Ethiopian Banking Sector Faces Rising Market Risk

The National Bank of Ethiopia (NBE) shares that the Ethiopian banking sector faces moderate but increasing market risk. Rising domestic interest rates significantly impact banks’ profitability and financial stability.

As domestic interest rates rise, banks face increased funding costs. Many of their deposit liabilities are linked to variable rates. Consequently, the costs tied to these deposits increase when interest rates rise. In contrast, banks hold a substantial amount of fixed-rate assets, including corporate bonds from the Commercial Bank of Ethiopia (CBE) and Development Bank of Ethiopia (DBE) and treasury bonds from private banks.

This mismatch can negatively impact banks’ profitability because their expenses rise while their income from fixed-rate assets remains unchanged.

NBE believes that despite these challenges, the Ethiopian banking system has shown resilience. After the birr depreciated following the foreign exchange regime reform in July 2024, stress tests indicated that the Capital Adequacy Ratio (CAR) would stay above the minimum regulatory requirement of 8% under various scenarios. This suggests that the banking industry can withstand shocks, even though systemic banks may have higher risk exposure.

Liquidity risk presents another critical concern. A small number of large depositors hold a significant portion of deposits. Over half of all deposits come from just 0.5% of depositors. Sudden withdrawals from these depositors could severely impact liquidity levels and push some banks below regulatory thresholds.

In summary, the Ethiopian banking sector faces moderate but increasing market risk due to rising interest rates and liquidity concerns. However, it has shown resilience by maintaining a Capital Adequacy Ratio above regulatory requirements. Banks must remain vigilant in managing operational risks and diversifying their deposit bases.

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