Financial Liberalization Policy at Micro Perspective, The Case of Banking Sector in Ethiopia: Literature Review

Abstract

International institutions like World Bank (WB) and international monetary fund (IMF) are preached countries to adopt structural adjustment program around 1990.  Financial liberalization is one of among the key pillars of structural adjustment program with its own principles. Even though liberalization is with some costs due to IMF and WB followed conditionality approach for every nations especially for developing countries, all nations are adopting it. The basic themes behind the liberalization program are openness, privatization of government owned enterprises / properties, deregulation, reducing or eliminating tariffs and tax for international trade within and outside the domestic country, increasing interest rate, reducing government expenditure and eliminating government intervention in the economy (free market there by the two market forces efficiently manage marketing system), among others. The financial sector is the one that needs the adoption of liberalization strategy. This review gives more emphasis for the liberalization of the banking sector due to banks play the key role in the development arena of a given country.

With the aim of facilitating economic growth the government of Ethiopia currently made different reforms to enhance and improve the capacity as well as efficiency of the banking sector.

The government of Ethiopia had implemented major reform tools in the banking sector like optimizing interest rate, providing license for domestic private investors, increasing the number of government owned banks and private banks, addressing the wide-spread problem of nonperforming loans experienced by state owned banks, reconstituting both the Development Bank of Ethiopia and the Construction and Business Bank as commercial banks. The major outcomes of these measures were increasing access by customers, enhancing competition, increasing efficiency and increasing the reserve ratio and smoothing loan- credit base, among others.

After implementing the above-mentioned reform measures in the banking sector (since 1990) the banking sector has been grown, yet still the banking sector is monopolized by government, inefficient in stabilizing the financial sector, and inefficient in accommodating the private sector saving as compared to other nations of the world. Hence the contribution of the banking sector for economic growth of the country remains insignificant.

This review presents rough sketch of historical perspective of the banking sector in Ethiopia, current status of the banking sector in Ethiopia, financial sector reforms, summary and policy recommendations in their respective sequence.