Background of study

The financial system of Ethiopia is a complex and evolving one, with both formal and informal
institutions playing a role in providing financial services to individuals and businesses. The
formal financial system includes banks, insurance companies, microfinance institutions, and the
Ethiopian Securities Exchange (ESE). The informal financial system includes iddir, iqubs,
mahibers.

The Ethiopian financial system faces a number of challenges, including limited access to
financial services, a lack of financial literacy, and a high level of informality. However, the
government has been implementing reforms to enhance the financial sector's efficiency, expand
access to financial services, and attract private investments to support economic growth and
development in the country. Ethiopian financial system would likely include the following:

A review of the Ethiopian economy and its development: This would provide an understanding
of the context in which the financial system operates and the challenges it faces.

An analysis of the structure of the Ethiopian financial system: This would include an
examination of the different types of financial institutions, their roles, and their relative
importance.

An assessment of the performance of the Ethiopian financial system: This would involve looking
at indicators such as access to finance, financial inclusion, and financial stability.

A review of the government's policies and reforms: This would provide an understanding of the
government's efforts to improve the financial system and address its challenges.

A comparison of the Ethiopian financial system with other developing countries: This would
provide a benchmark for assessing the performance of the Ethiopian system.

Chapter one: General introduction a financial system in Ethiopia

Overview:
The Ethiopian financial system is comprised of formal and informal institutions that provide a
range of financial services to individuals and businesses. The formal financial system includes
banks, insurance companies, microfinance institutions, and the Ethiopian Securities Exchange
(ESE). The informal financial system includes Rotating Savings and Credit Associations
(ROSCAs), money lenders, and pawnbrokers.

The financial system plays a crucial role in the Ethiopian economy by mobilizing savings,
allocating capital, and facilitating financial transactions. It also contributes to economic growth
by providing access to finance for businesses and individuals. However, the Ethiopian financial
system faces a number of challenges, including limited access to financial services, a lack of
financial literacy, and a high level of informality.

Impact on the Real Economy:

 Mobilizing Savings: The financial system mobilizes savings from individuals and
businesses, which can then be used to invest in productive activities.
 Allocating Capital: The financial system allocates capital to businesses and individuals
who can use it to grow their businesses or invest in other assets.
 Facilitating Financial Transactions: The financial system facilitates financial transactions,
such as payments and transfers, which are essential for economic activity.
 Promoting Economic Growth: By providing access to finance, the financial system can
help businesses to grow and create jobs.
 Financial Inclusion: Expanding access to financial services can help to reduce poverty
and inequality.

A financial system is a system that allows the exchange of funds between financial market
participants such as lenders, investors, and borrowers. Financial systems operate at national and
global levels. Financial institutions consist of complex, closely related services, markets, and
institutions intended to provide an efficient and regular linkage between investors and borrowers.

The financial system of Ethiopia consists of various institutions and markets that facilitate the
flow of funds, provide financial services, and support economic activities within the country.
Here are some key components of Ethiopia's financial system:
Central Bank: The National Bank of Ethiopia (NBE) serves as the central bank and the
regulatory authority for the financial sector. It formulates and implements monetary policy,
supervises financial institutions, and maintains the stability of the financial system.

 Commercial Banks: Ethiopia has both state-owned and private commercial banks that
offer a range of banking services, including deposit-taking, lending, trade finance, foreign
exchange transactions, and other financial services to individuals, businesses, and
government entities.
 Development Bank: The Development Bank of Ethiopia (DBE) plays a vital role in
supporting the country's development initiatives. It provides long-term financing for
priority sectors such as agriculture, manufacturing, infrastructure, and small and medium-
sized enterprises (SMEs).
 Microfinance Institutions (MFIs): MFIs in Ethiopia provide financial services to low-
income individuals, microenterprises, and small farmers who may not have access to
traditional banking services. These institutions offer microcredit, savings accounts,
insurance, and other financial products tailored to the needs of the underserved segments
of the population.
 Insurance Companies: Ethiopia's insurance sector comprises both state-owned and private
insurance companies that offer various types of insurance coverage, including life
insurance, property insurance, health insurance, and agricultural insurance.
 Stock Exchange: Ethiopia has a nascent stock market known as the Ethiopian Securities
Exchange (ESX). It provides a platform for trading stocks, bonds, and other securities,
enabling companies to raise capital and investors to participate in the capital market.
 Non-Bank Financial Institutions: Non-bank financial institutions, such as leasing
companies, pension funds, and investment firms, also contribute to the financial system
by providing specialized financial services and investment opportunities.

It's important to note that Ethiopia's financial system is still developing, and the sector faces
challenges such as limited access to financial services in rural areas, a predominance of state-
owned banks, and regulatory constraints. However, the government has been implementing
reforms to enhance the financial sector's efficiency, expand access to financial services, and
attract private investments to support economic growth and development in the country.
Chapter two: Ethiopian Financial Institutions.

2.1. Classification of Financial institution in Ethiopia(formal, semi formal, informal)and

it’s operations

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 country consists of
unregistered traditional institutions such as Iqub (Rotating Savings and Credit Associations) Idir
(Death Benefit Association) and money lenders. The components of each category are discussed
in detail in the following headings.

2.1.1. The Formal Sector

The major formal financial institutions operating in Ethiopia are banks, insurance companies and
microfinance institutions.

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.

Currently, there are 33 banks operating in the country, of which three are state owned banks,
namely Commercial Bank of Ethiopia (CBE), Development Bank of Ethiopia (DBE) and
Construction and Business Bank (CBB).

2.1.2. Semiformal – Saving and Credit Cooperatives

In Ethiopia there are three types of saving and credit cooperatives, namely Institution based
SACCOs; Community based SACCOS; and SACCOs sponsored by NGOs.
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 regulation of the National
Bank of Ethiopia. The ministry of cooperatives is responsible 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 nonmembers.

Many rural saving and credit cooperatives provide loan services for agricultural inputs, animal
fattening and in some cases for off farm activities.

2.1.3. Informal Finance

The term informal refers to the provision of service which is not generally or partly regulated by
law but which relies on self-regulating mechanisms.

In Ethiopia, various traditional or indigenous financial and saving systems have played a crucial
role in supporting communities, particularly in rural areas where formal banking infrastructure
may be limited. One such traditional system is the Iqub.

In both rural and urban areas in Ethiopia, it is common that neighboring family households
organize themselves and develop their own institutions,. The nature of the informal institutions
highly varies from social, religious and financial concerns, but are all aimed to address the needs
of the people. In most communities, membership in traditional community associations such as
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 (2020), 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 capacity of these traditional systems, however, is limited (Ibid). The three most common
informal finance or traditional institutions are discussed in detail in the following subheadings.

A. Iddirs

An Iddir is the most common informal institution in Ethiopia, common in both rural and urban
areas. It is an association made up by a group of persons united by ties of family 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.(Pankhurst and Mariam, 2020).

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. 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 said to be Ethiopia’s most democratic and egalitarian social organization
where membership is open to anyone regardless of religion, socioeconomic status, gender and
ethnic affiliation (Johansson, 2021)

Idir: Purpose: Idir is a traditional funeral insurance system. Members contribute regularly to a
fund, and when a member passes away, the collected funds are used to cover funeral expenses.
Community Support: Idir provides a social safety net by helping community members cope with
the financial burden of funeral expenses during challenging times.

B. 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 and the whole process starts again.

Iqqub: Purpose: Iqqub is another form of community-based savings and credit system where
members contribute regularly, and the pooled funds are made available to a member in need.
Economic Empowerment: Iqqub supports economic empowerment by providing financial
assistance to members for various purposes, such as starting or expanding businesses.

C. Mehabers

Another common Informal institution 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 times of difficulty
(Pitamber, 2020).

These traditional financial systems are deeply rooted in Ethiopian culture and community values.
They demonstrate the importance of community collaboration, mutual trust, and resource-
sharing. While these systems continue to be significant in rural areas, it's worth noting that
formal financial institutions and digital financial services are also gaining prominence in urban
centers, contributing to the overall financial landscape of Ethiopia.

2.2. Classification of financial institutions in Ethiopia(depository and non depository

financial institution)and it’s operations

2.2.1. Depository taking financial institution in Ethiopia

A, Commercial Banks: Ethiopia has both state-owned and private commercial banks that offer a
range of banking services, including deposit-taking, lending, trade finance, foreign exchange
transactions, and other financial services to individuals, businesses, and government entities.

B, Credit Unions
A credit union is a type of nonprofit financial institution providing traditional banking services
and is created, owned, and operated by its members. Examples

 Addis Ababa Saving & Credit Association

 Oromiya Saving & Credit Association
 Fana Youth Saving & Credit Cooperative

C, Savings and Loan (S&L) Associations

Savings and loan associations provide individual consumers with checking accounts, personal
loans, and home mortgages. Financial institutions are owned by their customers or community.

D, Microfinance Institutions (MFIs)

MFIs in Ethiopia provide financial services to low-income individuals, microenterprises, and

small farmers who may not have access to traditional banking services. These institutions offer
microcredit, savings accounts, insurance, and other financial products tailored to the needs of the
underserved segments of the population. Microfinance can be defined as provision of a broad
range of client-responsive financial services to poor people through a wide variety of institutions.
Microcredit activities in rural and urban Ethiopia were initiated by local and international NGOs
(Wolday, 2019).

Benefits of microfinance institutions include:

 providing economical values to the rural mass;

 Linking capital to communities who lack access;
 Serving as financial enablers to developmental goals;
 Encouraging planning and saving;
 Creating job opportunities; and
 Offering loans of varied types collaborating with.Commercial Bank of Ethiopia (CBE)
Example of Microfinance institutions in Ethiopia
 Sidama Micro Finance Institution S.C. (Hawassa);
 Benishangul-Gumuz Micro Financing S.C. (Assosa);
 Kalub Microfinance Institution S.C.(Jigjiga)
  Nisir Microfinance S.C. (Addis Ababa);
 Meklit Microfinance S.C. (Addis Ababa);
 Oromia Credit and Saving Institution S.C. (Addis Ababa)

2.2.2, Non depository financial institution in Ethiopia

A, Insurance sector: This sector is still relatively small but is growing rapidly. There are both life
and non-life insurance companies operating in Ethiopia.

B, Pension sector: This sector is also small but is growing. There is a single public pension fund,
the Ethiopian Social Security Agency (ESSA).

2.3, Financial Services Coverage in Ethiopia:

Ethiopia's financial services landscape includes traditional banking institutions and a growing
range of non-bank financial services. The sector aims to enhance financial inclusion and support
economic development.

2.4, Recent Financial Services Developments:

A, Financial technology (Fintech)

Fintech companies in Ethiopia are leveraging technology to offer innovative financial solutions,
such as mobile banking and digital wallets.

 CBE Mobile Banking (*889#)

Mobile banking is a service provided by a bank that allows its customers to conduct financial
transactions remotely using a mobile device. Which perform online banking tasks at everywhere,
any time. Can involve communication through USSD, Internet, or an application designed for the
bank services

 BOA mobile banking

BoA offers a safe and secure banking system with the most flexible structure and allows you
access to your account from anywhere and everywhere
  Telebirr

Telebirr is a mobile payment service developed and was launched by Ethio telecom, the state
owned telecommunication and Internet service provider in Ethiopia. It facilitates the delivery of
cashless transactions

 M-PESA

M-PESA is a mobile phone-based money transfer service, payments and micro-financing

service, launched in 2007 by Vodafone and Safaricom, the largest mobile network operator in
Kenya

Ethiopia has seen advancements in digital payment systems, facilitating electronic transactions
and promoting a cashless economy.

B, Islamic Financing:

 CBE Noor

CBE Noor is one of the full-fledged interest free banking services streamed to those interested in
and who are not able to access conventional financial services due to religious rationale. The
Service is designed to comply with the centralities of Sharia (or Islamic law) of doing business
and NBE’s directive No. SBB/72/2019.

 Marhaba Interest Free Banking

Amhara bank provides a specialized Interest-Free Banking service with the brand name
“MARHABA”. The word Marhaba in Arabic has the meaning of ”Welcome” signifying how we
are ready to serve. Our products and services are tailored to serve and fulfill the needs of our
esteemed customers.

 AbyssiniAmeen

Bank of Abyssinia provides a specialized Interest-Free Banking service with a brand name of
“AbyssiniAmeen” with unique product features and benefits. The product and services provided
by BoA fulfill the need of our esteemed customers and fully in compliance with the Shari’a
principles. Islamic finance principles are gaining traction, providing alternative financial
solutions compliant with Sharia law.

C, Capital Lease Financings:

Non-bank institutions are increasingly involved in capital lease financings, supporting businesses
with equipment and asset acquisitions.

Chapter three : Ethiopian Financial Markets

The Ethiopian financial market is a relatively young and developing market. It is

dominated by the banking sector, with a limited presence of other financial
institutions. The National Bank of Ethiopia (NBE) is the central bank and financial
market regulator.

D. 3.1 Structure of the Ethiopian Financial Market

The Ethiopian financial market is relatively young and underdeveloped compared to other
African economies. It is dominated by the banking sector, with non-bank financial institutions
playing a smaller role. The market is characterized by:

 Limited depth and breadth: There are few financial instruments available, and the market
is largely concentrated in Addis Ababa.
 State dominance: The government plays a significant role in the financial system, with
state-owned banks accounting for a large share of assets.
 High levels of informality: A large portion of the economy operates outside the formal
financial system, relying on informal sources of finance.

3.2 Money Market and Capital Markets

The Ethiopian financial market is typically divided into two main segments:

A, Money market:

The money market is the market for short-term borrowing and lending. It is primarily used by
banks to manage their liquidity. The main instruments traded in the money market are:
  Treasury bills: These are short-term government securities with maturities of up to one
year.
 Repurchase agreements (repos): These are agreements to sell securities with a repurchase
agreement at a later date.
 Interbank lending: This is the lending of funds between banks.
 Certificates of deposit: Time deposits offered by banks with a fixed interest rate and
maturity period.

This deals with short-term (less than one year) financial instruments such as Treasury bills,
commercial paper, and certificates of deposit. The National Bank of Ethiopia (NBE) plays a key
role in regulating and managing the money market.

B, Capital market: This market deals with long-term (more than one year) financial instruments
such as stocks, bonds, and derivatives. The Ethiopian Capital Market Authority (ECMA) was
established in 2020 to regulate and develop the capital market.

Capital market is the least developed segment of the financial market. There is no stock
exchange in Ethiopia, but there is a small over-the-counter market for government bonds.

This market deals with long-term financial instruments, typically with maturities of more than
one year. It is still in its early stages of development and primarily focuses on:

 Government bonds: These are issued by the government to finance public ex

unipenditures.
 Corporate bonds: These are issued by companies to raise capital for investment projects.
 Equities: These represent ownership shares in companies listed on the Ethiopian stock
exchange

The development of the Ethiopian capital market has the potential to play a significant role in the
country’s economic development by:

 Providing long-term financing for businesses.

 Encouraging savings and investment.
 Creating new job opportunities.
  Promoting financial inclusion.

The reasons for the underdeveloped capital market of Ethiopia include:

 Limited awareness and understanding of capital market instruments.

 Lack of a well-developed legal and regulatory framework.
 Insufficient market infrastructure, such as trading platforms and clearing and settlement
systems.
 Limited access to financial information and analysis.

3.3 The Nature of Foreign Markets in Ethiopia

Foreign participation in the Ethiopian financial market is limited. The government has
implemented various measures to control foreign investment, including restrictions on foreign
ownership of banks and insurance companies. However, the government has recently begun to
liberalize the financial sector, and there are signs that foreign participation is increasing.

Ethiopia has a relatively closed financial system, with restrictions on foreign ownership and
participation in the financial sector. This limits foreign direct investment and hinders the
development of the financial market. However, there are some recent initiatives to open the
market to foreign investors, including:

 Allowing foreign banks to operate in the country.

 Opening up the insurance sector to foreign investors.
 Establishing a regulatory framework for foreign portfolio investments.

3.4 Government Borrowing and Financial Markets

The government of Ethiopia relies heavily on the domestic financial market to finance its budget
deficit. The government issues Treasury bills and bonds to raise funds, and these instruments are
a major source of liquidity in the money market. The government's presence in the financial
market can crowd out private sector borrowing and limit the availability of credit for businesses.

3.5 Recent Developments: The Establishment of the Ethiopian Capital Market

The establishment of the Ethiopian Capital Market Authority (ECMA) in 2020 is a significant
development for the Ethiopian financial market. The ECMA is responsible for regulating and
developing the capital market, and its establishment is expected to lead to increased activity in
the market. The ECMA is currently working on developing a number of initiatives, including:

 Developing a legal and regulatory framework for the capital market.

 Establishing a stock exchange.
 Promoting the issuance of corporate bonds.
 Educating investors about the capital market.

The success of the Ethiopian Capital Market will depend on a number of factors, including the
government's commitment to reform, the development of a sound legal and regulatory
framework, and the ability to attract foreign investment. However, if successful, the Ethiopian
Capital Market has the potential to play a major role in stimulating economic growth and
development in Ethiopia.

Chapter Four : Financial assets in Ethiopia.

4.1, Types of Financial Assets

The types of financial assets currently traded in Ethiopia are limited due to the early stage of
development of the capital market. However, the following are the main categories:

1, Government Bonds: These represent debt obligations of the Ethiopian government and are the
most common type of financial asset traded. They have various maturities, ranging from short-
term treasury bills (up to one year) to long-term bonds (more than ten years).

2. Corporate Bonds: These are issued by companies to raise capital for investment projects,
acquisitions, or debt refinancing. They are less common than government bonds, but their
issuance is expected to increase as the capital market develops.

3. Equities: These represent ownership shares in companies listed on the Ethiopian Stock
Exchange (ESE). Currently, only a handful of companies are listed on the ESE, but the number is
expected to grow in the future.
4. Mutual Funds: These are investment vehicles that pool money from multiple investors and
invest it in a diversified portfolio of securities. They offer investors a way to gain exposure to the
stock market without the need to select individual stocks.

5. Money Market Instruments: These include short-term financial instruments such as certificates
of deposit and commercial paper. They are used by businesses and individuals to manage their
short-term liquidity needs.

4.2, Valuation Approaches

The valuation of financial assets in Ethiopia is primarily based on the following approaches:

1. Market Approach: This approach uses the current market prices of similar financial assets to
estimate the value of the asset being valued. This approach is most applicable to actively traded
securities like government bonds and listed equities.

2. Income Approach: This approach estimates the present value of the future cash flows that the
asset is expected to generate. This approach is commonly used for valuing long-term income-
generating assets like corporate bonds and dividend-paying stocks.

3. Asset-Based Approach: This approach values an asset based on the value of its underlying
assets. This approach is mainly used for valuing real estate and other asset-backed securities.

The choice of valuation approach depends on various factors, including the type of asset being
valued, the availability of market data, and the purpose of the valuation.

4.3, Interest Rate Theories and Structure

The Ethiopian financial system operates under a regulated interest rate environment, with the
National Bank of Ethiopia (NBE) setting the minimum and maximum interest rates for various
types of loans and deposits. This limits the flexibility of financial institutions to set their own
interest rates and can hinder the efficiency of the financial system.

Several interest rate theories are relevant to the Ethiopian context, including:
1. Liquidity Preference Theory: This theory suggests that individuals prefer assets with higher
liquidity to assets with lower liquidity. This explains why short-term interest rates are typically
lower than long-term interest rates.

2. Loanable Funds Theory: This theory suggests that interest rates are determined by the supply
and demand for loanable funds. When the demand for loans increases, interest rates tend to rise.

3. Expectations Theory: This theory suggests that interest rates reflect market expectations about
future inflation. If investors expect inflation to rise, they will demand higher interest rates to
compensate for the expected loss of purchasing power.

Understanding these theories is crucial for analyzing the behavior of interest rates in the
Ethiopian economy.

The structure of interest rates in Ethiopia is characterized by:

 Segmentation of the market: Different segments of the market, such as the banking sector
and the microfinance sector, have different interest rate structures. This reflects the
varying degrees of risk and competition within each segment.
 Limited market efficiency: The lack of transparency and information asymmetry can lead
to inefficiencies in the way interest rates are determined and transmitted throughout the
financial system.

Chapter Five: Regulations of the Financial system in Ethiopia.

5.1, Regulatory Bodies and Monetary Policy in Ethiopian financial system

The financial system in Ethiopia is primarily regulated by the following institutions:

National Bank of Ethiopia (NBE): The central bank acts as the primary regulator and supervisor
of the financial system. It is responsible for:

 Setting monetary policy.

 Issuing and managing currency.
 Regulating and supervising financial institutions.
 Promoting financial stability.
 The National Bank of Ethiopia (NBE) is the regulating authority for all types of financial
institutions. As such the National Bank of Ethiopia “licenses, supervises and regulates the
operations of banks, insurance companies and other financial institutions”.

Ethiopian Financial Services Supervisory Authority (EFSSA): This recently established body is
responsible for overseeing and regulating the insurance industry and the non-bank financial
sector.

Ethiopian Capital Market Authority (ECMA): This body regulates the capital market, including
the Ethiopian Stock Exchange (ESE).

The NBE conducts monetary policy through various instruments, including:

Open market operations: buying and selling government bonds to influence the money supply
and interest rates.

Reserve requirements: setting the minimum amount of deposits that banks must hold as reserves.

Discount window: providing loans to banks at a discount rate.

These instruments are used to achieve the NBE's primary objectives of price stability, financial
stability, and promoting economic growth.

5.2, Financial Institutions Regulations

Financial institutions in Ethiopia are subject to a comprehensive set of regulations designed to

ensure their safety and soundness. These regulations cover various aspects of their operations,
including:

 Licensing and authorization: Requirements for obtaining a license to operate as a

financial institution.
 Capital adequacy: Minimum capital requirements that financial institutions must meet to
absorb losses.
 Liquidity requirements: Requirements for maintaining sufficient liquid assets to meet
withdrawal demands.
  Corporate governance: Rules and practices for the management and oversight of financial
institutions.
 Anti-money laundering and combating the financing of terrorism (AML/CFT):
Regulations aimed at preventing the use of the financial system for illegal activities.

The NBE and EFSSA are responsible for enforcing these regulations and taking corrective action
when necessary.

5.3, Financial Markets Regulations

The Ethiopian capital market is still in its early stages of development and is subject to a lighter
regulatory framework compared to other markets. However, the ECMA has been established to
develop and enforce regulations for the capital market, including:

 Listing requirements: Requirements for companies to be listed on the ESE.

 Trading rules: Rules for the conduct of trading activities on the ESE.
 Disclosure requirements: Requirements for companies to disclose information to the
market.
 Investor protection: Regulations aimed at protecting investors from fraud and
manipulation.

The ECMA is expected to play a key role in developing the Ethiopian capital market into a well-
regulated and efficient market.

5.3, Financial Assets Regulations

The NBE and ECMA regulate the issuance and trading of various financial assets in Ethiopia,
including:

 Government bonds: Issued by the government and regulated by the NBE.

 Corporate bonds: Issued by companies and regulated by the ECMA.
 Equities: Listed on the ESE and regulated by the ECMA.
 Mutual funds: Regulated by the ECMA.
These regulations aim to ensure that financial assets are issued and traded in a fair and
transparent manner.

5.4, Risk Management Provisions

Financial institutions in Ethiopia are required to implement effective risk management

frameworks to identify, assess, and manage various risks, including:

 Credit risk: Risk of borrowers defaulting on their loans.

 Market risk: Risk of losses due to adverse movements in market prices.
 Operational risk: Risk of losses due to internal failures or external events.
 Liquidity risk: Risk of not being able to meet withdrawal demands.

The NBE and EFSSA have issued guidelines and regulations for risk management practices in
financial institutions.

5.5, Legal and Institutional Framework

The legal and institutional framework for the financial system in Ethiopia is based on various
proclamations, regulations, and directives issued by the government and regulatory bodies. These
include:

 The National Bank of Ethiopia Proclamation: Establishes the NBE and defines its powers
and responsibilities.
 The Banking Proclamation: Regulates the commercial banking sector.
 The Microfinance Institutions Proclamation: Regulates the microfinance sector.
 The Insurance Business Proclamation: Regulates the insurance sector.
 The Capital Market Proclamation: Establishes the ECMA and provides the legal
framework for the capital market.
 NBE Directives: Provide detailed regulations on specific aspects of the financial system.
 These laws and regulations provide the foundation for the regulation and supervision of
the financial system in Ethiopia.
 Fight Against Money Laundering and Terrorist Financing
Chapter 6

Observation

According to my view Ethiopian financial system is undergoing significant development and

transformation. The government has implemented various measures to address the challenges
and bottlenecks in the financial sector, including:

The government Establishing a stock exchange and promoting the issuance of corporate bonds to
develop the capital markets, opening the market to foreign investors and allowing greater
competition to liberalizing the financial markets and expanding access to financial services to
underserved segments of the populationto promote financial inclusion

The government also Implementing financial technology (Fintech) of mobile technology to offer
innovative financial solutions and establishing sound legal and regulatory frameworks to
promote financial stability and protect consumers by strengthening the regulatory framework

Despite the existence of development there is significant challenges are existed it includes,
including:

Limited access to financial services: Especially in rural areas and among low-income
households.

Lack of financial literacy: Many Ethiopians lack the knowledge and skills necessary to make
informed financial decisions.

High levels of informality: A large portion of the economy operates outside the formal financial
system.

Limited foreign investment: The financial market remains relatively closed to foreign investors.

Overcoming these challenges will require continued commitment from the government, financial
institutions, and other stakeholders. If successful, the development of Ethiopia’s financial system
can play a vital role in accelerating economic growth, reducing poverty, and improving the lives
of all Ethiopians.
Evaluation of General and Particular Elements:

General:

Strengths:

Covers key aspects of the Ethiopian financial system, including formal and informal institutions,
financial markets, and recent developments.

Provides a comprehensive overview of the different types of financial assets, valuation

approaches, and interest rate theories.

Includes information on regulatory bodies and monetary policy.

Well-organized structure with clear headings and subheadings.

Weaknesses:

Lacks depth and analysis in some areas, particularly regarding the impact of the financial system
on the real economy and financial inclusion.

Does not address specific challenges and opportunities facing the Ethiopian financial sector.

References are missing in some sections.

Some sections contain redundant information.

Particular:

Strengths:
Provides detailed information on the different types of formal and informal financial institutions
in Ethiopia.

Explains the structure and operations of the Ethiopian financial market.

Discusses the recent establishment of the Ethiopian Capital Market Authority.

Includes examples of different financial instruments and services.

Weaknesses:

Some information may be outdated or inaccurate.

Lacks clarity and conciseness in some sections.

Some terms and concepts may not be easily understood by non-financial experts.

Lacks practical examples of how the financial system works in Ethiopia.

Overall:

This comprehensive overview provides a good foundation for understanding the Ethiopian
financial system. However, it would benefit from further analysis, specific examples, and
updates to ensure its accuracy and relevance.

Recommendations:

Include a section on the impact of the financial system on the real economy and financial
inclusion.

Address the specific challenges and opportunities facing the Ethiopian financial sector.
Provide references for all information presented.

Edit and concise redundant information.

Consider using more visuals, such as charts and graphs, to illustrate key points.

Update information to ensure accuracy.

Use clear and concise language.

Provide practical examples of how the financial system works in Ethiopia.

Critics of the Ethiopian Financial System

Based on the information provided in the above documents, here are some potential
criticisms of the Ethiopian financial system:

Limited Access to Financial Services:

 The financial system remains largely concentrated in urban areas, leaving rural
populations with limited access to formal financial services.
 This can hinder financial inclusion, economic development, and poverty reduction in
rural areas.

Predominance of State-Owned Banks:

 State-owned banks dominate the banking sector, potentially limiting competition and
stifling innovation.
 This could result in lower efficiency, higher interest rates, and a lack of tailored financial
products for diverse needs.

High Levels of Informality:

 A significant portion of the economy operates outside the formal financial system, relying
on informal sources of finance like rotating savings and credit associations and money
lenders.
 This can expose individuals and businesses to higher risks and limited access to
financial resources for growth.
Underdeveloped Capital Market:

 The capital market is still in its early stages of development, with limited depth and
breadth.
 This restricts access to long-term financing for businesses, hinders investment
opportunities, and limits the ability to mobilize domestic savings for productive purposes.

Limited Foreign Participation:

 Foreign participation in the financial market is restricted, limiting access to foreign

investment and expertise.
 This can hinder the development of the financial system and slow down economic
growth.

Government Control over Interest Rates:

 The government's setting of minimum and maximum interest rates can distort the market
and limit the flexibility of financial institutions to respond to changing conditions.
 This can lead to inefficiencies and hinder the efficient allocation of capital.

Lack of Transparency and Information Asymmetry:

 Limited transparency and access to information can create an uneven playing field and
disadvantage certain market players.
 This can lead to inefficient pricing of financial instruments and hinder market
development.

Inadequate Regulatory Framework:

 The regulatory framework for the financial system, particularly for non-bank financial
institutions, might not be sufficiently developed to effectively address emerging risks and
promote sound financial practices.
 This can increase financial instability and expose consumers to potential harm.

Lack of Financial Literacy:

 Low levels of financial literacy among the population can limit their ability to make
informed financial decisions and access financial services effectively.
 This can increase vulnerability to financial scams and hinder effective financial inclusion.

Recent Developments and Challenges:

  While initiatives like the establishment of the ECMA and the liberalization of the financial
sector are positive steps, challenges remain in implementing these reforms effectively
and ensuring their intended benefits are realized.

It's important to note that these are just potential criticisms, and the impact of each issue
may vary depending on the specific context. Further research and analysis are needed
to fully understand the strengths and weaknesses of the Ethiopian financial system and
develop effective solutions for its improvement.

Questionnaires for Ethiopian Financial System:

1. Demographics:

Age

Gender

Location (Rural/Urban)

Occupation

Education Level

Income Level

2. Financial Access and Inclusion:

Do you have a bank account?

How often do you use your bank account?

What types of financial services do you use regularly (savings, loans, insurance, etc.)?

What are the main challenges you face in accessing financial services?

Do you use informal financial services (Iqub, Iddir, etc.)?

How satisfied are you with the current financial system in Ethiopia?

3. Financial Knowledge and Awareness:

Do you have a basic understanding of financial products and services?

Where do you get your information about financial products and services?

Do you feel confident making financial decisions?

What are your financial goals for the future?

4. Digital Financial Services:

Do you use mobile banking or other digital financial services?

How often do you use these services?

What are the benefits and drawbacks of using digital financial services?

Would you feel comfortable using these services for more complex transactions (loans,
investments, etc.)?

5. Financial Regulations:

Are you aware of the regulations governing the financial system in Ethiopia?

Do you believe that the current regulations are effective in protecting consumers?

What changes would you like to see made to the financial regulations?

Interview Questions for Ethiopian Financial System:

1. For financial institutions:

What are the main challenges and opportunities facing the Ethiopian financial system?

How do you see the financial system evolving in the next 5-10 years?

What role do you see technology playing in the future of the financial system?

What are the biggest risks facing the Ethiopian financial system?

How do you ensure that your institution is compliant with all relevant regulations?

2. For policymakers:

What are your top priorities for developing the Ethiopian financial system?

What measures are being taken to improve financial inclusion?

How are you addressing the challenges of financial literacy and awareness?

Are there any plans to further liberalize the financial system?

How are you working to ensure the stability and security of the financial system?

3. For individuals:

What are your biggest concerns about the Ethiopian financial system?

What changes would you like to see made to the financial system?

How would you like to see the government and financial institutions better serve your
needs?

What are your hopes and aspirations for the future of the Ethiopian financial system?

Observation List for Ethiopian Financial System:

Observe the availability and accessibility of financial services in different parts of the
country.

Observe the level of financial literacy and awareness among different segments of the
population.

Observe the use and adoption of digital financial services.

Observe the efficiency and effectiveness of the regulatory framework governing the
financial system.

Observe the level of trust and confidence in the financial system.

Observe the impact of the financial system on economic growth and development.

These are just a few examples, and you may need to modify the questionnaires,
interview questions, and observation list to fit your specific research objectives. It is also
important to ensure that your research methods are ethical and respectful of the
participants.