financial markets Ethiopian and institutions Chapter contents Ethiopian financial markets Ethiopian financial institutions Financial regulation in Ethiopia
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6.1 Ethiopian financial markets Money markets is where short term securities are traded securities traded in this market include government treasury bills time deposits interbank loans
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6.1 Ethiopian financial markets Government treasury bills are debt instruments issued by the federal government. have maturities of 28 days,91 days ,182 days, and 364 days are sold at a discount through non- competitive auction banks and non-bank firms participate in the treasury bill market non-bank firms include insurance companies, social security agency, Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 4 of 39 6.1 Ethiopian financial markets Government treasury bills… banks have been the primary investors in government treasury bills buying 89% of bills in 2006 and 74% in 2007. however, non-bank firms became major investors since 2008 with 93% in 2008 and 67% in 2009. the weighted average yield on treasury bills has increased from 5.3% in 2006 to 7.9% in 2009 Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 5 of 39 6.1 Ethiopian financial markets
Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 6 of 39
6.1 Ethiopian financial markets Treasury bill Price Per Br 100 Face Amount 2008/09 2009/10 2010/11 28 Days 99.951 99.943 99.886 91Days 99.783 99.757 99.703 182 Days 99.657 91.352 99.645
Treasury bill Yield
2008/09 2009/10 2010/11
28 Days 0.64% 0.74% 1.49% 91 Days 0.87% 0.98% 1.19% 182 Days 0.69% 18.99% 0.71%
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6.1 Ethiopian financial markets Time deposits (CDs) issued by commercial banks investors include other banks, non- bank financial institutions, private corporations, public enterprises, and retail customers it accounted for 7.1% of total deposit in 2006 and 4.5% in 2009 time deposits are kept with varying maturities of a few months to more Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 8 of 39 6.1 Ethiopian financial markets
Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 9 of 39
6.1 Ethiopian financial markets Interbank loan Market commercial banks borrow from each other it began operation in September 1998 since then a total of Br 292mill interbank loan has been extended between November 2000 and April 2008. the maximum interbank loan was Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 10 of 39 6.1 Ethiopian financial markets
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6.1 Ethiopian financial markets Interbank loan… term of interbank loan ranges from overnight to 5 years Interest on interbank loan ranges between 7% to 11%. Lenders included CBE, AIB, BoA, and NIB Borrowers included NIB, Wegagen and Awash Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 12 of 39 6.1 Ethiopian financial markets
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6.1 Ethiopian financial markets
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6.1 Ethiopian financial markets Capital Markets Why Capital Markets? Enhanced saving mobilization Help in resource allocation Promote efficient financial system Help term transformation and improve capital structure Allow deconcentration of ownership Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 15 of 39 6.1 Ethiopian financial markets Capital markets Why Capital Markets?... Improve accounting and auditing standards Attract Foreign Direct Investment(FDI) Provide effective tools for monetary and fiscal policy Help privatization efforts Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 16 of 39 6.1 Ethiopian financial markets Capital markets… no capital market in Ethiopia despite an intense pressure from entrepreneurs, academicians and international financial institutions such as IMF & WB, the Ethiopian government didn’t want to establish capital markets in the country. (Go to List of SEs in Africa)
but capital market instruments are
Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 17 of 39 6.1 Ethiopian financial markets Bonds are issued by public enterprises(EEPCO and Ethio Telecom), state/regional governments, and development bank of Ethiopia(DBE) during 2009/10 bonds by the total amount of Br10.86bill were issued of which nearly half is by EEPCO Value of bonds outstanding by June 2011 totaled Br 40.3 bill compared to Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 18 of 39 6.1 Ethiopian financial markets
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6.1 Ethiopian financial markets
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6.1 Ethiopian financial markets Stocks Despite absence of capital markets, financial institutions and corporations directly issue their stocks to the general public. Due to absence of a secondary market, investors seek the help of the original issuers when they want to sell their stocks Stocks of banks are highly Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 21 of 39 6.1 Ethiopian financial markets Mortgages mortgage loans are extended by construction and business bank(CBB), and Commercial Bank of Ethiopia(CBE). CBE has been extending mortgage loans to condominium owners. the banks do not have any options other than keeping the mortgage loans until maturity Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 22 of 39 6.1 Ethiopian financial markets Foreign Exchange Market Foreign currencies are traded through an open auction between NBE and Banks and among banks in the country. Auction is organized by the National Bank of Ethiopia Currencies traded in the forex market include: - US DOLLAR - JAPANESE YEN - SWIDISH KRONER Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 23 of 39 6.2 Ethiopian financial institutions Formal financial institutions
Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 24 of 39
6.2 Ethiopian financial institutions Formal financial institutions Banks State owned Vs private Development, construction , and Commercial banks By June 2010, there were 19 banks, of which 16 were private while 3 are state owned Banks account for 81% of capital of financial institutions in the country Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 25 of 39 6.2 Ethiopian financial institutions Formal financial institutions Banks(Brief History) Bank of Abyssinia established in 1905 BoA was dissolved in 1931 and Bank of Ethiopia was set up Many private banks were established after the Italians left State Bank of Ethiopia was founded in 1943 and splitted into NBE and CBE in 1963 Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 26 of 39 6.2 Ethiopian financial institutions Formal financial institutions Banks(Brief History)… The Agricultural and Industrial Development Bank (AIDB) was established in 1970 and the Housing and Saving Bank(HSB) in 1975. Many private banks and insurance companies were operating in the financial industry before the 1974 revolution. The derg nationalized all private banks Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 27 of 39 6.2 Ethiopian financial institutions Formal financial institutions Banks(Brief History) The banks were used as instruments in exercising socialist economic policy The 1994 banking reform reopened the financial industry to private investors
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Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 30 of 39
6.2 Ethiopian financial institutions Formal financial institutions Micro-finance institutions The five largest MFIs; namely Amhara Dedebit Oromia Omo and Addis Credit and Savings Institutions Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 31 of 39 6.2 Ethiopian financial institutions Formal financial institutions Pension Funds Social Security Agency • Administers pension programs for public sector employees • Private firms used to run their own Provident Fund • Private sector pension fund has been established through Regulation No 202/2011 Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 32 of 39 6.2 Ethiopian financial institutions Semi-formal financial institutions Employee Credit & Saving Associations are supervised NOT by the NBE, but by Federal Cooperatives agency Attract deposits Extend consumer loans Invest in shares of companies and run businesses of their own
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6.2 Ethiopian financial institutions Informal financial institutions Iqqub are variants of Rotating Saving and Credit Associations(ROSCAS) Established within family and friendship groups
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6.3 Financial market regulation in Ethiopia NBE regulats the financial market Issues licenses to Banks, Insurance firms,and Microfinance Institutions. Regulats the financial sector through issuance of directives. Supervises banks,Insurance companies and MFIs
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6.3 Financial market regulation in Ethiopia NBE regulats the financial market by the power vested upon it through The Monetary and Banking Proclamation No. 83/1994 It was issued along with The Licensing and Supervision of Banking Business Proclamation No. 84/1994
Ethiopian Financial Markets and Institutions Instructor: MEKONNEN M. February 2016 36 of 39
6.3 Financial market regulation in Ethiopia New Proclamations The National Bank of Ethiopia Establishment (as Amended) Proclamation No. 591/2008 Banking business proclamation No. 592/2008 WHY a NEW Proclamation? In 1994 there were only 3 banks all state- owned but in 2008 there were 12 banks of which 8 were private loans Ethiopian amounted Financial Markets to MEKONNEN and Institutions Instructor: only M.ETB February 1.15bill2016 in 371994 of 39 6.3 Financial market regulation in Ethiopia WHY a NEW Proclamation? Malpractices in the banking sector Unavailability of credit information sharing mechanism Increased pottential for bank failure
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End of Chapter 6
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