Ethiopia’s Financial Regulations and Laws: Navigating a Path to Development

Publication Information

Title: Ethiopia’s Financial Regulations and Laws: Navigating a Path to Development
Publication Type: News Article
Date: August 15, 2021
Authors: M. Kassahun Hagos and M. Asfaw

Ethiopia’s Financial Sector: A Snapshot of Development

The Ethiopian financial sector is underdeveloped compared to its East African neighbors. Key financial development indicators reveal the need for transformation in Ethiopia’s financial sector:

Branch-to-population ratio: 62,063 per 100,000 people
Adult population with access to formal credit: 1.197%
Global rank in credit access: 104
Interest rates: Negative real interest rates (-22.5% saving rate, -21.8% lending rate)
Collateral requirements: 85.4% of loans require collateral; highest ratio in Sub-Saharan Africa (234%)

Two Competing Theories: Financial Repression vs. Liberalization

The Ethiopian financial sector is at a crossroads, with opposing viewpoints on the role of financial regulation:

Financial Repression School: Control interest rates to foster development in emerging economies.
Liberalization School: Privatize government-owned financial institutions and liberalize financial markets for improved efficiency, soundness, and competition.

Ethiopia’s Balancing Act: Regulation, Supervision, and Liberalization

The Ethiopian government advocates for financial liberalization but follows a gradualist approach. Key aspects of financial development, liberalization, and regulation include:

Financial development trends
Modes of liberalization
Types of regulation and supervision

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