The Commercial Bank of Ethiopia (CBE), a state-owned financial institution, has adjusted its credit interest rates, a decision that has incited criticism from industry stakeholders. Critics argue that the bank is misunderstanding its responsibility to protect the nation’s economic stability. Simultaneously, CBE has expanded its range of loan offerings.

Earlier this week, CBE announced the adjustment of its loan interest rates, marking the first revision in four years.

The new rates, which took effect on Friday, March 7, apply to nearly all loan categories except for agriculture and housing. In its announcement, CBE attributed this change to the government’s initiative to foster greater economic competition.

“The financial sector is undergoing significant transformations,” the bank stated, explaining that the interest rate adjustments are based on the principles of supply and demand.

CBE also emphasized its commitment to implementing transformative strategies aimed at enhancing competitiveness and introducing new loan products.

However, the bank recognized that the cost of attracting deposits remains high, despite reductions in operational expenses due to ongoing reforms.

The rising cost of deposit mobilization, combined with loan interest rates that are lower than the market average, has adversely impacted the bank’s profitability.

This decision has elicited mixed reactions from experts. Some contend that as a policy-driven institution, CBE should prioritize its role in stabilizing the national economy rather than emulating private banks.

Conversely, others suggest that the decision’s impact will be minimal. “Given the limited availability of loans, the adverse effects are likely to be negligible,” one expert noted.

Eshetu Fantaye, a former executive at several banks, speculated that CBE’s move might prompt private banks to further increase their loan interest rates.

However, Eshetu, along with other experts, including current and former bank executives who requested anonymity, criticized CBE’s decision.

A senior banking official pointed out that CBE benefits from various policy protections that insulate it from competition with private banks.

“Numerous regulations do not apply to CBE, allowing the state bank to dominate the market without facing competitive pressures,” the official told Capital.

A former bank executive with extensive experience in both state-owned and private financial institutions echoed this sentiment. He asserted that CBE’s ability to attract funds is more efficient and less costly compared to private banks, which struggle to expand their deposit bases.

“Private banks are offering over 16% for fixed deposits, while CBE’s resources primarily come from public enterprises, government offices, and major public transactions,” he explained.

He cited petroleum transactions as an example, noting that they are processed exclusively through CBE and Telebirr, which ensures that all funds are directed to the state bank.

The former executive dismissed CBE’s claims of high fund mobilization costs as unjustified, arguing that such policies disadvantage private banks, particularly those providing essential working capital for sectors like fuel distribution.

He also cautioned that adjusting interest rates would likely increase market prices more than it would benefit borrowers, ultimately placing a greater burden on consumers. In advanced economies, similar measures are often implemented to curb inflation by discouraging borrowing at high rates.

However, he pointed out that this strategy may not be effective in Ethiopia, where demand for loans significantly exceeds supply, and basic goods remain scarce.

Experts emphasized that although CBE is a state-owned institution, it should still operate competitively within a free-market economy.

“A separate matter that needs resolution with the government arises if the reforms aim to address issues stemming from government interference,” remarked a sector analyst.

The analyst emphasized the significant loans that the government has taken from CBE, totaling hundreds of billions of birr.

“I don’t oppose the government borrowing from the policy bank to support development initiatives, but such borrowing must be managed wisely,” he told Capital.

The primary goal of a policy bank should be to stabilize the economy and promote growth, unlike private banks, which prioritize profitability.

“I expect the policy bank to concentrate on key sectors that drive national development and economic stability,” stated a banking professional.

He argued that merely increasing revenue would not make the bank more efficient. “CBE needs to overhaul its internal processes to enhance competitiveness and improve profitability,” he said.

Some business leaders who spoke with Capital expressed concerns that CBE’s decisions might deter borrowing. However, financial experts countered that the current shortage of loan supply undermines these worries.

“Such measures might be effective in more developed economies, but in Ethiopia, the imbalance between loan demand and supply makes them less impactful,” experts noted. “The market continues to experience shortages of essential goods.”

In terms of loan diversification, CBE has introduced new offerings, including mortgages, vehicle loans, and personal loans. Experts welcomed this development, noting that consumer loans, including mortgages, currently make up a small portion of banks’ lending portfolios.

“Banks primarily lend to economically active sectors, particularly trade. This new initiative is a step in the right direction, although it comes with some caveats,” said a former banking executive.

Eshetu Fantaye, now a consultant for various domestic and international organizations, observed that CBE’s rate increases are relatively modest compared to those of private banks. He recognized the overwhelming demand for loans, regardless of interest rates, and highlighted the ongoing challenge of limited loan availability.

He agreed that CBE’s cost of funds is significantly lower than that of private banks. “When I was at CBE, the cost of funds relative to inflation was no more than six percent. However, current expenditures on staffing, office rentals, and general overheads have risen,” Eshetu noted.

He told Capital that neither CBE nor other banks should maintain interest rates at their current levels, given the existing cost of funds. “Their systems are outdated and need modernization,” he added.

Eshetu estimated that, in Ethiopia’s current economic climate, loan interest rates should not exceed 15%. “Most banks rely heavily on savings, which average around eight percent, but the profit margins on loans are excessively wide,” he explained.

He predicted that CBE’s decision would lead private banks, particularly mid-sized ones, to adjust their interest rates again within a few months. “I don’t expect larger banks to follow suit, as their dividend payouts exceeded 25% in the last fiscal year,” he added.

He pointed out that the primary drivers of inflation at this stage are the interplay of market demand and pricing trends, both domestically and in neighboring countries, which are purchasing Ethiopian agricultural goods at higher prices.

Additional factors include rising costs for inputs due to currency devaluation, limited capacity to produce enough essential goods locally, and a persistent shortage of foreign exchange.

“Given these circumstances, the rise in loan interest rates will only have a marginal effect,” he clarified. Nevertheless, he stressed that excessively high interest rates, which could constrain loan supply, would pose a more significant risk to the economy.

To enhance regional connectivity and trade, Ethiopia has signed a landmark Memorandum of Understanding (MOU) with Korea Railroad Corporation (KORAIL), marking a major step forward in its ambitious rail expansion plans. The agreement between the Ethiopian Railway Corporation (ERC) and KORAIL aims to improve infrastructure development, with a focus on constructing a vital railway line connecting Mojo, Ethiopia, via Moayle to the Kenyan port of Lamu.

The MOU, signed by ERC CEO Hilina Belachew and KORAIL CEO Moon-hee Han, demonstrates a shared commitment to strengthening business relationships and advancing infrastructure development. This cooperation is crucial for Ethiopia, as it seeks an alternative access point to the sea through Lamu Port.

“The Lamu Port railway line is an important part of our infrastructure plans,” emphasized Sileshi Kassa, Deputy CEO of the Railway Infrastructure Development Division. “We are actively conducting bank feasibility studies to attract donors and investors and welcome KORAIL’s support.”

At the signing ceremony, KORAIL CEO Moon-hee Han expressed deep respect for Ethiopia, highlighting the enduring ties between the two countries. “Ethiopia is a country popular with Koreans for sending troops and high-quality coffee during the Korean War,” Han said, underscoring the historical significance of their relationship.

The MOU includes a comprehensive approach to strengthening Ethiopia’s rail sector beyond the Lamu Port railway line. KORAIL will provide technical expertise and training to ERC personnel, focusing on rail operations and maintenance to increase capacity. Additionally, KORAIL will offer consulting services to improve the efficiency and sustainability of Ethiopia’s existing railway lines.

The collaboration will explore opportunities to build new railway lines, internal logistics centers, and training centers in support of Ethiopia’s long-term rail vision. Joint efforts will focus on harmonizing to international standards while ensuring the compatibility and efficiency of the rail system.

Han noted that this agreement marks a revival of rail cooperation between the two countries, which have engaged in significant developmental cooperation since establishing diplomatic relations in 1963. With a 126-year history and extensive experience in rail development, KORAIL brings significant expertise to the collaboration, having successfully delivered projects in neighboring Tanzania.

The MOU also establishes a framework for a “Korea-Ethiopia Railway Working Group” to oversee the continuous exchange of information and the implementation of common goals. This working group will facilitate discussions on current affairs, the exchange of rail information, and personnel exchanges.

Both ERC and KORAIL are committed to securing funding and optimizing resources to ensure the success of the partnership. Priority areas include a guest training program, feasibility studies of Kenya’s associated rail line, and the establishment of an education and training center.

“This cooperation is a testament to our commitment to modernizing our infrastructure and growing business,” said Hilina Belachew. “We are confident that this partnership will bring significant benefits to both countries.”

KORAIL expressed hope to expand rail cooperation in other African countries, similar to its partnership with Ethiopia. This collaboration is an important milestone in Ethiopia’s infrastructure development, promising to enhance regional connectivity and accelerate economic growth.

Despite the promise of the decade-old Special Status Agreement (SSA) and the African Continental Free Trade Area (AfCFTA), trade between Ethiopia and Kenya remains underwhelming, according to officials and business leaders at the second Ethiopia-Kenya Business Conference held in Addis Ababa.

The conference aimed to bolster trade agreements and increase trade volumes, highlighting several challenges that hinder economic cooperation between the two nations. In 2023, Kenya exported approximately $113 million to Ethiopia, while Ethiopia exported $58.2 million to Kenya. Speakers emphasized the need for urgent action to translate existing agreements into tangible results.

“We have a number of agreements, but they have not turned into concrete action in improving trade volumes,” noted George Orina, Ambassador of Kenya to Ethiopia, speaking on behalf of the Kenyan government. This sentiment was echoed by Zekarias Assefa, Acting Secretary General of the Addis Chamber, who highlighted the historic diplomatic relations between the two countries but acknowledged that intra-African trade remains in its infancy compared to trade outside the continent.

Major obstacles identified at the summit included bureaucratic red tape, foreign exchange restrictions, and the need for deeper private sector involvement. Despite one-stop border stations and tariff concessions, businesses struggle with a complex regulatory environment. However, the National Bank of Ethiopia’s latest amendment allowing banks and investors to freely negotiate foreign exchange rates has been seen as a positive step.

Ambassador Orina noted that this move will enable many investors, especially small and medium-sized enterprises, to conduct business in Ethiopia without fear of repatriating their profits. Tobias Olando, CEO of the Kenya Association of Manufacturers (KAM), emphasized the critical role of collaboration, urging businesses to seize opportunities presented by these agreements.

The summit aimed to bridge the gap between policy and practice, with Ethiopia’s exports to Kenya projected to reach $100 million. Opening up sectors like banking, export-import, and retail to foreign investors creates significant opportunities, but businesses must overcome existing challenges to capitalize on these opportunities.

The success of the AfCFTA and SSA depends on both governments and the private sector working together to remove barriers and facilitate trade. Zekarias called on the business communities of both countries to renew their capacity and resources to take advantage of the opportunities presented at the summit.

The Addis Chamber assured attendees that it is always ready to cooperate in initiating and building joint trade and investment relations between the two countries. The summit served as a platform for exchanging best practices and building strong relationships between the Kenya Manufacturers Association (KAM) and the Addis Ababa Chamber of Commerce.

Ethiopia is striving to bolster its economy through the expansion of its horticulture sector, aiming to increase exports, create jobs, and alleviate poverty. However, despite significant successes, the journey is fraught with challenges as the country seeks to shift its agricultural practices to a market-oriented, team-based model.

In collaboration with the Japan International Cooperation Agency (JICA), the Ethiopian government is implementing the Smallholder Farmers Garden Empowerment and Promotion (SHEP) approach. This initiative empowers smallholder farmers by connecting them to profitable markets, resulting in a 125% increase in income for targeted farmers and a shift in viewing farming as a business.

“The SHEP approach has made a significant difference in filling the gap between policy and implementation and providing practical solutions on the ground,” noted State Minister of Agriculture, Melese Mekonen. JICA’s support includes market-oriented extension services, capacity building for thousands of professionals and millions of farmers, as well as resources for climate change adaptation and agricultural insurance.

However, challenges persist. Farmers accustomed to private farming struggle to adapt to SHEP’s team-based approach, and institutionalizing the SHEP approach at the regional level has been slow. “In Ethiopia, farmers who are traditionally only familiar with private farming find it difficult to work as a team because they are experts in the concepts of the SHEP approach,” explained Abdella Negash, CEO of MoA’s Horticulture Development Department.

To address these challenges, the government is focusing on continuous monitoring and evaluation, launching pilot initiatives with existing farmers’ groups, and strengthening institutional frameworks. The Ministry of Agriculture has begun incorporating the SHEP approach into national agricultural strategies and expanding its implementation using government resources, as seen in the Southwest Ethiopia region.

The SHEP program, currently in its second phase, targets five state governments and aims to improve living conditions for smallholder farmers through sustainable implementation. Significant results include increased farmers’ incomes, improved post-harvest management techniques, and a change in the mindset of over 25,000 smallholder farmers.

“Over the past three years, we have become aware of the significant impacts of the SHEP approach in the development of SHEP and have begun to institutionalize it in our national agricultural strategy,” said Melese.

Despite these achievements, challenges remain in expanding the SHEP approach. Efforts are underway to address these challenges, including ongoing monitoring, initiating pilot initiatives with existing farmers’ groups, and strengthening institutional frameworks.

The 11th SHEP International Workshop held in Ethiopia served as a platform to exchange experiences, discuss challenges, and explore new opportunities for the global expansion of the SHEP approach. The government remains committed to developing a market-oriented agricultural sector that benefits smallholder farmers and contributes to Ethiopia’s economic growth.