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Critique on and Supplement to Bank Sector Reform in Ethiopia

                                      Ghelawdewos Araia, PhD

                                      February 24, 2014

This essay, as its title suggests, intends to critique and supplement Bank Sector Reform in Ethiopia by Drs. Desta Asayehgn and Admassu Bezabeh that was published by (IDEA) Inc. (www.africanidea.org/Banking_sector_in_Ethiopia.html). I found their abstract interesting, especially in some parts where the authors present sound arguments and are leveled against government policies as constructive criticism, and I will endorse the ideas that I agree with. On some of their ideas, however, I have different views, reservations and disagreements; hence I will critique those ideas in an effort to make input and insight for future considerations.

Therefore, when I critique and supplement the Banking Sector Reform in Ethiopia, it is in anticipation of embracing a larger perspective that links the context of the Ethiopian economy in general and the financial institutions in particular. Broader perspectives, in turn, enable us reflect on the scope and magnitude on domestic Ethiopian banks’ overall   performance and how they are impacted by the entry of foreign banks.

This paper, thus, goes beyond critiquing and supplementing to suggesting and solving a major problem that encounters (at times bewitches) the Ethiopian economy. Problems are solved when we devote a great deal of attention in a creative way and in this context, I found Drs. Desta and Admassu’s Abstract not simply as incidental contribution but as an essential component of the creative process in solving Ethiopia’s problems. It is in the latter spirit that I like to present this essay to readers, but the central thesis of my paper underscores Ethiopia’s priorities in accordance with a set of criteria that ought to be established by the Ethiopian Government. But, the Ethiopian Government should also open up in terms of embracing external inputs put forth by Ethiopian intellectuals that could have a far-reaching implication in policy making.

Desta and Admassu argue, “Global experience suggests that greater competition among domestic and foreign banks can bring greater benefits in the form of improving efficiency. Fundamental market-oriented measures are therefore needed to further strengthen the financial sector in order to accelerate Ethiopia’s economic growth.”1    

Moreover, in order for Ethiopia to make a meaningful economic growth, the authors enumerate the following suggestions2

  1. The privatization of the dominant state-owned Commercial Bank of Ethiopia
  2. Permitting entry of foreign banks
  3. Allowing market forces to determine interest rates and exchange rates of the ETB
  4. Upgrade the regulatory and supervisory ability of the National Bank of Ethiopia to restore the public’s trust in the banking sector.

I disagree with items 1 through 3 and endorse item number 4. Let me begin my analysis with number 4 and return to the other three in right order later. I agree with the authors that the National Bank of Ethiopia (NBE) must undertake periodical structural reform within itself and upgrade its regulatory and supervisory ability not only “to restore the public trust” but also to guarantee the smooth functioning of the financial institutions in Ethiopia. However, it is important to acknowledge that the NBE has indeed wrought some upgrading by introducing a new technology in order to integrate the banking system in Ethiopia.

Yoseph Mekonnen, writing for Addis Fortune, for instance, reports how NBE launched new CORE banking system: “The National Bank of Ethiopia (NBE) launched its new centralized, on-line, real-time, electronic (CORE) banking system, called Quantum Intellect, on Monday 18, 2013. This will replace the previous Bank Master System. …The Intellect solution, which was developed specifically for central banks, is expected to resolve these issues by allowing the integration of currency management, securities, payments and settlement and the enterprise general ledger. In addition, it should speed the Bank’s operations and allow it to keep accurate management and regulatory reports, according to Polaris press release at the time of the contract signing. …The NBE has brought and deployed new services and software to support its CORE banking system. Afcor plc was awarded a one million-dollar contract in April 2013 for the supply of IBM 3650-M3 servers and Oracle software for data storage”3 

I happen to be an employee of Chase Manhattan Bank (now ‘Chase’) in the early 1980s in the Wall Street area and served as research assistant in the Cancelled Securities Department of the Bank and I very well know how efficient these private banks are. In New York City, where I have lived for a long time, there are also public institutions and state owned enterprises that are equally efficient, and examples of these are the New York City Metropolitan Transit (subway and city buses) that run by the minute on the clock, operate 24 hours, and that are the envy of the world. Likewise, as I have discussed in my debut book in 1995, the World Trade Center, the Holland and Lincoln Tunnels, the George Washington Bridge, the John F. Kennedy, LaGuardia, and Newark Airports are all managed by the Port Authority and owned by New York State and State of New Jersey. Similarly, New York State and the State of Connecticut own the Metro North that runs from Grand Central station. The more developed OECD countries in Europe also own and manage mass transit throughout Europe.

Therefore, it is not mere privatization of a firm, company, or bank that makes it efficient. It is the professional management and up-to-date technology in these respective enterprises that would play a decisive role in transformation, development, and the making of wealth. Privatization alone also cannot be an effective panacea especially during recession and/or depression. We know how governments from time to time intervened to either resuscitate an economy in crisis or revive a collapsing economy.

During the last major depression in the 20th century, John Maynard Keynes inspired Franklin D. Roosevelt in recovering the US economy. In his celebrated book, The General Theory of Employment, Interest, and Money, Keynes reasoned that the state could stimulate economic growth and improve stability in the private sector through interest rates, taxation, and public projects. 

It is the state intervention and not the “invisible hand” (the market corrects itself) of Adam Smith that breath life into the dying American economy. In 2011 too when it became Dé jávu (“already seen” or “here we go again”) and the US as well as the global economy were gripped by a deep recession, the US Government under Barrack Obama declared “too big to fail” in order to salvage the big banks and automobile industries, except for Ford. What happen to these banks and other private institutions that are supposedly “superior” to public enterprises? In New York and elsewhere it was the efficient financial institutions and banks like Lehman Brothers that vanished like morning dew, and not the public enterprises like the New York subway. And without timely injection of capital from the Federal Government, the major US industries perhaps would have crumbled and would have become part of the dustbin of history.

Given the above experience and the wrong libertarian classical political economy analysis of Adam Smith, thus, I would not suggest the privatization of the state-owned CBE. Moreover, the CBE have been operating for over fifty years and it is one of the most successful banks in Africa. The Bank has now 780 branches throughout Ethiopia and during the 2011/12 fiscal years it garnered an impressive profit of Ethiopian Birr (EB) 7,600,000,000. When it started its operations in 1963, the Chase Manhattan Bank sponsored The CBE and I remember CBE employees coming to New York in the early 1980s for further training, when I used to work there.

The CBE operated very much like its Western counterparts and most of the CEOs of the new private banks in Ethiopia have come out from the CBE and NBE and there is no doubt that the knowledge and expertise of managers of the private banks emanated from those old banks of Ethiopia. For instance, according to Bulcha Demeksa, among Ethiopian experts in banking who made feasibility study for the establishment of the Awash International Bank are, “Kebede Kumsa, who mainly led the study and who, as the General Manager of the Development Bank of Ethiopia, had gained years of experience in banking. Others were Tikkiher Hailu, Amerga Kassa, Bekele Nedi, who was legal advisor to the Development Bank of Ethiopia in the early 60s and Belete Menkir of the Commercial Bank of Ethiopia. As Tikkiher Hailu was former Governor of the National Bank of Ethiopia, and Amerga Kassa, former Director of International Banking in the National Bank of Ethiopia, they were particularly knowledgeable about central and commercial banking.”4

To his credit, Bulcha also acknowledged the professional ability of some Ethiopian bankers and tells us that the Awash International Bank (AIB) was fortunate enough to have Leikun Berhanu, who later became President of AIB, because he “was a professional banker and knew his job thoroughly and gave the government sound advice.” Bulcha also says, “ I was in constant contact with the Chief Legal Officer of the National Bank (Eshetu Irrena) who was strictly professional in all his dealings with us.”5

The second proposal of Desta and Admassu, “permitting entry of foreign banks” into Ethiopia also could stir controversy because questions such as 1) why do we need them in Ethiopia and 2) what could Ethiopia benefit out of these banks, could arise. The authors underscore the significance of efficiency and competition due to entry of foreign banks, and there is no doubt that the latter could bring innovation, new technology, professionalism, enormous assets, and above all linkage with the global economy because these foreign banks are part and parcel of transnational corporations (TNCs). However, their entry into Ethiopia could not materialize because, “only Ethiopians could operate and own financial institutions,” according to the law of the country. The latter is interpreted by Desta and Admassu, and justifiably so, as “prohibiting foreign banks entry based on infant industry policy,” or mercantile market economy.

For the sake of further understanding the controversy surrounding entry of foreign banks into Ethiopia, I now like to turn to the pros and cons propagated by some scholars and financial experts. Stijin Classens, Professor of International Finance Policy at the University of Amsterdam, along with his colleagues, has studied 7,800 banks in 80 countries in relation to how foreign banks affect domestic banking markets, and here below is their finding and their rationale.

Stijin Classens, Asli Demirguc-Kunt, and Harry Huzinga state, “We investigate how net interest margins, overhead, taxes paid, and profitability differ between foreign and domestic banks. We find that foreign banks have higher profits than domestic banks in developing countries, but the opposite is the case for developed countries. Estimation results suggest that an increased presence of foreign banks is associated with a reduction in profitability and margins for domestic banks.”6

Unlike Classsens et al, Hyun E. Kim and Byung-Yoon Lee studying the effects of foreign banks on domestic banks in Korea, seem to question the viability and validity of the role of foreign banks in Korea but they also seem to share aspects of the findings of Classens et al. Their position in foreign-domestic banks nexus looks ambivalent but it is important to examine their finding. “Has increased foreign participation actually contributed in any substantial degree,” say Kim and Lee, “to improvement in the efficiency and stability of the domestic banking system in Korea?” After posing the above question, Kim and Lee provide us with the following answer: “Despite the sharp rise in the level of foreign participation in local financial institutions in many emerging markets and particularly in the second half of the 1990s, an increasing body of empirical evidence indicates that it is not wholly clear as to whether foreign entry has improved either the efficiency or stability of domestic banking system.”7   

However, other experts like Dan Luo, Yizhe Dong, Seth Armitage, Wenxuan Hou who have studied foreign bank penetration into China, more or less reinforce Desta and Admassu’s reasoning in the whole gamut of foreign banks-domestic banks nexus. “Based on a sample of three types of Chinese banks from 2002 to 2011,” say Dan Luo et al, “we find that the expanded branch networks of foreign banks help stimulate the improved profitability of domestic banks, as a result of higher achieved efficiency and the increased of non-interest income of domestic banks, as a result of knowledge transformation from foreign banks. These positive relationships are more pronounced among joint-stock banks (JCBs). Finally, foreign bank penetration has been found to play a significant role in stimulating the risk-management improvement of domestic banks, especially those with foreign strategic investors.”8    

On the other hand, Yingkai Yin, Xiaotian Tina Zhang, and Yahua Zhang have entertained diametrically opposite ideas to that of Dan Luo et al positive analysis of the import of foreign banks. On the contrary, they argue that foreign bank entry, in fact, weakened domestic Chinese banks while at the same time they acknowledge the foreign banks contribution in new technologies, products and management skills, and increasing capital adequacy ratios. Despite these advantages of entry of foreign banks “however, there are potential problems associated with the influx of foreign capital. For example, foreign financial institutions tend to under value the value of Chinese banks and want to bargain a low acquisition price, sometimes even much lower than the market price. In addition, the introduction of foreign equity may increase the possibility of contagion and susceptibility to any financial crisis (Chen et al 2009)”9

In light of the above views and comparative analyses of foreign banks entry into given developing countries or even middle income status nations, and also given Ethiopia’s fresh ascent on the regional as well as global economy, I strongly propose that the Ethiopian Government should upheld the current existing bank and financial policy, especially in forestalling the coming of foreign banks into Ethiopia. This policy must remain in effect until the new private banks reach a certain threshold of strength and competitiveness and until the Ethiopian industrial base exhibits a remarkable stage of development.

Inviting foreign banks into Ethiopia at this stage, that is, when Ethiopia is still a staggering toddler nation in development, could mean allowing a great white shark into a pool of seals where the latter are eaten one by one by the sea beast. The White shark-seal analogy could also be attributed to the so-called Transitional Economies of Eastern Europe, in which the domestic banks are overrun by foreign Western European banks. American banks have not yet ventured into East Europe except for Citibank.  Foreign banks now own a significant number of former East European banks; Italian banks have now a predominant role in Croatia; other East European banks are owned by Sweden.

In order to have a clear picture of how foreign banks diminish the financial legal personality of East European banks, it is important to rely on the findings of Sophie Clays and Christa Hainz: “In Hungry foreign banks already outnumbered domestic banks in 1993. Due to the Hungarian liberalization strategy that started in [the] early 1980s, the share of foreign banks now represents more than 70 percent of the market… In 1999 the Polish Government started to sell majority shares of domestic banks to foreign investors. This led the number of foreign banks in Poland to exceed the number of domestic banks in 1999 and dominate the market in terms of market share since 2000.”10 Banking in tiny Estonia and other former Soviet allies in East Europe are now managed and owned by Western European banks.

In light of all the findings and indicators of the effect of foreign banks entry, I would not recommend the Ethiopian Government to permit international banks into Ethiopia and wittingly or unwittingly witness the East European scenario and fate in the country. On the other hand, I fully agree with Drs. Desta and Admassu that “the Ethiopian economy is characterized by low growth and high inflation.” However, this major Ethiopian problem could not be solved by inviting foreign banks or by Ethiopia’s domestic banks alone. It is understandable that developing countries like Ethiopia suffer from inflation and low growth during the transition period from small-scale phase to major industrial phase. Even highly developed nations encounter intermittent inflation during the overall growth cycles.

One assertion that I was unable to fathom is the fact that the authors of the Abstract seem to have taken it for granted when they stated, “Despite heavy pressure from the United States Government, as evidenced by Wikileaks messages, the Ethiopian Government continues by law to prohibit the entry of foreign banks to the country.” This argument is not palatable to me and it is for the following reasons: 1) Ethiopia is a sovereign nation-state and it must formulate and implement its policies without being instructed by foreign powers; 2) I am not opposed to any American vested interest in Ethiopia. After all, I am Ethiopian-American and I would favor American interests being promoted in Ethiopia and elsewhere but I would not like to see US hegemony over Ethiopia.

One other reason why I am not in favor of foreign bank entry into Ethiopia is because the Ethiopian banks, both state-owned and private, are doing very well in terms of profitability and some of them are also cooperative banks and people-oriented financial institutions and they render a distinct advantage to Ethiopian citizens that foreign banks would not even consider as part of their financial ethos. Some examples of cooperative banks are Addis International Bank (AdIB), the Cooperative Bank of Oromia, and Enat Bank.    

According to Addis Fortune, “the AdIB stands out from most other competitors in the industry for its strong cooperative base. Out of the total paid-up capital, 64.3 pc is owned by corporate shareholders (cooperatives 48 pc, share companies 11.1 pc, idirs [traditional Ethiopian credit union] 3.3 pc) and the remaining 35.7 pc by individual shareholders. Four unions (two coffee farmers, two saving and credit cooperative unions) are among the major shareholders of the bank.”11    

Similarly, “The Cooperative Bank of Oromia shows a considerable expansion in its assets, registering 6.54 billion Birr – an increase of 82 pc during the year that ended on June 30, 2013. The CBO’s profit after tax showed a remarkable increase, reaching 189.6 million Br. The profit after tax has been constantly on the up over the past few years.”12

Enat Bank (literally “Mothers” Bank) prioritize Ethiopian women’s interests and the majority of the shareholders, hence the benefactors, are women; and on top of these cooperative banks, 131 shareholders of the Bank of Abyssinia that was established in 1996 are all Ethiopians. 

To date, there are at least 18 private banks in Ethiopia and four of the top, successful, and competent banks are shown with their profit below.13

Name of bank                                                     Profit in EB 2011/12


Awash Int. Bank                                                     550,000,000

NIB                                                                      389,000,000

Dashen                                                                 896,000,000

Wegagen                                                               458,000,000

With the advent of the new private banks that have not supplanted the state owned banks, and also with the promising of an ongoing development surge in Ethiopia, it is highly probable that a sizable middle class will be created in the country. It is this middle class that would ultimately contribute to the economic transformation of Ethiopia and its historic leadership role should not be curtailed by foreign incursions. The middle class, that is essentially an entrepreneurship class, should not be confused with the very few rich Ethiopians that have popped out in the last two decades, at a time when we still have millions of impoverished Ethiopians. The real middle class will emerge (its incipient embryonic stage have already shown) when a sizable entrepreneur class leads the industrial, agricultural, and financial sectors of the economy and when at least ten to twenty million Ethiopians are uplifted from poverty. This goal, however, could be attained only when Ethiopian professionals have the upper hand in the business sector and when Ethiopia, as a whole, determines its fate itself. 

My answer to the third point, that is, “allowing market forces to determine interest rates and the exchange rate of the ETB” is unequivocally no, and it is for the following reasons: 1) the so-called market forces are mystified and as I have indicated above in relation to Adam Smith and his maxim of ‘invisible hand’, the market, as such, does not have an organic, built-in, and universally applicable laws that govern all societies. Moreover, as I have already extrapolated earlier the market does not correct itself during crisis and for this apparent reason the state intervenes to correct the failure of the market and thereby ameliorate the dire condition of the economy; 2) central banks (also known as national banks), including the Federal Reserve (US central bank), all over the world determine interest rates and I don’t see any reason why Ethiopia should be an exception and the market forces determine its interest rate and exchange rate of its currency.

Financial crisis and/or recession are inherent characteristics of capitalism and every time the market plummets and signs of recession are on the horizon, in the American case, the Federal Reserve steps in (other central banks take similar actions) and lowers the interest rate. Lowering interest rate in plain English means encouraging buyers (the consumer multitude) to buy more stuff, ranging from grocery to cars, and to real estate etc. and as a result the economy is stimulated.

If all central banks all over, including the US Federal Reserve, determine interest rates, why couldn’t the NBE do the same? The NBE, like other central banks, in fact, would play a positive role in the market economy by providing ‘close inspection and guidance’ to the financial sector of Ethiopia. But, beyond inspection and guidance, Ethiopia’s monetary policy is also clearly stated in the NBE Governor’s Note. In his annual report of 2011/2012 fiscal years, the Governor of NBE, Teklewold Atnafu, had the following to say: “Regarding the monetary sector, monetary policy continued to focus on maintaining price and exchange rate stability, ensuring financial system soundness and creating conducive environment for sustainable economic growth. To achieve these strategic objectives, the National Bank of Ethiopia (NBE) uses reserve money as monetary anchor to closely monitor monetary developments.”14      

One important point that Desta and Admassu raised and that I agree with is the problem of brain drain. Time and again, I have suggested in my other writings that Ethiopia device a strategy to attract Ethiopian Diaspora professionals but to no avail. The Government sponsored Diaspora conferences but they were not effective enough because the conferences were not an all encompassing and inclusive symposia.

The brain drain problem, however, is a little tricky and complicated; the problem is engendered not only by the weakness of the Government but also by the reluctance of Ethiopian professionals to stay and work in their home country due to low wages, benefits, and overall compensations. Nevertheless, despite the brain drain and dearth of professionals, the Ethiopian banks – both public and private – are managed by professional, experienced, and learned Ethiopians.

Binyam Alemayehu of Addis Fortune, reporting on the Bankers Association of Ethiopia has the following to say: “The 12-year-old Ethiopian Bankers Association (EBA) has installed a new face on its highest position, with the Board of Directors overwhelmingly electing Addisu Habba, the current President of Bank of Abyssinia (BOA) to lead them…At the Association, Berhanu [Berhanu Getaneh, former leader of United Bank and President of EBA] is replaced by Addisu, MA in banking and finance from Italy…Bekele Zeleke, President of the Commercial Bank of Ethiopia (CBE); Haileyesus Bekele, President of the CBB and Esayas Berhe, President of the Development Bank of Ethiopia (DBE), are the three members from the state-owned institutions. Members include presidents of long established private banks, such as Araya Gebreegziabher from Weggagen Bank; Berhanu Woldeselassie of Dashen Bank; Kibru Fendija of Nib International Bank (NIB); Taye Dibekulu of United Bank and Tsehay Shiferaw, President of Awash International Bank (AIB).”15    

By and large, it looks the Ethiopian banks are in good hands although they may further need professional cushioning in order to be more successful and productive. By way of concluding, thus, I like to mention four points, which I think are important: 1) Despite my opposition to foreign bank entry into Ethiopia, I am in favor of foreign investment, including foreign direct investment (FDI) and due to the overall favorable condition and stability in the country, hundreds of foreign investors have converged in Ethiopia and as a result, “the Ethiopian Investment Agency and the Regional Investment Offices licensed 62,068 investment projects with an aggregate capital of Birr 1.2 trillion in the period between 1992/93-2011/12. Of these projects, 52,462 (84.5 percent) were domestic, 9,498 (15.3 percent) foreign and 108 (0.2 percent) public;”16 2) I like to extend my gratitude to Drs. Desta and Admassu for their initiative and scholarly abstract, which has inspired me to write this critique, and we Ethiopians must evolve dialogue amongst ourselves in order to benefit the larger Ethiopian society; 3) the current Ethiopian Government and future regimes should open up, as indicated above, and encourage policy dialogue and proposals irrespective of who initiates policy-related issues and debates; 4) bank sector reform, for that matter restructuring and overhauling the Ethiopian economy in light of governing domestic, regional, and global realities must be a  prerequisite (sometimes precondition or necessary evil) to Ethiopia’s transformation and development.


  1. Desta Asayehgn and Admassu Bezabeh, Banking Sector Reform in Ethiopia, www.africanidea.org/Banking_sector_in_Ethiopia.html
  2. Desta Asayehgn and Admassu Bezabeh, Ibid
  3. Yoseph Mekonnen, “National Bank Launches New Core Banking System”, Addis Fortune, November 24, 2013
  4. Bulcha Demeksa, My Life: My Vision for the Oromo and the Other Peoples of Ethiopia, Red Sea Press, 2013, P. 208
  5. Bulcha Demekesa, Ibid, P. 213
  6. Stijin Classens, Asli Demirguc-Kunt, and Harry Huzinga, “How Does Foreign Entry Affect Domestic Banking Markets?” Journal of Banking and Finance, 25, 2001 891-911
  7. Hyun E. Kim and Byung-Yoon Lee, “The Effects of Foreign Bank Entry on the Performance of Private Domestic Banks in Korea,” March 2004
  8. Dan Luo, Yizhe Dong, Seth Armitage, and Wenxuan Hou, “The Impact of Foreign Banks Penetration on Domestic Banking Sector: New Evidence From China”, January 20, 2014 (originally posted on August 7, 2013)
  9. Yingkai Yin, Xiaotian Tina Zhang, Yahua Zhang, “Foreign Bank Entry and Domestic Bank Performance in China”
  10. Sophie Clays and Christa Hainz, “Foreign Banks in Eastern Europe: Mode of Entry and Effects on Bank Interest Rates”, Discussion Paper No. 95, Governance and the Efficiency of Economic Systems (GESU), February 2006
  11. Binyam Alemayehu, “Addis International Bank Benefits From Strong Cooperative Base with Impressive Growth”, Addis Fortune, December 8, 2013
  12. Binyam Alemayehu, “Cooperative Bank of Oromia Shows Remarkable Increase in Profits”, Addis Fortune, December 15, 2013
  13. National Bank of Ethiopia Annual Report of Fiscal Years 2011/12, November 18, 2013
  14. National Bank of Ethiopia Annual Report, Ibid
  15. Binyam Alemayehu, “New Face at the Helm of Bankers Association Board”, Addis Fortune, December 8, 2013
  16. National Bank of Ethiopia Annual Report, op cit, P. 98


All Rights Reserved. Copyright © IDEA, Inc. 2014. Dr. Ghelawdewos Araia can be contacted for educational and constructive feedback via g.araia@africanidea.org