1. Missing Financial Institutions and Markets in Ethiopia
By: Yohannes Ayalew
Vice Governor and Chief Economist
National Bank of Ethiopia

2. What is a financial institution?
It is an institution that provides financial services
There are three broad categories of financial institutions
Depository institutions that accepts and manages deposits and make loans:
- Banks, building societies, credit unions, trust companies, and mortgage loan companies
Contractual institutions that raises long term finance
- Insurance companies and pension funds
Investment institutions that facilitate investment financing
- Investment banks, underwriters, brokerage firms

3. What is a financial market?
A financial market is a market platforms in which people trade financial securities and other fungible items:
It is usually associated with:
low transaction costs and
prices reflect supply and demand

4. Types of Financial markets
Capital markets: primary and secondary markets
Equity markets
Bond markets (Debt markets)
Money markets: primary and secondary
Foreign exchange markets
Derivative markets

5. Why do we need financial institutions and markets. For their own sake
Why do we need financial institutions and markets? For their own sake? Or To fulfil other economic objectives?

6. The roles of financial institutions and markets in the economy
Capital accumulation and technological progress
Saving mobilization
Facilitate monetization of economic transactions and creating access to finance
Delivering information about investment
Optimizing allocation of financial resources

7. The Role of Ethiopian Financial Institutions in Economic development
Five Perspectives
Economic Growth and Macroeconomic Stability Perspective
Macroeconomic stability
Saving and investment
Financial Deepening Perspective
Increased role of money in economic transactions
Availability of credit

8. Access of financial services to all households at a reasonable cost
3. Financial Inclusion
Access of financial services to all households at a reasonable cost
Ensure continuity and certainty of investment
Ensure choice and affordability for clients
4. Financial sector stability perspective
Return on Assets
Return on Capital
Non-performing loans (NPls)
Liquidity
5. Poverty Reduction and Financial Inclusive Growth perspective

9. Economic Growth and Macroeconomic Stability Perspective
Saving and Investment

10. Macroeconomic Stability
Money market:
Have primary market for government Short-term securities
The effort to introduce an active secondary market for short-term securities was not successful
Excess reserves
Lack of alternative financial instruments
Limited access to financial services
Prices played little role in deposit mobilization of banks

11. So, Monetary Policy relied on direct control on money supply aggregates until 2010
Minimum deposit rate
Reserve requirement
T-bills sales in the primary market played little role
Occasionally resorting to credit ceilings

12. Was a secondary market for short-term securities missing?
Ans. Not at least until 2013
Is it a missing market now? Yes
Because:
Excess reserve is down to the required minimum
The demand for short-term securities is increasing
Access to financial services has grown significantly
Prices start to play increasing role in deposit mobilization
Deposit rates are spreading according to maturity structure

13. Monetary Policy has now resorted to indirect control
Since 2011
Monetary Policy has now resorted to indirect control
Reserve money is an anchor for monetary policy
T-bills sales in the primary market has started to play a prime role in monetary policy
Minimum deposit rate plays limited role
Reserve requirement
No need to resorting credit ceilings

14. Table 1: Interest Rate per Annum (%) Particulars 2010 2011 2012 2013
2014
2015
Ethiopia
Lending
12.25
11.88
Deposit
4.15
5.38
Spread
8.10
6.50
Kenya
14.37
15.05
19.72
17.31
16.51
16.09
4.56
5.63
11.57
8.64
8.37
9.19
9.81
9.42
8.15
8.67
8.14
6.90
Rwanda
16.94
16.73
16.49
16.93
17.66
17.03
7.10
7.96
10.04
8.58
7.76
7.59
9.84
8.77
6.45
8.35
9.90
9.44
Tanzania
14.55
14.96
15.46
15.83
16.26
16.10
6.57
6.78
9.51
9.82
9.86
7.98
8.18
5.95
6.02
6.41
6.21
Source: NBE and World Bank Country Data (WDI)

15. Table 1 (Cont’d): Interest Rate per Annum (%)
Particulars
2010
2011
2012
2013
2014
2015
Uganda
Lending
20.17
21.83
26.31
23.25
21.53
22.60
Deposit
7.69
13.02
16.23
11.84
10.81
12.77
Spread
12.49
8.81
10.08
11.41
10.72
9.83
South Africa
9.00
8.75
8.50
9.13
9.42
6.47
5.67
5.44
5.15
5.80
6.15
3.37
3.33
3.31
3.35
3.32
3.26
Egypt, Arab Rep.
11.01
11.03
12.00
12.29
11.71
11.63
6.23
6.74
7.64
7.68
6.92
6.91
4.77
4.29
4.36
4.61
4.79
4.72
China
5.81
6.56
6.00
5.6
4.35
2.75
3.5
3.00
1.5
3.06
2.85
Source: NBE and World Bank Country Data (WDI)

16. Table 2: Annual Headline Inflation Particulars 2010 2011 2012 2013
2014
2015
Ethiopia
7.3
38.0
20.8
7.4
8.5
10.4
Kenya
4.0
14.0
9.4
5.7
6.9
6.6
Rwanda
2.3
6.3
4.2
1.8
2.5
Tanzania
6.2
12.7
16.0
7.9
6.1
5.6
Uganda
18.7
5.5
4.3
5.2
South Africa
5.0
5.4
6.4
4.6
Egypt, Arab Rep.
11.3
10.1
7.1
China
3.3
2.6
2.0
1.4
India
12.0
8.9
9.3
10.9
5.9
Source: NBE and World Bank Country Data (WDI)

17. Saving and Investment
One of the growth constraints in developing countries is raising enough financing for investment
At the early stage of development,
Capital accumulation is the main driver of growth
Private and public capital accumulation
Productivity growth and innovation play limited role
Raising the rate of growth domestic saving ratio is the main challenge

18. What did we do to raise the rate of growth of gross domestic savings?
Enhance the role of financial institutions
Banks
Strengthen banks in capital and reserves
Encourage banks to branch out throughout the country
Transform maturity structure of loans from dominantly short-term to medium and long term ones
Eliminate undesired excess reserves
MFIs
Strengthen MFIs in capital and reserves
Encourage them to branch out in the rural area

19. Enhance the role of financial institutions (cont’d)
Strengthen the Pension scheme
Introduce private pension scheme
Reform the Public pension scheme
Insurance institutions
Strengthen in terms of capital and reserves
Housing Savings
Introduce various low cost housing scheme
GRD Bond: In primary market
Introduce GRD pond

20. Table 3: Financial Institutions in Savings Mobilization
(In Billions of Birr)
No.
Particulars
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Annual Average Growth 1
Bank Deposit
98.1
140.1
186.5
236.4
291.8
366.8
436.7
28.5
o/w Housing Scheme -
0. 4
9.4
16.3
21.0
770.3 2
Social Security
3.8
4.2
6.7
10.2
18.3
26.2
41.7
50.6
PSSSA
6.3
8.5
14.6
19.4
30.6
42.9
POESSA
0.4
1.7
3.7
6.8
11.2
144.6 3
Microfinance
2.7
5.5
7.6
11.8
14.8
18.4
38.5 4
GERD Bond
3.3
4.8
24.3 5
Total Financial Saving
104.5
148.1
202.0
259.1
327.4
414.6
504.5
30.2
Percentage Contribution to Total Financial Savings
Banks
93.8
94.6
92.4
91.3
89.1
88.5
86.6
Non-Banks
6.2
5.4
8.7
10.9
11.5
13.4
O/w Social Security
3.6
2.8
3.9
5.6
8.3
100.0
Source:NBE

21. Capital Market in Ethiopia
What is a capital market?
It is a market where funds are raised through issuance of shares and debt instruments to finance long-term investment
Capital market consists of primary and secondary markets
Primary market a market where investors raises investment finance by selling for the first time to those who have surplus funds
Although in rudimentary form it exists in Ethiopia
Eg. banks are raising capital by selling shares to the public
The market directly affects the level of domestic savings and investment

22. Secondary market is a market where the existing shares and debt instruments are traded
This market affects the level of savings and investment only indirectly by:
Creating liquidity
Ensuring the continuity of the primary market
This market does not exist in Ethiopia
Is the capital market a missing market in Ethiopia?

23. Preconditions for the Development A Capital Market
The literature outlines several preconditions for the successful development of equity and debt markets. Below are some of the key ones:
Share of the private sector in the economy
Deregulated interest rates
Well developed government securities market that can provide the benchmark yield curve for bond pricing
Up to date clearing and settlement systems in terms of both infrastructure and investor protection

24. Preconditions for the Development of A Capital Market (Cont’d)
A regulatory framework that provides for adequate
disclosure,
accounting standards,
proper corporate governance and the like
Enactment of laws to provide for regulatory oversight and investor protection
A credible system of experienced rating agencies in order to get opinions about debt issues into the public domain

25. Has Ethiopia lost because of the absence of a capital markets?
The answer inclines more to the ‘no’
Why?
There are only few potential listed companies who can fulfil the listing requirements.
a. The private sector is not yet developed
- Potential listed companies are in the financial sector
b. Poor accounting standards and discourse culture of companies

26. Access to finance and financial inclusion
2. The overarching problems so far have been:
Access to finance and financial inclusion
A significant section of the rural population has limited access to financial services
Quantity (availability) not price has so far been the major player in the market for credit
- The level of domestic savings is the major constraint
- The primary market is playing an important role

27. Access to finance and financial inclusion

28. As percentage of GDP (%)
Table 4: Access to Commercial Banking Services
Indicators
2009/10
2015/16
Absolute Change
Percentage Change A B
C=B-A
D=B/A
Number of Banks 15 18 3
20.0
Number of Bank Branches
680
3187
2,507
368.7
Number of Bank Accounts (In Million)
3.5
20.3
16.8
480.0
Total Deposits (In Billions of Birr)
98.6
438.2
339.6
344.3
Capital and Reserves (In Billion of Birr)
12.4
46.3
33.9
273.4
As percentage of GDP (%)
Total Deposits
26.0
34.7
8.7
33.3
Capital and Reserves
3.3
3.7
0.4
12.1
Source: NBE and CBs

29. Indicators 2010 2016 % Growth Table 6: Access to Microfinance Services
Number of Microfinance Institutions 30 35
16.7
Number of Branches
1,034
1,680
62.5
Number of Deposit Account (In millions)
2.4
4.3
79.2
Asset (in billions of Birr)
8.0
36.7
358.8
Total Loan (in billions of Birr)
5.8
25.2
334.5
Total Deposit (in billions of Birr)
2.7
18.4
581.5
Total Capital (in billions of Birr)
8.9
270.8
Source:NBE

30. Bank branches per 100,000 adults
Table : Access to Financial Services in Selected Countries
Particulars
Bank branches per 100,000 adults
ATMs per 100,000 adults
2010
2014
2015
2016
Africa
Ethiopia
1.4
4.5
5.1
6.0
0.3
1.9
2.4
3.2
Kenya
4.7
5.8
5.9
8.9
10.2
Ghana
5.4
6.1
7.2
3.9
8.2
10.3
Nigeria
6.5
5.6
4.9
11.1
16.1
16.7
South Africa
9.9
10.9
10.5
55.8
66.2
69.3
Egypt
4.8
9.0
12.7
13.8
Sub-Saharan Africa
3.6
4.1
2.9
Asia
China
n.a
8.1
8.5
24.8
55.0
76.4
Thailand
11.2
12.6
83.0
111.9
113.5
South Korea
18.3
17.4
16.9
266.6
290.7
278.8
Malaysia
10.7
53.2
51.9
51.1
India
10.1
13.0
13.6
7.3
18.1
19.7
Source: IMF Financial Access Survey (2016) and NBE

31. Will capital market be considered a missing market in the near future?
Yes. Because,
The private sector is developing
The number of potential listed companies could emerge from the production sector
The economy is getting complex
The problem of access to finance is receding
Price starts to play important role in the financial markets

32. Achievements without a capital market

35. Table 7: Real GDP Growth in Selected Countries
Particulars
2009/10
2010/11
2011/12
2012/13
2013/14
2014/15
Average
Ethiopia
10.5
13.5
8.7
9.9
10.3
10.4
Kenya
8.4
6.1
4.6
5.7
5.3
5.6
6.0
Rwanda
7.3
7.8
8.8
4.7
7.0
6.9
7.1
Tanzania
6.4
7.9
5.1
6.8
Uganda
7.7
2.6
4.0
4.9
4.8
5.2
South Africa
3.0
3.3
2.2
2.3
1.6
1.3
Egypt
1.8
2.1
4.2
2.9
China
10.6
9.5
8.3
India
6.6
7.2
7.6
Source: NBE, NPC, IMF-WEO and World Bank Country Data (WDI)

36. Financial Deepening Perspective
Increased role of money in economic transactions
Availability of credit

37. Table 8: Financial Deepening Indicators of Selected Countries (In Percent)
Particulars
2009/10
2010/11
2011/12
2012/13
2013/14
2014/15
2015/16
M2/ GDP
Ethiopia
27.54
28.22
25.34
27.14
28.07
28.61
29.14
Kenya
40.3
40.9
41.4
42.6
42.2
Tanzania
25.1
24.7
23.9
22.7
23.4
Uganda
22.9
22.4
20.4
20.8
22.3
South Africa
75.8
74.6
72.7
71.1
71.0
Egypt
80.7
70.5
75.3
76.5
78.4
China
177.5
175.9
182.4
188.2
193.2
205.7
India
76.2
78.8
76.9
77.9
77.8
79.2
Domestic Credit/GDP
26.32
25.30
26.92
28.28
30.31
32.08
41.1
41.7
42.9
44.3
45.2
15.5
17.2
18.0
18.2
20.2
22.8
14.6
16.1
13.8
14.2
16.8
17.9
185.5
171.5
180.7
182.2
185.7
180.1
69.4
73.9
82.0
88.2
95.8
143.6
142.1
150.8
157.6
169.4
196.9
71.9
76.1
77.1
77.6
76.8
Source: NBE, NPC and World Bank Country Data (WDI)

38. Table 9: Financial Deepening Indicators of Selected Countries (Cont’d)
Particulars
2009/10
2010/11
2011/12
2012/13
2013/14
2014/15
2015/16
Credit to Non-Government/GDP
Ethiopia
18.8
20.8
22.4
24.4
25.7
27.9
29.0
Kenya
27.2
30.6
29.5
31.7
34.2
34.9
Tanzania
11.9
12.6
13.0
12.9
13.8
15.4
Uganda
13.3
13.7
13.5
14.4
15.2
South Africa
149.0
139.5
146.1
149.5
151.5
150.0
Egypt
33.1
31.2
27.7
26.5
25.9
China
127.6
124.1
130.0
135.4
141.9
155.3
India
49.6
51.3
51.9
52.2
51.8
52.7
Source: NBE, NPC and World Bank Country Data (WDI)

39. Financial sector stability perspective
Return on Assets
Return on Capital
Non-performing loans (NPls)
Liquidity

40. Table 10: Ratio of Non Performing Loans to Total Loans
Particular
2010
2011
2012
2013
2014
2015
2016
Ethiopia
3.47
2.06
1.36
2.49
2.02
2.07
2.85
Kenya
6.29
4.43
4.59
5.05
5.46
5.99
Rwanda
11.27
8.22
6.00
7.00
5.22
5.84
Tanzania
7.84
5.40
6.40
5.12
6.58
6.26
Uganda
1.86
2.03
4.06
5.76
4.01
5.13
South Africa
5.79
4.68
4.04
3.64
3.24
3.12
Egypt, Arab Rep.
13.60
10.90
9.80
9.30
8.50
7.20
China
1.13
0.96
0.95
1.00
1.10
1.50
India
2.39
2.67
3.37
4.03
4.35
5.88
Source: NBE and World Bank Country Data (WDI)

41. Poverty Reduction and Inclusive Growth perspective
Financial inclusion and access to financial services play significant role

42. Table 11 Gini Coefficient)
Particulars
2000
2013
Sub-Saharan Africa
Ethiopia
29.8 (2004)
30.0 (2013)
Kenya
46.3 (1997)
48.5 (2013)
Rwanda
48.6 (2000)
51.3 (2011)
South Africa
57.8 (2000)
63.4 (2011)
Egypt
32.8(2000)
30.8 (2008)
Emerging Countries
China
39.2 (1999)
42.1 (2009)
India
33.4 (2005)
33.9 (2010)
Developed Countries
USA
40.5 (2000)
41.1 (2013)
Source: WB WDI

43. Conclusion

44. 1. Identifying the missing financial institutions and market must be defined in the context of
The countries of level of development
The development strategy
2. There is a need for sequencing and ordering of financial sector reform
Access to finance and financial inclusion needs first be addressed
Macroeconomic stability must be ensured
3. Debt market should come before the equity market
Sets benchmark for the equity market
Relatively easy to regulate

45. Thank You