separate
regulatory and supervisory body for the insurance industry to enhance efficiency and
effectiveness.

 Insurance Penetration: Enhancing insurance penetration and growth requires concerted

efforts from both the regulatory body and individual insurance companies.

Financial regulation in Ethiopian commodity market

Financial regulation in the Ethiopian commodity market is primarily overseen by the Ethiopia
Commodity Exchange Authority (ECX). The ECX was established to ensure the development of
an efficient, modern trading system and to control the secure, transparent, and stable functioning
of the commodity exchange. The ECX is responsible for regulating the proper functioning of the
commodity exchange. It ensures that trading on the exchange is conducted in a secure and stable
manner under conditions of free competition and it the ECX issues directives that establish the
fundamentals of trading on the exchange, the principles of the contracts to be traded, and the
conditions of membership. These directives aim to protect the interests of various actors in the
system and the public at large.

The ECX has developed risk management guidelines to address inherent and significant risks in
the commodity market. These guidelines provide practical guidance on managing risks to ensure
the safety and soundness of the commodity exchange.

 The ECX conducts regular supervision to ensure that market participants comply with
regulatory standards and maintain financial stability.

 Compliance: Market participants are required to adhere to the ECX's directives and
guidelines, which are designed to promote transparency, security, and stability in the
commodity market.

6.4 Ethiopian commodity exchange Market and Its operation

Ethiopian commodity market before 2008

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 Ethiopia’s marketing system, like its agriculture, is based on age-old tradition. To date,
agricultural markets have been characterized by high costs and high risks of transacting, forcing
much of Ethiopia into global isolation. With only one third of output reaching the market,
commodity buyers and sellers tend to trade only with those they know, to avoid the risk of being
cheated or default. Trade is done on the basis of visual inspection because there is no assurance
of product quality or quantity, which drives up marketing costs, leading to high consumer prices.
For their part, small-scale farmers, who produce 95 percent of Ethiopia’s output, come to
market with little information and are at the mercy of merchants in the nearest and only market
they know, unable to negotiate better prices or reduce their market risk. It is time for a marketing
system that coordinates better, that links faster, that protects the interests of both sides of the
trade. It is time for a marketing system that is transparent, efficient, and innovative. It is time for
a marketing system that will take Ethiopian agriculture into the new Millennium. Ethiopia, once
a commercial trading hub in antiquity linking markets of East and West, can again claim a place
in the global market arena.

Definition of Ethiopian commodity Exchange Market

With guarantees of quality, delivery, and payment, buyers and sellers can transact on the
Ethiopia Commodity Exchange, or ECX. ECX operates on a membership basis. Members
purchase tickets that enable ECX trading. This only implies that non-members must use a
member's services in order to trade on ECX, even if lawful trading is never prohibited. Why sign
up? The exchange's primary actors are its members. Members are dedicated to preserving the
integrity of the ECX marketplace through seat ownership. When combined, they protect the
marketing system's interests. Additionally, they are accountable for every transaction they make
on ECX.

Who is eligible to join? Anyone who satisfies the ECX standards and is prepared to abide by the
membership regulations is eligible to join. The Commodity Exchange Commission, which
oversees every facet of the ECX system, requires licenses from members of ECX or even
affiliates of members. Members are people who regularly and frequently use the market as
buyers, producers, or middlemen.

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Who is the beneficiary of ECX? The ECX innovation has the potential to benefit non-members
just as much as members. Everyone benefits from the increased liquidity that provides better
value and risk management in a much more transparent market environment, as well as the
security of trading through ECX.

Key Features of the Ethiopian Commodity Exchange:

1. Market Structure: The ECX functions as a centralized marketplace where buyers and sellers
can trade agricultural commodities, including coffee, cereals, pulses, and oilseeds. The exchange
uses a system of spot and futures contracts, allowing for either immediate delivery and payment
or future delivery based on agreed terms.

2. Warehouse Receipt System: • One of the key features of the ECX is its warehouse receipt
system, which enables farmers to store their commodities in certified warehouses and provides
them with liquidity and the ability to trade on the exchange.

3. Trading Mechanism: Trades are made through a network of licensed brokers who facilitate
transactions between buyers and sellers. The ECX uses an electronic trading platform that
enables real-time trading, increasing transparency and lowering the possibility of price
manipulation.

4. Quality Standards: To ensure that only products that meet these standards are traded on the
exchange, the ECX has established quality standards for various commodities. This helps to
maintain market integrity and fosters participant trust. Quality control measures include grading
and certification processes that evaluate the commodities' quality prior to their listing for trade.

5. Price Discovery: • Market forces use supply and demand dynamics to establish prices, and
the exchange is a key player in this process. In an agricultural economy like Ethiopia's, where
prices can vary greatly depending on market circumstances and seasonal changes, this is
especially crucial.

6. Market Participation: Smallholder farmers, cooperatives, merchants, exporters, and

processors are among the stakeholders that the ECX promotes participation from. For rural
producers, this inclusivity facilitates better market access and competition.

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7. Effect on Farmers: The ECX has improved farmers' income stability by offering a structured
market environment. By providing them with access to data on market prices and trends, the
exchange has also empowered them. • By lowering the number of middlemen in the supply
chain, farmers are now able to keep a higher portion of the final selling price.

8. Difficulties: In spite of its achievements, the ECX still has to deal with issues like poor
infrastructure, smallholder farmers' inability to obtain financing, and disparities in market
knowledge. Furthermore, there is still room for improvement in the areas of regulatory
frameworks and the requirement for ongoing capacity building among market participants.

An important development in Ethiopia's agricultural marketing system is the Ethiopian

Commodity Exchange. It improves efficiency, encourages fair pricing, and advances the general
growth of Ethiopia's agricultural industry by offering a regulated platform for commodity trade.
For its impact on rural life and the nation's economic growth to be maximized, ongoing efforts to
address current issues will be essential.

Conclusion

In conclusion, Ethiopia's financial system represents a dynamic and evolving sector that is
integral to the country's economic development. While significant strides have been made in
expanding financial institutions and diversifying services, challenges remain in enhancing the
efficiency and accessibility of financial markets. The interaction between various financial

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entities, regulatory frameworks, and market mechanisms is crucial for fostering a stable and
inclusive financial environment.

The role of the National Bank of Ethiopia in regulating financial institutions ensures consumer
protection and maintains the integrity of the financial system. Moreover, the Ethiopian
Commodity Exchange stands out as a transformative initiative that not only supports farmers but
also enhances the overall agricultural market structure in the country.

Moving forward, efforts must focus on strengthening the regulatory framework, enhancing the
capacity of financial institutions, and promoting financial literacy among the population. As
Ethiopia continues to pursue economic growth and development, a robust and inclusive financial
system will be essential in mobilizing resources, facilitating investment, and ultimately
improving the livelihoods of its citizens. The path ahead is promising, but it requires concerted
efforts from all stakeholders to build a resilient financial system that can adapt to the changing
economic landscape and meet the needs of a growing population.

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