FINANCIAL
STABILITY
REPORT

Upholding a sound and stable financial system in Ethiopia is one of the mandates of the National Bank of Ethiopia (NBE). This requires the assessment and addressing of risks that may affect financial sector stability, whether these risks originate within the financial sector itself or from other domestic or international developments. Considering this, the NBE is publishing its first Financial Stability Report (FSR) to inform key stakeholders about the NBE’s analysis and assessment of key risks as well as its recommendations to mitigate these identified risks. The report is based on an assessment of risks and stress tests undertaken for the 2022-23 fiscal year (the review period).

The main conclusion of the report is that while the systemic risk level of Ethiopia’s financial sector is low, some risks have increased in the most recent review period, and these warrant appropriate attention and preventive actions to ensure the continued safety and soundness of the financial system.

• In the banking sector, overall risks are judged to be moderate. At the same time, credit, liquidity, operational, and, to a lesser degree, market risks increased during the review period. Nevertheless, banks have remained sound and stable due to strong capital and liquidity buffers, solid profitability, and other factors (see Figure). These factors contribute to the resilience of banks to various potential shocks, as indicated by the risk stress tests performed by the NBE.
• In the microfinance sector, the capital adequacy ratio, non-performing loan ratio, and liquidity ratio are all well within the NBE’s parameters and have improved over the course of the review period.
• The capital goods finance business sector’s risk rating is moderate, with low capital risk and moderate ratings for asset quality and systemic risk.
• The insurance sector remains resilient, but earnings and concentration risks are rated high and may call for regulatory actions.
• Across the industry, credit and deposit concentration risks are found to be high, an area that warrants close oversight as well as potential regulatory intervention.
• With respect to Ethiopia’s financial sector infrastructure, there have been substantial improvements in recent years, but some areas remain underdeveloped. It requires further improvements in structural, operational, and technical efficiencies. A more refined and explicit standard for risk assessment in the rapidly evolving space of digital finance is one of the key areas requiring policy attention, as well as the implementation—in partnership with industry players—of risk mitigation strategies and interventions.

As the FSR is the first report of its kind prepared by the NBE, special care was taken in its preparation, and the views of peers with ample experience in preparing such reports were sought and incorporated into the report. As a result, it has taken longer than initially planned to publish the report. Future Financial Stability Reports will be published annually, with the aim of having them completed by November of each year, covering the previous fiscal year. The next edition is thus planned to be published before the end of 2024.