8 October 2017

Ethiopia: Central Bank Steps Up to Implement Zero Balance Account

Photo: Addis Fortune
Central Bank of Ethiopia.

The Central Bank, in its financial inclusion strategy, launched a week ago, envisaged all the banks to implement a no-frills or zero balance account in the next three years. The primary aim of the account is to raise the percentage of the banked population in low-income areas.

The account is introduced to provide necessary banking facilities for people with low incomes. The accounts could be upheld without balance, unlike the existing situation where banks require at least 25 Br of initial deposit to open an account.

This was announced during the launching ceremony of the strategy held on October 2, 2017, in the presence of Deputy Prime Minister, Demeke Mekonen, Teklewold Atnafu, governor of the Central Bank and ministers from health and social affairs. To the surprise of many, amongst no less than 300 attendants, representatives of development partners including World Bank were absent during the meeting.

The strategy is launched almost three months after being approved by the Council of Ministers (CoM).

"Despite the impressive growth in the finance sector over the past two decades, the percentage of the unbanked population is still significant in Ethiopia," said Teklewold, while giving an opening speech during the launching ceremony. "The gap has necessitated for the formulation of a new strategy."

Presently, there are 18 banks, 17 insurance companies and 35 microfinance institutions in the country, having 30.7 million accounts, resulting in 22pc of adult banked population- 14 percentage points lower than the sub-Saharan African countries' average.

Thus, to narrow the gap, the strategy aspires to triple the banked population in the next three years. Also, it aspires to boost saving accounts by three folds to 40pc in 2020.

Furthermore, the majority of financial institutions are concentrated in the capital, accounting for 36pc and 56pc of bank and insurance branches, correspondingly. To improve the existing situation, the strategy aims to make financial institutions accessible to 80pc of the population within five kilometres radius.

One of the options to advance the financial industry is implementing the zero balance account system in the country.

"Implementing such accounts would contribute a lot in raising the saving and banked population especially in rural areas," said a director of the Central Bank, who was involved in the process of drafting the strategy.

Taye Dibekulu, president of United Bank, agrees with the director.

"Although it has been practised through wallet banking, making it mandatory will be very helpful in advancing the financial sector," he said.

Such accounts are already practised in India, where the financial inclusion grew from being less than 30pc a decade ago to over 55pc now.

The implementation of the accounts is not clear on the strategy, according to experts.

"There should be clarity of what no-frill account means as it differs country to country," said Abdulmeman Mohammed, a financial expert with 15 years of experience. "Even if we assume that it is the most basic account with insufficient services, there are limitations of providing this service to the larger public due to geographical and cost constraints."

The government has already formed a national council for financial inclusion to coordinate the public and private sectors in an attempt to advance the financial sector including implementing the new account system.

Abdulmenan, nonetheless, doubts the applicability of the account in the period envisaged in the strategy.

"No doubt, providing basic services will improve financial inclusion. However, the three-year period is concise to make significant strides," he said. "I don't think the initial deposit, considering its value in the current inflationary atmosphere, is a deterrent for having a basic bank account."

As of now, there are 19.3 million bank account holders in the country with a deposit of over half a trillion Birr from being below 30 billion Birr five years ago.

Apart from the zero account, the major obstacles for expanding financial services particularly in rural areas are inaccessibility, the non-financial viability of opening branches and lack of awareness, according to Abdulmenan.

"Information communication technology could solve many of the obstacles. The trouble is that there is no adequate and reliable infrastructure so far," he said.

Ethiopia

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