A. Background

9. This was the first STA mission on FSIs for the NBE. Ethiopia does not report FSIs to STA but it does produce and share a select subset of FSIs with the AFR department. Prior to this mission, Ethiopia received an MFS mission which assisted the NBE in compiling monetary and financial statistics in standardized report forms (SRFs) for the central bank (SRF 1SR) and ODCs (SRF 2SR) in January 2019.

10. Ethiopia is currently under ECF/EFF arrangements with proposed financial sector reforms. Improved FSIs are expected to facilitate better monitoring of financial stability by the NBE and help guide economic policies in the context of the ECF/EFF arrangements, by shedding light on the underlying accounting and regulatory frameworks for the FSIs. In May 2020, Ethiopia requested emergency financial assistance under the RFI to fight the coronavirus pandemic.

11. In response to the COVID 19 pandemic, the NBE recently issued temporary measures to ease the impact of pandemic on the local economy and its social consequences. These measures, among others, require commercial banks to assess individual borrowers’ conditions on a case by case basis whenever loans are renegotiated/restructured in accordance with the NBE’s Directive on loan classification and provisioning requirements, and to temporarily suspend the provisioning requirements for these loans by delaying their supervisory classification. These measures are applied to borrowers affected by the pandemic.

B. Ethiopia’s Financial System

12. The functions, responsibilities, and mandate of the NBE are contained in the National Bank of Ethiopia Establishment Proclamation (#206 of 1963), last amended in 2008. The mission of the NBE is to maintain price and exchange rate stability, to foster a sound financial system, and undertake such other functions as are conducive to the economic growth of Ethiopia. The NBE acts as a fiscal agent in the country’s relations with the IMF. The NBE has regulatory and supervisory authority over the ODC sector (except for SACCOs, which are supervised by the Federal Cooperative Agency) as well as insurance companies and capital goods finance companies.

13. Ethiopia’s financial system is largely dominated by one state owned commercial bank. As of end-December 2019, total assets of the financial system (excluding NBE) were Birr 1,630 billion, equivalent to 46 billion U.S. Dollars and representing 60 percent the country’s gross domestic product (GDP). The commercial banks constitute close to 90 percent of this market of deposit-takers with the state-owned commercial bank, notably, the Commercial Bank of Ethiopia (CBE), holding an almost 65 percent market share of financial assets and credit to the economy (loans and long-term debt securities) and 62 percent of deposits. An overview of the structure of the entire financial sector including the NBE is presented in Table 2.

^{Table 2.}

The Financial Sector in Ethiopia (as of end-December 2019)

Source: National Bank of Ethiopia.

^*Data on saving and credit cooperatives were not available to the mission.

^{Table 2.}

The Financial Sector in Ethiopia (as of end-December 2019)

Institutions			Number of Institutions	Total Assets (Birr Billions)	Percent of GDP	Percent of total financial system assets
National Bank of Ethiopia				470.4	17.4	23.2
Depository Corporations				1,523.3	56.5	75.2
	Commercial Banks		17	1,345.7	49.9	66.4
		o/w Government owned	1	829.6	30.8	41.0
		o/w Private commercial banks	16	516.2	19.1	25.5
	Development Bank of Ethiopia		1	91.8	3.4	4.5
	Deposit-taking microfinance companies		39	85.7	3.2	4.2
	Savings and Credit Cooperatives*		n.a	n.a	n.a	n.a
Other Financial Corporations				31.8	1.2	1.6
	Insurance Companies		18	28.7	1.1	1.4
		o/w life insurance companies	10	2.3	0.1	0.1
		o/w non-life insurance companies	8	26.4	1.0	1.3
	Capital Goods Finance Companies		6	3.2	0.1	0.2

Source: National Bank of Ethiopia.

^*Data on saving and credit cooperatives were not available to the mission.

View Table

^{Table 2.}

The Financial Sector in Ethiopia (as of end-December 2019)

Institutions			Number of Institutions	Total Assets (Birr Billions)	Percent of GDP	Percent of total financial system assets
National Bank of Ethiopia				470.4	17.4	23.2
Depository Corporations				1,523.3	56.5	75.2
	Commercial Banks		17	1,345.7	49.9	66.4
		o/w Government owned	1	829.6	30.8	41.0
		o/w Private commercial banks	16	516.2	19.1	25.5
	Development Bank of Ethiopia		1	91.8	3.4	4.5
	Deposit-taking microfinance companies		39	85.7	3.2	4.2
	Savings and Credit Cooperatives*		n.a	n.a	n.a	n.a
Other Financial Corporations				31.8	1.2	1.6
	Insurance Companies		18	28.7	1.1	1.4
		o/w life insurance companies	10	2.3	0.1	0.1
		o/w non-life insurance companies	8	26.4	1.0	1.3
	Capital Goods Finance Companies		6	3.2	0.1	0.2

Source: National Bank of Ethiopia.

^*Data on saving and credit cooperatives were not available to the mission.

14. The ODC sector comprises commercial banks, the DBE, microfinance institutions (MFIs), and SACCOs, with total assets of about Birr 1,630 billion at end-December 2019 (Table 2):

• Commercial banks are licensed by the NBE to provide services such as accepting deposits, making business and mortgage loans, and offering basic investment products. The legal framework for the banking business was last updated with Proclamation 1159/2019. There are currently 17 licensed commercial banks in Ethiopia, of which 16 are privately owned and one state owned bank, notably the CBE. The CBE has also subsidiaries in Djibouti and South Sudan. There is no foreign ownership of any bank in Ethiopia.

• The Development Bank of Ethiopia (DBE) operates as a financial development institution and accepts current accounts, time and savings deposits from social security funds, state-owned enterprises, DBE staff, and DBE’s private sector borrowers. The DBE requires all borrowers to make an equity contribution of 30 percent of the value of the project before approving any credit facilities. Its share of total financial system assets is approximately 4.5 percent.

• MFIs take deposits and are regulated by Proclamation 1164/2019. There are currently 39 MFIs operating in Ethiopia with about 5 percent of total financial system assets. Concentration in the MFI sector is high, with the five largest MFIs controlling 90 percent of the market share. Eleven of the MFIs are owned by regional governments. Ten commercial banks have equity participations, but these are not significant. MFIs are mainly funded from customer deposits of about 40 Birr billion at end-2019. The DBE also provides funding to the MFI through government schemes.

• Savings and Credit Cooperatives (SACCOs) are cooperative financial organizations owned and operated by and for its members. They are supervised by the Federal Cooperative Agency (FCA) as well as by their respective regional cooperative bureaus. There are two major types of SACCOs operating in Ethiopia. Institution based SACCOs provide deposit, credit, and micro-insurance services to members of a specific organization while community-based SACCOS provide these services to members of a small geographic area. All SACCOs lend only to their members.

15. Currently there are no DTs in receivership or liquidation in Ethiopia. The FSI Guide recommends including DTs in distress if they hold significant positions and to compile FSIs both including and excluding these DTs.

16. Commercial banks also offer a range of Shariah compliant products commonly referred to as ‘interest free banking products’ in Ethiopia. As of December 2019, the share of interest free banking products was 1.6 percent of total loans and 4.7 percent of total deposits, and both of these shares have been increasing recently. There has also been significant new interest free banking licensing activity, with six new banking licenses applications currently under consideration, and one newly licensed bank that is in the process of starting its activities.

17. The Other Financial Corporation (OFC) sector is relatively undeveloped. It includes 18 insurance companies and 6 capital good finance companies that are supervised by the NBE.

• The insurance corporations in Ethiopia is small and mainly provides general insurance. Insurance companies are allowed to conduct both life and nonlife insurance business, although the NBE requires the composite insurance companies to report separate financial statements for their life and non-life operations. There are currently 18 insurance companies operating in Ethiopia, the largest of which is owned by the state and has roughly a 35 percent market share. There is also one reinsurance company. Other financial auxiliaries operating in the insurance sector include insurance brokers and agents.

• The capital good companies provide mainly leasing and hire purchase facilities to their customers. Almost a third of their assets are prepayments to acquire fixed assets for leasing. CGFC liabilities are mostly commercial borrowings from commercial banks or the DBE.

A. Consolidation Basis and Institutional Coverage

18. Ethiopia’s FSIs for DTs are compiled using a “domestic consolidation” (DC) basis, which is appropriate based on Ethiopia’s banking system structure. ² Only the CBE has two foreign subsidiaries located in Djibouti and South Sudan, and one domestic non-deposit-taking subsidiary, but their operations are currently not material. Thus, DC basis is appropriate for Ethiopia. The DC basis, defined in the FSI Guide, includes data for resident DTs along with those of their resident branches and subsidiaries in the same sector. Although the FSI Guide recommends using either a “cross-border, cross-sector, domestically incorporated” (CBCSDI) or a “domestic controlled, cross-border, cross-sector” (DCCBCS) basis, it also provides the DC basis as an alternative when resident DTs have no nonresident branches or subsidiaries, or have ones that are so small that they do not materially affect the results.

19. The FSIs for DTs cover all 17 domestically incorporated commercial banks, representing approximately 90 percent of the assets of the depository corporation sector in Ethiopia. The remainder of the sector that is not covered includes the DBE (Box 1), MFIs, and SACCOs.

20. MFIs have their own regulatory requirements on capital adequacy, asset classification, and liquidity. For instance, MFIs are subject to a 12 percent capital adequacy ratio, slightly adjusted asset classification rules in comparison to banks, a 20 percent liquidity ratio, and additional limits on loan maturity and borrowing. With a few exceptions (i.e., capital adequacy and liquidity), reporting formats for MFIs are different from those of DTs. The NBE is currently redesigning the call reports for MFIs with a view to shifting from the current collection in hard copy to their electronic version in a few months. Also, due to capacity constraints, reports from some MFIs do not fully comply with IFRS/IAS. Taking these issues into account, the mission team proposed incorporating MFIs into DT compilation once the data quality and timeliness can be improved and data are collected electronically.

^{Box 1.}

The Development Bank of Ethiopia

While the DBE is a development finance institution with its own developmental objectives, it also qualifies as a deposit-taking institution for FSI compilation purposes. Therefore, there is scope for the NBE to include the DBE in the coverage of FSIs in the future. Despite the differences in the regulatory frameworks (paragraph 30), source data on the soundness of the DBE are quite similar to those of commercial banks with the exception of supervisory series on large exposures and liquidity requirements which would have to be collected from a statistical perspective. The 2019 FSI Guide also provides flexibility to consolidate deposit-takers that are at different stages of implementation of the Basel framework in the same jurisdiction, so the fact that the DBE is subject to different capital adequacy requirements should not rule out its inclusion in the coverage of FSIs. Furthermore, any deviation arising from the DBE’s specific regulatory framework including those relating to asset classification and provisioning requirements would need to be properly documented in the metadata. The table below provides a comparison of selected FSIs for the banking sector that were derived for the 17 commercial banks both with and without the DBE.

Financial Soundness Indicators with and without the DBE, end-December 2019

Sources: IMF staff.

Financial Soundness Indicators with and without the DBE, end-December 2019

	DBE Included	DBE Excluded
Core FSIs
Regulatory capital to risk-weighted assets	17.2	17.7
Regulatory Tier 1 capital to risk-weighted assets	17.2	17.7
Nonperforming loans net of provisions to capital	15.3	7.7
Nonperforming loans to total gross loans	5.5	2.7
Liquid assets to total assets	13.8	11.6
Net open position in foreign exchange to capital	28.4	28.9
Return on assets	2.9	2.9
Return on equity	21.7	20.6
Interest margin to gross income	65.0	66.3
Noninterest expense to gross income	54.0	56.9
Additional FSIs
Capital to assets	8.0	8.0
Personnel expenses to noninterest expenses	47.1	47.7
Customer deposits to total (noninterbank) loans	144.8	157.7
Foreign-currency-denominated liabilities to total liabilities	3.1	2.4

Sources: IMF staff.

View Table

Financial Soundness Indicators with and without the DBE, end-December 2019

	DBE Included	DBE Excluded
Core FSIs
Regulatory capital to risk-weighted assets	17.2	17.7
Regulatory Tier 1 capital to risk-weighted assets	17.2	17.7
Nonperforming loans net of provisions to capital	15.3	7.7
Nonperforming loans to total gross loans	5.5	2.7
Liquid assets to total assets	13.8	11.6
Net open position in foreign exchange to capital	28.4	28.9
Return on assets	2.9	2.9
Return on equity	21.7	20.6
Interest margin to gross income	65.0	66.3
Noninterest expense to gross income	54.0	56.9
Additional FSIs
Capital to assets	8.0	8.0
Personnel expenses to noninterest expenses	47.1	47.7
Customer deposits to total (noninterbank) loans	144.8	157.7
Foreign-currency-denominated liabilities to total liabilities	3.1	2.4

Sources: IMF staff.

21. Since the NBE does not have a formal agreement to share supervisory information with the FCA, source data on SACCOs were not available to the mission. The mission was thus not able to review the source data on SACCOs to assess whether it was adequate for the compilation of FSIs. Also, the regulatory framework for SACCOs is not fully aligned with that of commercial banks and microfinance institutions, complicating the aggregation of data to compile FSIs. This mission therefore reiterates the recommendation of the 2019 MFS mission that the NBE and Federal Cooperative Agency should enter into a memorandum of understanding to share source data on SACCOs.

22. Recommendations:

• The NBE to begin regular reporting of FSIs for commercial banks according to the 2019 FSI Guide using the workbook developed during the mission.

• The NBE to include MFIs in the compilation of FSIs for DTs once the data quality, timeliness, and reporting formats are enhanced.

B. Accounting and Regulatory Frameworks Underlying the FSI Data

23. Commercial banks in Ethiopia have adopted International Financial Reporting Standards (IFRS) and, where applicable, International Accounting Standards (IAS) for the preparation of financial statements including the quarterly reports that are used for compiling FSIs. The application of international conventions enhances cross-country comparability of FSIs. The Ethiopia Accounting and Auditing Board is responsible for ensuring adherence to IFRS/IAS. Beginning July 1, 2018, banks in Ethiopia have started implementing IFRS9, which replaced IAS39, for the classification and measurement of financial instruments and the calculation of impairment and provisioning requirements in parallel with the NBE’s directive (SBB/69/2018) on Asset Classification and Provisioning.

24. Loans are classified as nonperforming when they are past due for 90 days or more.³ Under IFRS9, banks can make a rebuttable presumption that loans are classified as nonperforming when they are past due for more than 90 days. However, because the NBE’s regulation is prescriptive, the 90 days backstop under IFRS9—as applied by the commercial banks in Ethiopia—cannot be rebutted.

25. The NBE’s directive on Asset Classification and Provisioning (No. SBB/69/2018) prescribes the minimum thresholds that banks must adhere to in terms of provisioning requirements for performing and nonperforming loans. The minimum provisioning requirements prescribed by the NBE for performing loans are 1 and 3 percent on outstanding amount of loans that are classified as “Pass” and “Special Mention” (30 days past due) respectively; and 20, 50 and 100 percent on the outstanding amount of loans net of collateral for nonperforming loans that are classified as “substandard” (90 days past due), “doubtful” (180 days past due) and “loss” (360 days past due) respectively (Table 3). In terms of the NBE’s directive on Asset Classification and Provisioning, based on days past due, “pass” will correspond to IFRS9’s stage 1 (initial recognition), “special mentioned” to IFRS9’s stage 2 (significant increase in credit risk); and “substandard”, “doubtful” and “loss” to IFRS9’s stage 3 (impairment). To ensure compliance with the minimum provisioning requirements, the NBE has recently issued a circular requiring commercial banks to transfer any excess/shortfalls of provisions derived from the application of IFRS9’s expected credit loss models and supervisory approach to/from regulatory risk reserves accounts. The regulatory risk reserves account is not included in regulatory capital.

^{Table 3.}

Loans Classification and Provisioning Rules for Commercial Banks

Source: NBE SBB/69/2018 Asset Classification and Provisioning (5th Replacement) and audited financial statements of banks.

^{Table 3.}

Loans Classification and Provisioning Rules for Commercial Banks

IFRS9	NBE’s Loans Classification	Number of Days Past Due	Minimum Provisions Prescribed by the NBE (in percent)
Stage 1 (Initial recognition)	Pass	Less than 30 days	1
Stage 2 (Significant increase in credit risk)	Special Mention	30–90 days	3
Stage 3 (Impairment)	Substandard	90–180 days	20
	Doubtful	180–360 days	50
	Loss	More than 360 days	100

Source: NBE SBB/69/2018 Asset Classification and Provisioning (5th Replacement) and audited financial statements of banks.

View Table

^{Table 3.}

Loans Classification and Provisioning Rules for Commercial Banks

IFRS9	NBE’s Loans Classification	Number of Days Past Due	Minimum Provisions Prescribed by the NBE (in percent)
Stage 1 (Initial recognition)	Pass	Less than 30 days	1
Stage 2 (Significant increase in credit risk)	Special Mention	30–90 days	3
Stage 3 (Impairment)	Substandard	90–180 days	20
	Doubtful	180–360 days	50
	Loss	More than 360 days	100

Source: NBE SBB/69/2018 Asset Classification and Provisioning (5th Replacement) and audited financial statements of banks.

26. Financial instruments are valued at amortized cost or fair value through profit and loss/other comprehensive income (FVTPL/FVOIC) in accordance with IFRS9. A level 3 measurement approach is commonly used in Ethiopia to measure financial instruments that are valued at fair value due to the absence of secondary financial markets for trading debt securities and equity participations. Equity investments, which were previously measured at nominal value under IAS39, are measured at fair value under IFRS9.

27. The regulatory framework for the computation of capital adequacy ratios for the commercial banks currently follows a modified version of Basel I, although the NBE plans to implement Basel II in the future. The minimum capital adequacy ratio, as defined by the ratio of primary capital to risk weighted assets, is currently set at 8 percent for commercial banks. According to the NBE’s Directive (No. SBB/9/95) on computation of risk weighted assets, primary capital consists of paid-up capital, share premium, general reserves and legal reserves. Since the NBE’s regulation does not prescribe any element of Tier 2 capital, primary capital is equal to total regulatory capital. Retained earnings and gains on revaluation of fixed assets are excluded from primary capital while no supervisory deductions are applied to intangible assets such as goodwill, and investment in unconsolidated subsidiaries. Total risk-weighted assets of banks are the sum of on- and off-balance sheet assets exposures, multiplied by fixed risk weight coefficients ranging from 0 to 100 percent (Table 4), as modified by the NBE. Off-balance sheet exposures are converted in credit equivalent amounts using prescribed credit conversion factors before risk weights are applied in accordance with the risk profile of the counterparts. There is no capital requirement for market risk.

^{Table 4.}

Summary of Risk-Weighted Coefficients by Types of Claims

^{Table 4.}

Summary of Risk-Weighted Coefficients by Types of Claims

Risk-Weights	Types of Claims
0 percent	Cash in hands Claims on or guaranteed by the NBE Claims on or guaranteed by Federal Government of Ethiopia
20 percent	Claims on or guaranteed by banks with a maturity of less than 1 year Claims on or guaranteed by Regional Government of Ethiopia
50 percent	Residential mortgage loans
100 percent	Claims on or guaranteed by banks with a maturity of more than 1 year Loans other residential mortgage loans Investment in securities and equity other than government Fixed assets Other assets

View Table

^{Table 4.}

Summary of Risk-Weighted Coefficients by Types of Claims

Risk-Weights	Types of Claims
0 percent	Cash in hands Claims on or guaranteed by the NBE Claims on or guaranteed by Federal Government of Ethiopia
20 percent	Claims on or guaranteed by banks with a maturity of less than 1 year Claims on or guaranteed by Regional Government of Ethiopia
50 percent	Residential mortgage loans
100 percent	Claims on or guaranteed by banks with a maturity of more than 1 year Loans other residential mortgage loans Investment in securities and equity other than government Fixed assets Other assets

28. The NBE’s Directive (No. SBB/57/2014) on Liquidity Requirements requires commercial banks to maintain liquid assets of not less than 15 percent of their net current liabilities. While the NBE’s directive on Liquidity Requirements prescribed a broad range of instruments that may qualify for inclusion in liquid assets, the NBE has not yet approved any financial instruments other than cash (foreign and local currencies), deposits with the NBE, net deposits with local and foreign banks, or treasury bills for calculation of liquid assets. Also, NBE bills are currently not included in the calculation of liquid assets because they are mainly issued to finance long-term development projects in Ethiopia, tend to have longer maturity profiles than treasury bills, and lack effective secondary market in Ethiopia.

29. Large exposures are defined as loans and advances granted to a single borrower or group of connected borrowers in excess of 10 percent of primary capital. This reporting requirement is introduced in the NBE’s Directive (No. SBB/53/12) on credit exposures to single and related counterparties, which also prescribes a regulatory limit on aggregate credit exposures, comprising loans and advances, to a single borrower or group of connected borrowers of 25 percent of total capital. The NBE’s regulation defines a group of related companies as consisting of a corporation, a share company, a public enterprise or any business entity and their majority-owned subsidiaries as well as the directors, their spouses and close relatives by first degree consanguinity. However, the NBE’s definition of large exposures is not fully in line with the BCBS Standard, the recommended approach for measuring large exposures in the 2019 FSI Guide. The BCBS’s “Supervisory Framework for Measuring and Controlling Large Exposures” (BCBS Large Exposures Standard) defines large exposures as the sum of all exposures—including loans, investments in debt securities, and equity of a bank—to a counterparty or to a group of connected counterparties if it is equal to or above 10 percent of the bank’s Tier 1 capital. The BCBS Large Exposures Standard defines counterparties as connected when there exists either a control relationship or economic interdependence between counterparties. Therefore, realigning the definition of large exposures with the Basel’s definition would ensure consistency with the approach adopted by the 2019 Guide. This would require, among others, extending the definition of credit exposures to cover corporate bonds.

30. Commercial banks need to maintain a daily net open position in foreign currencies of 15 percent of their total capital. As per the NBE’s Directive (No. SBB/27/01) “Amendment of Limitation on Open Foreign Currency Position of Banks” the net open position in foreign exchange is the sum of the net long or short positions of the on- and off-balance sheet assets and liabilities in each foreign currency as per the format provided in the Annex in the Directive.

31. The DBE follows its own regulatory and supervisory framework according to its development objectives as set out by the Government of Ethiopia. The DBE is subject to a 15 percent capital requirement—defined as the ratio of the net worth of the bank to its risk weighted assets—and has its own loans classification and provisioning requirements. According to the NBE’s directive (No. SBB/52/2012) on Asset Classification and Provisioning for Development Finance Institutions, the DBE is required to maintain the same level of provisions and assets classification criteria as commercial banks for short-term loans while for medium/long-term loans the requirements are less stringent (Table 5). The DBE is in the process of adopting a modified version of IFRS9 for loans classification and provisioning, consistent with the ageing of the debtors prescribed by the NBE’s regulation.

^{Table 5.}

Loans Classification and Provisioning Rules for Medium and Long-Term Loans Granted by the DBE

Source: NBE SBB/52/12 Asset Classification and Provisioning for Development for Finance Institutions and the DBE.

^{Table 5.}

Loans Classification and Provisioning Rules for Medium and Long-Term Loans Granted by the DBE

IFRS9	NBE’s Loans Classification	Number of Days Past Due	Minimum Provisions Prescribed by the NBE (in percent)
Stage 1 (Initial recognition)	Pass	Less than 180 days	1
Stage 2 (Significant increase in credit risk)	Special Mention	6–12 Months	3
Stage 3 (Impairment)	Substandard	12–18 Months	20
	Doubtful	18 Months- 3 years	50
	Loss	More than 3 years	100

Source: NBE SBB/52/12 Asset Classification and Provisioning for Development for Finance Institutions and the DBE.

View Table

^{Table 5.}

Loans Classification and Provisioning Rules for Medium and Long-Term Loans Granted by the DBE

IFRS9	NBE’s Loans Classification	Number of Days Past Due	Minimum Provisions Prescribed by the NBE (in percent)
Stage 1 (Initial recognition)	Pass	Less than 180 days	1
Stage 2 (Significant increase in credit risk)	Special Mention	6–12 Months	3
Stage 3 (Impairment)	Substandard	12–18 Months	20
	Doubtful	18 Months- 3 years	50
	Loss	More than 3 years	100

Source: NBE SBB/52/12 Asset Classification and Provisioning for Development for Finance Institutions and the DBE.

C. Source Data

32. The mission found that the source data for compiling FSIs for commercial banks are broadly consistent, but some gaps need to be addressed. The source data for compiling FSIs for DTs include income and expense statements, the balance sheets and other call reports that are relevant for compiling supervisory series relating to regulatory capital requirements, the liquidity profile, the net open position in foreign exchange, nonperforming loans, and provisioning. Most source data used in the compilation of FSIs are reported on a quarterly basis with the exception of the net open position in foreign exchange which is reported daily. The NBE also collects high level summary data on the balance sheet position of banks on a monthly basis. Quarterly call reports are due within 20 business days of the end of the reporting period⁴. Only a few series are not available, most notably, information on the geographical distribution of loans and the breakdowns of commercial and residential real estate loans.

33. FSIs in Ethiopia are calculated using the following reporting forms:

• PL001: Profit and loss statement (quarterly);

• BA001: Breakdown of income accounts (quarterly);

• BE001: Breakdown of expenses (quarterly);

• BS001: Balance sheet (quarterly);

• QC001: Capital adequacy report (quarterly);

• QI001: Capital adequacy – on balance sheet (quarterly)

• QO001: Capital adequacy – off-balance sheet (quarterly)

• MA001: Maturity of assets (Weekly);

• LP001: Loan classification (quarterly);

• NL001: Non-Performing Loans and Advances & Provisions (quarterly);

• DF001: Foreign currency positions (daily); and

• LBOO1LB: Large exposures (quarterly).

34. Further sectorization of loans and deposits would improve the presentation of the sectoral financial statements used in the compilation of FSIs. This would require disaggregating loans to the the private sector into nonfinancial corporations, households, and nonprofit institutions serving households, and recording transactions with nonresidents as a separate sector. Further, loans to nonfinancial corporations should be disaggregated by economic activities such as agriculture, construction, tourism, etc., using the United Nation’s International Standard Industrial Classification of All Economic Sector Activities (ISIC). Sectorization of the financial statements may be extended to other financial instruments on the asset and liability sides (including deposits) of the balance sheet (consistent with the recommendations of the 2004 and 2009 MFS missions) to ensure that the classification and sectorization that are used for compilation of FSIs are consistent with the Monetary and Financial Statistics compiled by MFAD. The 2019 MFS mission also recommended a number of improvements in the sectorization of financial instruments, notably collecting disaggregated data on “sundry debtors” and “accounts payable” to identify positions with nonresidents, insurance companies, other depository corporations, and clearing/settlements that are relevant for the compilation of FSIs.

35. Recommendation:

• The BSD and MFAD to adopt common definitions for the classification and sectorization of financial instruments (including deposits) in the balance sheet (BS001 Form), consistent with the Monetary and Financial Statistics Manual and 2019 FSI Guide.

36. The NBE needs to strengthen the validation of data submitted by banks and issue clear guidance to banks on how to report the different line items in the call reports. The NBE is currently revising its call reports, which provides an opportunity to strengthen its data validation procedures and clarify their taxonomy. The mission found several discrepancies across the different call reports that need to be addressed, notably:

• a. Income and expense statement and detailed breakdown of income and expenses do not always reconcile;

• b. Provisioning figures in the call reports and balance sheet do not match;

• c. Components of regulatory capital and risk weighted assets do not align with their value on the balance sheet;

• d. Letter of credit on the assets and liabilities of the balance sheet cannot always be offset.

37. Recommendation:

• The NBE to implement quality control checks for data submitted by commercial banks and closely work with them to explain the reporting requirements and resolve data discrepancies.

38. The Bank Supervision Directorate (BSD) has made commendable efforts to collect supervisory data in electronic form from banks during the past three years. Phasing out completely the traditional hard copy submissions would improve the timeliness and accuracy of data collected by the NBE. In 2017, the BSD started to collect supervisory data from commercial banks using the Bank Supervision Application (BSA), which is a web-based platform used by several central banks in Africa to collect and process data from commercial banks. Prior to the implementation of the BSA in 2017, supervisory data were collected mostly in hard copy, and therefore were not readily available to the mission for compilation of FSIs. The microfinance and insurance supervision departments plan to begin gradually shifting the collection of their call reports from hard copies to the BSA in the near future. Once the migration of the call reports to the BSA is complete, the NBE may initiate the incorporation of MFI data with DT data for the compilation of FSIs and start compiling FSIs for insurance corporations.

39. The BSA should be configured to generate the FSIs for the banking sector and for individual banks. Currently, the BSA generates high-level summary reports only, and thus the staff of the BSD has to manually aggregate the more granular data from the call reports when they need to compile FSIs. The NBE would benefit from configurating the BSA to automatically generate these aggregated data for commercial banks in the detailed format of the call reports as they contain useful granular information that are relevant for off-site monitoring including the compilation of FSIs. This would facilitate the transition to the new FSI report forms currently under development, including the new template to collect data on Concentration and Distribution Measures (CDM).

40. Recommendations:

• The NBE to configure the BSA to generate aggregate data for commercial banks from the detailed inputs for the call reports in order to facilitate the compilation and validation of FSIs in the workbook developed by the TA mission for the NBE.

• The NBE to generate FSIs from the BSA once collection of data is fully automated.

D. Compilation Framework

41. The mission developed compilation spreadsheets to electronically derive FSIs from source data (aggregated income statement, balance sheet, and supervisory series) for DTs. This process involved mapping source data to the IMF’s FSI sectoral financial statement template and deriving the indicators for the sectoral financial statements in the template, to minimize manual work and errors. The mapping of income and expense statement, balance sheet, and supervisory data was conducted based on the methodology of the 2019 Guide using bridge tables. The bridge tables show where each item in the income statement and balance sheet is classified, serving as a useful reference for current and new FSI compilers. The compilation spreadsheets, including the bridge tables, were provided to the NBE. This compilation framework will ensure a smooth FSI compilation.

42. The mission assisted the NBE in the compilation of 11 core FSIs and 11 additional FSIs for deposit-takers as well as two additional FSIs relating to the size of OFC subsectors. These indicators were compiled for dissemination based on the list of core and additional indicators in 2019 FSIs Guide. The core FSIs for deposit-takers that were not compiled are common equity tier 1 capital to risk-weighted assets, loan concentration by economic activity, the liquidity coverage ratio, the net stable funding ratio, and residential real estate prices. Additional FSIs that were not available include the geographical distribution of loans to total loans, the spread between the reference lending and deposit rates, and credit growth to the private sector. Although the new core FSI on provisions to nonperforming loans was not compiled, it can be calculated by taking specific provisions divided by nonperforming loans. Most of the FSIs that were not compiled are yet to be implemented in the new report forms currently under development by STA.

43. The main differences between the existing FSIs compiled by the BSD and those developed during the mission stem from compilation methodologies. The FSIs compiled by the mission were based on the recommended compilation methodologies of the 2019 FSI Guide. This included the reclassification of general provisions and other provisions to other liabilities, the annualization of income and expenditure figures, and the use of average capital and total assets figures where appropriate. Other differences are explained in Appendix III. The mission also calculated selected FSIs including the DBE to illustrate the likely impact of extending the coverage of the FSIs (Box 1).

44. The mission also presented the Concentration and Distribution Measure (CDM) tool to the BSD staff. The 2019 FSI Guide introduced CDMs for selected FSIs to provide critical information about financial system vulnerabilities not directly captured by simple averages. The CDM tool can be downloaded on the IMF FSI website. The use of the CDM tool is especially important for Ethiopia given the dominance of the CBE which may cause sectoral averages to be unrepresentative of the rest of the banking system.

E. New FSI Report Forms

71. The 2019 FSI Guide has phased out extraordinary income/expenses from the presentation of income statements. IAS1 no longer allows the reporting of extraordinary items in presentation of profit or loss and other comprehensive income statements. Accordingly, extraordinary items in the profit and loss statement (PL001) are mapped to other income, if positive, or other expenses, if negative. This treatment will help the NBE to transition to the new FSI template when it is implemented in the coming months.

72. Provisions on performing loans and other assets are mapped to other liabilities in the current report forms, consistent with the approach adopted in 2019 FSI Guide. However, these should be reported under “General and other provisions” on the liability side of the balance sheet when the new FSI report forms are introduced.

73. The 2019 FSI Guide recommends that countries report other comprehensive income (OCI) as an additional line item in their income and expense statements. Other comprehensive income consists mainly of revenues, expenses, gains, and losses that are excluded from net income on the income statement as well as unrealized gains and losses on financial instruments that are measured at fair value through other comprehensive income (FVOIC). Since Ethiopia has been implementing IFRS 9 since 2018, comprehensive reporting of the income statement would necessitate the introduction of other comprehensive income.

F. FSI Metadata

74. The mission highlighted the need to complement the FSI data with the corresponding metadata. Metadata are key for interpreting the FSIs and to allow for cross-country comparisons. Any deviations from the recommendations of the 2019 FSI Guide should be explained in the metadata and updated when necessary. Metadata should also contain information on the content and coverage of the FSIs, as well as the accounting conventions and other national guidelines. The mission has developed FSI metadata for DTs based on information provided by the authorities. The draft metadata should be updated when changes are observed, for instance, when there are changes to the accounting and regulatory frameworks as well as the BSL’s instructions underlying the FSI source data.

75. The understanding of how key underlying series are calculated is important for better interpretation of FSIs. Although the 2019 FSI Guide provides guidance on the calculation of the underlying FSI series, the calculation of some data series used by national FSI compilers may not always fully in line with the 2019 FSI Guide due to lack of data. Furthermore, there might be some adjustments to the underlying series for the FSI calculation. The 2019 FSI Guide also defers the calculation of some underlying series to national practices. Appendix IV presents the detailed FSI metadata for deposit takers for reference and for the NBE’s own publication. The mission also completed the FSI metadata template in Excel file for reporting together with the FSI data to STA for posting on the IMF’s FSI website.

G. FSI Data and Metadata Reporting

76. The NBE aims to regularly report the sectoral FSIs to the IMF with quarterly frequency, to be posted on the IMF’s FSI website, upon the NBE management’s approval. As discussed earlier, the NBE can compile and report all 11 core and 11 additional FSIs for deposits-takers as well as two additional FSIs on the size of OFC subsectors on a quarterly basis⁶. The mission also worked with NBE officials to complete the FSI institutional coverage template (FS1 template) with information on the number of the reporting DTs and their branches, split by ownership, and their respective total assets. The FS1 template should also be reported to the IMF for dissemination.

77. Recommendations:

• The NBE to finalize and report to STA for review the FSI sectoral financial statements (FS2 template) for DTs, including balance sheet, income statement, and memorandum series, the sectoral FSIs with underlying series (FSD template) for DTs with quarterly data beginning from 2017: Q2, the FSI institutional coverage (FS1 template) with annual data starting from 2017, and the FSI metadata (FSM template).

• The NBE to start regular reporting to STA, for posting on the IMF’s FSI website, of the FSD and FS2 templates with quarterly data starting from 2017: Q2, and the FS1 template with annual data starting from 2017. Also report the FSM template periodically.

H. FSIs for Other Sectors

78. Two FSIs for OFCs, namely, OFC financial assets to total financial assets and OFC financial assets to gross domestic product, were compiled during the mission. The OFC sector currently represents a quite small share of the financial system. The insurance sector,—the largest OFC subsector—has less than one and a half percent of the assets of the financial system. The asset share of capital goods finance companies is around 0.1 percent. The mission advised that developments in the OFC sector be monitored.

I. Resources, Training, and Technical Cooperation

79. The mission recommended that NBE staff seek to attend regional and HQ training courses on financial sector statistics. STA regularly delivers courses on both MFS and FSI at IMF HQ (each course once every two years), and regional trainings are also scheduled. Details can be found on the webpage of the IMF’s Institute for Capacity Development.

80. Recommendation:

• Support NBE officials’ efforts to participate in IMF FSI training courses to improve their methodological knowledge and skills in compilation and interpretation of FSIs.

J. Other Issues

81. The mission followed up on MFS mission recommendations pending since January 2019. The MFID is currently consulting with the NBE management on the MFS mission recommendations and in the process of providing further clarifications on monetary data based on SRFs. The mission also encouraged data sharing and consistency checks with BSD, including for sectoral bank loans data.

82. The mission also inquired about the status of Ethiopia’s Financial Access Survey (FAS) reporting. Ethiopia was a FAS reporter until its most recent data submission in 2012. The mission clarified the contact information, and the NBE provided an updated list of contact persons.