Banking Sector Review 2010

 Ethiopian banking is booming. Financial results for the 2010 fiscal year show an industry enjoying
high growth, high profits, and high dividends. Even in the midst of a challenging environment, all
key areas of banking operations—collecting deposits, providing loans, and foreign exchange
dealing—showed growth of more than 20 percent. Profits were up 45 percent and shareholders (at
banks open for more than a year) received an average return of 27 percent on their investments.

 Although sharing strong growth, there are of course notable variations among banks in terms of
their aggregate size, relative profitability, revenue sources, customer focus, loan concentration, and
operational efficiency. We provide a ranking of banks’ performance on these financial measures
using annual reports that have just become available for all 12 of Ethiopia’s private banks
(Abyssinia, Awash, Berhan, Bunna, CBO, Dashen, Lion, NIB, OIB, United, Wegagen, and Zemen).

 The outlook for the banking sector does, on the surface, look somewhat threatening given some
rather unconventional policy interventions—such as lending quotas and windfall taxes—that private
banks have had to deal with in the past year. Moreover, looking ahead, banks will surely be
challenged by the entry of six new banks (Abay, Enat, Hawassa, Debub Global, Noah, Zam-Zam), by
the very rapid growth of micro-finance institutions (more than 30 of which are now active), and by
the proliferation of share company formations that are working to raise more than Birr 5 billion in
funds directly from the public rather than going to banks for loans. But none of these developments
represents a serious blow to the prospects of the existing private banks in our view. Indeed, given
still huge and still largely unmet financial intermediation needs in Ethiopia, our assessment is that
there will be no fundamental change to the high-growth, high-profit banking environment that has
been a fixed feature of the economy for quite some time.

December 2010
Access Capital Research
 Banking Sector Review 2010

Banking Sector Review1

Ethiopia’s private banks showed very strong growth in the 2010 fiscal year. Overall deposits collected by private
banks rose by more than Birr 8 billion in a single year, from Birr 29.9 billion in June 2009 to 38.3 billion in June
2010. This represents a growth rate of 28 percent, which is not much lower than the average annual deposit growth
seen in the past five years (31 percent). Given lending restrictions imposed by the central bank during the year, the
increase in banks’ lending was of course not as fast as the growth of deposits but still managed to rise by 21 percent
(from Birr 17.7 to 21.4 billion). Substantially higher growth was recorded in the foreign assets built up by private
banks, which more than doubled from $252 million to a record level of $570 million. This 126 percent growth rate in
foreign assets shows the extent to which banks scaled up their trade-related operations (financing exports and imports)
in the wake of the credit caps that became increasingly restrictive during the course of the year (Table 1 and Annex 1).

TABLE 1: Summary Indicators for Ethiopia's Private Banks

Growth
All Private Banks FY 08/09 FY 09/10 rate
Deposits (Birr millions) 29,864 38,339 28.4%
Loans (Birr millions) 17,661 21,385 21.1%
Total Assets (Birr millions) 39,683 50,571 27.4%
Foreign Assets (in millions USD) 252 570 126.4%
Net Profits after tax (Birr millions) 974 1,417 45.4%
Capital (Birr millions, end of period) 4,165 5,064 21.6%
Return on Average Equity (percent) 23.4% 22.2% …
Return on Average Assets (percent) 2.5% 2.4% …
Source: Annual reports of banks

Growth in the three main banking operations noted above—collecting deposits, providing loans, and dealing in
foreign exchange—is what provides the bulk of the income generated by Ethiopia’s private banks. With the
volume of loans rising to Birr 21.4 billion, private banks collected Birr 2.0 billion in interest income given an
industry-wide effective lending rate of about 9½ percent. This income was offset by Birr 0.9 billion in interest
payments that private banks paid on their deposits (an effective deposit rate of 2 percent), thus translating in to net
interest income of Birr 1.1 billion. The other main income source for banks is from the financing of export and import
activities: banks buy foreign exchange from exporters (who are obliged to sell 90 percent of their export earnings to
banks after a period of 28 days) and sell this foreign exchange to importers at a 2 percent mark-up, which is the
difference between Ethiopia’s buying and selling rates.2 In addition, banks charge additional fees (of 2 to 4 percent)
for processing letters of credits granted to importers. Supplementing these non-interest income sources are revaluation
gains that arise from Birr depreciation plus fees and commissions collected from services such as remittances,
domestic wire transfers, and check clearance and related services.

Propelled by all of the above, profits at private banks reached record levels in 2010. Profits after tax at the 12
private banks reached a high of Birr 1.4 billion in FY 2009/10, a 45 percent growth rate from the Birr 974 million in
profits of a year before. Given an overall capital base of around Birr 5.1 billion, this profit level translates into a
return on average equity of 22 percent for private banks (or 27 percent excluding two start-up banks that were not yet
open for a full year).

1
The focus of this report is on private banks, which have now all publicly released their annual reports. Annual reports from the three state
banks—CBE, CBB, and DBE—were still not available as of end-December 2010.
2
As of end-December 2010, the rate at which banks buy one US dollar from an exporter is 16.55 and the rate at which the banks sell this same
US dollar to an importer is 16.88—this spread of 2 percent is fixed by the central bank.

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 Banking Sector Review 2010

With respect to the relative role of private banks in the overall banking industry, the trend-lines continue to be
broadly positive despite some setbacks in recent years. The private banks share in total deposits has shown a
steady and uninterrupted increase for the last 14 years and has now reached its highest level of 40 percent, from just 2
percent in 1995 (see Table 2). On the lending side, progress was very rapid up to around 2006, when private banks’
share jumped to 55 percent of total loans, but this has subsequently been reversed more recently as lending by state
banks exploded in the last few years. The share of private bank loans in total loans now stands at 48 percent.

TABLE 2: Private Banks' Share in Total Deposits and Total Loans

50%
Percentage of Total Loans Percentage of Total Deposits
by Private Banks (%) at Private Banks (%)
60%
40%
50%

30%
40%

30% 20%

20%
10%
10%

0% 0%

More broadly, the role played by private banks in the overall economy is substantive in many dimensions,
despite the criticism sometimes leveled at banks about their high profits, weak lending practices, and
inadequate services and technologies. Indeed, taking into account Ethiopia’s stage of development and regulatory
environment, we find the record of private banks is actually quite commendable whether judged by their profits, cost
of credit, lending allocation, non-performing loans, or even technological sophistication.

Excessive Profits? Private banks in Ethiopia are sometimes seen as generating “excessive” profits given the
year-after-year returns of 25-30 percent that have been provided to shareholders for more than a decade now.
However, seen from several perspectives, it is not at all apparent that banks’ profit levels should be seen as
excessive. For example, real returns after accounting for the high inflation of the past five years are only in
the range of 5-10 percent per annum, as annual inflation averaged 19 percent in the last five years. If one is
considering returns on a foreign currency basis, the 25-30 percent returns paid out in Birr terms translate into
substantially lower returns in USD terms. In addition, banking profits are not particularly “excessive” when
seen in a cross-country context: the average ROE is 21 percent in other African countries compared to 22
percent in Ethiopia, while the average return on assets is 2.0 in other African countries compared to 2.4 in
Ethiopia. Finally, one distinctive feature to note about banking is that it is—by its very nature—more
profitable than other businesses simply because it relies on leverage; in other words, a bank deploys a given
sum of its own funds (its start-up capital) but is then able to multiply this initial start-up investment by ten-
fold or more by collecting public deposits and by subsequently generating income from that much larger sum

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of collected deposits.3 Thus, the high profitability of banks in Ethiopia or anywhere else is simply a reflection
of this “multiplicative effect” of leverage, which tends to offer shareholders of banks much higher returns on
their investments compared to other non-bank businesses.

Expensive Loans? The high cost of loans is a charge commonly directed at many banking systems,
especially in African countries, but this is certainly one charge that does not have much validity in the
Ethiopian context. Nominal interest rates at Ethiopia’s private banks range from 8-12 percent, being at the
lower end for export loans (generally 8-9 percent) and at the higher end for all other loans (10-12 percent).
Such rates of interest are exceptionally favorable to borrowers considering the inflation rates of recent years.
Even if and when inflation falls towards mid-single digits, this implies that real lending rates are about 3-5
percent, which is a very borrower-friendly rate in a developing country context.

“Unproductive lending”? A common misconception of Ethiopia’s banks is that they focus predominantly on
lending to short-term traders, basically just financing importers and those engaged in domestic trade and
services to the exclusion of other sectors. Of course, the basic premise that importers and those engaged in
domestic trade and services are engaged in “unproductive” activities is an incorrect one, as they provide
critical intermediation services that makes it possible to connect producers and consumers in all manner of
economic activities. Still, even on this faulty metric, one finds that the share of lending to what would clearly
fall under “productive sector” such as agriculture, manufacturing, exports, and construction is now just around
50 percent of total loans and well ahead of the share of loans given to importers and those engaged in
domestic trade and services (see below).

Weak lending practices? Weak lending practices have certainly plagued the banking industry in the past, but
this issue has now been substantially addressed and was, in any case, largely concentrated in state-owned
banks (though a few private banks were not immune). In recent years, non-performing loans (a key measure
of lending practices) have improved substantially and now average only about 5 percent of total loans, down
from a peak of 19 percent in 2005 (see IMF’s June 2010 Article IV Report). There are still challenges in this
area, but there has been much improvement thanks in part firmer supervision and oversight from the central
bank. What weaknesses remain are due in large part due to the difficulties of operating in a business
environment where credit information systems are still incomplete, financial record-keeping by business rare,
and where many large businesses still operate in a highly informal manner.

Backward Technologies? The common critique of Ethiopian banks as technologically backward has been
valid for quite some time, and remains so to some extent, but many changes are taking place in this area both
from initiatives by the central bank (a national payment system is soon to be operational providing a real-time
and electronic inter-connection among all banks) and from initiatives by individual banks. Within a year, all
banks will have full-fledged core banking systems, which will mean that all their branch operations will be
automated, thus simplifying customer transactions and making it possible to move away from the heavily
paper-based system of the past. Modern banking services such as ATM services (now provided by Dashen,

3
As a simple illustration, if a Bank starts with Birr 100 million in capital and soon collects ten times that amount in deposits (Birr 1 billion), then
it has magnified its income-earning potential by ten-fold. In this case, the Birr 1 billion in collected deposits can potentially earn up to Birr 100
million in interest income if loaned at a 10 percent interest rate. What is notable is that the Birr 100 million in interest income is only 10 percent
of the total deposits collected, but is very high relative to the initial capital investment made by the bank (it is 100 percent of the initial equity
invested). Even after assuming half of this gross income is spent on interest payments to depositors, salaries, and other general expenses, then
the implied return on equity in this case is 50 percent (i.e., Birr 50 million in net income over the Birr 100 million initially invested). This is the
effect of leverage and explains the high profitability of banks in Ethiopia and elsewhere: bank assets are 10 times banks’ capital in Ethiopia (thus
a 10-fold multiplicative leverage effect), which is considered within a healthy range and similar to the asset-capital ratios seen in other African
countries. Some of the biggest banking collapses of the 2008-09 Global Financial Crisis took place in banks that were leveraged by 20 to 40-
fold their capital base (which brought even more profitability than the illustrative example above but also substantially greater risk).

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 Banking Sector Review 2010

Wegagen, and Zemen banks as well as the state-owned CBE), Internet Banking (provided by United Bank and
Zemen Bank) and SMS banking (provided by United and Berhan banks) are increasingly becoming available.
Moreover, additional technology-based services such as mobile banking are being launched. With these
innovations, the sector is becoming much more technologically in tune with banking services available in
neighboring countries and even the wider world.

Further to the above, banks provide a very sizeable contribution to the economy through their
disproportionately large tax payments as well as their role in employment generation. The tax on the profits of
banks—a high rate of 30 percent—by itself provided Birr 586 million in income to the government in FY 2009/10 (see
Annex 1). However, many other taxes are paid by bank activities, as they distribute dividends (taxed 10 percent), pay
salaries (taxed 30-35 percent for most categories of bank employees), and purchase fixed assets (taxed at 15 percent
VAT rate). We estimate that these other taxes add another Birr 500 million for a total tax payment to the government
of more than Birr 1 billion.4 This amount, paid by just twelve banks, is equivalent to more than 10 percent of the Birr
8.8 billion in direct income tax revenue collected by the government last year. With respect to employment, the
private banks as a whole employ 14,140 people, which is equivalent to about 10 percent of total formal sector
manufacturing employment. By way of comparison, of the 15 industry sub-categories in Ethiopia’s manufacturing
sector, only two sub-categories (textile manufacturing and food/beverage products manufacturing) employ a greater
number of employees than does the banking sector and banking sector employees exceed those of many large
industries such as those producing leather products, apparel/clothing, paper, plastics, iron and steel, or wood products.5

All of the above should of course not conceal the fact that the private banking industry has some notable weak
spots and long-standing failings. Three areas, in our view, are particularly poorly addressed by Ethiopia’s private
banks. First, the interest rates offered to savers have stayed unusually low for many years, remaining fixed at 4
percent in the past five years despite inflation averaging 19 percent over the same period. This implied a real savings
rate of -15 percent, which has been a strong deterrent to placing savings within in the banking system. Second, long-
term lending (i.e. loans with maturities of five years or longer) is still very hard to find at Ethiopia’s private banks.
From data available in banks annual reports on the loan maturity of their loans, we estimate that more than 60 percent
of loans are short-term at most private banks. Third, the payment system—processing checks, transferring funds
among banks, or even transferring funds among the branches of a given bank—has been particularly backward; the
clearance of checks can take many days without the use of special procedures and movements of funds among banks
still rely on manual methods. The good news in most of these areas is that some incremental progress is being seen:
regulatory measures are pushing up the interest rates on savings and payment systems reform is accelerating in the
coming year (as noted above). The availability of long-term lending remains a challenge, but policy reform could
potentially play an instrumental role here—for example, greater openness to permit qualifying private banks to borrow
long-term funds from abroad would allow the on-lending of such funds to many credit-worthy and deserving projects.

4
The Birr 500 million additional tax payment estimate is arrived at as follows: 75 percent of banks’ net after-tax profit is assumed to be paid to
shareholders as dividends (yielding Birr 107 million in taxes from dividends); the Birr 605 million in annual salary payments of private banks
are assumed to be taxed at 30 percent (the rate applicable for most bank employees) yielding Birr 178 million in taxes on bank staff salaries; and
the Birr 45 billion asset base of banks is assumed to include at least 3 percent of fixed assets (judging by figures seen in annual reports) which
are subject to VAT, thus yielding 206 million in VAT related payments on bank equipment purchases.

5
Given all of the above, it is clear that sector-friendly policies that boost the size and scale of the domestic banking system can go a long way
towards bring higher tax revenues, higher employment and improved financial services for the economy at large. Unfortunately, some recent
policy initiatives in this area—such as the 75 percent windfall tax recently imposed on banks’ gains from the September 1, 2010 devaluation—
do not help in further building the size and scale of Ethiopia’s private banks. For example, the banks’ gains following the unusually large
devaluation could have usefully been deployed to raise their capital (as a quarter of bank profits always go to legal reserves) and, more broadly,
to strengthen the emergence of large “domestic champions” in the banking sector (in line with government policy). This is certainly needed
when one notes that, despite having the second largest population in the continent, only one of Ethiopia’s private banks (Dashen) figures in the
top 100 African banks when measured by assets, capital, or profits. Policies should thus ideally encourage rather than discourage the emergence
of large domestic private banks that are at least comparable in capital, assets, and profits to those of (much smaller) neighboring countries.

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 Banking Sector Review 2010

Comparative performance of private banks

Although united by their strong growth, there are significant differences in the comparative performance of the
12 private banks. In what follows, and utilizing the banks’ annual reports, we review the record of the 12 banks on
the basis of their size, relative profitability, source of income, customer type, lending concentration, and efficiency.

Size: Ethiopia’s 12 private banks can be classified into two broad categories when it comes to size, based on
whether they were established more than a decade ago (Awash, Dashen, Abyssinia, Wegagen, United, NIB) or
set up only within the last five years (CBO, Lion, Zemen, OIB, Bunna and Berhan). The second-oldest
private bank, Dashen Bank, is currently the largest private bank on most measures of financial size, including
deposits, loans, assets, or capital and has held this position for at least a decade. The second place spot is held
by Abyssinia (in the case of loans) and Awash (in the case of deposits), followed closely by United and NIB.

TABLE 3: Financial Indicators Across Private Banks

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 Banking Sector Review 2010

Profitability: Banking profitability is commonly measured by return on equity (which gives an indication of
the return a shareholder can expect) and return on assets (which gives a measure of the income generated from
a given asset base). On this measure, the most profitable private bank is Dashen Bank based on its 37.7
percent return on equity (versus an industry average of 22.2 percent) and Zemen Bank based on its 5.5 percent
return on assets (versus an industry average of 2.4 percent).6
TABLE 4: Profitability Measures

Return on Equity Return on Assets

Dashen 37.7% Zemen 5.5%
Awash 36.4% Wegagen 4.1%
United 36.4% NIB 3.7%
Zemen 35.9% LIB 3.4%
Abyssinia 30.4% United 3.3%
NIB 29.0% Awash 3.1%
Wegagen 28.1% Dashen 2.9%
LIB 19.4% Abyssinia 2.4%
CBO 15.7% CBO 1.8%
OIB 3.2% OIB 0.7%
Bunna 0.0% Bunna 0.0%
Berhan -5.8% Berhan -2.6%
Average 22.2% Average 2.4%

Income sources: In terms of income sources, private banks can be categorized into two broad categories
based on whether they are primarily reliant on loan income or on international banking/other income. This
can be measured by the relative dominance of gross interest income to total income. On this measure, we see
that five banks are more heavily reliant on loan income (namely Berhan, Dashen, CBO, Abyssinia, and LIB)
while seven banks are more heavily reliant earnings from international banking and other sources (Zemen,
OIB, Bunna, Wegagen, Awash, NIB, and United).

TABLE 5: Banks’ Income Sources

Banks reliant on loan income Banks reliant on IBD/Other income

Loan income IBD/Other income
share share
Berhan 71% Zemen 77%
Dashen 65% OIB 62%
CBO 58% Bunna 58%
Abyssinia 56% Wegagen 56%
LIB 51% Awash 56%
NIB 52%
United 51%

6
As banks sometimes use different methods to compute ROE and ROA, we apply a uniform formula across all private banks. ROE is derived as
Net Profit After Tax divided by period average Capital (where Capital is the sum of paid-up capital, share premium, legal and other reserves).
ROA is derived as Net Profit After Tax divided by period average Total Assets. All data are from banks’ annual reports.

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Deposit type: Notable differences are seen in the source of customer deposits across banks, with some banks
collecting almost half their deposits in the form of checking accounts (as at Wegagen) while others see less
than a quarter of their deposits from this source such as at Abyssinia, Awash, and Zemen (see Table 6).
Having a high share of checking deposits has the advantage of reducing interest costs (since interest is
generally not paid on such accounts) but at the same time also implies a higher likelihood of immediate
customer withdrawals. On the other end, time deposits, which cannot be withdrawn for a given term, have the
advantage of providing a more stable deposit base but of course at a much higher interest cost. Banks more
reliant on the latter category are mainly the newest banks (Zemen, OIB, Birhan, and Bunna), where time
deposits are more than 30 percent of total deposits, in contrast to just a 1 percent share of total deposits at the
country’s oldest private bank (Awash).

Table 6 : Private Banks' Deposit Structure

1
24% 23% 22%
32% 32% 31% 30% 27% 26%
0.8 39% 38%
46%

0.6 45%
31% 36% 39% Checking Deposits
0.4 42%
52% 60% 61%
66% 74% 76% Saving Deposits
51%
0.2 39% 33% Time Deposits
35% 34%
19%
10% 8% 7% 7%
0 3% 3% 1%

Source: Annual reports of banks

Lending concentration: The lending portfolio of banks show notable differences in sector orientation,
reflecting both the conscious strategic decision of different banks as well as varying degrees of success in
entering particular market segments. For the private banking industry as a whole, the top four sectors to
which loans are provided are Domestic Trade and Services (29 percent of total loans), Exports (15.3 percent),
Manufacturing (15 percent) and Construction (15 percent). But of course different banks show very different
sector loan allocations. Looking at specific sectors and the banks which allocate the largest share of their loans
to that sector, we find that: Agriculture is given the greatest share of total loans at NIB (6 percent of loans);
manufacturing at Dashen (23 percent of loans); domestic trade and services at CBO (77 percent of loans);
exports at Zemen (36 percent of loans); imports at Lion (28 percent of loans); Construction at Bunna (23
percent of loans); Transport at Wegagen (10 percent of loans); and Personal loans at Zemen (3 percent of
loans).

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 Banking Sector Review 2010

TABLE 7: Private Banks ' Loan Book Composition (in percent )

Share of Loans by Sector Abyssinia Awash Berhan Bunna CBO Dashen LIB NIB OIB United Wegagen Zemen

Agriculture 0.2% 4% 1.0% 5% 3% 3% 6% 6% 0% 1% 1%

Manufacturing 10% 7% 6.0% 6% 4% 23% 4% 21% 17% 18% 14% 14%
Domestic Trade and Services 38% 26% 36.7% 42% 77% 30% 51% 20% 43% 18% 13% 27%
Export 11% 26% 23.6% 8% 9% 9% 8% 15% 13% 15% 22% 36%
Import 12% 12% 12.8% 17% 0% 9% 28% 12% 2% 23% 22% 7%
Construction 13% 16% 10.1% 23% 2% 16% 5% 22% 12% 15% 13% 11%
Transport 4% 7% 9.7% 3% 6% 0.5% 3% 4% 5% 10%
Personal 1% 1% 0.2% 1% 1% 1% 0.3% 1% 1% 2% 2% 3%
Loans in Legal Department 6% 2% 0% 2% 3% 2%
Advance in Letter of Credit 4% 2% 1% 1% 1%

Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Market shares: Market shares in different sectors show the dominance of some of the oldest and largest
private banks. Indeed, reflecting its large size, Dashen Bank has the largest market share in five sectors,
providing 35 percent of all manufacturing lending by private banks, 28 percent of total transport lending, 26
percent of construction lending, 25 percent of domestic trade and services lending, and 19 percent of total
personal lending. In only a few sectors is the market leadership position held by others: by Awash in the case
of total export loans (25 percent), by NIB in agriculture loans (29 percent), and by United in Import related
loans (21 percent).

TABLE 8: Market Shares of Private Banks in Different Loan Categories (Ranked)

Domestic Trade and
Agriculture Manufacturing Services Export

NIB 28.7% Dashen 35.4% Dashen 24.5% Awash 24.5%

Dashen 26.3% NIB 16.7% Abyssinia 19.8% Wegagen 16.3%
Awash 23.7% United 14.4% Awash 13.3% Dashen 13.8%
CBO 7.1% Wegagen 10.6% CBO 9.1% United 12.2%
Wegagen 4.4% Abyssinia 10.1% NIB 8.4% NIB 11.9%
OIB 4.1% Awash 6.9% United 7.9% Abyssinia 10.7%
LIB 3.9% OIB 2.0% Wegagen 5.5% Zemen 4.2%
Abyssinia 0.9% Zemen 1.6% LIB 4.9% CBO 1.9%
Zemen 0.6% CBO 0.9% OIB 2.6% OIB 1.5%
Berhan 0.3% LIB 0.7% Zemen 1.7% LIB 1.4%
United Bunna 0.4% Bunna 1.3% Berhan 1.1%
Bunna Berhan 0.3% Berhan 0.9% Bunna 0.5%

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 Banking Sector Review 2010

Imports Construction Transport Personal

United 20.5% Dashen 25.8% Dashen 27.5% United 21.5%

Wegagen 18.7% NIB 17.5% Wegagen 22.4% Dashen 18.4%
Dashen 16.3% Awash 15.7% Awash 17.9% Wegagen 16.3%
Abyssinia 12.9% Abyssinia 13.0% United 12.0% Awash 15.1%
Awash 12.7% United 11.9% Abyssinia 10.1% Abyssinia 11.9%
NIB 10.2% Wegagen 10.1% NIB 6.9% NIB 5.7%
LIB 5.6% OIB 1.4% Berhan 1.3% Zemen 4.6%
Bunna 1.1% Bunna 1.4% OIB 1.3% CBO 3.6%
Zemen 1.0% Zemen 1.3% Bunna 0.5% OIB 2.0%
Berhan 0.7% LIB 0.9% LIB 0.2% LIB 0.6%
OIB 0.3% Berhan 0.5% Zemen Bunna 0.3%
CBO CBO 0.4% CBO Berhan 0.1%

Cost structure and efficiency: The cost-to-income ratio and the revenue per employee are key measures of
cost-effectiveness and efficiency used in the banking sector. On this basis, we find Awash has the lowest
cost-to-income ratio of just 24 percent, followed closely by United, NIB and Zemen Banks (the cost-to-
income ratio is computed as operational expenses divided by gross income). With respect to employee
productivity, Zemen Bank shows Birr 397,000 of profit generated per employee followed by Dashen Bank
with Birr 180,000 in profit per employee.

TABLE 9: Efficiency Measures Across Banks

Cost-to-Income Ratio Profits per Employee
1 Awash 24% 1 Zemen 397,319
2 United 25% 2 Dashen 180,344
3 NIB 27% 3 NIB 177,607
4 Zemen 28% 4 Wegagen 170,806
5 Wegagen 29% 5 United 169,403
6 Abyssinia 31% 6 Awash 141,238
7 Dashen 33% 7 Abyssinia 107,640
8 LIB 33% 8 LIB 92,640
9 OIB 50% 9 CBO 41,351
10 CBO 51% 10 OIB 13,948
11 Bunna 81% 11 Bunna 404
12 Birhan 132% 12 Birhan (43,840)

Beyond these rankings, we also review overall industry concentration measures and find that trends over the
past decade are moving in a positive and more competitive direction. In particular, we review the relative
dominance of the largest three private banks in the industry as a whole. Ten years ago, in FY 1999/2000 for example,
the top three private banks made up 82 percent of total loans, 78 percent of total deposits, and 77 percent of total
foreign exchange flows, showing an unhealthy concentration among a few banks. By the middle of the past decade, in
FY 2004/05 the shares taken up by the three private banks declined to about two thirds of total deposits, loans, and FX
assets. Most recently, the shares taken up by the top three private banks is nearing 50 percent, indicating substantial

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distribution in loans, deposits, and FX activity across a widening range of private banks, as would broadly be expected
from an increasingly competitive operating environment.

Outlook and Prospects

The broad macroeconomic environment for private banks will be very positive in the coming years if many (or
even most) of the targets under the new Five-Year Growth and Transformation plan are realized. The key
drivers of bank operational growth—deposits, loans, and FX activity—are primarily determined by trends in two
macroeconomic variables: nominal GDP growth (which in turn reflects real GDP growth plus inflation) and foreign
exchange flows. On these two narrow macroeconomic indicators, the likelihood of continued strong growth is very
high in our view as elaborated below:

Deposit growth outlook: Deposit growth at Ethiopia’s private banks has averaged 32 percent per year in the
last decade. Indeed, it is remarkable that annual deposit growth has never fallen below 25 percent at any time
since the start of private banking 15 years ago. This rate of growth has taken place when real savings rates
were both positive (as in early 2000s) and significantly negative (as in recent years). Of course, despite
nominal growth in deposits, it is worth noting that the ratio of deposits to GDP has collapsed from a peak of
35 percent registered in 2002/03 to just 24 at present.7 This has been an abnormal development, however,
linked to the much faster rise in nominal GDP (the denominator) on account of recently high inflation. As the
macroeconomic environment returns to more normal conditions, the deposit-to-GDP ratio will rise in line with
Ethiopia’s earlier experience and consistent with the norm for fast-growing developing countries. If, for
example, the deposit-to-GDP ratio reverts back to its 2002/03 peak in a period of three years, then annual
average growth in deposits will be around 32 percent. Alternatively, if we project deposit growth on the basis
of the recent correlation between deposit growth and nominal GDP growth, this would imply deposit growth
of around 22 per annum.8 We think the likely outturn is much closer to the higher end of this range, i.e.,
deposit growth of close to 30 percent per annum over the next five years, given the more favorable savings
conditions likely to prevail in the coming years. In particular: (i) maintaining low inflation is now a major
priority of policymakers and a recurrence of the exceptionally high rates seen two years ago is very unlikely;
(ii) even if inflation does pick up, the central bank has recently adopted a major policy shift that links
minimum deposit rates to inflation, thereby ensuring strong incentives for savers; and (iii) foreign exchange
inflows from exports, remittances, and FDI are likely to do well in the years ahead (see below) and will drive
deposit growth as these inflows increase banks’ foreign assets which in turn increase banks’ deposit base.

Loan growth outlook: Growth in bank lending should match and even exceed deposit growth in the coming
years as long as credit ceilings on private banks are removed—something which we now expect to take place
in early 2011. Private banks’ loan- to-deposit ratio has fallen dramatically in recent years (from 86 percent in
2001 to just 56 percent at present) as banks kept accumulating deposits but were restricted from lending out
most of these deposits because of the credit caps. For most banks, reverting back to a more normal loan-to-
deposit ratio of 70 percent should be possible in a period of as little as three years, which will imply (even
with this conservative assumption) annual lending growth of 40 percent per year up to FY 2012/13.
7
Total deposits in the banking system at end of FY 2009/10 were Birr 96.8 billion versus an estimated nominal GDP figure (according to the
latest IMF staff report) of Birr 399.2 billion.

8
We use the FY 2009/10 correlation between nominal GDP growth and deposit growth as this is a period when inflation had stabilized and
nominal GDP was not distorted by the unusually high inflation of FY 2007/08 and FY 2008/09. Thus, in FY 2009/10 one saw deposit growth of
28 percent in the midst of nominal GDP growth of 19 percent, or deposit growth of 1.41 times nominal GDP growth. Utilizing the IMF’s
nominal GDP projections for the period to FY 2014/15 (i.e., 16 percent annual nominal GDP growth) and applying this 1.41 relationship, the
projected deposit growth is around 22 percent per year.

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 Banking Sector Review 2010

Assuming loans grow exactly in line with deposit growth thereafter, then the average annual growth in lending
over the next five years would be around 36 percent. Such growth in private banks’ loan portfolio will imply
similar growth in profits as long as interest spreads are broadly unchanged (which we think will be the case)
and as long as expenses can be controlled to grow by a similar or lower annual rate (which is very much
within most banks’ capabilities).

FX flows outlook: The outlook for foreign exchange flows is very much tied to the performance of exports,
imports and other balance of payments items with large private sector components (such as remittances and
FDI). Moreover, the experience of the past decade indicates that FX asset growth is very closely tied to
growth in total trade: indeed, banks’ FX assets are consistently around 7-9 percent of total trade showing that
fast growth in exports and imports contributes to rising FX asset growth. Assuming FX assets maintain their
same share of total trade, then FX asset growth will average 25 percent in the coming five years driven by the
strong growth rates expected both for exports and (to a lesser extent) for imports.9 International Banking
incomes reflect banks’ FX assets and would thus rise by a broadly similar rate, but as there is likely to be
some pressure on International Banking fees and commissions to be lowered in the coming years (see below),
it is more realistic to project International Banking related incomes will grow by closer to 20 instead of 25
percent per year.

TABLE 10: Banking Indicators: Past Five Years and Next Five Years
Annual Average Growth Past 5 Years Next 5 Years
Outturn Projection
Deposits 31% 30%
Loans 25% 36%
Foreign Assets 18% 25%
Source: Bank’s Annual reports and IMF staff reports for historical data and Access Capital
Research for projections

Despite the considerable growth opportunities identified above, the sector will still face several notable
challenges. First, there will be increasing competition from at least six new entrants (Abay, Enat, Hawassa, Debub
Global, Noah, Zam-Zam). These entrants will, on the margins, intensify competition for deposits, for loans and
especially for foreign exchange. Second, banks are increasingly being substituted by the general public as a source of
funds by new share companies being established in a variety of sectors. Indeed, our compilation of new share
company formations reveals more than 20 such companies in the pipeline seeking to raise Birr 5.9 billion in capital
(see Annex 2). Third, the micro-finance industry continues to show exponential growth, with several of the largest
MFIs already bigger than some of the smaller banks. At end 2009, for example, MFIs had collected Birr 2.4 billion in
deposits from 2.1 million depositors and provided Birr 5.5 billion in loans, or equivalent to about 25 percent of total
loans by private banks (see Annex 3).

But each one of these emerging challenges will not pose a major threat to the growth of the existing banks in
our view. Surely, competition from new banks will increase, but if the overall market for financial services is rising at
a fast enough pace that there is little risk of a zero-sum game among banks. Some pressures on prices is likely (for
example on International banking charges) but this will still be taking place in the context of large volume growth so
that revenue should not be substantially affected. Moreover, several of the new banks are focusing on very specific
and so far underserved niches that may actually work to expand the overall demand for financial services—for
example, targeting women (Enat), Islamic banking users (Zam-Zam), or specific regions. With respect to the more

9
The assumptions applied are that exports grow by 30 percent per annum in the next three years but then show a somewhat slower growth of 25
percent per annum in the following two years, while imports grow by an average of 20 percent annually over the next five years.

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 Banking Sector Review 2010

than two dozen share companies under formation, these companies may seek initial funding from the public but
actually work with banks in multiple ways: they all place their initial capital deposits at banks; many will seek
working capital loans once they start operations, and many others will utilize banking services for exports, imports and
other financial services. Indeed, as large professionally run businesses that will create brand new business activities
and expand existing industries in new directions, they will likely bring to banks more gains rather than losses. Finally,
with respect to the potential rivalry between banks and MFIs, this again is unlikely to be threatening to any significant
degree: the two institutions focus on almost completely separate target markets, with the former serving
predominantly established businesses and salaried individuals in urban areas while the latter address the needs of very
small-scale and/or rural individuals and businesses. Also, with foreign banking and remittance services remaining the
sole preserve of banks, the MFIs will not be entering this part of the banking business any time soon. Thus, instead of
competition, there may instead be considerable scope for collaboration as banks can, for example, become sources of
wholesale funds for MFIs who are typically short of loanable funds.

In summary, despite what might seem to be tough times ahead for the banking industry, the opportunities
within the sector are actually large enough that existing private banks have plenty of room for continued
expansion, growth, and profitability. Perhaps one instructive indicator in this regard is to look at the experience of
the six long-established banks (Awash, Dashen, Abyssinia, Wegagen, United, NIB) both before and after they were
joined by six additional banks. What one observes is that their profit growth, return on equity, and return on assets did
not decline to any significant extent in the subsequent years and was actually higher in some cases than was seen
before. More generally, financial intermediation in Ethiopia is still in its early stages even by the standards of other
low-income countries: financial assets—measured by deposits in the banking system—are just 24 percent of GDP
compared to near 40 percent of GDP in Africa and well above 70 percent of GDP in other developing countries; less
than 10 percent of the population is banked (versus an average of 30-40 percent elsewhere in Africa); and many other
metrics such as the total number of banks, bank accounts per person, branches per person, and bank credit per person
are orders of magnitude lower in Ethiopia compared to other African countries. Considering all of the above, and
given the inherent profitable nature of the banking business due to leverage, we believe that there will be no
fundamental change to the high-growth, high-profit banking environment that has been a fixed feature of the economy
for quite some time.

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 Banking Sector Review 2010

ANNEX TABLE 1

Financial Indicators for Ethiopia’s Private Banks (Alphabetically listed)

Abyssinia Awash Berhan Bunna CBO Dashen LIB NIB OIB United Wegagen Zemen
Balance Sheet
Indicators
Total Assets
(Birr millions) 6,280 9,023 14 480 1,769 12,353 1,364 5,971 1,119 5,896 5,742 1,056
Foreign Assets
(USD millions) 47 85 4 12 13 169 20 47 20 49 82 22
Loans
(Birr millions) 3,154 3,146 153 192 722 5,048 584 2,546 369 2,614 2,474 384
Deposits
(Birr millions) 5,139 6,106 238 239 1,372 10,145 1,018 4,127 821 4,725 3,817 688

Capital 483 764 108 169 169 932 214 767 211 506 884 133
(Birr millions)

Income Statement Indicators

(Birr millions)

Gross income 469 687 8.3 20 128 741 111 557 80 511 566 134
of which: net
interest 135 148 4 6 48 235 36 176 15 147 171 8
of which: other 334 539 4 13 81 506 75 381 65 364 395 126

Expenses 145 163 11 16 65 247 37 148 40 130 164 38

of which:
salaries &
benefits 79 94 4 5 25 115 18 77 20 68 91 9
Net Profit
Before Tax 196 351 -6.0 0.05 36 458 50 285 8 248 318 60
Net Profit After
Tax 141 248 -6.0 0.05 25 324 40 201 5 174 223 42

Other
Indicators
Return on 30.4% 36.4% -5.8% 0.03% 15.7% 37.7% 19.4% 29.0% 3.2% 36.4% 28.1% 35.9%
Average Equity
Return on 2.4% 3.1% -2.6% 0.01% 1.8% 2.9% 3.4% 3.7% 0.7% 3.3% 4.1% 5.5%
Average Assets
Cost-to-Income
Ratio 31% 24% 132% 81% 51% 33% 33% 27% 50% 25% 29% 28%

Employment 1,824 2,484 138 119 874 2,541 536 1,606 546 1,462 1,859 151
Profit per -
employee (Birr) 107,640 141,238 43,840 404 41,351 180,344 92,640 177,607 13,948 169,403 170,806 397,319
Source: Annual reports of banks

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 Banking Sector Review 2010

ANNEX 2

Share Companies Under Formation

Company Name Targeted Capital (in Birr)

Hiber Sugar 1,000,000,000
Ayat 660,000,000
Habesha Cement 600,000,000
Haset Supermarket 599,400,000
Hawassa Bank 300,000,000
Debub Global Bank 300,000,000
Enat Bank 300,000,000
Habesha Breweries 250,000,000
Raya Brewery 250,000,000
Ardi International Logistics 200,000,000
Habesha Construction Materials and Development 200,000,000
Dalol Oil 150,000,000
Alliance Transport Services 150,000,000
Hiber Agro Industry 150,000,000
Hagere Construction Share Company 150,000,000
Timiret Agro industry 150,000,000
Jacaranda Integrated Agro-Industry 100,000,000
Crystal Tannery 100,000,000
Sylvia Pankhurst Memorial School 100,000,000
Gutu Oromia Business S.C. 100,000,000
International Cardiovascular Hospital 50,000,000
Sheger Mater Taxi 50,000,000
Total 5,909,400,000
Source: Data from companies under formation and press reports

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 Banking Sector Review 2010

ANNEX 3

Gross loan Number

portfolio of active
Rank Selected Listing of Micro-finance Institutions in Ethiopia
(in USD) in borrowers
2009 in 2009
1 Amhara Credit and Saving Institutions S.C (ACSI) 131,184,763 679,518
2 Dedebit Credit and saving Institutions S.C (DECSI) 107,610,231 488,922
3 Oromia Credit and saving S.C (Ocssco) 76,352,189 458,762
4 OmoMIcrofinance S.C 36,813,225 280,232
5 Addis Credit and saving Institutions S.C (ADCSI) 25,498,654 107,954
6 Wisdom MIcrofinance S.C 7,567,759 56,302
7 Wasasa MIcrofinance S.C 5,072,600 42,276
8 Bussa Gonofa MIcrofinance S.C 3,615,229 42,146
9 Poverty eradication and Community Empowerment Microfinance Institutions S.c (PEACE) 3,360,273 18,174
10 Benshangul Gumuz MIcrofinance S.C 3,250,672 27,816
11 Specialized Financial and Promotional Institutions S.C (SFPI) 2,662,921 29,044
12 Eshet Miccrofinance S.C 2,620,980 24,836
13 Gasha MIcrofinance S.C 1,260,218 14,119
14 Africa Vilage Financial services S.C (AVFS) 889,775 13,917
15 Harbu MIcrofinance S.C 811,492 12,541
16 Metemamen MIcrofinance S.C 804,205 14,154
17 Letta MIcrofinance S.C 142,899 455
18 Digaf MIcrofinance S.C 110,045 1,240
Source: Microfinance Information exchange

Total MFIs in Ethiopia (2009) 30

Gross Loan Portfolio in 2009 (millions USD) 432.3
Number of active borrowers (millions) 2.4
Average loan balance per borrower (in USD) 2009 166.4
Deposits in 2009 (millions USD) 189.7
Total Assets in 2009 (millions USD) 600.1
Number of depositors in 2009 (millions USD) 2.1
Source: Microfinance Information exchange

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