Banking Sector ‘Low Risk’ as Economy Shifts to Positive Real Interest Rates : NBE Report

EBR_News Mar 18, 2026

Ethiopia’s banking sector has been declared stable, resilient, and low-risk, with key indicators including capital adequacy, asset quality, liquidity, and profitability all improving over the past fiscal year, according to the National Bank of Ethiopia’s third Financial Stability Report covering July 2024 to June 2025.

The report highlights a significant macroeconomic shift: declining inflation has created a more stable environment supporting the transition to positive real interest rates, enhancing the effectiveness of monetary policy. Improvements in fiscal performance, reflected in lower budget deficits and more sustainable public and domestic debt, have reduced macroeconomic vulnerabilities and reinforced financial stability.

Stress tests covering credit, liquidity, and foreign exchange risks confirm that the sector is well positioned to absorb plausible shocks. Ethiopia’s sole systemically important bank successfully passed all major stress tests conducted at the end of June 2025, indicating that systemic risk from this institution remains low, although the concentration in a single bank warrants continued monitoring, the report noted.

The microfinance sector posed low risk to financial system stability, reflecting its small share of total financial assets and strong performance during the review period. Capital adequacy, asset quality, liquidity, and non-performing loan indicators all improved and remained within regulatory thresholds, while profitability increased. Similarly, capital goods finance companies exhibited sound financial conditions with low credit risk and adequate capital and liquidity buffers.

The insurance sector remained stable and resilient, demonstrating solid performance in liquidity, profitability, premium growth, and improved underwriting results.

The outlook for the 2025/26 fiscal year is positive, supported by expectations of continued economic growth, single-digit inflation, expanding credit, and rising foreign exchange earnings. The NBE concluded that the financial system recorded remarkable growth in major balance sheet indicators and profitability, remaining safe, sound, and stable throughout the review period.