Ethiopian Financial Sector Development

Abstract

Financial sector development has played a key role in Ethiopia’s economic development, particularly since the launching of the first Five-year Growth and Transformation Plan in 2010. The gradualist approach that Ethiopia followed in reforming its financial sector seems to have borne fruit as no single commercial bank has gone bust so far, unlike the case in neighbouring countries. Though Ethiopia’s financial sector growth was following output growth in the first two phases, government has started to play a key role in accelerating the sector’s growth through active interventions, such as encouraging branch expansion, and introduction of new financial instruments such as the Grand Ethiopian Renaissance Dam Bond, a housing saving scheme, and the private pension fund. Consequently, the number of bank branches expanded from 681 to 4,257 between 2010 and 2017 while the deposit-to-GDP ratio went up from 25.9 per cent to 31.4 per cent in the same period.

Transformation of Household Savings into Investments: The Country's Credit Potential

“…It manifests itself in the creation of derivatives and the infrastructure that allows for their efficient use [Karlsson & Tavassoli, 2018 The financial sector's high yields force a reallocation of resources in its favor, which is reflected in its rapid growth rates. Experts estimate that daily transaction volume has gone from $1 billion in the 1970s to $3-4 trillion now, with the volume of goods-and-services trade only increasing by 50% [Birru, 2019].…”