Financial Inclusion: Where Does Ethiopia Stand?

What needs to be done in order to create greater financial inclusion and literacy in a developing country like Ethiopia? That’s the question on the minds of many government officials who are looking to encourage greater financial knowledge among the country’s populace. Finance experts are looking to mobile technology to create greater financial awareness. Large banks and companies like M-BIRR, which provide mobile financial services, are emerging in Ethiopia and have ambitious plans to have millions subscribe to their services in a few years. These goals, however, are lofty, considering that Ethiopia has one of the lowest mobile penetration rates in sub-Saharan Africa. So what has to be done? EBR’s Samson Hailu spoke with stakeholders dealing with this issue in order to shed light on its complexity and potential solutions.

Policy makers in Ethiopia have been embracing financial inclusion as an important development priority. The philosophy stems from the belief that access to financial services can help poor and unbanked households improve their lives and spur economic activity.
Certainly, Ethiopia came a long way to achieve the ultimate goal: where citizens have access to and can use financial services in the country. The change has been eminent in the past two decades, as the country provided limited financial services to its citizens back then. Despite reports of success, the country’s achievement on the issues is not comparable to other developing nations that have started the road to full digital financial services at almost a similar time as Ethiopia.
In fact, the Financial and Digital Inclusion report that was released by the Brookings Institution, a non-profit public policy organisation based in Washington, D.C., in August 2015, put Ethiopia at the bottom of the progress ladder that measures the performance of 21 developing nations that have made commitments to expand financial services for the poor globally.
The report, which included eight sub-Saharan counties including East African nations such as Kenya, Rwanda, Tanzania and Uganda, assessed the countries’ performance using 33 indicators spanning four dimensions: access, usage, government commitment and the regulatory environment.

Access and Usage
Globally, very few measures of financial access and usage exist, and those that do lack time dimension and are available for only a limited number of countries. However, certain indicators – such as unique mobile subscribership, financial account ownership among adults and women – appear to be highly correlated with the level of financial development in these countries.
In terms of mobile subscription, the report ranked Ethiopia, with a 23Pct unique mobile penetration rate among adults in 2014 (12.4 million), at the bottom among 20 countries.
Ethiopia’s mobile penetration rate lagged behind Kenya, Uganda, Tanzania and Rwanda, whose unique mobile subscriber rates stood at 44Pct, 31Pct, 39Pct and 34Pct, respectively. However, it wasn’t only the sub-Saharan African countries included in the study that outperformed Ethiopia. Even countries like Afghanistan, which has suffered from decades of conflict and systemic corruption, scored above Ethiopia.
The Brookings Institution’s figure, however, contradicts reports from state telecom monopoly ethio telecom, which states the number of mobile subscribers in Ethiopia reached 35 million during the same period.
Crunching the numbers, however, will help to understand the inconsistency. There is an important difference between the number of mobile subscribers, a method traditionally used by the industry to measure market size and penetration, and unique mobile subscribers, which refers to individuals that have subscribed to a mobile service and may have more than one SIM card.
In the traditional method, a person will be counted by the industry as two mobile connections, although it is a single individual who possesses two SIM cards. But the Brookings Institution’s report considers this person to be a single mobile subscriber since, according to the report, the ownership of multiple connections distorts mobile market penetration figures in many countries.
For instance, China announced that it reached 1.25 billion connections at the end of 2013. However, research conducted by Groupe Speciale Mobile Association, an organisation representing 800 mobile operators with more than 250 companies worldwide, shows that during the same period each Chinese mobile subscriber held 1.79 SIM cards on average, which means that there were only 630 million subscribers at the time.
Setting aside the incongruity, as much as the availability of a mobile connection matters, so does the degree of mobile adaptation to access financial services, an endeavour where Ethiopia lags behind many other countries.
This lacklustre performance is a phenomenon of which banking insiders are acutely aware. “Although Ethiopia started late, progress has been registered towards expanding digital financial services,” argues Abraham Telahun, manager of the Alternative Channel Banking Division at Lion International Bank.
Ethiopia only approved a mobile and agent banking regulatory framework in 2013, after many sub-Saharan African countries already implemented similar policies. For instance, by the time the National Bank of Ethiopia (NBE) allowed financial institutions to provide services using mobile and agent banking, nearly 60Pct of the adult population in Kenya had a mobile money account.
Even in Uganda, a country that started introducing mobile banking around the same time as Ethiopia, the percentage of active mobile money account holders reached 29Pct of adults in 2014. In Ethiopia, however, there is significant room for growth with respect to mobile money adoption. According to the report, only 0.05Pct of adults in Ethiopia had a mobile money account by the end of 2014.
That reality may change in the near future due to the proliferation of mobile money services in Ethiopia. M-BIRR is one such service provider. After launching its pilot project in collaboration with the big five Micro Finance Institutions (MFIs) in the country in 2013, M-BIRR started to provide full-fledged services a few months ago.
Bereket Dereba, marketing manager of M-BIRR, says 900 agents received training in the past two years. “Of the total, 300 agents have signed a contract and 200 of them are now working with us,” he explains. “The number of agents will increase in the future to serve the potential market, which is in the millions.”
M-BIRR plans to provide mobile financial services to at least 1.5 million people and to sign a contract with 1,800 agents within three years.
The Addis Ababa Credit and Saving Institution (AACSI) is one of the companies working with M-BIRR. The Institute currently has 33,000 clients that use mobile banking services, according to Habtamu Shiferaw, M-Birr’s Core Process Owner at AACSI, who says that the Institute handled 212,127 transactions worth ETB124.3 million within the past two months.
It is not only MFIs that are providing financial services using mobile technology – larger banks are also making use of it. For instance, Lion International Bank is among the 11 private banks that launched mobile and agent banking. In February 2015, Lion and the Somali Micro Finance Institution partnered with BelCash Technology Solution PLC to launch the pilot version of HelloCash mobile money, a system that will allow users to receive, send, deposit and pay using their mobile phones.
As of June 30, 2015, the Bank has carried out transactions worth ETB5.6 million with over 180 agents and more than 5,300 customers, according to the 2014/15 annual report of the Bank. After the NBE gave authorisation for the Bank to launch the service, it started to provide full-fledged mobile banking services this fiscal year.
Mobile and agent banking have many advantages, according to Abraham. “It allows banks to reach the unbanked society without incurring the costs that are associated with opening new branches. It will also improve the liquidity status of banks because the system allows collecting many small-sized transactions that will result in large amounts of money when merged together.”
The state-owned Commercial Bank of Ethiopia (CBE) is also one of the banks that provide only mobile banking services. “CBE will start agent banking as soon as the studies that are being undertaken are finalised,” says Ephrem Mekuria, Communications Manager of CBE. “But our mobile banking system provides service for more than half a million account holders.’’
In contrast to mobile banking services, the traditional way of boosting financial inclusion – through bank branches – is relatively widespread in Ethiopia. In October 2012, the number of commercial bank branches stood at 1,427. Three years later, that figure grew to 2,793, up by 95.7Pct, according to the data obtained from the NBE.
“Branch expansion is becoming costly and risky, especially for banks that have little to spare,” argues Abraham. “As a result, private banks rely more on technology than opening more branches.”
Ephrem disagrees with Abraham’s assessment. “If it is done carefully with the support of a feasibility assessment, opening branches can bring a lot of benefits to banks,” he says. “There are many unbanked individuals with a lot of money in their mattresses.”
The majority of the increment came from CBE, which launched an aggressive branch expansion agenda by increasing its number of branches from 627 to 987 within three years. The existing 16 private banks also increased their branches to the current 1,653 from 687 three years ago.
This expansion of the banking industry helped the country to increase the percentage of adults that own a financial account to 23Pct, while the percentage of women that have a bank account stood at 21Pct. These figures are better than the performances registered by some sub-Saharan African countries such as Malawi.
Still, the fact that most of the branches were opened in Addis Ababa demonstrates the reality that it is still more difficult for the rural community to access financial services. Data obtained from the NBE reveals that although an increasing number of bank branches were opened within the last three years, 35Pct of them are located in the capital, a figure that increased from 33Pct in October 2012.
Industry players also believe that this trend can drag the country from its goal of improving financial inclusion in this country. “The experiences of other neighbouring countries like Kenya reveal that branch expansion only improves financial inclusion if more than two-thirds of a given bank’s branches are located in rural areas,” Abraham explains.

Commitment and Regulatory
Environment
Ethiopia was among the first countries that agreed to implement the targets outlined in the declaration approved in Maya, Mexico in September 2011. That same year, the country introduced the National Payment System, a modern system that enables the banking industry to use automated transfers that save time and resources.
In 2013, the government approved a mobile and agent banking regulatory framework to permit banks and MFIs to offer financial services through mobile phones and agents and by 2014, a Real Time Gross Settlement system was put in place.
Indeed, Ethiopia has made moves towards many Maya Declaration goals, including establishing the Financial Inclusion Council and an associated secretariat responsible for handling the use of the savings that are mobilised by banks.
Although much has been done so far, more remains undone. For instance, Ethiopia is still preparing a national financial sector master plan. However, Temesgen Zeleke, director of the secretariat, says it will be finalised in January 2016.
The plan will introduce strategies that will improve the financial inclusion efforts of the country by mobilising the activities of different banks towards one goal. “The policy will help the country to increase the number of adult account holders to 80Pct by 2020,” says Temesgen.
The plan will also include ways of increasing financial literacy, which stakeholders say is the biggest challenge, especially in rural areas. Although the number of users and transactions are starting to increase, Habtamu argues there are still challenges that will affect their performance in the future. “It is becoming very difficult to persuade people to use the service, especially in rural areas,” he told EBR. “In addition, lack of financial knowledge and poor telecommunication connections pose a threat [to our efforts].”
Drawing from experience, Ephrem also has the same opinion. “When we started mobile banking, not even our staff were interested to use the system,” he explains. “Although we managed to reverse the situation, it shows that more emphasis should be given to financial literacy in Ethiopia.”
Stakeholders stress that targeting the unbanked section of the society could have an advantageous effect on the financial inclusion effort that is undertaken in the country. However, they say interventions like simple and context-specific financial literacy training should be given to rural communities in order to boost bank account and digital financial service users in the country. EBR

4th Year • November 16 – December 15 2015 • No. 33