An Analysis of Financial Sector and Credit policies during the Derg period and post –Derg Reforms

Abstract

The paper provides systemic analysis of the past and current financial sector, credit, and other related policies in Ethiopia based on a critical examination of the provisions of the numerous proclamations, regulations, and directives governing economic activates in the country, the incentives / dis-incentive elements contained in them, and their consequences. It also gives an assessment of developments in the financial sector following the reforms, as well as the depth & structure of the financial sector. A severe from of financial repression which, unlike many, unlike many other financially repressed economies where secession was generally Hugh taxes, stamp duties and an un-conducive legal framework, mainly took the form of outright prohibition and was driven by ideology, existed during the derg regime. Financial institutions were effectively reduced in to mere instruments for channeling private sector access to credit together with the stringent absolute limit on single borrower loans served as effective instruments in suppressing the private sector. A marked increase in the magnitude of loan able funds of the banking system, mainly due to a switch out of non-earning existing assets, and a fundamental shift in the flow of credit towards the private sector occurred during the post-derg period. Entry in to the financial sector has been slow but steady. However, concentration in terms of ownership, asset portfolio, as well as institutional, sectoral and geographic distribution of intermediation services, remains too high. Besides, some regulatory issues of critical significance remain yet to be addressed.