In the wake of the 1974 bloody socialist revolution, all private banks and insurance companies in Ethiopia were nationalized.

After the downfall of the Dergue military regime, the EPRDF-led government allowed the private sector to engage in the banking and insurance industry in 1994. Accordingly, private banks began to flourish thereafter. In the past 15 years more than ten private banks have been established and their market share has grown substantially. In recent years more private banks are being established.

Nib International Bank, one of the private banks, last Saturday organized a meeting at the Hilton Hotel on its tenth anniversary to deliberate on the state of the banking sector in Ethiopia. Presenting a comprehensive overview of the sector, Getahun Nana, director of the supervision directorate with the National Bank of Ethiopia, said that the banking sector in Ethiopia was playing a significant role in the economic development being observed in the country. According to Getahun, the number of private banks that entered the market has shown a dramatic increase.

 The Ethiopian banking system expanded rapidly between 2003 and June 2009. During this period, total assets, loans and deposits of the banking system increased by an average annual growth rate of about 20 percent each.

Between 1995 and 2004, when profitability was at a reasonable level, only seven banks were established. In contrast, in the four years between 2005 and 2009 five private banks joined the sector.  In 1994, there was no single private bank; only three state-owned banks existed. By September 2009 the number of private banks has reached 12.

The three public banks - Commercial Bank of Ethiopia, Development Bank of Ethiopia and Construction and Business of Bank - together opened 58 branches in the past 15 years while private banks opened 383 branches in the same period.

State-owned banks have the lion’s share in the market.  However, in recent years the market share of the private banks has grown remarkably. In terms of deposit public banks had 94.5 percent of the total deposit in 1998. This figure went down to 61 percent by 2009 while the private banks' deposit surged to 39 percent. In 1998, 92.6 percent of loans were disbursed by public banks. By 2009 this slumped to 54.2 percent while private banks' loan disbursement shake rose to 45.8 percent.

The total amount of branches in the country has reached 656 - 243 in Addis Ababa,183 in Oromia, 88 in Amhara, 58 in SNNP, 41 in Tigrai and 43 in other regions. Despite the banking industry's encouraging growth, access to banking services in Ethiopia is still low compared to other African countries. The number of bank branch per 100,000 adults in Ethiopia stands at 1.2. In Keya it is 4, in Uganda it is 1.9 and South Africa it is 8.0.

Getahun said that in view of the high profitability of the banking industry in Ethiopia, people are rushing to open new banks.

Worku Lemma, from Oromia International Bank, on his part complained regulatory that the National Bank of Ethiopia (NBE) occasionally overreacts. Worku said the measures taken by NBE to curb inflation were affecting the profitability of banks.

In reply Getahun said that tightening the monetary policy was an important step in the fight against inflation.  

NBE has limited the amount of loans the banks could disburse. It has also increased interest rates on lending and cut interests on deposits.

“Banks should be supervised regularly. Otherwise things could go out of control and that can have serious impacts. It is difficult to control hyper inflation. In order to avoid such risks, we took appropriate measures,” Getahun said. “We are doing this and to some extent it affects the profitability of the banks. But it is a matter of choice."

Getahun went on to say that local banks are still profitable even under the tight monetary policy. “We need a healthy growth,” Getahun said. The banking industry is expected to achieve an average of 17 percent growth in profit next year.

Speaking of the lessons Ethiopia learnt from the global market meltdown, Getahun said the regulatory body should be able to put in place a mechanism to check and balance the activities of the bank. “We should measure and minimize risk. We have to know the extent of risk and manage it,” he added.

Zerihun Megenta of NIB bank asked why the issue of establishing a stock market was ignored by NBE and concerned authorities. Getahun said the issue of the establishment of capital market in Ethiopia has not been ignored. In fact, Getahun said, NBE was undertaking a study on the matter. According to him, the project is being financed by the World Bank. The project is expected to produce guidelines for the establishment of a capital market. It is not clear, though, when the stock market will be up and running.

By Kaleyesus Bekele