It is crystal clear that the provision of financial service plays crucial role in stimulating the economy of a given country.
The functioning of market, value chaining, whole sale and retail activities, the provision of loan and credit facilities can be mentioned as a life line of the economy and to these to happen, finance is inalienable. It is also a key player in creating and accumulation of wealth.
Yared Hilemeskel is an economist who works as a consultant for various firms. In his recent interview with local media he said that Monetizing the economy in Ethiopia traced back to hundred fifty years and before that bartering was a common phenomenon which indicated economic under development.
The modern banking system was introduced at the dawn of the 20th century, by the then king of Ethiopia, Emperor Menelik II.
And following that, insurance companies owned by both public and private sector were established and reached the public by offering financial services such as depositing and giving loan money based on the market determined interest rate.
With regard to the formulation of financial and monetary policies in the modern times of the nation exclusive mandates had been provided to the National Bank of Ethiopia (NBE) and the mandate continues to these days.
According to Yared, determining exchange rate of Ethiopian Bir with other hard currencies, preventing and reducing inflation through various mechanism such as raising interest rate while depositing money and borrowing, selling government bond to the private entities have been exercised by the National Bank.
According to the report released from the National Bank of Ethiopia, banks under the auspicious of the NBE have their own duties. First, they are allowed to do their day to day business based on the rules and regulations introduced by the government and expected to report their performance annually approved by the external auditor.
With regard to the Birr – Dollar exchange rate only they serve their customers based on the NBE instruction. In addition, they have responsibility to detect illegal activities that might occur in the finance sector to the National Financial Security Agency. Commercial Bank of Ethiopia and other private banks played pivotal role by providing financial service which enabled for stretching of infrastructure, supplying agricultural products to local and international markets.
Aiming to reach all sections of the people and various sectors in all parts of the country, the banks are expanding their activities to from time to time. Yared further explained that the provision of financial service to the private companies in the 1960s and 70s enabled the expansion of largescale mechanized farms which were expected to narrow the gap between the demand for food and the supply.
That time in the rift valley areas of the country, in Afar region, in the then Humera and Setit areas of Gonder Administration zone and in the Wolayita area modern irrigation farms owned by the private sector were established. Commercial crops such as sugar cane, oilseeds, fruits and vegetables had been produced. Some farming firms had supplied their products to the emerging industries expanded in various parts of the country.
On the other hand, similar to today, oil seeds had been exported to the foreign market and boost the nation’s foreign currency earning capacity. The then cultivation of crops and agricultural practices was unthinkable without obtaining loan from banks.
Farmers imported agricultural inputs including machinery, fertilizer, pesticides and herbicides by securing loan from banks. Exporters also had strong attachment with financial institutions. Had such practice been continued to these days, in addition to being food self-sufficient, Ethiopia would have been food exporter to the the rest of the world. Unfortunately, the outbreak of the Ethiopian revolution in 1974 and the introduction of socialist economy by the Dergue regime crippled the private sector and many farming firms were closed down.
Even though the regime tried to establish public owned vast farming firms, they failed to meet their objectives and became bankrupted due to mismanagement and misallocation of the resources. Solomon Zegeye, an economist and working as Manager of the Micro Insurance Department under the Nyala Insurance Company for his part said that the flourishing of insurance companies also played pivotal role by providing life and property insurances and helped to channel huge financial resources to other sectors in the form of loan but because of various reasons the companies are mainly serving the few section of the society who have disposable income and have the capacity to purchase premium.
As to Solomon, after the down fall of the imperial regime, all private financial institutions were nationalized by the new regime and the emerged economy characterized by competition changed in to the command one and the role of the private sector in the financial sector curtailed and its growth also shrunk. As a result, many investors also shied away from investing in the economy.
Commendably, 30 years ago, when the EPRDF government assumed power, the private financial institutions were given green light to be re-established and began to play their role in the economy.
Currently, more than a dozen of private banks and insurance companies have been established and functioning in a competitive manner and their paid and un-paid capital is rising and created job for thousands.
Their service provision is enhancing from time to time and because of the lucrative nature of the sector, the government enabled to earn billions of Birr in the form of revenue. As to Yared, since their asset is part of the nation’s wealth, the National Bank is applying strict supervision and follow-ups to be adhered to its instruction. Saving is a source of investment and whenever the amount of the saving money is boosting the money that could be utilized for investment could be attainable but as to some sources, the saving rate compared to other sub Saharan countries is less than the expected level hence, upgrading the saving culture at any cost is essential.
Currently, the purchasing of the GERD bond and the saving of money for condominium houses at the Commercial Bank of Ethiopia are commendable. In addition, saving money in credit associations in public institutions must be enhanced.
It is understood that the emerging saving culture helped the development and the commercial banks to mobilized huge amount of money which is utilized for the nation’s economic development.
Yet, the expansion of the financial institutions is concentrated in urban centers and the rural poor are still marginalized. In fact, in order to provide service to the rural mass other supportive infrastructures such as electric power, Information Communication Technology and road infrastructure are vital but drawing lesson from other developing countries in this regard is essential.
The other thing that should be mentioned is that reaching the poor through credit is still hard because collateral is an obligatory precondition in getting finance from banks.
According to Desalegn Rahmato, the renowned land researcher, the land law introduced since the Dergue era allows farmers only to have the right to use on their land. As a result, they are not entitled to get loan from banks by putting their plots as collateral. It is understood that, 85 percent of the nation’s population earn its living from subsistence farming and still poverty is rampant.
Therefore, without eradicating rural poverty achieving development might continue being a challenge.
According to Solomon, the World Bank with the cooperation of private financial institutions crafted Project and provides insurance service to farmers through micro finance institutions in the rural part of the country. The project provides service to millions of farmers but because of limited financial service, farmers still survive with subsistence living.
It is undeniable fact that micro finance institutions and farmers’ consumers association still play crucial role in supplying agricultural inputs to them and in supplying their products to the market and this must be enhanced but to do so there must be sufficient money at hand. In addition, to enhance its geographic coverage, widening the service area is necessary.
Currently, the government is dedicating it’s time for poverty reduction and for the expansion of manufacturing and agribusiness which need more finance hence, boosting the role of financial sectors should be prioritized.
BY ABEBE WOLDEGIORGIS
The 3 March 2022