III.

Banking business

3.1. Provide the meaning and definition of banking and discuss Banking services in
Ethiopia.

According to Art 2 (12) of the Monetary and Banking Proclamation No 83/1994, banking
business means any operation involving receiving money on deposit, lending money, receiving
commercial instruments on deposit, accepting, negotiating/ transferring, discounting commercial
instruments and other evidences of debt, and buying and selling of gold and silver notes and
foreign exchange. Similarly, Art 2 (2) of the Licensing and Supervision of Banking Business
Proclamation No 84/1994 defines banking business as:

“Any business involving acceptance of money on deposit, using such funds or deposits,
in whole or in part, for loans or investments on the account of and at the risk of the
person undertaking the business, purchasing, selling and deposit of negotiable
instruments (shares, bonds and other securities/ and checks, bills and notes, and buying
and selling of gold and silver bullions and foreign exchange).”

Bank service in Ethiopia

Art 4(2) of the same proclamation clearly prohibits foreign nationals and business organizations
from undertaking banking business in Ethiopia. In our view, Ethiopia’s banking system is in the
process of being modernized. Most people of our country do not use banking system, the fact
that the people of our country continue to put money in pots and bags. Following are the few
services which bank provides

 Advancements of loans - to generate the profit they give loans to the public and private
organizations. Cheque payments - the account holders draw cheque upon the bank they are
required to pay the money. Discounting on bills of exchange - the person who holds the bill
of exchange gets it discounted by the bank in exchange for a bill.
 Consultancy - Modern banks expand their businesses and also provides consultancy
services to its customers. Other service of bank is Funds remittance, Create Accounts for
new sever and the other services of banks include exchange of foreign currency, online
banking, home banking, ATM services, and many more.
 3.2. Describe the Evolution and development of banking services Ethiopia
The agreement that was reached in 1905 between Emperor Minilik II and Mr. MA Gillivray,
representative of the British owned National Bank of Egypt marked the introduction of modern
banking in Ethiopia. Following the agreement, the first bank called Bank of Abyssinia was
inaugurated in Feb.16, 1906 by the emperor. It’s capital was 1 million shillings. According to the
agreement, the bank was allowed to engage in commercial banking (selling shares, accepting
deposits and effecting payments in cheques) and to issue currency notes. The agreement
prevented the establishment of any other bank in Ethiopia.
The Ethiopian Government, under Emperor Haile Sellassie, closed the Bank of Abyssinia, paid
compensation to its shareholders and established the Bank of Ethiopia which was fully owned by
Ethiopians, with a capital of pound Sterling 750,000. The Bank started operation in 1932.The
Bank was authorized to combine the functions of central banking (issuing currency notes and
coins) and commercial banking.
With the Italian occupation (1936-1941), the operation of the Bank of Ethiopia came to a halt,
but a number of Italian financial institutions were working in the country. These were Banco Di
Roma, Banco Di Napoli and Banca Nazionale del Lavora. It should also be mentioned that
Barclays Bank had opened a branch and operated in Ethiopia during 1942-43.
With the departure of the Italians and the restoration of Emperor Haile Selassie’s government,
the State Bank of Ethiopia was established in 1943 with a capital of 1 million Maria Theresa
Dollars by a charter published as General Notice No. 18/1993 (E.C).
In 1963, the State Bank of Ethiopia split into the National Bank of Ethiopia and the Commercial
Bank of Ethiopia S.C. with the purpose of segregating the functions of central banking from
those of commercial banking.
Banco Di Roma and Banco Di Napoli are continued to operate.But the first Ethiopian privately
owned business was Addis Ababa Bank. Following the 1974 Revolution, on January 1, 1975 all
private banks were nationalized. The above three private banks were merged to form “Addis
Bank” in 1976. Eventually Addis Bank and Commercial Bank of Ethiopia S.C. were merged by
proclamation No.184 of August 2, 1980. After the overthrow of the Dergue regime, The new
economic policy replaced centrally planned economic system with a market-oriented system and
ushered in the private sector. Several private companies were formed during the early 1990s, and
currently more than 17 banks are found in Ethiopia.
 3.3 Identify types of banks in Ethiopia and discuss their respective roles

The National Bank of Ethiopia

The National Bank of Ethiopia was created by order No 30/1963 and reconstituted by
the Monetary and Banking Proclamation No 83/1994 as an autonomous organ, which is engaged
in the provision of regular banking services to the government and other banks and insurance
companies. The main purpose of the bank is to forester monetary stability financial system and
such other credit and exchange conditions as are conducive to the balanced growth of the
economy of Ethiopia. / Art 6/

The role NBE (art 7) - Mint coin, print and issue legal tender currency. Regulate the supply and
availability of money and fix the minimum and maximum rates of interest that banks and other
financial institutions may charge for different types of loans, advances and other credits and pay
on various classes of deposits. (Art 7 and Art 30). Set limits on gold and foreign exchange assets
that banks and other financial institutions.

Commercial Banks

It is for doing the banking business activities that the banks from the beginning come to
existence. The function of commercial bank of Ethiopia is clearly stated at Art 2 sub article 2 of
the banking business proclamation No 592/2000. But now we discuss about the role of
Commercial Bank of Ethiopia. As a group investigate the role of the commercial bank

Financing industry - It needs huge capital and they need the help of bank for loan service and
these commercial banks are providing this loan service to the industry. Financing trade - The
commercial bank helps the financing both external and internal trade. Financing agriculture -
This enable the agriculture sector to be effective and efficient in its productivity. The commercial
bank provide loan to the unions to import fertilizer and other agriculture inputs to the country.
Facilitating commerce – it is helping the society to make commerce by using e-commerce.

Savings Banks and Investment Banks

The Monetary and Banking Proclamation No. 83/1994 empowered the National bank of

Ethiopia (NBE) to license, supervise and regulate financial institutions such as banks, insurance
companies, microfinance institutions and savings and credit cooperatives. Investment banks are
the bridge between large enterprises and investors

The role of SB-IB - A savings bank is a financial institution that gathers savings and that pay
interest or dividends to savers. It channels the savings of individuals who wish to consume less
than their incomes to borrowers who wish to spend more. The primary goal of an investment
bank is to advise businesses and governments on how to meet their financial challenges.
Investment banks help their clients with financing, research, trading and sales, hedging, and
more. also Role as an Advisor.

Development Banks
Development Bank of Ethiopia (DBE) is one of the state-owned financial institutions engaged in
providing short, medium and long-term credits over the last 107 years. The Bank has been
playing central role in promoting the over-all economic development of the Country since its
establishment. It is a specialized financial institution established to promote the national
development agenda through development finance and close technical support to viable projects
from the priority areas of the government by mobilizing fund from domestic and foreign sources
while ensuring its sustainability. The Development Bank of Ethiopia is established with the
purpose of providing long-term loans to agricultural and industrial undertakings, which are
considered crucial in the development of the economy.

Islamic Banking

In response to the long-standing demand of Ethiopian Muslims, the government introduced

interest free banking in 2011 by enacting two directives: 1) the Directive to Authorize the
Business of Interest Free Banking No. SBB/ 51/2011; and 2) the Directive to License and
Authorize Interest Free Banking Business No. SBB/72/2019. Although these directives oblige
the application of Islamic laws for interest free banking transactions.

The Role of Islamic Banks; A bank under Islamic Shariah can act as an agent (on AlWakalah
basis) of the customer and can carry out the transaction on his behalf. Moreover, it can charge
agency fee for the services. Ethiopia adopted Islamic banking through interest-free banking
window scheme in 2011 and Full-fledged interest-free banking by the end of 2019. "Islamic
banking refers to a system of banking activity that is consistent with the Islamic law (Sheria). It
is guided by principles of Islamic economics.