Transcript tanzania capital

Missing Financial Institutions
and Markets in Ethiopia
By: Yohannes Ayalew
Vice Governor and Chief Economist
National Bank of Ethiopia
What is a financial institution?
It is an institution that provides financial services
There are three broad categories of financial institutions
1.
Depository institutions that accepts and manages deposits and
make loans:
- Banks, building societies, credit unions, trust companies, and
mortgage loan companies
2.
Contractual institutions that raises long term finance
- Insurance companies and pension funds
3.
Investment institutions that facilitate investment financing
- Investment banks, underwriters, brokerage firms
3
What is a financial market?
 A financial market is a market platforms
in which people trade financial securities
and other fungible items:
 It is usually associated with:
low transaction costs and
prices reflect supply and demand
4
Types of Financial markets
1. Capital markets: primary and
secondary markets
a. Equity markets
b. Bond markets (Debt markets)
2. Money markets: primary and secondary
3. Foreign exchange markets
4. Derivative markets
5. Foreign exchange markets
5
Why do we need financial institutions and
markets?
For their own sake?
Or
To fulfil other economic objectives?
6
The roles of financial institutions and
markets in the economy
1. Capital accumulation and
technological progress
2. Saving mobilization
3. Facilitate monetization of economic
transactions and creating access to
finance
4. Delivering information about
investment
5. Optimizing allocation of financial
resources
7
The Role of Ethiopian Financial
Institutions in Economic development
Five Perspectives
1. Economic Growth and Macroeconomic
Stability Perspective
a.
Macroeconomic stability
b.
Saving and investment
2. Financial Deepening Perspective
a.
Increased role of money in economic
transactions
b.
Availability of credit
8
 3.
Financial Inclusion
a.
Access of financial services to all households at
a reasonable cost
b.
Ensure continuity and certainty of investment
c.
Ensure choice and affordability for clients
 4.
Financial sector stability perspective
 Return on Assets
 Return on Capital
 Non-performing loans (NPls)
 Liquidity
Poverty Reduction and Financial
Inclusive Growth perspective
 5.
9
Economic Growth and Macroeconomic
Stability Perspective
 Macroeconomic Stability
 Saving and Investment
10
Macroeconomic Stability
Money market:
 Have primary market for
government Short-term securities
 The effort to introduce an active secondary
market for short-term securities was not
successful
 Excess reserves
 Lack of alternative financial instruments
 Limited access to financial services
 Prices played little role in deposit
mobilization of banks
11
So, Monetary Policy relied on direct
control on money supply aggregates
until 2010
 Minimum deposit rate
 Reserve requirement
 T-bills sales in the primary market
played little role
 Occasionally resorting to credit
ceilings
12
Was a secondary market for short-term
securities missing?
Ans. Not at least until 2013
Is it a missing market now?
Yes
Because:
 Excess reserve is down to the required minimum
 The demand for short-term securities is increasing
 Access to financial services has grown significantly
 Prices start to play increasing role in deposit
mobilization
 Deposit rates are spreading according to
maturity structure
13
Since 2011
 Monetary Policy has now resorted to
indirect control
 Reserve money is an anchor for
monetary policy
 T-bills sales in the primary market
has started to play a prime role in
monetary policy
 Minimum deposit rate plays limited
role
 Reserve requirement
 No need to resorting credit ceilings
Table 1: Interest Rate per Annum (%)
Particulars
Ethiopia
Kenya
Rwanda
Tanzania
20102011
2012
2013
2014
2015
Lending
12.25
11.88
11.88
11.88
11.88
11.88
Deposit
4.15
5.38
5.38
5.38
5.38
5.38
Spread
8.10
6.50
6.50
6.50
6.50
6.50
Lending
14.37
15.05
19.72
17.31
16.51
16.09
Deposit
4.56
5.63
11.57
8.64
8.37
9.19
Spread
9.81
9.42
8.15
8.67
8.14
6.90
Lending
16.94
16.73
16.49
16.93
17.66
17.03
Deposit
7.10
7.96
10.04
8.58
7.76
7.59
Spread
9.84
8.77
6.45
8.35
9.90
9.44
Lending
14.55
14.96
15.46
15.83
16.26
16.10
Deposit
6.57
6.78
9.51
9.82
9.86
9.90
Spread
7.98
8.18
5.95
6.02
6.41
6.21
Source: NBE and World Bank Country Data (WDI)
Table 1 (Cont’d): Interest Rate per Annum (%)
Particulars
20102011
2012
2013
2014
2015
Lending
20.17
21.83 26.31
23.25 21.53 22.60
Deposit
7.69
13.02 16.23
11.84 10.81 12.77
Spread
12.49
8.81 10.08
Lending
9.83
9.00
8.75
8.50
9.13
9.42
Deposit
6.47
5.67
5.44
5.15
5.80
6.15
Spread
3.37
3.33
3.31
3.35
3.32
3.26
Lending
11.01
Deposit
6.23
6.74
7.64
7.68
6.92
6.91
Egypt, Arab Rep. Spread
4.77
4.29
4.36
4.61
4.79
4.72
Lending
5.81
6.56
6.00
6.00
5.6
4.35
Deposit
2.75
3.5
3.00
3.00
2.75
1.5
Spread
3.06
3.06
3.00
3.00
2.85
2.85
Uganda
South Africa
China
11.03 12.00
Source: NBE and World Bank Country Data (WDI)
11.41 10.72
9.83
12.29 11.71 11.63
Table 2: Annual Headline Inflation
Particulars
2010
2011 2012 2013 2014
2015
Ethiopia
7.3
38.0 20.8
7.4
8.5
10.4
Kenya
4.0
14.0
9.4
5.7
6.9
6.6
Rwanda
2.3
5.7
6.3
4.2
1.8
2.5
Tanzania
6.2
12.7 16.0
7.9
6.1
5.6
Uganda
4.0
18.7 14.0
5.5
4.3
5.2
South Africa
4.3
5.0
5.7
5.4
6.4
4.6
11.3
10.1
7.1
9.4
10.1
10.4
China
3.3
5.4
2.6
2.6
2.0
1.4
India
12.0
8.9
9.3
10.9
6.4
5.9
Egypt, Arab Rep.
Source: NBE and World Bank Country Data (WDI)
17
Saving and Investment
One of the growth constraints in
developing countries is raising enough
financing for investment
At the early stage of development,
Capital accumulation is the main
driver of growth
Private and public capital
accumulation
Productivity growth and innovation
play limited role
Raising the rate of growth domestic saving
ratio is the main challenge
18
What did we do to raise the rate of growth of gross
domestic savings?
 Enhance the role of financial institutions
 Banks
 Strengthen banks in capital and reserves
 Encourage banks to branch out throughout
the country
 Transform maturity structure of loans from
dominantly short-term to medium and long
term ones
 Eliminate undesired excess reserves
 MFIs
 Strengthen MFIs in capital and reserves
 Encourage them to branch out in the rural
area
19
 Enhance the role of financial institutions
(cont’d)
 Strengthen the Pension scheme
 Introduce private pension scheme
 Reform the Public pension scheme
 Insurance institutions
 Strengthen in terms of capital and
reserves
 Housing Savings
 Introduce various low cost housing
scheme
 GRD Bond: In primary market
 Introduce GRD pond
Table 3: Financial Institutions in Savings Mobilization
No.
Particulars
1 Bank Deposit
o/w Housing Scheme
2 Social Security
PSSSA
POESSA
3 Microfinance
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
140.1
186.5
236.4
291.8
366.8
436.7
28.5
-
-
-
0. 4
9.4
16.3
21.0
770.3
3.8
4.2
6.7
10.2
18.3
26.2
41.7
50.6
3.8
4.2
6.3
8.5
14.6
19.4
30.6
42.9
-
-
0.4
1.7
3.7
6.8
11.2
144.6
2.7
3.8
5.5
7.6
11.8
14.8
18.4
38.5
3.3
4.8
5.5
6.7
7.6
24.3
202.0
259.1
327.4
414.6
504.5
30.2
104.5
148.1
Percentage Contribution to Total Financial Savings
1 Banks
2 Non-Banks
O/w Social Security
3 Total Financial Saving
Source:NBE
Annual
Average
Growth
98.1
4 GERD Bond
5 Total Financial Saving
(In Billions of Birr)
93.8
94.6
92.4
91.3
89.1
88.5
86.6
6.2
5.4
7.6
8.7
10.9
11.5
13.4
3.6
2.8
3.3
3.9
5.6
6.3
8.3
100.0
100.0
100.0
100.0
100.0
100.0
100.0
21
Capital Market in Ethiopia
 What is a capital market?
 It is a market where funds are raised through
issuance of shares and debt instruments to
finance long-term investment
 Capital market consists of primary and
secondary markets
 Primary market a market where investors raises
investment finance by selling for the first time to those
who have surplus funds
 Although in rudimentary form it exists in Ethiopia
 Eg. banks are raising capital by selling shares to
the public
 The market directly affects the level of domestic
savings and investment
22
 Secondary market is a market where the
existing shares and debt instruments are
traded
 This market affects the level of savings and
investment only indirectly by:
 Creating liquidity
 Ensuring the continuity of the primary
market
 This market does not exist in Ethiopia
 Is the capital market a missing market in
Ethiopia?
23
Preconditions for the Development A
Capital Market
 The literature outlines several preconditions for
the successful development of equity and debt
markets. Below are some of the key ones:
1.
Share of the private sector in the economy
2.
Deregulated interest rates
3.
Well developed government securities market
that can provide the benchmark yield curve for
bond pricing
4.
Up to date clearing and settlement systems in
terms of both infrastructure and investor
protection
24
Preconditions for the Development of A
Capital Market (Cont’d)
5.
A regulatory framework that provides for
adequate
 disclosure,
 accounting standards,
 proper corporate governance and the like
6.
Enactment of laws to provide for regulatory
oversight and investor protection
7.
A credible system of experienced rating
agencies in order to get opinions about
debt issues into the public domain
25
Has Ethiopia lost because of the absence
of a capital markets?
The answer inclines more to the ‘no’
Why?
1. There are only few potential listed
companies who can fulfil the listing
requirements.
a. The private sector is not yet developed
- Potential listed companies are in the
financial sector
b. Poor accounting standards and discourse
culture of companies
26
2.
The overarching problems so far have
been:
a. Access to finance and financial inclusion
- A significant section of the rural population has
limited access to financial services
b. Quantity (availability) not price has so far
been the major player in the market for credit
- The level of domestic savings is the major
constraint
- The primary market is playing an important role
27
Access to finance and financial
inclusion
Table 4: Access to Commercial Banking Services
Indicators
Absolute
Change
Percentage
Change
2009/10
2015/16
A
B
C=B-A
D=B/A
15
18
3
20.0
Number of Bank Branches
680
3187
2,507
368.7
Number of Bank Accounts (In Million)
3.5
20.3
16.8
480.0
Total Deposits (In Billions of Birr)
98.6
438.2
339.6
344.3
Capital and Reserves (In Billion of Birr)
12.4
46.3
33.9
273.4
Number of Banks
As percentage of GDP (%)
Total Deposits
Capital and Reserves
Source: NBE and CBs
26.0
34.7
8.7
33.3
3.3
3.7
0.4
12.1
Table 6: Access to Microfinance Services
Indicators
2010 2016
%
Growth
30
35
16.7
1,034
1,680
62.5
2.4
4.3
79.2
Asset (in billions of Birr)
8.0
36.7
358.8
Total Loan (in billions of Birr)
5.8
25.2
334.5
Total Deposit (in billions of Birr)
2.7
18.4
581.5
Total Capital (in billions of Birr)
Source:NBE
2.4
8.9
270.8
Number of Microfinance Institutions
Number of Branches
Number of Deposit Account (In
millions)
Table : Access to Financial Services in Selected Countries
Bank branches per 100,000 adults
Particulars
2010 2014 2015 2016
ATMs per 100,000 adults
2010
2014
2015
2016
Africa
Ethiopia
Kenya
Ghana
Nigeria
South Africa
Egypt
Sub-Saharan
Africa
China
Thailand
South Korea
Malaysia
India
1.4
4.7
5.4
6.5
9.9
4.8
4.5
5.8
6.1
5.6
10.9
4.8
3.6
4.1
n.a
11.2
18.3
10.9
10.1
8.1
12.7
17.4
10.7
13.0
5.1
5.9
7.2
4.9
10.5
4.7
Asia
8.5
12.6
16.9
10.7
13.6
Source: IMF Financial Access Survey (2016) and NBE
6.0
0.3
8.9
3.9
11.1
55.8
9.0
1.9
10.2
8.2
16.1
66.2
12.7
2.9
6.0
24.8
83.0
266.6
53.2
7.3
55.0
111.9
290.7
51.9
18.1
2.4
10.2
10.3
16.7
69.3
13.8
76.4
113.5
278.8
51.1
19.7
3.2
31
Will capital market be considered a
missing market in the near future?
 Yes. Because,
 The private sector is developing
The number of potential listed companies
could emerge from the production sector
 The economy is getting complex
 The problem of access to finance is receding
Price starts to play important role in the
financial markets
32
Achievements without a capital market
33
Table 5፡ Gross domestic savings
(percentage of GDP)
2005
2014
Ethiopia
10.3
22.5
Nigeria
18.0
19.8 1/
Uganda
11.7
19.6
Ghana
3.7
10.8 1/
China
46.4
50.4 1/
India
31.5
29.0
South Korea
34.6
34.5
Source
World Economic Indicator
1/ Latest data refers 2013
34
Table 6፡ Gross Domestic Investment (% of
GDP)
1995
2014
Ethiopia
23.6
40.3
Kenya
21.8
21.4
Nigeria
7.1
14.7 1/
Uganda
12.4
28.9
Ghana
20.0
23.8 1/
China
41.7
47.7 1/
India
26.1
31.4
South Korea
34.8
29.2
Source: World Development Indicators
1/ The latest figure for 2013
Table 7: Real GDP Growth in Selected Countries
Particulars
Ethiopia
2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 Average
10.5
13.5
8.7
9.9
10.3
10.4
10.5
Kenya
8.4
6.1
4.6
5.7
5.3
5.6
6.0
Rwanda
7.3
7.8
8.8
4.7
7.0
6.9
7.1
Tanzania
6.4
7.9
5.1
7.3
7.0
7.0
6.8
Uganda
7.7
6.8
2.6
4.0
4.9
4.8
5.2
South Africa
3.0
3.3
2.2
2.3
1.6
1.3
2.3
Egypt
5.1
1.8
2.2
2.1
2.2
4.2
2.9
China
10.6
9.5
7.9
7.8
7.3
6.9
8.3
India
10.3
6.6
5.6
6.6
7.2
7.6
7.3
Source: NBE, NPC, IMF-WEO and World Bank Country Data (WDI)
36
Financial Deepening Perspective
a. Increased role of money in
economic transactions
b. Availability of credit
Table 8: Financial Deepening Indicators of Selected Countries (In Percent)
Particulars
2009/10
2010/11
2011/12
2012/13
2013/14
2014/15
2015/16
27.54
28.22
25.34
27.14
28.07
28.61
29.14
Kenya
40.3
40.9
40.9
41.4
42.6
42.2
Tanzania
25.1
24.7
23.9
22.7
23.4
24.7
Uganda
22.9
22.4
20.4
20.8
22.3
22.9
South Africa
75.8
74.6
72.7
71.1
71.0
74.6
Egypt
80.7
75.8
70.5
75.3
76.5
78.4
China
177.5
175.9
182.4
188.2
193.2
205.7
India
76.2
78.8
76.9
77.9
77.8
79.2
27.54
26.32
25.30
26.92
28.28
30.31
Kenya
41.1
41.7
42.2
42.9
44.3
45.2
Tanzania
15.5
17.2
18.0
18.2
20.2
22.8
Uganda
14.6
16.1
13.8
14.2
16.8
17.9
185.5
171.5
180.7
182.2
185.7
180.1
Egypt
69.4
74.6
73.9
82.0
88.2
95.8
China
143.6
142.1
150.8
157.6
169.4
196.9
India
71.9
76.1
77.1
Source: NBE, NPC and World Bank Country Data (WDI)
77.6
75.8
76.8
M2/ GDP
Ethiopia
Domestic Credit/GDP
Ethiopia
South Africa
32.08
Table 9: Financial Deepening Indicators of Selected Countries (Cont’d)
Particulars
2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16
Credit to Non-Government/GDP
Ethiopia
18.8
20.8
22.4
24.4
25.7
27.9
Kenya
27.2
30.6
29.5
31.7
34.2
34.9
Tanzania
11.9
12.6
13.0
12.9
13.8
15.4
Uganda
13.3
15.4
13.7
13.5
14.4
15.2
149.0
139.5
146.1
149.5
151.5
150.0
Egypt
33.1
31.2
27.7
26.5
25.9
26.5
China
127.6
124.1
130.0
135.4
141.9
155.3
India
49.6
51.3
51.9
52.2
51.8
52.7
South Africa
Source: NBE, NPC and World Bank Country Data (WDI)
29.0
39
 Financial sector stability perspective
Return on Assets
Return on Capital
Non-performing loans (NPls)
Liquidity
Table 10: Ratio of Non Performing Loans to Total Loans
Particular
2010
2011
2012
2013
2014
2015
Ethiopia
3.47
2.06
1.36
2.49
2.02
2.07
Kenya
6.29
4.43
4.59
5.05
5.46
5.99
Rwanda
11.27
8.22
6.00
7.00
5.22
5.84
Tanzania
7.84
5.40
6.40
5.12
6.58
6.26
Uganda
1.86
2.03
4.06
5.76
4.01
5.13
South Africa
5.79
4.68
4.04
3.64
3.24
3.12
13.60 10.90
9.80
9.30
8.50
7.20
Egypt, Arab Rep.
China
1.13
0.96
0.95
1.00
1.10
1.50
India
2.39
2.67
3.37
4.03
4.35
5.88
Source: NBE and World Bank Country Data (WDI)
2016
2.85
41
Poverty Reduction and Inclusive
Growth perspective

Financial inclusion and access to
financial services play significant role
Table 11 Gini Coefficient)
42
Particulars
Ethiopia
Kenya
Rwanda
South Africa
Egypt
China
India
USA
Source: WB WDI
2000
2013
Sub-Saharan Africa
29.8 (2004)
30.0 (2013)
46.3 (1997)
48.5 (2013)
48.6 (2000)
51.3 (2011)
57.8 (2000)
63.4 (2011)
32.8(2000)
30.8 (2008)
Emerging Countries
39.2 (1999)
42.1 (2009)
33.4 (2005)
33.9 (2010)
Developed Countries
40.5 (2000)
41.1 (2013)
Conclusion
44
 1. Identifying the missing financial
institutions and market must be defined in
the context of
The countries of level of development
The development strategy
There is a need for sequencing and
ordering of financial sector reform
 2.
Access to finance and financial inclusion
needs first be addressed
Macroeconomic stability must be ensured
Debt market should come before the
equity market
 3.
Sets benchmark for the equity market
Relatively easy to regulate
45
Thank You