CHAPTER TWO

Ethiopian Banking Sector

 Organization and Structure of Ethiopian
Banking Industry
The banking sector of Ethiopia composed of the central bank, the
National Bank of Ethiopia (NBE), and 31 commercial/private
banks.
 Ethiopia has allowed foreign banks to provide liaison service for
their country of origins. E.g; Chanies, Germeny, Turkish, Keneya
and South Africa.
CBE was legally established as a share company in 1963.
CBE has more than 37.9 million account holders in its more than
1900 branches.
he National Bank of Ethiopia was established in 1963 by
proclamation 206 of 1963.
The Bank used to carry out dual activities, i.e. commercial banking
and central banking.
 Other Financial Institution in Ethiopia
Micro finance Institutions:
MFIs are provide small loans to people who do not have any access
to banking facilities.
Currently in Ethiopia there are about 45 microfinance institutions.
(E.g. Amhara, oromia, Dedebit Credit and Saving Institutions)
Vision fund, Omo…etc.
The major objectives of microfinance are to help in generating
income for low-income households and help in alleviating poverty.
Initial capital required by the National Bank of Ethiopia
has 75 million Birr on the replaced 2015 legislation, became
effective as of Jan 16, 2023.
Major challenge of MFIs in Ethiopia are ow outreach, fund
shortage, limited product diversification, limited research and
innovation, and weak internal control system.
 Other Financial Institution in Ethiopia
Saving and Credit Associations:
SACCOs are voluntary associations where by members regularly
pool their savings, and subsequently obtain loans which they use
for different purposes.
A cooperative society is a form of a business organization or a
group of people who agree to voluntarily associate.
Savings and Credit Cooperatives (SACCOs) in Ethiopia - over
21,000 in total - can play an important role in financial inclusion.
 In Ethiopia there are three types of saving and credit
cooperatives, Institution based SACCOs; Community based
SACCOs; and sponsored by NGOs SACCOs.
The objective of SACCos are bringing broad-based development
and poverty alleviation in Urban and Rural area as they were
permitted to take deposit from and grant loan to members.
Central Banks
A central bank, reserve bank, or monetary authority is a
banking institution granted the exclusive privilege to lend
a government its currency.
It is the entity responsible for overseeing the monetary
system for a nation (or group of nations).
 Central banks have a wide range of responsibilities,
from overseeing monetary policy to implementing
specific goals such as currency stability, low inflation
and full employment. Central banks also generally issue
currency, function as the bank of the government, regulate
the credit system, oversee commercial banks, manage
exchange reserves and act as a lender of last resort.
Nature of Central Banks
A bank which is entrusted with the functions of guiding
and regulating the banking system of a country is known
as Central bank.
Such a bank does not deal with the general public. It acts
essentially as Government’s banker; maintain deposit
accounts of all other banks and advances money to other
banks, when needed. The Central Bank provides
guidance to other banks whenever they face any problem.
It is therefore known as the banker’s bank. The central
bank also has the function of controlling commercial
banks and various other economic activities.
 Objectives of Central Banks
For the economic interests of the nation, consistent with government
economic policy.
 Monetary policy :- stability in the domestic purchasing power of

the currency
 Financial stability: - mitigate financial risks and provide stability

 Payment System:- supervise the smooth operation of the clearing

and payment system

 Employment, growth and welfare objectives

 Support policies of government

 Achieve surplus or profits

 To regulate the supply, availability and cost of money and credit.

 To manage and administer the country's international reserves

 To license & supervise banks & hold commercial banks reserves

& lend money to them.

 Functions of Central Bank
In the monetary and banking setup of a country, central
bank occupies central position and perhaps, it is because
of this fact that this called as the central bank. In this
way, this bank works as an institution whose main
objective is to control and regulate money supply
keeping in view the welfare of the people.
Central bank is an institution that fulfills the credit needs
of banks and other credit institution, which woks as
banker to the banks and the government and which work
for the economic interest of the country. The following
are functions of central bank;
 1. Monetary Stability Functions
Monetary policy: refers to credit control measures
adopted by central banks of a country. It also refers
to a policy employing central bank’s control of the
supply of money as an instrument for achieving the
objective of general economic policy.
Any conscious action undertaken by the monetary
authorities to change the quantity, availability, or
cost … of money.
Financial stability policy
 Monetary Policy
 Exchange Rate Policy
Monetary Policy Objectives
Principal objectives of Monetary Policy:
Price Stability
Balance of Payment
Economic Growth
Full Employment
Central Bank and objectives of Credit
Control
 The credit control is the means to control the lending
policy of Commercial banks by the central bank to
achieve the following objectives
To stabilize the internal price level
To stabilize the rate of foreign exchange
To protect the outflow of gold
To control business cycles
To meet business needs
To have growth with stability.
Controller of Credit
This is the most important function of the bank in order
to control inflation and deflation through adopting
quantitative and qualitative methods.
Quantitative methods aim at controlling the cost and
quantity of credit by adopting:
Bank rate policy
Open market operation and
By variation in reserve ratio of commercial banks
Qualitative methods control the use and direction of
credit through:
Selective credit control and
Direct action
 2. Regulatory Functions
 Financial stability policy and oversight of the financial system.
 Involved in licensing, supervision and in intervention (of
financial institutions) to require corrective action
Additional controlling functions of Central banks include
regulation of branch expansion, to see that every bank maintains
the minimum paid up capital and reserve as provided by law ,
inspection or auditing the accounts of banks, control and
recommend merger of weak banks in order to avoid their
failures and to protect interest of depositors, and recommend
nationalization of certain banks to the government in public
interest.
Prudential policy development
Supervision and Oversight
3. Policy Operation Functions
 Operations to support policy are
prominent among the functions of central
banks
Foreign Exchange (FX) reserve management
(Reserve and Intervention)
Liquidity Management (overall market
liquidity)
Lender of Last Resort (Individual institution's
liquidity)
 4. Financial Infrastructure Provision Functions
Provision of infrastructure for the financial system is a
dominating function of central banking
Issuance of currency (Design, Print and Mint) and the
management of its circulation; the provision of banking
services to commercial banks and the government; and
the provision of a system for the exchange of central
bank money in settlement of transactions.
 Banking/account management services
 Payment System (Inter-Bank)
 Settlement system for central bank money
 Other settlement systems
 Registry provision (recording the ownership of assets (primarily securities) and for
recording debts)
5. Other Public Good Functions
 Central banks act as the government’s
banker
 Central banks provide extensive
account management services to
government and agencies of the state
Maintain accounts
Make and receive payments
6. Responsibility for debt and asset management and
other public good functions
Agent role to the government
Asset management
Debt management
Development Functions
Research
Consumer services
To approve the appointment of chairpersons
and directors of such banks in accordance
with the rules and qualifications
To control and recommend merger of weak
banks in order to avoid their failures and to
protect interest of depositors
To recommend nationalization of certain
banks to the government in public interest
To publish periodical reports relating to
different aspects of monetary and economic
policies