POLICY INITATIVES FOR IMPROVED FINANCIAL SERVICE PROVISION IN THE RURAL AREAS: THE CASE OF ETHIOPIA

1. POLICY INITATIVES FOR IMPROVED FINANCIAL SERVICE PROVISION IN THE RURAL AREAS: THE CASE OF ETHIOPIA By Getahun Nana National Bank of Ethiopia July 2008

2. Introduction • Top Government Economic policy agenda • is accelerated and sustained economic growth • Agriculture playing a leading role • The role of Finance in bringing accelerated growth • Finance being an essential catalyst to boost investment by: • mobilizing scarce financial savings and channelling it to productive investments; • reducing risk of investors and of course savers; • lessening the barriers to new entry; and • facilitating efficient exchange of goods and services • Thus, there is a need to have vibrant, efficient and strong financial system which is accessible to majority of the population, if not all.

3. Introduction continued • Creating enabling environment is essential to improve accessibility of finance • Creation of enabling environment for financial systems includes: • maintaining stable macro-economic condition, • ensuing soundness of FI, and • developing stronger underlying infrastructure including in information and legal dimensions.

4. Introduction continued • The objective the paper • To outline policy initiatives taken by the GoE since early 1990s to foster development and accessibility of finance to the rural areas in particular and the country in general (section 2); • Section one presents overview of Ethiopian financial system; and • Section 3 concludes the paper.

5. I Financial Systems in Ethiopia • Financial systems of a country • Financial institutions; • Financial markets • Financial instruments • Financial systems evolve over time – three distinct periods. • Pre Derg (1905 - 1974 ): The first bank in Ethiopia was established in 1905 (Bank of Abyssinia). • Derg (1974 – 1991): Nationalizations of financial institutions, • Post derg (1991 ---): Reorientation of the financials system to market economy.

6. Financial Systems in Ethiopia • Reforms since 1991 included • comprehensive restructuring of government owned financial institutions, and • opening the sector for local private equity participation; • As a result, nine banks (Zemen Bank), eight insurance companies and 28 MFIs have been created until June 2008. • Ownership of the newly created institutions: • Banks and insurers 100% by local private shareholders • MFIs mixed= regional governments, local NGO, and private .

7. Financial Systems in Ethiopia • Other financial institutions (other than banks, MFIs and insurers) • Pension fund, and • saving and credit cooperatives (5,437 of them, September 2006) • Limited contractual saving services • Thus financial institutions in Ethiopia constitute: the central bank (NBE), 12 banks, 9 insurers, 28 MFI, the pension fund, and over 5000 SACCOS

8. Financial Systems in Ethiopia • Financial markets in Ethiopia are underdeveloped. • Inter-bank local money and foreign exchange market is almost non- existent or inactive • No long term debt securities market or • No stock exchange market • Financial instruments • limited to government papers (mostly Tbs) • No secondary market (even for gov’t papers). • Banking products are traditional (saving, time & demand deposits; as well as standard loan products)

9. Financial Systems in Ethiopia • Thus Ethiopian financial systems is thus bank dominated. • Yet it is not easily accessible to large segment of the population • A study by the World Bank showed that only 20% of adult population have accounts in financial institutions in the median African country (Honohan, P. 57) • The figure for Ethiopia is about 19% (NBE, Banking Supervision).

10. Financial Systems in Ethiopia • Reason for low access: • Low geographic and demographic penetration, and • All banks are headquartered in Addis Ababa (the capital city). • Ethiopia : Population per bank branch135,404 (June 2008) • Spain 96 branches per 1000 people (Kunt P.6). • Thus mainstream bank branches are hardly accessible to rural poor.

11. Number and distribution of Bank Branches

12. Financial Systems in Ethiopia • Affordability: • For a small farm landholder living on subsistence, minimum account opening balance (birr 50) set by banks is relatively high. • For banks small farmers/the poor are considered unbankable. • Loans are granted to urban rich who can offer collateral • Average loan size for the banking sector was birr 728 for March, which was much higher than borrowing capacity of the poor.

13. Facts on mainstream banking: Loans

14. Facts on mainstream banking: Deposit mobilization • There are 3,403,959 deposit accounts • Balance maintained in the accounts stood at birr 60,943 million • A.A. accounted for 66% of the total • 2% deposit account holder contributed for 73% of total deposits; or • 98% of account holder contributed for only 27% of deposits

15. II. Policy Initiatives • Creating enabling environment • Government has a central role in creating enabling environment for expansion, competition and growth of financial services industry in the country. • First Maintaining sound Macro-economic condition • Inter-temporal nature of financial contracts, • low inflation and stable exchange rate • until recently, Ethiopia’s macroeconomic system has been stable • over the last five years, the country grew by about 11% per annum • inflation rate has been below 10% • exchange rate continued to be stable • however the current rise in inflation is worrisome

16. Creating Enabling Environment • Second, Conducive Legal and regulatory Framework • Banking and insurance laws of 1994 (now being revised) • MFI law of 1996 (under revision) • A law that allows for establishment and operation of leasing companies • Foreclosure law • Third, Creation of Credit information bureau

17. Creating Enabling Environment • Fourth, expanding modern telecommunication network to rural areas • Fifth, Payment System Modernization Project

18. Mitigating market failure • Input loans that enable farmers buy agricultural inputs • Rural Financial Intermediation Program (RUFIP) • Urban Financial Intermediation Program (UFIP)

19. The Way Forward • The challenge to stabilize the economy (inflation currently is running at doable digit). • Modernizing the payment and settlement systems • improve breadth and depth of access to finance • speed up the implementation of this important program. • Develop missing laws and regulations • On electronic banking/transactions • Develop securities market particularly, market for long term debt securities. • Extending application of foreclosure law to MFIs • Extending credit information sharing system to MFIs, utility service providers, tax authorities and commodity exchange, and • Expand further appropriate telecommunication infrastructure.