The Role of Public and Private Sector Banking in Ethiopia’s Future Economic Growth

This paper considers the manner in which Ethiopia’s public and private banking systems affect the development of the national economy, with particular reference to anti-money laundering and countering the financing of terrorism (AML/CFT) vulnerabilities. It reviews the role these interdependent systems can play in Ethiopia’s economic development in the coming years. The paper notes that the Ethiopian financial sector has not been able to offer adequate and competitive services on the scale required. This is a major impediment to the expansion of productive activities. Ethiopia has used tools such as low interest rates, currency appreciation, and targeted usage of credit and foreign exchange to support public enterprises and drive economic growth. This strategy has succeeded but led to the neglect of private sector development. Key recommendations for furthering economic growth in Ethiopia include:

• Expansion of private sector banking should be prioritized and encouraged in a controlled manner, including consideration of attracting foreign banks and capital to the country;
• Expanding private sector banking should be encouraged to improve the national savings rate;
• Existing Ethiopian banks should expand their networks and other forms of financial inclusion;
• Existing lending should be more equitably distributed between the public and private sectors.