Ethiopia's Investment Overview: Q3 2022/23 Insights

Ethiopia, located in the Horn of Africa, has been a focal point for investors due to its vast resources, strategic location, and burgeoning market. The third quarter of 2022/23 witnessed significant developments in the investment landscape of the country. This article delves into the intricacies of these developments, providing a comprehensive overview of the investment environment during this period.

As of March 2023, the Ethiopian banking landscape underwent notable changes:

• Number of Banks: The country was home to 30 banks, with a dominant presence of private banks, numbering 28, while the state-owned 2.

• Bank Branch Expansion: A commendable addition of 746 new bank branches was observed, bringing the total number of bank branches to 10,967. This expansion signifies the growing reach of banking services across the nation.

• Population to Bank Branch Ratio: With the aforementioned expansion, the ratio of population to bank branch improved, standing at 9,787. This indicates enhanced accessibility of banking services for the Ethiopian populace.

• Capital Allocation: The capital of the banking sector reached a staggering Birr 234.1 billion. State-owned banks held 36% of this capital, while private banks accounted for the remaining 64%. Notably, the Commercial Bank of Ethiopia (CBE) alone constituted 23.1% of the total banking system's capital.

The insurance sector, a pivotal component of the financial system, also showcased significant developments:

• Number of Insurance Companies: The number remained constant at 18, with 17 being private entities and one state-owned.

• Branch Expansion: The insurance companies expanded their network by opening 59 new branches, taking the total to 732. A significant 56.4% of these branches were located in the capital, Addis Ababa.

• Capital Growth: The combined capital of these insurance companies surged to Birr 15.3 billion, up from Birr 12.5 billion a year ago. Private insurance companies held a dominant share of 77.6% in this capital.

Micro Finance Institutions play a crucial role in bridging the financial inclusion gap, especially for the underserved segments of the population:

• Number of MFIs: The quarter under review saw the number of MFIs reaching a significant milestone.

• Performance Metrics: These institutions witnessed a surge in their key metrics. Savings, outstanding credit, and total assets grew by 16.9%, 25.8%, and 26.8% respectively on an annual basis. Their capital also saw a robust growth of 58.8%, amounting to Birr 13.5 billion.

• Role of MFIs: The MFIs in Ethiopia have been instrumental in providing access to financial services for low-income groups and micro and small-scale enterprises, both in rural and urban settings.

In the third quarter of 2022/23, the banking system's total resources mobilized amounted to Birr 194.2 billion, reflecting a 9.3% year-on-year growth. This growth was primarily driven by the following components:

• Net Change in Deposits: The banking system witnessed a net change in deposits amounting to Birr 115,577.8 billion for state-owned banks and Birr 116,337.9 billion for private banks. This resulted in a total net deposit of Birr 187,669.8 billion. However, there was a decline of 23% in the net change in deposits compared to the previous year.

• Borrowing: The total outstanding borrowing of the banking system reached Birr 106.1 billion, marking a 19.1% year-on-year growth. Out of this, Birr 81.6 billion (or 76.9%) was sourced domestically, while Birr 24.5 billion (or 23.1%) came from external sources.

• Loan Collection: Banks collected loans, including corporate bonds, amounting to Birr 97.3 billion. This represented a significant growth of 78.2% over the same quarter of the previous year. Private banks held a major share of 71.6% in this loan collection, while state-owned banks accounted for 28.4%.

The total deposit liabilities of the banking system amounted to Birr 2.1 trillion, showcasing a 29.3% year-on-year growth. The breakdown of these deposits is as follows:

• Demand Deposits: These accounted for 30.9% of the total deposits and stood at Birr 637 billion, marking an 18.4% annual expansion.

• Saving Deposits: Representing 61.6% of the total deposits, saving deposits surged by 34.5% year-on-year, reaching Birr 1.3 trillion.

• Time Deposits: Time deposits constituted 7.5% of the total deposit liabilities and increased to Birr 153.9 billion, reflecting a 37.3% annual growth.

State-owned banks held 49.4% of these deposits, while private banks accounted for the remaining 50.6%.

In the third quarter, the Ethiopian banking sector witnessed a significant disbursement of fresh loans amounting to Birr 123 billion. This figure includes the Commercial Bank of Ethiopia's bond purchase and represents a 13% annual increase.

To provide a clearer perspective, let's break down the distribution of these loans. State-owned banks were responsible for 39.6% of the new loans, while private banks took the lead with a 60.4% share. Such a distribution highlights the growing role of private banks in the Ethiopian financial landscape.

The total outstanding credit of the banking system, inclusive of corporate bonds, saw a surge of 27.7%, reaching a staggering Birr 1.9 trillion compared to the same period in the previous year. A noteworthy point here is the role of private banks: a whopping 99.5% of their outstanding credit was directed towards financing the private sector, including cooperatives.

The NBE's gross claims on the central government, encompassing direct advances and bonds, stood at Birr 514 billion as of March 2023. This marked a 47.9% increase from the previous year. Delving deeper, government bonds constituted 84.4% of this amount, while direct advances made up the remaining 15.6%. On the liabilities front, the NBE's deposit liabilities experienced a 19.5% growth, primarily driven by a 27.2% increase in the bank's reserves.