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Since the Ethiopian People's Revolutionary Democratic Front (EPRDF) came to power in Addis Ababa almost two decades ago, the local private banks have grown like mushrooms, protected by the ban on foreign banks from opening up shop in Ethiopia. This local banking sector in a state of ferment is nevertheless beginning to come up against certain serious difficulties: a lack of cautious regulation, insufficient internal funds. In the absence of legislation on bankruptcy, several of these commercial banks could fall in a shake-out through a process of merger and acquisition over the next few years. Meanwhile, they are continuing to mushroom and the total number of banks is now nearing a score.

A bank for each need. After the Debub Global Bank which was recently launched by Abate Kisho (a former President of the Southern Regional State), Tilahun Abay (formerly with the Commercial Bank of Ethiopia) and Tsegaye Gebrewold (the owner of Ethio-Investment Promotion), two new banks (Abay Bank and Awassa Bank) are in the pipeline. Many of the 16 Ethiopian commercial banks already operating were created on community-oriented shareholder and client base (the OromiyaCooperative Bank for the Oromos, Wegagen Bank for the Tigrayans and Nib International Bank for the Gurage). Others are centred on specific sectors of activity. The very recent Buna Bank (Buna means coffee in the Amharic language) is intended for operators in the coffee sector and wants to procure financing for them in return for collecting part of their profits. Their relative isolation has protected these local banks from the effects of the global financial crisis, but not from the difficulties inherent in the Ethiopian financial system.

Problems in view. These banking institutions, which are still relatively fragile, operate in a difficult economic environment. The consequence is the proportion of loan defaults is rather high. The Bank of Abyssinia (BoA) is the one that has accumulated the highest rate of bad debts, after it made many loans to clients whose banking security was shaky. Its board is now tearing itself apart to try and bring the bank to rights, but certain observers consider that its only way out would be through a merger with another bank. Perhaps with the Zemen Bank, which also has problems with substantial unpaid debts. In fact, even the banks which claim to make substantial profits, such as the AwashBank which announced a figure of 33% a year, could get into trouble. Because these good results may be partly attributed to overestimating their assets and/or underestimating the risks of defaults. Although a few of the banks' executives have indulged in openly illegal dealings (some have even been imprisoned), on the whole they have been somewhat lax and have not always respected traditional banking ratios. A situation in which the National Bank of Ethiopia (NBE, central bank) bears its share of the responsibility, because it is supposed to oversee the activities of the commercial banks. In many cases, the latter have not respected their ratios but were not called by the NBE to put their houses in order.

Negative real interest rates. Beyond these management problems, which explain the constant reshuffling of executives, these banks come up against a lack of liquidity due to the shortage of savings deposits. The reason is easy enough to understand: the rate of real interest is in fact negative! To be sure, the rates of interest are between 5% and 10%, varying from one bank to another, whereas the rate of inflation is around 20%. A great many potential savers therefore snub bank deposit accounts, preferring to place their savings in buying houses (the property sector has been going through a boom period for some time now) or gold and jewellery. While it is true that Prime Minister Meles Zenawi recently promised two digit growth in GDP and single digit inflation, he is a long way from achieving these targets, particularly since 2010 is an election year. Furthermore, the fight against inflation that the State wants to wage could lead to a period of austerity, hardly conducive to cutting banking defaults. To such an extent that within the next few years, Ethiopian commercial banks may well not be as exuberant as they are today.