The Benefits of Financial Sector Liberalization for Developing Countries: A Case Study of Ethiopia

Abstract

This paper focuses on issues of financial sector liberalization in Ethiopia, with reference in particular to the Ethiopian banking sector. Ethiopia is a country that has not been studied extensively because of its isolation and comparative lack of data. Through newly obtained panel data from all commercial banks (privately held and state-owned),we have identified two factors that may constrain Ethiopia’s financial development. One is the closed nature of the Ethiopian financial sector in which there are no foreign banks,a non-competitive market structure, and strong capital controls in place. The other is the dominant role of state-owned banks. Our observations and analysis of bank performance suggest that the Ethiopian economy would benefit from financial sector liberalization, especially from the entry of foreign banks and the associated privatisation of state-owned banks.