The National Bank of Ethiopia’s (NBE) second annual financial stability report reveals growing cracks in the banking system, raising alarms over operational risks, liquidity shortfalls, and a constrained credit environment. With banks accounting for 96.1pc of total financial assets as of June 2024, their systemic importance remains unparalleled. Yet, underlying vulnerabilities threaten the stability of the sector, prompting calls for urgent reforms and risk mitigation strategies.

Operational risks—spanning social engineering schemes, insider fraud, and third-party vulnerabilities—dominate the list of concerns. These risks have intensified fraud cases, with total losses climbing to 1.3 billion Br last year, up from one billion Birr in 2023. Liquidity concerns have also worsened, with 20 out of 29 banks falling below regulatory requirements under stress scenarios. The ripple effects of these issues are felt across credit markets, exporters, and leasing companies, casting a shadow over the financial sector's stability.

According to the report, the banking industry has become a prime target for sophisticated fraud. Social engineering tactics—where attackers manipulate individuals into divulging sensitive information such as passwords or bank account details—have grown in prevalence, leaving both customers and banks vulnerable.

A detailed section of the NBE report outlines how banks are falling prey to counterfeit cash and checks, embezzlement, unauthorised guarantees, and phishing scams. Fraudulent activity has been reported across all 28 commercial banks, reflecting a systemic issue.

Dormant accounts have become a key entry point for fraudsters, according to financial expert Worku Lemma. He raises the competitive banking environment as a contributing factor, arguing that in the race to acquire new customers, some banks have compromised on stringent security protocols.

“They are less monitored and susceptible to unauthorised access,” he said.

The growing pressures of cost of living crisis have also heightened risks from within. Training programs focused on cybersecurity and fraud prevention have been recommended by the expert as immediate priorities for banks to combat these threats.

“Employees under financial stress are more susceptible to unethical behaviour,” Worku said, calling for improved due diligence during the hiring process and robust background checks.

Liquidity issues, described as “severe and growing” in the report, pose another risk to the banking sector. A hypothetical scenario, where the top 10 depositors of each bank simultaneously withdraw their funds, would leave 20 banks unable to meet minimum liquidity requirements. This is a major increase from the 18 banks identified in last year’s report.

Nib Bank’s struggles serve as a case study in liquidity mismanagement. Recently undergoing a major leadership shakeup, the bank’s newly appointed president, Henok Kebede, attributed its difficulties to mismanagement of resources by the previous administration.

“The lack of proactive risk management left us exposed to both liquidity shortfalls and cybersecurity threats,” Henok said.

He has since prioritised overhauling the bank’s risk management strategies and updating its technological infrastructure.

Embezzlement and fraud are not just isolated issues but indicative of systemic vulnerabilities across the sector, according to Henok. Nib Bank’s active role in the interbank money market platform has added to its liquidity constraints.

The NBE report offers a mixed outlook for banking sector. Total banking assets grew by 15.2pc to 3.3 trillion Br as of June 2024, driven largely by loans and advances. Yet, the growth rate slowed compared to 19.9pc last year, reflecting broader economic pressures.