Professional Documents
Culture Documents
2.1 Introduction
This chapter provides an overview of the economy and financial sector development of
the country. The chapter begins with an overview of the countrys economic status and
describes the major social and macroeconomic performance for the study period 2004-
2009; then GDP composition and its trends followed by the poverty profile of the country
and its trends. The next section provides details of the financial sector evolution and
development. The third section focuses on the MFIs sector with reference to legal and
concludes.
Ethiopia is the second most populated country in Africa with an estimated population of
more than 83 million people. Ethiopia is one of the least developing countries which
ranks 157 out of 169 countries on the United Nations Development Programs 2009
Human Development Index. According to a recent survey nearly 30% of the countrys
population live below the poverty line MoFED (2011). The Ethiopian economy is based
product (GDP), about 80 percent of total employment, and nearly 80 percent of foreign
currency earnings (MoFED, 2009). Ethiopia's major exports include coffee, oil seeds,
15
gold, chat, flowers, pulses, and live animals. Coffee is the leading export, constituting
Generally, the overall economic growth of the country has been highly associated with
the performance of the agriculture sector. Recently the industry and service sectors have
been increasing their share of the GDP. The industrial sector, which mainly comprises
small and medium enterprises accounted for about 13 percent of GDP in 2009. In the
same year, the services sector accounted for about 44 percent of GDP (see Table 2.2).
In recent years, the country has been experiencing strong economic growth. More
importantly, it has registered an average annual real GDP growth rate of 11 percent
during the study period. During the period the agriculture sector, the mainstay of
Ethiopias economy, has grown by an average rate of 9.2 %. The industry and service
sector registered an average growth rate of 9.92% and 14.17% respectively (see, Table
2.1). In addition, the countrys performance on human development in recent years has
also been strong (see Table 2.1 and Table 2.4). In the last few years, the country has
made significant strides in reducing rural poverty, improving life expectancy, and rising
education levels. However, these gains have been accompanied by high urban income
inequality and surging inflation. Despite the years of rapid growth, Ethiopia is among the
worlds poorest countries with a gross national income per capita of US$230. Table 1
provides economic and social indicators of the country for the study period i.e., 2004-
2009.
16
Table 2.1: Ethiopias main social and economic indicators
Primary completion rate , total (% of relevant group) 37.41 43.24 47.40 48.33 52.07 55.16
GDP (Current, US$ billions) 10.05 12.31 15.16 19.55 26.64 31.96
GNI per capita, PPP (current international $) 560 630 710 800 880 950
Inflation, GDP deflator (annual %) 3.91 9.88 11.55 17.22 30.31 24.15
17
The government of Ethiopia has outlined its growth targets for the next five years in its
Growth and Transformation Plan (GTP 2011-2015). According to this strategy document,
the country aims to maintain the average annual economic growth at 11% and hence,
meet all millennium development goals by 2015.This government plan also has ambitions
Although the economy remains heavily reliant on agriculture, the service sector has
driven recent growth, accounting for nearly half of the GDP by the end of year 2009.
More importantly, during the period, the share of the services sector in GDP has been
rising, while that of agriculture has been declining steadily (see Table 2.2).
GDP)
GDP)
GDP)
18
The agriculture sectors share of GDP declined gradually from 47.4 percent in 2004 to 42
percent in 2009 and has now been surpassed by the service with its share increasing from
39.7% in 2004 to 46.1% in 2009. However, the share of industry showed no significant
change during the period (see Figure 2.1). Although the share of agriculture in GDP
tended to decline over time, it still remains the largest employer, the main source of
foreign exchange, and supplier of raw materials and market to domestic industries.
19
Figure 2:1 Sectoral distribution of GDP in 2004 and 2009
2004 2009
Services Services
39.7% Agriculture
Agriculture 46.1% 42%
47.4%
Industry
Industry
13%
13.6%
20
Table 2.3 shows the GDP growth rate by sector for the period 2004-2009. The double
digit growth has been sustained throughout the study period that led to a simple average
real GDP growth rate of 11.3%. The economy registered a 10.4% real growth in the year
2009. According to MoFED (2009), this is one of the highest growths compared to the
registered in Ethiopia is not only the fastest, but is also broad-based in the sense that
agriculture, industry and services sectors registered commensurate growth rates of 9.2%,
GDP growth rate 2004 2005 2006 2007 2008 2009 Average
Agriculture 13.50 10.90 9.40 7.50 6.40 7.60 9.22
Industry 9.40 10.20 9.50 10.10 9.70 10.60 9.92
Services 12.80 13.3 15.30 16.60 14.00 13.00 14.17
All Sector 12.6 11.5 11.8 11,2 10 10.4 11.26
Source: MoFED data
18.00
16.00
14.00
12.00 Agriculture
10.00
Industry
8.00
Services
6.00
All Sector
4.00
2.00
0.00
2004 2005 2006 2007 2008 2009
21
2.4 Poverty profile in Ethiopia
Poverty reduction has been the overriding development agenda of the government of
Poverty Reduction Program (SDPRP) which was executed during the years 2002/03-
2004/05. This was followed by the five-year plan: the Plan for Accelerated and Sustained
Development to End Poverty (PASDEP) which covered the period between 2005/06 and
2009/10 and now the Growth and Transformation plan (GTP) covers 2010/11-2014/15.
Indeed, the rapid growth over the periods (SDPRP and PASDEP) has helped reduce the
proportion of people living below the poverty line (measured by headcount index)
declined from 38.7% in 2004 to 29.6 % in 2010. Further, the report shows that the
poverty incidence in rural areas dropped from 39.3% in 2004 to 30.4% in 2010, while in
the urban area's poverty declined from 35.1% to 25.7%. According to the report between
2004 and 2010, income (consumption) inequality measured by Gini Coefficient has
shown a slight decline from 0.3 in 2004 to 0.298 in 2010. Inequality as measured by the
coefficient has declined in urban areas from 0.44 to 0.37, while rural inequality increased
from 0.26 to 0.27 though inequality is still higher in urban than in rural areas.
22
Table 2.3: Trends of the country poverty
The financial sector in Ethiopia consists of formal, semiformal and informal institutions.
The formal financial system is a regulated sector which comprises of financial institutions
such as banks, insurance companies and microfinance institutions. The saving and credit
cooperative are considered as semi-formal financial institutions, which are not regulated
and supervised by National Bank of Ethiopia (NBE). The informal financial sector in the
and Credit Associations) Idir (Death Benefit Association) and money lenders. The
The major formal financial institutions operating in Ethiopia are banks, insurance
23
(i) Formal Banks
Banking in Ethiopia started in 1905, with the establishment of the Bank of Abyssinia that
was owned by the Ethiopian government in partnership with the National Bank of Egypt
then under British rule. But a well structured banking system started to evolve starting in
the 1940s-after the Italian departure. A government owned bank-the State Bank of
Ethiopia-was established in 1942, and a number of foreign bank branches and a private
bank were operating in competition with the government owned commercial bank until
they were nationalized and merged into one government owned mono-bank in 1976. The
competitive banking situation that started to flourish during the 1960s and 1974s was
nipped in the bud by the command system that reign over the 1974-1991 periods.
Following the change of government in 1991, and the subsequent measures taken to
liberalize and reorient the economy towards a system of economy based on commercial
considerations, the financial market was deregulated. A proclamation number 84/94 was
issued out to effect the deregulation and liberalization of the financial sector, and a
number of private banks and insurance companies were established following the
mainly including the gradual liberalizations of the interest rate, foreign exchange
Currently, there are 17 banks operating in the country, of which 13 are private banks
while the remaining three are state owned banks, namely Commercial Bank of Ethiopia
(CBE), Development Bank of Ethiopia (DBE) and Construction and Business Bank
(CBB). The total number of bank branches in the sector reached 970, with a larger
24
concentration of them(more than 40%) located in the capital city, Addis Abeba (NBE,
2009). Ethiopia is still one of the most under banked countries in the world with one bank
Although one can observe a strong growth and revival of the private sector since
liberalization in the 1990s; yet, the state-owned banks seem to dominate the industry. As
of the year 2009, the state owned banks account for 67% of total deposits and 55% of
outstanding loans and advances and 55 percent of the capital. More specifically, the
stateowned Commercial Bank of Ethiopia (CBE) - the largest bank in Ethiopia alone
controls about 43% of the branch networks, nearly 40% of the capital , about 46% of the
outstanding loans and advances, and about 58 % of the deposits of the commercial banks.
Table 2.4 provides the share of capital and branch network of Ethiopian Banks as of the
year 2009.
25
Table 2.4: Capital and branch share of the formal Banks in Ethiopia as
of 2009(Capital in million ETB1)
Capital Branches
Amount Share Number Share
Public Bank
Commercial Bank of Ethiopia 6,262.0 39.3 417 43.0
Construction & Business Bank 277.0 12.7 34 3.5
Development Bank of Ethiopia 2179.0 13.7 32 3.3
Total Public Banks 8718.0 54.7 483 49.8
Private Banks
Awash International Bank 1104.0 6.9 70 7.2
Dashen Bank 1152.0 7.2 65 6.7
Abyssinia Bank 532 3.3 57 5.9
Wegagen Bank 1093 6.9 53 5.5
United Bank 748 4.7 50 5.2
Nib International Bank 983 6.2 51 5.3
Cooperative Bank of Oromiya 207 1.3 43 4.4
Lion International Bank 318 2.0 30 3.1
Oromia International Bank 265 1.7 36 3.7
Zemen Bank 193 1.2 3 0.3
Buna International Bank 220 1.4 11 1.1.
Berhan International Bank 138 0.9 10 1.0
Abay Bank 161 1.0 8 0.8
Addis International Bank 117 0.7 - -
Total Private Banks 7231 43.6 487 50.2
All Banks 15949 100 970 100
Source: National Bank of Ethiopia, 2009
1
1 USD is equivalent to 16.66 Ethiopian birr
26
Despite some improvement in the sector in the last couples of years, Ethiopian banking
remains in its low status. For instance, the estimates of Banks recent Financial Sector
Diagnost show that less than 10% of households have access to formal credit (African
limited range of services, absence of capital markets and the sector largely remains closed
to foreign investors.
traced back to the establishment of the Bank of Abyssinia in 1905. The Bank had been
acting as an agent for foreign insurance companies to underwrite fire and marine policies.
Before liberalization the command economy including political instability had been the
stumbling block for the growth of the financial sector in Ethiopia. The 1990s ushered in
economic liberalization that led to the revival of private sector participation in the
financial sector. This has led to the formation of a number of private insurance
companies. According to the National Bank of Ethiopia (2010) there were 14 insurance
companies with a total of 221 branches operating in the country. In terms of ownership,
all insurance companies except the Ethiopian Insurance Corporation (EIC), are privately
owned. Private insurance companies accounted for 69.5 percent of the total capital, while
the remaining share was taken up by the single public owned enterprise, the Ethiopian
Insurance Corporation. Of the total insurance branches, 50.7 percent are concentrated in
Addis Ababa. Private insurance companies owned 81.4 percent of the total branches.
27
According to Gebreyes (2011) the insurance market is undeveloped, uncompetitive and
there exist paucity of information on the kind of life insurance that is currently present.
The current practice of bulk of insurance coverage and business in Ethiopia is targeting
the corporate market and focuses mainly on general insurance with a very limited
The insurance sector is dependent on the banking sector for much of its new business.
Most Ethiopian insurance companies have sister banks and it's common for these banks
to refer their clients to their sister insurance companies, but this is largely restricted to
credit life insurance products. Moreover, insurance companies tend to derive a large
portion of their total income from investments in banks (Smith and Chamberlain, 2009).
(iii)Microfinance Institutions
to other developing countries. The first microfinance service in Ethiopia was introduced
rehabilitate drought and war affected people through the rural credit scheme. It was
inspired by other countries experiences and adapted to the conditions of the Tigray
region (northern part of Ethiopia). In the second half of the 1990s, as a result of its
success, the microfinance service was gradually replicated in other regions (Berhanu and
Thomas, 2000).
Similar to microfinance approaches in many other parts of the world, MFIs in Ethiopia
focus on group-based lending and promote compulsory and voluntary savings. They use
28
joint liability, social pressure, and compulsory savings as alternatives to conventional
forms of collateral (SIDA, 2003). These institutions provide financial service, mainly
credit and saving and, in some cases, loan insurance. The objectives of MFIs are quite
similar across organizations. Almost all MFIs in the country have poverty alleviation as
income, and building household assets. They seek to achieve these objectives by
institutions.
The Ethiopian microfinance industry has undergone tremendous growth and development
in a very short period of time (Micro Ned, 2007, Amaha 2009), As of 2009, the 29 MFIs
licensed by the National Bank of Ethiopia succeeded in reaching more than 2.3 million
clients and delivered about 7 billion Birr in loans. They also mobilized about 3.8 billion
Birr of savings. In the same year, the sector has a total asset Birr 10.2 billion and total
capital of Birr 2.9 billion. Despite the notable achievements, the operating MFIs reach
less than 20% of the total microfinance demand in the country (AEMFI, 2010). Turning
to market concentration, the three largest MFIs, namely Amhara, Oromia and Dedebit
Credit and Savings institutions accounted for 67.1 percent of the total capital, 81.4
percent of the savings, 74.0 percent of the credit and 76.2 percent of the total assets of
MFIs.
29
2.5.2 Semiformal Saving and Credit Cooperatives
In Ethiopia there are three types of saving and credit cooperatives, namely Institution
Savings and credit cooperatives are type of organizations providing financial services to
the poor in rural areas of Ethiopia. These include multi-purpose and credit and saving
cooperatives.
Unlike other formal financial institutions (banks and micro finance institutions), saving
and credit cooperatives are owned, controlled and capitalized by their members. This
implies that the savings and credit cooperatives are not subjected to supervision and
for the coordination of their activities. One of the principles of SACCOs is that lending is
limited to only members of the cooperatives and the amount of loan depends on the level
of individual saving deposits. One of the weaknesses reflected in the co-operative sector
is poor administrative and financial management. On the other hand the government
through the relevant ministry is not adequately equipped to monitor and control the
cooperative movement.
Savings and credit cooperatives in Ethiopia are not permitted to take deposits from non-
members. Many rural saving and credit cooperatives provide loan services for
agricultural inputs, animal fattening and in some cases for off farm activities. Loan
disbursement policies are prudent, only those with sufficient savings and collateral can
lend. The majority of loans are provided for a period of one year or less. Usually interest
on loans is higher than charged by commercial banks but often lower than that of MFIs
30
and definitely lower than the money lenders rate. At the end of 2006, almost 5 500
SACCOs served more than 380 000 members with savings and credit services. According
to the Cooperative Agency (CA), SACCOs mobilized 994 million Birr (US$111 million)
from member contributions. The average deposit size of a single SACCO member is 2
In both rural and urban areas in Ethiopia, it is common that neighboring family
households organize themselves and develop their own institutions, popularly known as
Community-Based Organizations (CBOs). The nature of the CBOs highly varies from
social, religious and financial concerns, but are all aimed to address the needs of the
iddirs, iqqubs and mehabers are very common. More importantly, these traditional
institutions also play a crucial role in savings and beneficiary mobilization in the informal
financial sector.
According to Micro Ned (2007), the outreach of the informal financial sector is high;
more than two thirds of the population have access to an informal finance provider,
whether it is from money lenders, friends/relatives, or from one of the three popular
systems (iddirs, iquips and mehabers) of informal finance. The price of informal credit
fluctuates greatly from 10.5% per month on average from money lenders and traders to
31
According to Micro Ned (2011), the informal finance has been popular due to three main
reasons. First, it has more often than not been the only form of service delivery available.
Second, loan processing is quick and not too many questions are being asked about the
application of the borrowed sum. Third, in the case of Iddir and Iqqub, loans are provided
traditional systems, however, is limited (Ibid). The three most common informal finance
Iddirs
An Iddir is the most common informal institution in Ethiopia, common in both rural and
and friendship, by living in the same district, by jobs, or by belonging to the same ethnic
group and as an object of providing mutual aid and financial assistance in certain
circumstances. It is primarily a burial society whereby savings are made to cover the cost
of funerals, but also weddings. Whenever a death occurs among its members, the
organization raises an amount of money to handle the burial and other related
ceremonies. It further aims to address different community concerns and provides various
emergencies. Iddir, unlike the insurance system is very popular among people because it
32
profit making institution based upon solidarity, friendship, and mutual assistance among
members.
In general, individuals tend to join iddirs when starting to have a family. Membership of
iddirs is also increasingly widespread particularly among the poorest members of society,
who are in most need of their support. Only new migrants without a fixed address and
those who cannot afford the fees (the most impoverished of society) lack membership,
and are consequently without the only form of social insurance that currently exists in
Ethiopia (Ibid). Most of the associations are however not officially registered due to the
high cost of registration. As a consequence, most iddirs remain unable to open bank
Concerning its organizational structure, nearly all iddirs have a secretary and a treasurer
as well as a chairman and judge. Due to its impartial membership structure, it is often
During the current rule of the Ethiopia Peoples Revolutionary Democratic Front
(EPRDF), the potential of iddirs as a vehicle for development has been further
(NGOs). From the governments point of view, the general recognition of civil societys
role in development has led to that iddirs have been accepted as possible partners for
33
Iqqubs
Iqqubs have played a significant role especially for the informal sector in Ethiopia. An
iqqub is a traditional saving and credit association (Rotating Saving and Credit
Association), of which its purpose is basically to pool the savings of their members in
accordance with the rules established by the group. Members usually deposit
contributions on a weekly or monthly basis, and lots are drawn by turns so that the one
who wins the chance gets the total sum. This process continues on a regular basis until
the last member receives his/her share or what she/he has been saving through the months
Mehabers
Another common CBO is the Mehaber, which is a religious, informal institution that
aims to raise funds for medical and burial expenses. It is widespread among the Orthodox
Christians of Ethiopia, as it typically draws its members from the church. Members
usually meet on a monthly basis for food and drink, and commonly support each other in
Prudential regulation is very critical in ensuring the sustainability and viability of MFIs.
the initiatives to establish the regulatory framework in order to facilitate the development
34
establish the legal framework for microfinance institutions and define the regulatory role
of the National Bank of Ethiopia (NBE). The requirements for establishing microfinance
companies 2) They should elect board of directors and other officers and 3) Deposit
minimum required capital and 4) They should obtain a license from the NBE. The
following section discusses the main regulations which are relevant to the study and the
Directive No. MFI/01/96 states that MFI applying for a license shall have a minimum
paid up capital of 200,000 Birr (25,000 USD). However, the minimum capital required
by the NBE is low (Amaha, 2008). This is a deliberate action of the government to
improve entry and growth in the microfinance industry. On top the minimum capital
requirement, an MFI is applying for a license should submit memorandum and articles of
economic conditions of the area, cash flow, income statement and balance sheet
projections for the first year of the operations, curriculum vitae of the board of directors
and the Chief Executive Officer (Directive No. MFI/01/1996 of NBE). Table 2.5 gives
35
Table 2.5: List of the selected MFIs along with the year of establishment
As stated earlier, the development of the microfinance industry in Ethiopia can be traced
back to the early 1970s, when NGO's in Ethiopia were delivering relief and development
services such as emergency food, education, water and medicine to the under privileged.
The NGO's were directly funding micro credit services as part and parcel of their relief
programs. The enactment of the MFI legislation in 1994 has led to the transformation of
36
the traditional NGO microcredit programs into full fledged autonomous Microfinance
institutions including SFPI, Bussa Gonofa, PEACE, ESHET, Wasasa etc. In this case the
principal shareholders of the concerned MFIs are their mother NGOs. On the other hand,
existing ones that were previously aligned to NGOs such as ACSI, DECSI, OMO and
Ownership of financial institutions in Ethiopia is set aside for Ethiopian nationals only.
Proclamation No.84/1994 clearly states that financial institutions including MFIs should
be owned by Ethiopian nationals. In other words, foreigners are not allowed to participate
in the MFIs; however, they can support the MFIs by providing fund as part of their
Amaha (2000) and SIDA (2003) claim that restriction of ownership in MFIs to Ethiopian
nationals has led to the existence of nominal shareholders who nominally hold shares
effectively provided by foreigners, and who do not have real stake in the MFIs.
mixture of regional government, local NGOs, associations and individuals (see Table
2.6). The majority of MFIs are in reality owned either by NGOs or Regional
Governments. Individual owners except in very few cases have merely posed as owners
37
table 2.6 below ACSI, ADCSI, Benshangul, DECSI, Omo and OCSI are predominantly
regional governments, ADCSI and Omo are largely owned by their respective regional
governments with ownership share 96.7 percent and 80 percent respectively while ACSI,
DECSI, and OCCSI have similar ownership with the same share of regional governments
(25 percent) and for Benshangul 40 percent. On the other hand, AVFS, Agar,
Metemamen, Shashemene, and Wisdom are truly individual owned MFIs in which
owners expect profit from their share contribution. Bussaa, Eshet, PEACE and Wasasa
According to Bienen et al. (2009) in many of the investor- owned MFIs (regional or
NGOs), those classified as individual shareholders are not the real owners with personal
stake in the MFIs in the sense that they actually paid for the shares, hence have
something to lose. Instead, the funds for the shares were actually contributed by the
institutions/NGOs promoting the MFIs and the individuals are merely acting as nominal
38
Table 2.6: Ownership Structure of Microfinance Institutions in Ethiopia
According to Amaha (2008) the interest rates of MFIs have been revised four times by
the NBE. Initially, the NBE issued Directive No. MFI/09/96 that sets the lending and
saving interest rates of MFIs. According to this directive, the lending interest rate of
39
MFIs should not be higher than 2% above the maximum lending interest rate charged on
loans extended by formal banks. Thus, the maximum lending interest rate was set at
12.5% per annum. The interest rate on savings and time deposits shall not be less than 1%
higher than the minimum interest rate paid on such deposits extended by formal banks. In
May 1998, the NBE increased the maximum ceiling of the lending interest rate of MFIs
to 15.5 percent per annum (Directive No. MFI/10/98). However, both directives did not
state whether the lending interest rate was flat rate or declining rate. In June 1998, the
NBE removed the ceiling of the lending interest rate of MFIs. It has clearly stated that the
board of directors of each MFI can set its own lending interest rate (Directive No.
savings and time deposits was 7% per annum. Directive No. MFI/12/98 was issued to
reduce the minimum interest rate on savings and time deposits from 7% to 6% per
annum. However, in 2002 (Directive No. 13/2002) the NBE reduced the lower ceiling of
saving interest rate for formal banks and MFIs to 3%. The minimum saving interest rate
for the MFIs was increased to 4% in 2007 (Directive No. 19/2007 of NBE).
2.6.4 Reporting
Reporting is one of the tools to supervise MFIs in Ethiopia. MFIs are required to provide
quarterly reports on income statements, balance sheet, loan, saving and status of impaired
loans and loan provision to the NBE. Moreover, MFIs with deposits of 1 million Birr (re-
registered) are required to submit quarterly liquidity and capital adequacy reports within
one month after the close of each quarter (Directive No. MFI/07/96). In practice few
MFIs do so for a variety of reasons: sheer size and volume of activities covering entire
40
regional states, limited functionality and capacity of management information systems
2.7 Conclusion
The country background shows that the country has been experiencing strong economic
growth during the study period. In sector wise, the service sector has driven recent
growth and yet the economy remains heavily reliant on agriculture. Indeed, the rapid
growth over the years has helped in reducing the incidence of poverty in the country. The
countrys financial sector also seems to be flourishing only recently. Despite the
improvement in the last couples of years, Ethiopian banking remains in its low status. For
banking, the state-owned banks seem to dominate the industry. Surprisingly, the
Commercial Bank of Ethiopia (CBE) - the largest bank in Ethiopia CBE) alone controls
for nearly half of the branch networks, capital, outstanding loans and advances, and
more than half of the deposit of the countrys banks. In general, the sector is
characterized by small banking, limited range of services, absence of capital markets and
the sector largely remains closed to foreign investors. Likewise to banking, Ethiopias
banking sector for much of its new business. Though the emergence of microfinance is a
growth and development in a very short period of time. However, the demand for
microfinance is far from being met by the existing MFIs. Consequently, the informal
sources of finance have been remaining as the main sources for many of the countrys
poor.
41