Financial sector development and industrialization: lessons and prospects for Ethiopia

ABSTRACT

A functional and efficient financial sector is essential for the industrial advancement of a nation. In the context of Ethiopia’s rapidly growing economy, this study examines the limitations imposed by its underdeveloped financial sector on the country’s economic advancement and explores viable policy interventions. Characterized by state-owned bank dominance, a scarcity of non-bank financial institutions, and deficient infrastructure, Ethiopia’s financial system perpetuates widespread financial exclusion. This exclusion hinders industrial transformation, stifles local business growth, and narrows financing avenues for foreign entities. Insights from China’s shift toward market-oriented financial reforms and Kenya’s fintech innovations suggest a path for Ethiopia involving clear, gradual reforms. Strategic steps could include diversifying financial institutions, improving financial infrastructure, advancing mobile payment solutions, and adopting more versatile financing methods to address the financial challenges of industrialization.

KEYWORDS:

• Financial system
• industrialization
• financial exclusion
• Fintech

JEL CLASSIFICATION:

• F36
• F43
• O14
• O16

Acknowledgments

This study is funded by the National Natural Science Foundation of China under Project ID 72303009, the Graduate School of Peking University, and the National School of Development at Peking University. We are grateful for the insightful feedback provided by Min Wang, Chengfang Liu, Yongmei Zhou, Xiao Ma, Huayu Xu, Jinjie Wang, and all participants of the 2023 Peking University Summer Research Group to Ethiopia. The fieldwork conducted in Ethiopia was made possible through the exemplary organizational efforts of Jing Lu and Cheng Chang and the assistance of Ethiopian alumni from Peking University’s Institute of South-South Cooperation and Development.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. The most notable informal financial organizations in the local context fall into two categories. One is known as Iddir (also written as Idir). Iddir is an informal insurance system typically formed and managed around kinship, residency, occupation, or ethnic groups. Members regularly contribute and can withdraw lump sums for great events such as weddings, funerals, or illnesses. The other is called Iqqub (also written as Iqub). Ikub operates similarly to Iddir, organizing around communities, with members required to contribute amounts regularly. However, withdrawal standards differ; members do not have to experience great events but instead take turns withdrawing lump sums through methods such as drawing lots or rotation. Therefore, Ikub is closer to informal savings and borrowing arrangements. See Aredo (1993) and Aredo (2004).

2. See http://tfs.mofcom.gov.cn/article/ba/bl/201101/20110107352171.shtml

3. See http://www.mofcom.gov.cn/aarticle/b/f/200207/20020700031072.html

4. See https://www.gov.cn/gongbao/content/2019/content_5468826.htm