13 June 2017

Ethiopia: Space for Financial Sectors to Stimulate the Economy

editorial

It is understood that, financial sectors play pivotal role in stimulating the economy. The function of market, the value chaining between various sector, the whole sale and retail activities, the provision of loan and credit facilities can be mentioned as a life line of the economy. For these to happen finance is inevitable. It is also a key player in creating and accumulating of wealth. Monetizing the economy in Ethiopia could be traced back to hundred years. Prior to that bartering was a common practice which indicates economic underdevelopment.

Modern banking system was introduced at the dawn of the 20 century by emperor Menelik II. Following this, insurance companies owned by both public and private sector flourished and outreached the public by providing financial services. With regard to the formulation of financial and monetary policies an exclusive mandate was provided to the National Bank of Ethiopia and the mandate is still in place.

Determining exchange rate, preventing and reducing inflation through various mechanisms such as raising interest rate while depositing money and borrowing, selling government bond to the private entities have been the jurisdictions of the National Bank. On the other hand, the Commercial Bank of Ethiopia and other private banks played pivotal role by providing financial services which allowed the expansion of infrastructures and the supply of agricultural products to local and international market. From time to time they stretched the frontier of their activities to various sectors.

The provision of financial service to the private companies in the 1960s and 70s enabled the expansion of large scale mechanized farms which was expected to close the gap between the demand for food and supply. The burgeoning of insurance companies also played pivotal role providing life and property insurances. It as well channelled huge financial resources to other sectors in the form of loan but because of various reasons the companies still serve the few segment of the society who have disposable income.

After the downfall of the imperial regime all private financial institutions were nationalized by the new regime and the economy characterized by competition changed in to the command one and the role of the private sector in the financial sector was curtailed. Hence, the sector's growth shrunk down. Many investors also shied away. Six years ago when the incumbent re-established the private financial institutions to play their role in the economy. Currently, more than a dozen of private banks and insurance companies are established.

They are functioning in a competitive manner and their paid and UN-paid capital is rising and creating job for thousands. Their service provision is increasing from time to time and because of the lucrative nature of the sector's business, the government has managed to earn billions of bir in the form of revenue. As their asset is part of the nation wealth, the National Bank strictly supervises them and the institutions also abide by its instruction.

Saving is a source of investment and whenever the amount of the money saved increases the the money that could be utilized for investment will be easily available. But as to some sources, the saving rate compared to other sub-Saharan countries is less than the expected. Hence, upgrading the saving culture at any cost is essential.

Currently, the purchasing of the Hidasie Dam bond and the saving of money for condominium houses are commendable. In addition, savings in credit associations and in public institutions must be enhanced. It is understood that, the emerging saving culture helps both the Development and Commercial banks to mobilize huge amount of money, utilized for the nation development.

Yet the expansion of the financial institutions is more concentrated in urban centres and the impoverished rural community members are still marginalized. In fact, in order to provide service to the rural masses other supportive infrastructures such as electric power, Information, Communication, Technology are vital.

Regarding this drawing lessons from other developing countries is essential. The other thing that should be mentioned is that reaching the poor through credit is still hard because the collateral system still puts as precondition getting financial access. According to the law, farmers have use rights only on their land. As a result, they are not entitled to collateral it. It is understood 85 per cent of citizens earn their living from subsistence farming and still poverty is rampant. So without eradicating rural poverty achieving development might be a challenge.

Of course, micro finance institutions in the rural part of the country provide service to millions of farmers but because of limited financial service, farmers survive with subsistence living. It is an undeniable fact that, micro finance institutions, farmers, consumers association still play crucial role in supplying agricultural inputs to them and in value chaining their products to the market. This must be enhanced. But to do so there must be sufficient money at hand.

In addition, to enhance its geographic coverage, widening the service area is necessary. Currently, the government is dedicating its time for poverty reduction and for the expansion of manufacturing and agro-industry sectors which need more finance. Hence, boosting the role of the sector should be prioritized.

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