Structure and Trends of Financial Development and Sectoral Growth in Ethiopia

Tekilu Tadesse

doi:10.7176/dcs/10-8-01

Abstract

Ethiopian economy had passed through different regimes and, hence economic policies had formulated differently. As a result, national economic policies were set in line with the respective regime’s political ideology as policies are directed with the intention of achieving a wide range of macroeconomic goals. Throughout all regimes, the major financial institutions operating in Ethiopia are banks, insurance companies, and microfinance institutions and the financial sector of the country shows a slightly on the way of growth but the performance of the financial sector of Ethiopia as compared to other middle-income African countries shows the need for more improvement which show still weak financial system which manifested in high government regulation and dominance of the government-owned commercial bank in terms of holding assets, savings mobilization, and loans disbursement. Following different economic policies set by different regimes, on average, the service sector has contributed increasingly and agricultural sector decreasingly contribute to economic growth while until implementation of Growth and Transformation plan I, industry sector showed a slow trend in contribution to economic growth In line with surprising economic growth registered last one decades, the financial system in Ethiopia has also improved following rapid growth in the number of participating institutions including the scope and services rendered in which the system comprises the regulatory authorities, banks, non-bank financial institutions. Keywords : financial development, sectoral growth, Private credit to sectors, Ethiopia DOI: 10.7176/DCS/10-8-01 Publication date: August 31 st 2020

Highlights

Analyzing structure and trends of financial development and sectoral output growth in a given country is crucial because it provides useful information on economic phenomena that the government and concerned bodies need to control relevant variables in order to attain the desired level of the macroeconomic objectives such as economic growth (Miftah, 2013).In Ethiopia economic system including financial institution has become market-oriented in 1992 after the collapse of socialism economic system and has undergone financial reforms called liberalization through gradualism (Alemayehu, 2006; Murty et al, 2012)
Ethiopia has been experiencing strong economic growth compared to early years; the major financial institutions operating in Ethiopia are banks, insurance companies, and microfinance institutions and the financial sector of the country shows a slightly on the way of growth but the performance of the financial sector of Ethiopia as compared to other middle-income African countries shows the need for more improvement (Fozia, 2014)
This clearly show that there is still weak financial system which manifested in high government regulation and dominance of the government-owned commercial bank in terms of holding assets, savings mobilization, and loans disbursement

Summary

Introduction

Analyzing structure and trends of financial development and sectoral output growth in a given country is crucial because it provides useful information on economic phenomena that the government and concerned bodies need to control relevant variables in order to attain the desired level of the macroeconomic objectives such as economic growth (Miftah, 2013).In Ethiopia economic system including financial institution has become market-oriented in 1992 after the collapse of socialism economic system and has undergone financial reforms called liberalization through gradualism (Alemayehu, 2006; Murty et al, 2012). Loans and advances by financial institutions over the ten year period between 1981 and 1990 show that on average the government sector absorbed 37.4 percent of the total, while 51.3% went to public enterprises while the private sector’s share was only 9% of the total loans and advances made by the banking system during the Derg regime (NBE, 2016).

Results

Conclusion