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1.1. Early Banking period
The history of banking in Ethiopia dates back to the turn of 20th century when the Bank of Abyssinia was established in 1905 in Addis Ababa marking the introduction of banking in the country. This bank was
established with the request of the Ethiopian government for British Government support in setting up the bank. The bank was then established with the support of the British envoy through the National Bank of Egypt and
was given a 50-year concession with exclusive privileges in respect of banking, coinage and issue of notes, bonded warehouses, custody of all moneys belonging to the state and a preferential right to all state loans.
Ethiopian subscribers held only 6.2 percent of the bank's share while the rest belonged to an Anglo-Egypt group, a French group, an Italian group, German, Austrian and American subscribers. However, the bank later
was found to be a purely profit-making institution rather than promoting the banking habit as it was expected to. It was then needed to establish a government bank when opposition to its monopolistic position was first
manifested in 1928. With the willingness of the National Bank of Egypt to abandon its concessionary rights in return for a sum of pound sterling, the transfer of ownership took place smoothly in 1931. (establishment and
Liquidation of banks is summarized in the following table). The new bank, the Bank of Ethiopia, retained the offices and personnel of the old bank. The new bank differed from its predecessor in ownership and
functional responsibility. The Ethiopian Government owned 60% of the shares, and all transactions were subject to scrutiny by its Minister of Finance. The bank had branches in Dire Dawa, Gore, Dessie, Harar and Gambella
and was later liquidated in 1936 due to the Italian invasion. Development banking also emerged in the early period of the century with the founding of Societe d' Ethiopie pour le Development de I'Agriculture et du
commerce in May 1908. Two other foreign banks, the Banque de l'Indochine and the Compagnie de l'Afrique Orientale, had also established a branch and an agency respectively in 1915. In 1928 the
Societe Nationale d' Ethipie
was reorganized as a private bank with full foreign ownership, a French group subscribing 60% of the capital and the French Government the remaining 40%. Various studies indicate that the idea of banking appears to have grown considerably in popularity during the period prior to the Italian occupation.
Date Established
|
Name of Bank
|
Liquidated |
July 1906 |
Bank of Abyssinia |
August 1931 |
May 1908 |
Socie'te' Nationale d' Ethiopie pour le Development de I'Agriculture et du commerce |
|
August 1931 |
Bank of Ethiopia |
1936 |
1915 |
Banque de I'Indochine |
|
1915 |
Compagine de I'Afrique |
|
| |
Oriental |
|
B. ITALIAN OCCUPATION
Bank |
Branches |
Banca d'Italia |
Addis Ababa, Asmara, Assab, Dessie, Dire Dawa, Gondar, Jimma, Harrar, Massawa. |
Banco di Roma |
Addis Ababa, Asmara, Assab, Combolcha, Dembi Dollo, Dessie, Dire Dawa, Gambella, Gondar, Gore, Harar,
Jigiga, Jimma, Lekemt and Massawa. |
Banca Nazionale del Lavoro |
Addis Ababa, Asmara, Decamere, Massawa. |
Cassa di credito
Agrario and Minerario (Agricultural and Credit Institute) in Asmara. |
|
C. POST-WAR YEARS
Date Established
|
Name of Bank |
Withdrawn |
1941 |
Barclays Bank (Dc and O) |
April 1943 |
1942 |
Barclays Bank (Dc and O) |
|
| |
Asmara (Eritrea) |
1952 |
30th Nov. 1943 |
State Bank of Ethiopia |
31st Dec. 1963 |
| |
Banque de l'Indochine |
|
30th Sept. 1949 |
Agricultural and Commercial Bank of Ethiopia |
1957 |
| |
Banco di Roma (in Eritrea only) |
1967 |
| |
Banco di Napoli (In Eritrea only) |
|
1951 |
Development Bank of Ethiopia |
|
1962 |
Imperial Savings and Home Ownership Public Association |
|
1963 |
Investment Bank of Ethiopia |
1970 |
1963 |
Addis Ababa Bank, S.C. |
|
1st Jan. 1964 |
National Bank of Ethiopia(Central Bank) |
|
1st Jan. 1964 |
Commercial Bank of Ethiopia, S.C. |
|
1965 |
Mortgage Co. of Ethiopia, S.C. |
|
1967 |
Banco di Roma (Ethiopia) S.C. |
|
1970 |
Agricultural and Industrial Development Bank, S.C. (formed out of the merger of the Ex-Development Bank
of Ethiopia and Ex-Ethiopian Investment Corporation) |
|
D. 1974 - 1991 SOCIALISM ERA
Date Established
|
Name of the Bank
|
Nov. 1975 |
Housing and Savings Bank (formed out of the merger of Imperial Savings and Home Ownership Public
Association and Mortgage co. of Ethiopia S.C.) |
E. AFTER ADOPTION OF MARKET ECONOMIC SYSTEM
Date Established
|
Name of the Bank
|
Sept. 1994 |
Commercial Bank of Ethiopia (reorganized and re-established) |
Sept. 1994 |
Construction and Business Bank (ex-Housing and Savings Bank, reorganized and reestablished) |
Sept. 1994 |
Development Bank of Ethiopia (ex-Agricultural and Industrial Development Bank, reorganized and
re-established) |
Feb. 1995 |
Awash International Bank (A private bank newly established) |
Jan. 1996 |
Dashen Bank (A private bank newly established) |
Aug. 1996 |
Bank of Abyssinia (A private bank newly established) |
During the period of Italian occupation, the banking business was held Italian banks and other
financial institutions which increased their branches both in the capital, Addis Ababa, and across the regions widely. Banca d'Italia, Banco di Roma and Banca Nazionale du Lavoro had 9, 15, and 4
branches in Ethiopia, respectively. Their operation came to an end, except in Eriterea, after the liberation in 1941. After the liberation the banking business was resumed by the Barclays Bank (Dominion, Colonial and
Overseas) in 1941 by setting up its branch in Addis Ababa. Barclays bank had also opened a branch in Asmara in 1942. This bank withdrew later from both cities in 1943 and 1952, respectively. In the
aftermath of the liberation, the Ethiopian government took up the tasks of reorganizing the monetary and credit conditions of the country. It then established the State Bank of Ethiopia in 1943: and
other circulating currencies also withdrew from the country. Between 1943 and 1963 all aspects of banking activities central, commercial, savings and mortgage,
was dominated by the State Bank of Ethiopia. As regards foreign bank, Banco di Roma and Banco di Napoli reopened their branches in Eritrea only to withdraw later in 1967. The early period of banking in
Ethiopia, therefore, way of some innovative character in the business and could have done more if it were not for the frequent interruptions for different socio-political reasons. The development of
banking activity that flashed in early period of the century must have contributed to the development of the idea that brought into existence some specialized banks later, viz. the Development Bank of
Ethiopia in 1951, the Imperial Savings and Home ownership Public Association in 1962 and the Investment Bank of Ethiopia in 1963. 1.2. Modern Era of Banking 1. 2.1. The Last Decade of the Imperial Regime
A recent and important phase in the history of Ethiopian banking was started with the introduction of monetary and banking proclamation of 1963. With the coming into effect of this proclamation, the
State Bank of Ethiopia was split into two separate bodies: The National Bank of Ethiopia and the Commercial Bank of Ethiopia. The former assumed central banking functions while the latter took up
commercial banking business of the old bank. The powers and functions assigned to the National Bank were more or less the usually accepted ones
of the majority of central banks elsewhere. Basically the functions of the central bank are divided into three major areas:- 1. The regulation, availability and cost of money and credit.
2. The management of gold and international reserve assets. 3. The licensing and supervision of banks and other financial institutions.
4. Holding the central treasury of the government and rendering general banking services to government departments and agencies. The commercial bank on the other hand took up the duties of :-
1. Holding in deposit public's money with guaranteed security. 2. Giving loans for all sorts of commercial and personal needs. 3. Offering assistance in matter of foreign exchange to business men.
4. Providing safekeeping for an individual's most valuable possessions. The first private bank, the Addis Ababa Bank, also came into existence in the first half of 1960s. This
bank was also engaged in commercial banking and it injected dynamism into Ethiopian banking. The bank was active in crop financing, providing advice and facilities to newly established Ethiopian
enterprises encouraging and sponsoring the accelerated growth of the activities of the private sector in all economic fields, and acting as paymaster on behalf of large government and private agencies in
addition to attending to all normal domestic and international commercial banking activities. As the economy went on showing impressive growth and the business showed robust development, it
was felt by the government necessary to have adequate backing of finance institutions. Accordingly, a new financial institution, the Agricultural and Industrial Development Bank S.C., was formed to take
over the assets and liabilities of the ex-Development Bank of Ethiopia and the ex-Investment Corporation, thereby effectively merging the two former financial intermediaries. The new institution
was to be used as the government's principal instrument to mobilize and channel investment funds for accelerated development of the country's agriculture and industry. 1.2.2. Banking During the Socialist Regime
The Banking sector was changed into a mono-banking system during the rule of the command economic system in the country. The Housing and Savings Bank was established in 1975 by
proclamation No.60/1975 decreeing the transfer of all assets and liabilities of the former Savings and Mortgage Corporation of Ethiopia S.C. and the Imperial Savings and Home Ownership Public
Association (ISHOPA). The bank was established with the objective of providing loans for residential and commercial construction industries.
The Agricultural and Industrial Development Bank, which was originally established in 1970, was re-established in 1979 under proclamation 158/79 as a public financial agency. This bank was used by
the government as a channel to direct funds to the agricultural and industrial sector , mainly through cooperatives, state farms and other state enterprises.
The Commercial Bank of Ethiopia (CBE) became the only bank rendering universal banking services to the public. The CBE was re-established in 1980 by proclamation No. 184 amalgamating all assets and
liabilities of the old Commercial Bank of Ethiopia and the Addis Ababa Bank. It has been dominating the market with over 155 branches in the country. The objective of the bank during the period was
rendering commercial banking services with special favour for public enterprises and service co-operatives while denying appropriate attention for the private sector. The bank has been
operating under the guidelines specified in the proclamation that restricts it to providing short-term lending of up to one year.
Generally speaking all banks were operating under the administratively set rates of interest and restrictive credit policy based on rationing and sectoral priority importance. Each bank had a strict
credit ceiling beyond which it has to gain approval from the central bank for disbursement. 1.2.3 Banking After the Economic Reform
As part of the recently launched economic reform, different financial liberalization measures and restructuring of financial institutions have been undertaken. All the measures have the aim of
promoting a competitive environment and efficient banking services to the public. The Commercial Bank of Ethiopia was re-established in 1994 by proclamation No. 202 taking over the rights and
obligations of the Commercial Bank of Ethiopia which was established under proclamation No. 184/1980. The bank's capital has been raised and is entrusted with engaging in all banking activities
as customarily carried out by commercial banks. The Construction and Business Bank has also been established under proclamation No. 203/1994 by
taking over the rights and obligations of the Housing and Savings Bank which was established under proclamation No. 60/1975. The bank's objectives include providing loans for construction, repair,
modification and acquisition of dwelling houses and buildings, for construction sector activities and for the development of hotels and tourism, accepting savings, demand and time deposits, administering
funds entrusted to it by the government or other institutions and carrying out all other activities as are customarily done by banks.
The Development Bank of Ethiopia has also been established by Regulation No. 200/1994. The bank took over the rights and obligations of the Agricultural and Industrial Development Bank which was
established under proclamation No. 158/1979. The bank's objectives include mobilizing funds from sources within and outside the country and providing medium and long term investment credits,
holding savings, demand and time deposits, acting as a trustee and other activities usually performed by development banks.
With the coming into effect of the Licensing and Supervising Banking Business Proclamation No. 88/1994 a couple of private banks have also emerged and joined the market since 1994.
Given the limited number of banks operating in the economy there is an untapped market for new banks to come up with a wide branch network.
There are three private banks established under this proclamation, viz. Awash International Bank S.C., Dashen Bank S.C. and Bank of Abyssinia S.C.. Each of them has an authorized capital of Birr 50 million. 2. STRUCTURE OF CURRENT FINANCIAL SECTOR
Components of the current financial sector are the central bank (National Bank of Ethiopia (NBE)),
commercial and specialized banks, insurance companies, Pension and Social Security Authority (PSSA) and saving and credit cooperatives. A number of private commercial banks and insurance companies
have emerged and entered the business since 1994 with the issuance of regulations governing the businesses. Currently there are two commercial and one specialized government banks operating
competitively with three private commercial banks. In the insurance business there are one government insurance corporation and eight private insurance companies. The National Bank of
Ethiopia is the central bank and regulatory authority of financial institutions. It also provides certain commercial bank activities such as holding the accounts of government departments and ministries
and facilitating government import letters of credit and foreign exchange business. Other objectives and functions of the central bank are set out in the Monetary and Banking proclamation No. 83/1994.
Saving and credit cooperatives have to register with and be supervised by NBE as well, while the PSSA is supervised by the Ministry of Social Affairs. 3. FINANCIAL POLICIES 3.1. Banking Laws
Banking business in Ethiopia is governed by two Proclamations. The first, Monetary and Banking Proclamation No. 83/1994, defines the powers and responsibilities of the National Bank of Ethiopia
which is the Central Bank of the country. The second, a proclamation to provide for the Licensing and Supervision of Banking Business No. 84/1994, which sets out the conditions under which commercial
banks can be licensed and the supervisory requirements they should observe in the course of their operation. Specifically, the Proclamation stipulates that in order to undertake a banking business in
Ethiopia, a person should meet the following requirements: a) it is a company; b) it has share capital fully subscribed;
c) total per value of the shares has been paid up and deposited in a bank in the name and to the account of the company; (minimum required capital to start banking business is 10 million birr);
d) it is confirmed by the National Bank of Ethiopia that the directors and officers of the company have the qualifications prescribed by it;
e) the company has been issued with a license by the National Bank of Ethiopia; f) it meets other requirements of the Proclamation or Directives issued by the National Bank of Ethiopia.
At present no foreign national is permitted to undertake banking business in Ethiopia. 3.2 Insurance Laws
The terms and conditions for undertaking insurance business are governed by the provisions of a Proclamation to provide for the Licensing and Supervision of Insurance Business No. 86/1994. As in
the case of banking, the Proclamation empowers the National Bank of Ethiopia (the Supervisory Authority) to issue various Directives necessary to ensure the safe and sound operation of insurance
companies. In order to carry on insurance business in Ethiopia, any person will have to meet the following conditions: a) it is a company; b) its share capital is not less than:
1. Birr 3,000,000 if the business to be done is general insurance business; 2. Birr 4,000,000 if the business to be done is long-term insurance business;
3. Birr 7,000,000 if the business to be done is both general and long-term insurance business. c) it has paid up in cash and deposited in a bank in its name the full amount of the capital stated above;
d) it has obtained a license from the National Bank of Ethiopia; e) its appointed principal officers meet the standard set by the National Bank of Ethiopia;
f) it meets other requirements of the Proclamation or prudential Directives issued by the National Bank of Ethiopia. At present no foreign national is permitted to undertake insurance business in Ethiopia. 3.3.
Micro-Financing Institution Laws A Proclamation to provide for the Licensing and Supervision of the business of Micro-Financing
Institutions No. 40/1996 defines the requirements for licensing micro-financing institutions that cater for the financing needs of small businesses. This Proclamation also empowers the National Bank of
Ethiopia to license and supervise micro-financing institutions and, to this end, issue relevant Directives. Conditions that should be fulfilled to engage in micro-financing business are:
a) obtain a license from the National Bank of Ethiopia; b) be formed as a company; (a company means a share company the capital of which is owned fully
by Ethiopian nationals and/or organizations wholly owned by Ethiopian Nationals and registered under the laws of, and having its head office in, Ethiopia);
c) deposit with a bank the minimum initial capital required by the National Bank of Ethiopia (the minimum capital is Birr 200,000);
d) the directors and other officers of the micro-financing institution meet the requirements set by the National Bank of Ethiopia.
Most of the Directives (regulations) to be issued by the National Bank of Ethiopia are specifically stated in each Proclamation and have been issued by the Bank. However, the National Bank can issue
other Directives which are consistent with the spirit of the Proclamations even if they are not specifically mentioned therein.
4. CURRENCY The Ethiopian national currency is known as the Birr. The Birr note comprises the following
denominations: Birr 1, Birr 5, Birr 10, Birr 50, and Birr 100. A one-Birr note represents one hundred cents of its coinage. Its coinage has also denominations of 1 cent, 5 cents, 10 cents, 25 cents and
50 cents. One Ethiopian Birr amounts to one hundred cents. The sole right of issuing notes and coins in Ethiopia belongs to the National Bank of Ethiopia.
The Ethiopian Birr is directly convertible into the US Dollar in the country. It is also convertible into other currencies at cross-rate of US dollar and the other currency. Current the Birr's exchange rate
with the US dollar is determined through foreign exchange auction held weekly by the central bank. According to the result of this auction, the rate was Birr 6.14 and 6.33 per US dollar on average
during 1995 and the first half of 1996, respectively. In November 1996 the rate was Birr 6.39 per US dollar. 5. INTEREST RATE POLICY
The interest rate policy is aimed at maintaining market-determined rates in according with the overall
monetary policy of the country. In a gradual move from long time fixed rate of interest to a market rate, the current practice allows banks to set their own rate above and below a certain limit for
deposit and lending, respectively. At the moment, the central bank has set a minimum deposit rate at 7 percent and a maximum lending rate at 10.5 percent. The floor and ceiling rates are subject to
revision based on developments in inflation and other macro-variables in the economy. 6. MONEY AND BANKING The monetary situation in the country is tight usually in line with agreements and program targets of
the Structural Adjustment Program. The aggregate monetary survey is prepared by the National Bank of Ethiopia (the Central Bank). It is derived from the balance sheets of all commercial and other
specialized banks. The central bank produces and analyses the survey every month (for internal use), and publishes it officially on quarterly and annual bases.
The survey categorizes money into narrow money, quasi-money and broad money. narrow money includes currency in circulation and demand deposits while quasi-money is the sum of savings and
time deposits. Narrow and quasi-money added up together give broad money which is usually taken to indicate the monetary situation. Factors that influence broad money are external assets, domestic
credit (both to central government and non-central government) and other items. Domestic commercial banks give all types of services, including accepting deposit, lending, foreign banking,
exchange, etc. Deposits mobilized from and credit extended to the private sector has been growing significantly since the reform. This is due to the intensified privatization and private sector
participation in the economy. 6.1 Deposit Mobilization All types of deposits in the banks have been increasing considerably in recent years. This is due to
the surge in economic activities with the improvement in macroeconomic policies and real interest rate. An annual average of total deposits (net change) of Birr 9205.2 million has been mobilized during
1992/93 - 1995/96 Ethiopian fiscal years. Average shares of demand, savings and time deposits have been 52.8, 39.2, 8.0 percent, respectively. A higher and increasing share of demand deposits reflects
an increase in business activities. 6.2 Bank Loan Bank loans are also increasing considerably as a source of financing business activities. In 1994/95,
with Birr 3438.0 million, it was more than double the 1992/93 level, which was Birr 1565.5 million. Borrower-wise, the private sector has become a dominant beneficiary of bank loans. Its average
share for the 1992/93 - 1994/95 period was 68.1 percent, while 19.9 percent and 8.6 percent went respectively to public enterprises and co-operatives. The balance represents inter-bank lending.
Commercial banks as a whole hold assets worth of Birr 22096.5 billion as of 31st October 1996. 6.3 Banks Reserve and Liquidity Requirement
According to the power vested in the National Bank of Ethiopia in the Monetary and Banking Proclamation No. 83/1994, the bank can require commercial banks to maintain with it cash and/or
other liquid assets as a proportion of their deposit liabilities. This reserve requirement, used as a monetary instrument, is 8 percent for the Commercial Bank of Ethiopia and 5 percent for other
commercial banks. As a safeguard for the credibility of commercial banks for their clients, commercial banks are also required to maintain their liquidity position at 15 percent of their net current deposit.
7. BALANCE OF PAYMENTS (BOP) 7.1 Components of the BOP Export There has been a good performance in the export sector since 1992. This is largely due to the
implementation of various economic reform measures after this period. Proceeds from the export of goods and non-factor services during the fiscal year 1995/96 were USD 831.6 million, which is above
the level in 1993/94 (US D555.7 million) and in 1994/95 ( 783.2 million). In other words, the export of goods and services amounts to 12.1 percent of nominal GDP for the period 1993/94 - 1995/96 in
contrast to 6.0 percent between 1989/90-1992/93. Coffee accounts for about 60 percent of export earnings most of the time. Other major export items include hides and skins, pulses and oilseeds. Imports
Import payments increased drastically in the last few years. The improvement in the efficiency of foreign exchange market and the increased availability of foreign exchange contributed to the rise in
imports. Total imports in 1995/96 amounted USD 1412.9 million. This was considerably higher than the levels recorded in 1993/94 and 1994/95 as USD 914.6 and 1063.0 million, respectively. Value of total
imports for the years 1993/94 - 1995/96 is on average 21.6 percent of nominal GDP. A significant share of Ethiopia's imports originate from Europe, the Middle East and North America.
Specifically, merchandise import from Germany, Italy, Netherlands, the United Kingdom, Saudi Arabia, the USA, and Japan constitute the lion's share. Commoditywise, major imports are consumer goods,
capital goods and fuel. Major imported consumer goods include cars and other vehicles, cereals and other food items and medical and pharmaceutical items. Capital goods ,on the other hand , include
heavy transport goods and industrial machinery. Semi-finished goods and raw materials are also imported in bulk. Current Account
The current account shows an improvement in its balance, though the deficit continues. The continuing current account deficit was, therefore, to a large extent, caused by a sharp rise in the
value of merchandise imports. The current account balance in 1994/95 was a deficit of USD 237.5 million(7.5 percent of GDP, excluding official transfers) This reflects the rise of imports when
compared to the previous year's record of 6.5 and 6.6 percent of GDP for 1992/93 and 1993/94, respectively. Capital Account
Over the past few years the capital account of the balance of payments improved. The net inflow of capital was USD 0.9 million in 1994/95 fiscal year. Moreover, during the fiscal year 1993/94 the net
inflow of capital was USD 2382.8 million. The capital account turned into a deficit of USD 18.8 million in 1995/96. Overall Balance
The overall balance of payment showed a surplus in the 1994/95 fiscal year. This was lower than the surplus recorded in the preceding year. However, it was a good improvement when compared to the
previous years. The overall balance was 148.9 million USD in 1994/95 fiscal year. 7.2. Foreign Debt Ethiopia's total outstanding foreign debt has been increasing since 1991/92 fiscal year. In the
1991/92 fiscal year total outstanding foreign debt was USD 3,165 million, and this increased to USD 4799.5 million in 1994/95 fiscal year. It then rose at an average rate of 11.6 percent per year. This
was due to increased borrowing in relation to the structural adjustment program. Reflecting the sharp increase in Ethiopia's receipts from goods and non- factor services since the
1991/92 fiscal year and the debt relief obtained from the Paris Club rescheduling, its debt servicing ratio however improved continuously from 76.9 percent in 1991/92 of export proceeds to 36.37
percent in 1994/95 fiscal year. 8. FOREIGN EXCHANGE REGULATION
The foreign exchange regulation of Ethiopia which have been in operation over the past 19 years (with various amendments during the period) puts down rules and procedures regarding transactions in foreign exchange.
The regulations can be summarized as follows: - All foreign exchange transactions must be carried out through an authorized dealer under the control of the National Bank of Ethiopia (NBE).
- Imports financed with suppliers' credits require prior approval and are limited to raw and intermediate materials, pharmaceuticals, machinery and transport equipment.
- The Exchange Controller of the National Bank issues exchange permit for all exports and payments. - Non-residents may open accounts either in local currency, Birr or in foreign currencies with
authorized banks upon approval of the Exchange Control Department of the NBE. - Balance in non-resident foreign currency accounts may be freely transferred abroad, and
transferred between non-resident accounts held with domestic banks do not require prior approval. - Members of the diplomatic community must use transferable or non-transferable Birr accounts for
payments of local expenses. - Joint ventures are permitted to open foreign currency accounts or transferable or non-transferable
Birr accounts to purchase raw materials, for the presentation of documents regarding liquidation and on payment of all taxes and other liabilities.
- Foreign investors are permitted to hold a majority share in a joint venture except in the following sectors: precious metals, public utilities, telecommunications, banking and insurance, transport, and
trade in selected products deemed essential to the economy by law. - A joint venture may also transfer abroad in convertible currency payments for debts, fees, or
royalties in respect of technology transfer agreements. - Borrowing abroad requires approval from the Exchange Control Department. Authorized banks may
freely place their funds abroad except on fixed-term deposit. But they may not acquire securities denominated in foreign currency without the permission of NBE. Furthermore, they need prior approval
from the NBE to overdraw their accounts with foreign correspondents, borrow funds abroad, or accept deposits in foreign currency.
9. FOREIGN EXCHANGE REGIME Since May,1993, the National Bank of Ethiopia has made foreign exchange available to licensed
importers through a bi-weekly auction. The frequency of auction has now increased to weekly appearance. Until July 25,1995 the exchange system consisted of two rates: the official rate and the
auction rate. On this date the official rate and the auction rate were unified with the official rate set equal to the marginal rate derived from the auction. The commercial banks can now engage in retail
trading of foreign exchange with participation in the auction held by the central bank. This system is used as a transition from a fixed to a free floating exchange rate system.
The type of auction system adopted is the Dutch auction whereby the highest bid is rewarded until the predetermined supply is exhausted. Successful bids are completed at the respective bid prices,
and the marginal exchange rate is determined by the lowest successful bid. Basically, the auction system has various purposes. Indeed, it enables to narrow the gap between official and parallel
markets, minimize the problem of administration of allocation of foreign exchange and to allow the exchange rate to respond to change in demand and supply of foreign exchange. According to the
Foreign Exchange Auction Regulation , the following are eligible to apply for foreign exchange at the auction. - Holder of valid import licenses - Public industries, enterprises and organizations.
- commercial banks Recently, the National Bank of Ethiopia increased the frequency of the foreign exchange auction from biweekly to weekly. There are also other recent developments in the auction. The requirement of
depositing the full cover of foreign exchange demand in local currency during the early period of the auction was reduced to 25 percent in the mean-time. The cover requirement has now been abolished
and applicants are required to provide a 2 percent bid bond as a guarantee to correct the foreign exchange they won within a specified period of time. Export proceeds surrender requirement has also
been reduced to 50 percent. Exporters are permitted to hold 10 percent of their receipts in foreign currency in accounts maintained with domestic banks. They can convert the remaining 40 percent
into Birr through sales to foreign exchange bureaus and at auction. Outgoing payments are normally made in convertible foreign exchange appropriate to the country of
the recipient or in US dollars. Major convertible currencies which are usually listed and notified by the Foreign Banking Department of NBE are as follows: US Dollar, Pound Sterling, Deutsch Mark, Japanese
Yen, Swiss Franc, French Franc, Italian Lira, Canadian Dollars, Swedish Kroner and UAPTA. Foreign exchange loans at auction are also provided in these currency. Compiled from other sources (1997) |
