Commercial banks in Ethiopia are currently grappling with a serious liquidity crisis, raising concerns across the financial sector. According to insiders who spoke to The Reporter, the problem is being caused by a mix of structural weaknesses, economic instability, and government-driven policies that are weakening banks’ ability to lend or meet customer withdrawals.
Industry experts point fingers at imbalanced deposit and lending growth, inflation, low confidence in the financial system, and the negative impact of mandatory Treasury bill investments as some of the core issues behind the crunch.
A senior bank executive, who preferred anonymity, said that while the central bank is tightening monetary policy to control inflation, it is also shrinking the money supply, making it hard for banks to operate smoothly.
“Banks are required to invest a portion of their deposits in long-term, low-yield government securities. That limits their ability to lend or meet urgent withdrawals,” he said. “We’re also seeing aggressive lending practices that were not matched by equivalent growth in deposits. This imbalance is simply not sustainable.”
Private banks are said to be the most affected. Many of them operate with loan-to-deposit ratios (LDRs) as high as 80% or more, which industry analysts describe as dangerously high.
The problem is made worse by stagnant deposit mobilization, with rising inflation and currency depreciation discouraging people from trusting banks with their savings. According to the World Bank, less than half of all Ethiopians have a bank account, with most of the country’s 31 commercial banks depending heavily on deposits from urban centers like Addis Ababa.
“There is fierce competition for deposits among too many banks. It’s become cannibalistic. And yet many areas of the country remain underbanked,” another expert said.
The lack of strong foreign exchange earnings from exports and remittances is also contributing to the crisis. Slow export growth and reduced remittance flows have left banks short of hard currency, making it difficult to support forex transactions or meet foreign obligations.
Experts add that cash hoarding is still a major problem in Ethiopia, especially after the 2020 demonetization process. Many citizens are holding on to cash rather than using banks, and this further reduces liquidity in the system. The parallel market for forex is also draining money from formal banking channels.
Adding to the woes are the conflicts in Amhara, Oromia, and Tigray, which have disrupted normal banking services in affected areas. Many branches are closed, cash flow is down, and reconstruction costs are putting more pressure on public finances — indirectly hitting banks as well.
Even though the Ethiopian government says its homegrown economic reform program is restoring macroeconomic stability, industry experts argue that the banking sector tells a different story.
Microfinance institutions and mobile money platforms are also drawing away depositors that would have previously relied on traditional banks, further squeezing liquidity.
Meanwhile, there are signs of big change on the horizon. Sources at the National Bank of Ethiopia (NBE) told The Reporter that Kenya Commercial Bank (KCB) Group is expected to be the first foreign bank to enter Ethiopia under a new financial sector liberalization law.
NBE is currently in discussions with KCB executives on the requirements for entry. The law, amended in November 2024, allows foreign banks to operate in Ethiopia in four ways: as subsidiaries, through joint ventures, by opening branches, or through representative offices. However, foreign ownership is capped at 40%, and a domestic bank can only sell up to 49% of its shares to foreign investors.
Despite the looming threat of competition from well-capitalized foreign banks, most local banks are not preparing through mergers or capacity upgrades, experts note. This, they warn, could leave them vulnerable.
The total asset value of Ethiopia’s banking sector is now over 3 trillion birr. The Commercial Bank of Ethiopia (CBE) alone controls 2.073 trillion birr in assets as of April 2025, up from 1.2 trillion in 2016.
With weak financial structures and growing uncertainty, Ethiopia’s banks face a challenging road ahead — unless immediate reforms and consolidation efforts are taken.
