By: Tefera Assefa
Lecturer and Department Head
Department of Public Administration and Development Management
College of Business and Economics
The paper concerned with the assessment of resistance, justification and the credibility of this justification in financial sector liberalization in Ethiopia. Financial liberalization is an integral part of the overall economic liberalization. It is a set of operational reforms and policy measures designed to deregulate and transform the financial system and its structure with the view to achieving a liberalized market-oriented system within an appropriate regulatory framework. The full financial liberalization involve six main dimension: the elimination of credit controls, the deregulation of interest rates, free entry into the banking sector, bank autonomy, private ownership of banks, and the liberalization of international capital flows. Most of these dimensions are lacking in Ethiopia because they lack political supports and the politician resists the proposal and advice from international financial institution. The paper attempted to address the details of the political resistance and justification of the politicians for resisting financial sector liberalization. The credibility and soundness of the justification was also assessed. For this purpose data were collected from different secondary data such as journals, article and books. Manuals and reports were also used to substantiate secondary data. Qualitative research approach was used in analysis of the data. It is found that financial sector liberalization in Ethiopia is very low in comparison with some neighboring countries and the sector remains poor and under developed. The majority of populations are out of reach of financial service in the country. Because of the unbalanced concentration of the sectors in the urban areas, majority portion of rural population suffers from acute shortage of financial infrastructure and serves. Based on the above point, it is also found that the justification for not to liberalize is not sound and credible.
Key Words: Ethiopia, El Niño, Financial Liberalization, Financial repression, economic liberalization and prohibitionist policy
Economic liberalization encompasses the processes, including government policies that promote free trade, deregulation, elimination of subsidies, price controls and rationing systems, and, often, the downsizing or privatization of public services (Woodward, 1992) cited in UN, 2010. Economic liberalization has been central to adjustment policies introduced in developing countries since the late 1970s, mostly in the context of the conditions for lending set by international financial institutions. Thus, government policies were redirected to follow a non-interventionist, or laissez-faire, approach to economic activity, relying on market forces for the allocation of resources. It was argued that market-oriented policy reforms would spur growth and accelerate poverty reduction.
Financial liberalization is an integrated part of overall economic liberalization. Specifically, the objective of financial liberalization is to promote the role of the market and to minimize the role of the state in determining who gets and gives credit and at what price, or as stated by McKinnon (1973) quoted in Baswir (n.d) , the primary objective of financial liberalization is to eliminate financial sectors from ‘financial repression’. As cited in Sulaiman et al (2012), Johnston and Sundararajan (1999) viewed financial liberalization as a set of operational reforms and policy measures designed to deregulate and transform the financial system and its structure with the view to achieving a liberalized market-oriented system within an appropriate regulatory framework.
Financial liberalization, broadly defined, can be characterized as the process of allowing markets to determine who gets and grants credit and at what price. As cited in Hailay, 2014 (Abiad and Mody, 2003; Kabir and Hoque, 2007; Odhiambo, 2011) put that the full financial liberalization involves six main dimensions: the elimination of credit controls, the deregulation of interest rates, free entry into the banking sector, bank autonomy, private ownership of banks, and the liberalization of international capital flows .
As it was stated in different literatures, economic liberalization in Ethiopia is very low in comparison with neighboring countries. Financial sector, trade, cash follow, development banking system and foreign investment in Ethiopia is still underdeveloped and highly controlled by government. Stock exchange and foreign bank is some of prerequisite for and determinant of foreign investment in a given country. But in Ethiopia there is not such stock exchange and foreign bank to facilitate and attract foreign investment to the country. Ethiopia has increased its involvement in international trade, although less rapidly than other countries. The trade is even reduced from time to time in Ethiopia. As indicated in World Trade Indicators 2009/10, Ethiopia maintained its 2007, 5.9 percent real trade (in constant 2000 U.S. dollars) growth rate of goods and services in 2008, though this is expected to fall to 3.7 percent in 2009. Exports of goods and services growth slowed down significantly from 10.2 percent in 2007 to 3.1 percent in 2008, while import growth almost doubled from 3.8 percent to 7.3 percent. (Reinert, 2006; Dejene et al, 2011)
The financial system of Ethiopia is underdeveloped. There is no stock exchange and of the 19 banks that exist, three state owned banks dominate the sector (Brook, 2015). There is no foreign bank in the country, and the system remains isolated from the effects of globalization while policy‐makers fear that liberalization will lead to loss of control over the economy. The government controls interest rates and sets them below the high inflation rate. Corruption, though strictly sanctioned, remains a concern. The National Bank of Ethiopia is the country’s central bank. The state‐owned Commercial Bank of Ethiopia is the largest bank in Ethiopia and controls ~2/3 of the assets of the entire banking system. The Central Bank has a monopoly on all foreign exchange transactions and supervises all foreign exchange payments and remittances. The currency, the Birr, is not convertible. The government carefully monitors and controls its movement and as a result, it trades in a very narrow range. The Birr is widely considered to be overvalued particularly in light of Ethiopia’s high inflation rate. (Kiyota et al, 2007; UNDP, 2015; Amasu and Asayehegn, 2014; Hailay, 2014; Getnet, 2014)
As indicated in and posted by new business Ethiopian reporter (2010), With regards to ratio of bank coverage to the population size, Ethiopia is one of the under-banked countries in Sub-Saharan Africa. The U.S. representatives noted that government reluctance to liberalize Ethiopia’s telecommunications, insurance and banking sectors prevents the Ethiopian economy from reaching its full potential and attracting broad investment. In 2013/14 Commercial banks have branched out in previously unbanked areas and the number of bank branches went from 390 in 2009 to 2,208 in 2014. As a result, the ratio of total bank branches to total population improved to 39,834 from 49,675 over the past year, reflecting a significant annual improvement in financial service outreach (Brook, 2014; UNDP, 2015; Admasu and Asayehegn, 2014; Hailay, n.d; Getnet, 2014)
Given this annual improvement in financial outreach, government strictly limits participation of private sector in financial market. Three public banks constitute 77 percent of total assets of the banking sector. Within this group Commercial Bank of Ethiopia (CBE) and Development Bank of Ethiopia (DBE) are the dominant state bank in Ethiopia (World Bank Group, 2015).
CBE holds 80 percent of the total outstanding loans and investment used to finance public investments and DBE is a large holder of treasury bills. Consequently, financial intermediation remains low and on a declining trend. The share of private sector credit of the total banking sector credit has consistently been declining from 66.5 percent in 2007/08 to 40.1 percent in 2013/14(ibid: 5)
In this paper attempts has been made to identify and assess the political reason for resisting the liberalization of financial sector in Ethiopia, justification and credibility of the justification.
Political supports for any reform in specific countries are very essential for the introduction, implementation, and sustainability of the reform. In developing countries, reforms are almost always come from external link through the government need and interest with either voluntary or pressures from international institution which is the major determinant for the successful introduction of the reform. In contrary to this, there may also be political resistance which is primary obstacle in introducing reforms. Financial sector liberalization like other reform needs greater political consideration and support to be effective and functional. Different procedures, technical quality, and evidence and research based financial liberalization has to contribute to the effective financial sector liberalization and hence to win the attitudes of the politicians.
For a long period of time and still Ethiopian financial sectors are highly controlled under government and government institutions. Government plays a major role in financial sector and tightly control financial sectors through its regulation as well own the major financial assets through its bank. Private sectors are not well developed in financial sectors in the country. Though the government of Ethiopia faces different pressures from different international institutions that attempt to liberalize the financial sectors, the politician retain their position not to liberalize the sectors. They presume that the introduction of foreign bank to the financial sectors in the country will jeopardize the financial sector in particular and economy in general (Keatinge, 2014; World Bank Group, 2015).
In other side, different literatures show that different factors contributed to the underdevelopment of financial sector in Ethiopia. Ethiopia’s financial sector remains closed and is much less developed than its neighboring countries. Ethiopia has no capital market and very limited informal investing in shares of private companies. A series of financial sector reforms has been introduced since 1992, when private banks were allowed to be re-established. But the three large state-owned banks continue to dominate the market in terms of capital, deposits and assets. The current government is committed to alleviating poverty through private sector development and through integrating Ethiopia into the global economy. However, the government is not, at this time, seem prepared to privatize large state-owned bank, allow for private ownership of land, or open the financial sector to foreign participation and competition (Kiyota et al, 2007; World Bank Group, 2015).
The politicians put their own justification for resisting financial sector liberalization and open no door for the introduction of the foreign bank and competitions. Given the justification, Ethiopian financial sector remains one of the most weak in sub-Saharan Africa countries because of government’s dominant role in the sector. The financial repression school (as it is sometimes referred to) argues that government intervention in the finance sector, in particular through subsidized interest rates and (favored) credit allocation, not only distorts the financial market but also depresses savings and leads to inefficient investment (Alemayehu , 2006). Not only this, the majority of peoples are still remaining under banked in Ethiopia. Besides, they are also outside and uncovered with insurance service. The financial sectors are highly concentrated at urban areas where the minorities are living. Almost all rural dwellers are out of the financial service as the financial institution and service are limited to the urban areas.
Those who are access to banking, insurance and other financial services are suffering from less quality service. Because of lack of effective competition both from domestic and international market in financial sectors, the performance of the sectors and their service still remain underdeveloped in terms of quality, coverage and time. Generally, the paper attempted to address the details of the political reason and justification of politicians for resisting financial sector liberalization; the credibility and soundness of the justification was also be assessed in the paper. Moreover, Ethiopian financial sector performance is assessed in comparison to the financial sector performance of some selected African countries.
- Objectives of the paper
- General objective
The general objective of the paper is to identify credibility and soundness of the political resistance and its justification to financial sector liberalization in Ethiopia.
- Specific Objectives
The specific objectives of the research are:
- To explain the details of political justification not to liberalize financial sector in Ethiopia.
- To identify whether the justification is based on the research and evidence taken from different experience or it was based on simple political intuition of the politicians.
- To assess the financial sectors performance of the country in comparison to some selected countries those liberalize their financial sectors.
Since the paper deal with the politics of the financial liberalization, qualitative approach to research were employed. Descriptive, analytical and comparative research design was used to explain and compare the performance of some of financial sector of Ethiopia with some selected African countries.
In this paper, data were collected from different theoretical and empirical evidences. Data were collected from secondary sources of data including journal, articles, books, and working paper. Manuals and reports are also used as a source of data in order to assess the financial sector performance and its level of liberalization in Ethiopia.
Descriptive and analytical methods of data analysis are used to describe the political justification of the government bodies and identify the reasons of their justification. Comparative analysis was also employed to assess the comparative performance of financial sectors especially baking and insurance sector of Ethiopia with some neighboring countries as well as to identify the soundness of the political position held by the politicians.
In this part, different empirical data were used to analyze the politics of financial liberalization in Ethiopia. As such the resistance and justification, the credibility of the resistance and the performance of the financial sectors in Ethiopian in light of some selected countries were given in the paper.
Government of Ethiopia faced different pressure from international financial institution to liberalize the financial sectors. Inspite the pressures, Ethiopia politicians remain reluctant and resist liberalizing its financial sectors. The governments limit the financial liberalization through its prohibitionist policy to the entrance of the foreign competition in the financial sectors. Different financial indicators which show financial development of nation are lacking in Ethiopia because of the financial policy bottlenecks followed by the government. This policy problem on specific financial sectors was also cited as the macro-economic policy constraints (Teklebirhan, 2007). This is to mean that the impacts of the financial repression have adverse effects on the real economy and government has to consider these latent effects while formulating the policy.
Both international and domestic competition is very minimal in Ethiopian financial sector. International competition is non-existence in Ethiopian financial sector. It would appear therefore that the highly closed nature of the in Ethiopian financial sector would serve to negate the positive effects that would otherwise come from greater financial intermediation. Foreign banks are not permitted to enter the market in any form, and Government maintains strong control over international capital movements (Teklebirhan, 2007; Kiyota et al, 2007).
The domestic competition in Ethiopian financial sector is highly constrained with major government ownership and exerting of strict control on the domestic private ownership of financial institution. This further exacerbated by the semi-monopolistic state owned commercial bank, lack of innovative and motivated financial management skill and non-commitment to manpower placement particularly in the leadership position and this are internally induced constraints generated by the politicians (Teklebirhan, 2007; Kiyota et al, 2007).
In banking sector national bank of Ethiopia plays greater role in different aspects. The Central Bank has a monopoly on all foreign exchange transactions and supervises all foreign exchange payments and remittances. The currency, the Birr, is not convertible. The government carefully monitors and controls its movement and as a result, it trades in a very narrow range. The Birr is widely considered to be overvalued particularly in light of Ethiopia’s high inflation rate. Not only this, the bond market is limited to Treasury bill and this Treasury bill was issued by the national bank of Ethiopia. Interest rate floor is still determined by the national bank of Ethiopia and the ceiling of interest rate was open to the market.
Both insurance and micro-finance in Ethiopia is poor and shallow. Kiyota et al (2007) put that both sectors are dominated by the government and it’s constrained by legal and regulatory requirements for their establishment. (Teklebirhan, 2007) put, by comparing the Ethiopian insurance penetration in total insurance premium as a percentages of GDP and density that shows per capita premium with some selected African countries (Kenya, Zambia, Tanzania an republic of south Africa), and found that Ethiopian insurance schemes was ranked at the bottom end.
Ethiopian government and politicians, irrespective of the pressures as well as potential benefits drown from financial liberalization, still opposing the introduction of effective financial liberalization. They took the side of the negative impacts of the financial liberalization as their political justification by ignoring the potential benefits of the liberalization. Consideration has never been given to the balanced position between the criticism and appraisal of the financial liberalization. For their opposition the stakeholders (politicians and some of the private owner of financial institution), put their justification. Kiyota et al, 2007 in their working papers titled as (The Benefits of Financial Sector Liberalization for Developing Countries: A Case Study of Ethiopia) provided a plenteous evidence from the literature and their analysis and discussion made on the importance of greater openness and foreign participation in enhancing financial intermediation and economic growth. Given this, it may be surprising that the Ethiopian government remains so strongly in opposing to liberalize its financial sector.
The let Prime Minister, his economic advisors, and the Cabinet of Ministers are particularly concerned about the potential impact of foreign bank entry on the development of the domestic banking sector, access to and the allocation of credit, domestic savings mobilization, the country’s capital account, and the ability of the central bank to supervise foreign banks and the new products and services that they introduce into the market. Ethiopia’s Late Prime Minister, Meles, 2007, has expressed his political views on financial sector reform and development in Africa in a partially completed manuscript entitled, African Development: Dead Ends and New Beginnings. His views on the past failures of financial reforms and the design of new reforms are of interest (ibid).
Ethiopian government officials for instance put the following justification and concerns not to liberalize or introducing foreign bank in the banking system most of which was also shared by other stakeholders. Kiyota et al (2007; 14-15) put that the late Prime Minister Meles Zenawi and his government have five key concerns regarding this.
- The government believes that the development of a viable domestic banking sector will be threatened by foreign banks, because they have more capital, more experience, and better reputations. They argue that the Ethiopian financial sector is too young and inexperienced to compete (the infant industry argument).
- Ethiopian government officials also believe that entry by foreign banks will further skew credit allocation towards large-scale industrial, real estate and service enterprises (including trade) and away from agriculture, small-scale and cottage/micro enterprises (sectors which are the priorities for the government’s development strategy). They contend that foreign banks will concentrate lending in major urban centers using foreign funds, contributing little towards the development of rural banking. Furthermore, they contend that foreign banks will “cherry pick” the best companies and sectors.
- Domestic savings mobilization has been identified as an area of concern to Ethiopian officials, who have suggested that foreign banks would lend in their home or other foreign currencies and would not be interested in mobilizing domestic savings.
- There is concern that foreign banks may serve as conduits for the inward and outward flows of capital (e.g., through capital and money-market transactions; credit operations; personal capital movements; etc.). This may cause foreign exchange and/or liquidity shortages, with potentially adverse effects on the country’s capital account. The concern becomes more pronounced in view of the limited regulatory capacity of the central bank.
- Finally, it is strongly believed that the authorities will be unable at present to regulate and supervise foreign banks effectively
Now the greater question here is that does the political justification and concerns of the Ethiopian government credible or sound while it is compared and contrasted with different theoretical and empirical evidence. This question has to be carefully considered and analyzed with the help of different and plenty of literatures and firsthand data. But, this paper emphasized only on the secondary data given above.
At the first place, the political justification of the government of Ethiopia is based totally on the personal views of the individual and small political elites. These justifications are not comprehensive in nature. It was not based on the comprehensive assessment of the benefit and negative effects of financial sector liberalization. It is simply the intuition and belief of the politicians. For instance, foreign financial sectors could serve as an instrument for foreign exchange rather than lead to liquidity shortage. Additionally, they could be a better regulatory mechanism by which the governments control informal money transfer which resulted in loss of huge foreign exchange in Ethiopia (Keatinge, 2012)
The justification and the concern of the government is one sided in that it ignore the possible potential benefits of the financial liberalization given in different theoretical and practical contribution. The politicians failed to consider the contradictory natures of the financial liberalization and the controversial issues regarding the benefit and adverse effect of the liberalization. Beside they have not considered the successful countries in liberalizing their financial sectors to sketch lesson or experience.
The position held by the government is also fail to assess the reason for the failure of the financial sector liberalization and simply point out the failure of the system. As indicated in different literatures, financial sector liberalization has been failed in developing countries not because of the defect of the system itself and mostly the failure is attributed to the defects of other factor important for the effective and successful implementation of financial liberalization. Pill and Pradhan (1997) stated that financial sector liberalization in developing countries especially in Africa has been less successful because of absence of different supportive environmental condition (Kiyota et al, 2007). Hence, greater consideration has to be given to the development of basic infrastructures and supportive legal and regulatory framework in Ethiopia.
Based on the above analysis, it is difficult to say that the political justifications given by politicians are credible or sound. The politicians and policy makers has to be supported by scientific analysis of the professionals and they should have consulting different international institutions on the effect of financial liberalization and how to minimize the negative impact to capitalize possible positive contribution of the liberalization. In this manner a numbers of scholars and practitioners provide their recommendation to liberalize financial sectors of Ethiopia. Here, they indicate the potential benefits of financial liberalization in Ethiopia. To cite the work of (Admasu and Asayehgn, 2014: 32):
Ethiopian banking sector needs to be tuned to the following additional market-oriented reforms in order to benefit positively from the harmonization of financial intermediation with economic growth. These measures include: the privatization of the dominant state-owned Commercial Bank of Ethiopia; permitting entry of foreign banks; allowing market forces to determine interest rates and the exchange rate of the ETB, and upgrade the regulatory and supervisory ability of the National Bank of Ethiopia to restore the public’s trust in the banking sector.
As opposed to the political justification of the government, (Keatinge, 2014) indicate the possible potential benefit that could be gained from financial liberalization with special reference to banking sector in Ethiopia. He put that IMF believes that, in seeking to attain the goals set by the GTP, state-owned banks such as the CBE will come under increased strain. Particularly, the health functioning of the Ethiopian economy is closely correlated with and dependant on the performance of this bank. Therefore, as of Keating, financial liberalization would serve Ethiopia well to diversify the strain placed on the CBE by creating a greater role for private banks, including potentially opening access for foreign banks and offshore investors.
To this end, it is the right time to question the government and pose challenges on government elite to liberalize the financial sector for the benefit of the community at large and government specifically. Government should pay attention and concentrate on effective regulation of the sector rather than remaining a dominant role player. For the subsequent period government of the country should question itself the following question. To what point and for how long the progressive financial liberalization approach works? What results has been achieved from this approach? Do the opportunity cost of not to liberalize commensurate with the benefit of liberalization?
Despite of numbers of financial sector reform government has been lounging since 1990s, Ethiopian financial sectors are remaining much closed and underdeveloped while compared to the rest of some neighboring countries. The government strictly intervenes and control in almost the entire financial systems. As it was shown in the introductory parts of this paper, the bonking sectors as a major and dominant financial sector in Ethiopia and is dominated by the single government owned commercial bank of Ethiopia. National bank of Ethiopia in other side exercise strict regulatory procedures on the private banks through it monetary and fiscal policy. The implication of this is that there is no effective competition in banking system in Ethiopia both from domestic and international or foreign banks. Additionally, the majority of the population still remains under banked in Ethiopia as the banks are highly concentrated in the urban areas where the small proportion of population resides.
As shown in Teklebirhan (2007), in Ethiopia the majority of the people are deprived from banking system especially rural dwellers whose business is agricultural sector. This is especially aggravated with greater concentration of the banking sectors in urban areas while little emphasis was left for the rural areas. In comparison with some selected African countries, Ethiopia is the least in terms of population served per bank branches. In 2007, for instance, in Ethiopia 165,000 peoples were served per bank while this is small, for Ghana 54,000; Uganda 130,000; South Africa 11,136 and for Namibia 20,074 peoples are served per bank branches (Teklebirhan, 2007). In 2010, this figure shows that one bank branch in Ethiopia serve 130,000 Ethiopians. This figure is dropped to 14,000 in Tanzania, 31,000 in Kenya and 70,000 in Uganda. In 2015, As a result of expansion in bank branches, the ratio of total bank branches to total population improved to 39,834 from 49,675 over the past year. This reflects a significant annual improvement in financial service outreach (WB group, 2015).
Regarding insurance sector in Ethiopia, the sector in terms of its coverage, it is far lag behind the insurance scheme of some selected African countries. As shown in the following table, the insurance penetration (total insurance premium as a % GDP) and insurance density which show per capita insurance premium of Ethiopia ranked at the bottom end of the growth of the league for some selected African countries. The 4th Ethiopian economic update shows that the insurance sector remains underdeveloped. Because most insurance is targeted at the corporate market, focusing on general insurance, about 90 percent of the population does not have any type of formal insurance in 2015 (WB Group, 2015).
In 2015, there are total of 332 insurance branches, of which over 50 percent are concentrated in Addis Ababa (WB group, 2015). From this it is possible to imagine that majority of rural residents (more than 80% of the total population) are out of reach of insurance service in Ethiopia. The current and highly reported drought happen as a result of El Nino in Ethiopia is partly aggravated because of absence of effective and efficient financial service particularly of agricultural insurance at rural areas. Extensive and widely accessible Agricultural insurance is unquestionably important for countries whose economy is highly dependent on rain feed agricultural activities, like Ethiopia.
Other financial markets such as bond market (issued only by government i.e government Treasury bill) and microfinance institutions are also under the government control with minimum or no private participation. Because of the prohibition of foreign bank and financial institution, and the concentration of MFIs in urban and semi-urban areas resulted in deprivation of the rural poor from microfinance service. Given the year-to-year improvement of MFI in-terms of saving mobilization, credit outstanding and asset, Access to finance for MSMEs, medium and large scale firm remains a critical.
Only 1.9 percent of small firms have a loan or line of credit. This rate is lower than among micro, medium, and large firms (6.0, 20.5, and 35.5 percent, respectively) and corroborate with assertions that small firms struggle the most in obtaining access to finance since MFIs cater to micro-sized firms, and commercial bank clientele are predominantly medium and large firms (WB Group, 2015; 6-7).
Beside foreign exchange is very limited and dominated by large government bank while stock market is non-existence in the financial system of Ethiopia.
Generally, given the political resistance to financial liberalization proposed by IMF and WB, because of the fear of financial crisis, the financial sector in Ethiopia still failed to provide effective and sufficient financial service to the community, most commonly for the larger portion of rural dwellers where, in 2007, 93.3% of the population is served by only less than 50% of the existing bank branches. In 2007, urban population accounted 6.6% of the total population served by 243 bank branches (52.1%).
With the change in the socialist regime in 1991, the EPRDF government has been introducing different social, political and economic reforms to boost the economic development. A financial sector is also one of the areas that have got attention in the reform process. Especially, starting from 1994 the government attempts to reform the financial sector and different private financial institutions were established while only one state owned bank was privatized. Despite the government efforts, the financial sectors of the country remain highly closed and not well developed.
Different international financial and other institution such as IMF, WB, and WTO imposed pressure on Ethiopian government to further liberalize its financial sectors especially the introduction of foreign bank in its financial sectors. But the government has been holding its position in opposing to follow what those institutions put as a precondition for supporting the country. The politicians and their government, based on the personal views of late Prime Minister Meles Zenawi, simply expressed their idea by referring different negative impacts of the financial liberalization without considering different factors contributing to the negative impacts of the reform. Beside, the political justification and concern of the government fail to recognize the potential benefit of financial liberalization. Moreover, the government of Ethiopia has never make a comparative analysis to balance what would be the negative and positive impact of the liberalization if it will be implemented under appropriate macro-economic, political, legal and regulatory system, and institutional structure and setup.
Comparing to different neighboring and other African countries, Ethiopian financial sectors performance was ranked at the bottom end. The banking sector is overwhelmed by semi-monopolistic state owned commercial bank of Ethiopia. The majority of the population remained under served and the financial institution such as bank, insurance and microfinance institution are still highly concentrated at the urban and semi-urban areas where less than 10% of the population resides. The only existing bond market is the government bond i.e Treasury bill which is issued by government. Stock markets are non-existent while foreign exchange rate are monopolized by national bank of Ethiopia. As such majority of peoples in Ethiopia is out of reach of financial service.
The government of Ethiopia has a plenty of policy option to improve and change its financial sector performance. It has to consider the potential benefits that could be derived from financial sector liberalization especially by using supports (both financial and technical) obtained from international institution and has to engage in comprehensive financial sectors reform rather than the gradualism which the government opted to follow since 1991 as the gradual liberalization has its own problem just as its counterpart. At this time, Ethiopia should have not spent its time as little achievements are displayed from 1991 to date. Consideration and reconsideration of financial sector liberalization policy has to be held in consultation with different stakeholder.
Policy and institutional capacity is very important for the institutionalization of the financial liberalization of the country. From the part of the government, what is required is the strengthening of the policy framework, regulatory and procedural requirement, which creates effective environment for the successful introduction and implementation as well as sustainability of the financial liberalization. The politicians have to question themselves that what change has been achieved from the existing and past policies and previous strategy of financial sector reform.
One think that should be considered by developing countries in general and by Ethiopia in particular is that financial liberalization will never be succeeded with the absence of effective government regulation, appropriate macroeconomic, financial and institutional environment. Without such precondition, financial linearization would result in financial crisis which is prevalent in most developing and emerging countries. Financial liberalization does not mean that the government will totally ignored from financial sectors but direct government involvement has to be limited to the building of appropriate environment for effective functioning of the sectors. The government has to establish effective regulatory institution to oversight the effective functioning of the sectors.
Government has to consider that non-financial institution which is basic for the government to strictly oversight the operation of the financial sectors rather than directly engaged in provision of the service. Effective Regulatory institutions and mechanisms by which, these regulatory institutions could follow the operation of the institution such as effective information and communication technology, has to be incorporated.
Prohibitionist government policy has to be reconsidered to enhance both domestic and international competition in financial sectors. Policy and strategy vital for the capacity building of the domestic institution has to be established and make them internationally competent with foreign institution. This does not mean that complete foreign competition has to be developed rather the government has to work to maintain a right balance between domestic institutional capacity with the foreign competition.
Government has to learn from its past mistake that resulted in the deprivation of rural population from financial service and should device effective institutional and policy frameworks that directly engaged in the issues of rural poor, the most under served in section of the community in the country. The government must develop and improve the quality of basic infrastructural facilities such as electricity, telecommunication, roads and other basic human service such as water, healthcare, and sanitation in the rural areas to attract private financial sectors with highly qualified financial professionals. This is the only means by which the government could enhance balanced distribution of financial sectors both among the community and between rural areas and urban centers.
Ethiopian economy is highly dependent on household based and rain feed agriculture which is highly prone to weather condition such as El Nino. To overcome this risk, government should develop efficient and effective agricultural finance that lead to mechanization of agricultural sector. Moreover, government should strive to create effective and sustainable agricultural insurance in order to enable farmers to cope up with unforeseen weather condition as well as to relieve them from external aid and assistance. Hence this resulted in building of image of the country, incumbent government and the community.
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