The National Bank of Ethiopia (the country’s central bank) has published a very insightful, data rich, well prepared document titled “National Stability Report”, the first one of its kind by NBE.

Mekelle:  15 April 2024 (Tigray Herald)

By Zemedeneh Nigatu

The National Bank of Ethiopia (the country’s central bank) has published a very insightful, data rich, well prepared document titled “National Stability Report”, the first one of its kind by NBE.

One of the key highlights in the report is the classification of the country’s 30 banks into three categories:

MY VIEW: Africa’s 5th largest economy needs 4 to 5 very large sophisticated commercial banks created via M&A.

Currently, Ethiopia’s banks are too many and too small (excluding state owned CBE) as stand-alones to adequately support the country’s growth.

For instance, in the 2023 ranking of Africa’s 100 largest banks by “Tier 1 Capital”, by @AfricanBizMag, only two Ethiopian private banks were ranked and they were at No. 82 and No. 86 (CBE was No. 30).

Therefore, it’s time for the private banks to voluntarily consider M&A (instead of a mandate from the regulator) and create a few very large “money-center” commercial banks. Big balance sheets with large capitals matter in banking and for the economy.

Specialized banks (agriculture, industrial, mortgage, regional, etc) should be maintained or should even be newly created.

Consolidation now is optimal as Ethiopia’s financial services sector is reforming rapidly including the entry of foreign banks, the start of capital markets later this year and the major Mega Trend – the economy’s shift to a significantly expanded role of the private sector.

*South Africa, UK and China have just 4 very large commercial banks and Canada has 5
*Nigeria is in the process of an expected further consolidation of its existing 25 banks (there used to be 85 Nigerian banks). Consolidation likely via M&A due to newly enacted capital increase requirements by the Nigerian central bank and estimates are 17 of the 25 can’t meet the requirement on their own.

All of the above referenced countries do have many more specialized banks, and in some countries, in large numbers, but the main drivers and supporters of each country’s economy are the very few, very large, commercial banks.


Industry Structure and Systemic Risk

Of the 30 commercial banks registered before end of June 2023 in Ethiopia(excluding the DBE), one is a state-owned bank; three are private interest-free banks:five are micro-finance institutions (MFIs) transformed into commercial banks; andthe rest are conventional private commercial banks.

NBE distinguishes (based on asset size) three types of commercial banks: large.medium, and small banks. Their respective roles in the market are as follows.

Large Bank: The only large bank in the country that also dominates the industry is thestate-owned Commercial Bank of Ethiopia (CBE). At end-June 2023, its total assetsand deposits constituted almost half (49.5 percent and 48.7 percent, respectively) ofthe whole banking sector. However, its total capital accounted for just over a quarter(27.5 percent) of the total. Although its market share had declined from the previousyear, CBE is clearly a domestic systemically important bank.

Assessment of Systemic Risk Stemming from Industry Structure

As indicated above, CBE is a systemic bank in the Ethiopian banking system and cantherefore entail systemic risk. Because of its relatively strong capitalization, CBE isbelieved to have withstood a number of recent negative domestic and externalshocks, including local conflicts and droughts, global inflation, disruptions to thesupply chain brought on by the war in Ukraine, changes in the price of oil and othercommodities, climate change and others.

Medium-sized Banks: At end-June 2023. the combined assets of the fivemedium-sized banks accounted for 28.0 percent of the sector’s total assets, slightlyhigher from the previous year. Their total deposits accounted for 29.4 percent of thesector’s total, marginally lower than at end-June 2022. On the other hand, their entirecapital was 31.0 percent of the sector’s total, up from 28.8 percent of the previousyear. None of these banks is currently regarded as a systemic bank, despite theirgrowing market share.

Yet CBE has a high cushion of regulatory capacity as its capital adequacy ratio (CAR)is significantly above NBE’s 8 percent minimum capital requirement, and its liquidityposition is also above the 15 percent minimum requirement. Thus, at all levels of riskstress, CBE’s CAR and liquidly position will remain above the regulatory minima.

Small Banks: At end-June 2023, the combined assets and deposits of the 24 smallbanks accounted for 22.5 percent and 21.9 percent, respectively, of the wholebanking sector – an annual increase of 3.4 and 2.6 percentage points, respectively.Likewise, their combined total capital share increased from 40.2 percent of thesector’s total capital in 2022 to 41.6 percent at end-June 2023. The growth of thesmall banks’ aggregate market share can be explained by the increase in their number(two more banks had joined the banking sector) and the rapid initial expansion ofrecently established banks. However, with an individual share in assets, deposits, andloans & bonds of less than one percent, none of the small banks can be considered asystemic bank.

However, because the majority of the bank’s paid-up capital is government-issuedpromissory bond (Proclamation No. 994/2017 Government Bond) that has not yetbeen fully paid for in cash; CBE’s capital position requires targeted policy andregulatory attention in the event of unfavorable circumstances. Furthermore, eventhough the stress tests performed show that the systemic bank is resilient to creditrisks (see Section below), NBE will continue to monitor the bank’s exposure toloans transferred to the Liability and Asset Management Corporation. 1

Of which, one is full-fledged interest-free bank

Awash Bank. Bank of Abyssinia, Cooperative Bank of Oromia. Dashen Bank, Hibret Bank.

Abay Bank, Addis International Bank, Ahadu Bank. Amhara Bank, Berhan Bank, Bunna Bank, Enat Bank, GadaaBank, Global Bank, Goh Betoch Bank, Hijra Bank, Lion International Bank, Nib International Bank, Omo Bank.Oromia Bank, Rammis Bank, Shabelle Bank, Sidama Bank, Siingee Bank, Tsedey Bank, Tsehay Bank, Wegagen

The Liability and Asset Management Corporation was established by the Government in 2021 to manage theconsolidation and servicing of a portion of the debt of the country’s state-owned enterprises (SOE) and otherstate-owned assets

Bank, ZamZam Bank. Zemen Bank.

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