Financial Crime World

Ethiopia’s Banking Sector Faces Multiple Risks, Experts Warn

Addis Ababa - The National Bank of Ethiopia (NBE) has released its latest Financial Stability Report (FSR), which highlights the various risks facing the country’s banking sector.

Credit Risk

The report notes that credit risk is deemed moderate in the industry, but it is expected to increase in 2024 due to factors such as:

  • Droughts
  • Internal conflicts
  • Weakening external sector
  • Concentration of credit, with top ten borrowers accounting for 23.5% of total loans as of June 2023

Liquidity Risk

The stress tests conducted by the NBE reveal that the sector is vulnerable to liquidity risk due to:

  • Potential mass withdrawals by major depositors
  • Mismatches in assets and liabilities
  • Funding shortfalls
  • Concentrated deposits
  • Lapses in meeting weekly liquidity norms

Operational Risks

Operational risks are also on the rise, driven by:

  • Increase in insider threats
  • Social engineering
  • Bank fraud and forgeries
  • Fraud incidents have doubled in one year to ETB1.0 billion (approximately USD 27 million)

Market Risk

The report highlights market risk, which is driven by fluctuations in global commodity prices and interest rates.

Mitigation Measures

To mitigate these risks, the NBE has implemented several measures, including:

  • Increasing provisioning to non-performing loans (NPLs) from 122.9% to 132.5%
  • Requiring banks to maintain a minimum capital adequacy ratio of 8.0%

Loan-to-Deposit Ratio

The sector’s loan-to-deposit ratio is expected to remain low due to increasing financial sector penetration, which has seen deposit growth outpace loan growth.

Capital Adequacy Ratios

Capital adequacy ratios are robust, with the sector’s capital adequacy ratio falling from 16.3% in Q2 2022 to 14.7% in Q2 2023. However, this is still above the minimum requirement of 8.0%.

Fiscal Deficits

The government’s fiscal deficits, driven by large-scale public investment, will continue to weigh on the country’s sovereign support capacity.

Conclusion

While the banking sector has made significant strides in recent years, it remains vulnerable to multiple risks that could have far-reaching consequences for the economy. As such, it is essential that banks and regulatory bodies continue to work together to address these risks and ensure the stability of the financial system.