15 April 2024
Addis Ababa, Ethiopia – A new report by the National Bank of Ethiopia (NBE) raises concerns about the country’s banking sector’s vulnerability to liquidity risks due to a high concentration of deposits among a small number of depositors.
The ‘Financial Stability Report’ analyzes developments and risks within Ethiopia’s financial sector, particularly focusing on the banking industry for the fiscal year ending June 2023.
The report highlights the potential for a liquidity crisis despite current high liquidity ratios. Capital concentration is a key factor. According to the report, a mere 0.5% of depositors held a staggering 56.3% of total banking sector deposits at the end of June 2023. Additionally, “liquid assets of banks only included a small share of high-quality liquid assets (cash).”
This situation has already caused “real-time transaction-level liquidity shortages” for some banks, the report reveals.
To assess the industry’s resilience to sudden withdrawals, the report conducted a stress test simulating the top ten depositors in each bank withdrawing all their funds simultaneously. The results were concerning. The banking sector liquidity ratio would plummet from 24% to 13%, falling below the regulatory minimum of 15%.
Furthermore, the stress test exposed significant vulnerabilities among individual banks. While the state-owned Commercial Bank of Ethiopia (CBE) demonstrated resilience, 18 banks – including 4 medium-sized and 14 small banks – would fail to meet the minimum liquidity requirement.
These findings suggest an alarming dependence on a small number of large depositors, making the banking sector highly susceptible to liquidity risks. The report also points out a worrying trend – the industry’s vulnerability has increased compared to the previous year.
The concentration of risk extends beyond deposits. The report reveals a similar pattern with loan distribution. The top ten borrowers held a significant share (23.5%) of total loans and advances at the end of June 2023, up from 18.7% a year earlier.
Even more concerning, borrowers with individual credit exceeding 10 million birr, representing only 0.5% of the total, held a whopping 73.7% of all banking sector loans. Notably, nearly all loans (99.8%) were issued to borrowers in urban areas.
The report emphasizes the need for tighter regulations to address these concentration risks. The NBE plans to implement stricter measures and enhance governance practices to mitigate market risks and promote financial stability.
