Banking Sector Reform in Ethiopia
Banking Sector Reform in Ethiopia: An Abstract
Admassu Bezabeh, Ph.D, School of Business and Leadership, Dominican University of
California San Rafael, California
Desta, Asayehgn, Ph.D. School of Business and Leadership , Dominican University of
California, San Rafael, California.
The fragile and inefficient state-dominated banking sector that existed in Ethiopia during the military government (1974-1991) was a major hindrance to economic growth. Since it took power in 1991, the current government has implemented a number of reforms. For instance, in 1994, the government legalized domestic private investment in the banking industry. In addition, it restructured the two development banks as commercial banks, and introduced a new Banking and
Monetary Proclamation that gave more autonomy and further clarified the National
Bank of Ethiopia’s activities as the regulator and supervisor of the banking sector.
Although the process has taken two decades, the banking sector remains repressed since the reform process has been painstakingly slow and the policy measures implemented so far are not fully adequate. To date, these measures fall short of significantly improving the banking sector. It is not yet competitive and efficient, nor is it capable of accelerating the economic growth of the country which remains marginal. The government’s concern that financial liberalization may lead to a banking crisis that may culminate into an economic crisis is also misplaced. Empirical studies provide evidence that as regulatory and supervisory tools are upgraded and as supervision becomes increasingly vigorous, the probability of a banking crisis significantly diminishes. It is time to recognize this contradiction and it would be wise to begin the process of vigorous reform to achieve financial strength. Global experience suggests that greater competition among domestic and foreign banks can bring greater benefits in the form of improving efficiency. Fundamental market-oriented
Admassu Bezabeh, Ph.D, School of Business and Leadership, Dominican University of
California San Rafael, California
Desta, Asayehgn, Ph.D. School of Business and Leadership , Dominican University of
California, San Rafael, California.
The fragile and inefficient state-dominated banking sector that existed in Ethiopia during the military government (1974-1991) was a major hindrance to economic growth. Since it took power in 1991, the current government has implemented a number of reforms. For instance, in 1994, the government legalized domestic private investment in the banking industry. In addition, it restructured the two development banks as commercial banks, and introduced a new Banking and
Monetary Proclamation that gave more autonomy and further clarified the National
Bank of Ethiopia’s activities as the regulator and supervisor of the banking sector.
Although the process has taken two decades, the banking sector remains repressed since the reform process has been painstakingly slow and the policy measures implemented so far are not fully adequate. To date, these measures fall short of significantly improving the banking sector. It is not yet competitive and efficient, nor is it capable of accelerating the economic growth of the country which remains marginal. The government’s concern that financial liberalization may lead to a banking crisis that may culminate into an economic crisis is also misplaced. Empirical studies provide evidence that as regulatory and supervisory tools are upgraded and as supervision becomes increasingly vigorous, the probability of a banking crisis significantly diminishes. It is time to recognize this contradiction and it would be wise to begin the process of vigorous reform to achieve financial strength. Global experience suggests that greater competition among domestic and foreign banks can bring greater benefits in the form of improving efficiency. Fundamental market-oriented