Financial Sector Surge Rests on a Narrow Banking Base

Mar 28 , 2026
By Aminu Nuru

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The domestic financial sector has made progress in widening access and supporting economic activity. But its dependence on banks remains a structural vulnerability. A more balanced financial system, in which non-bank institutions play a larger role, will be essential for reducing risk and widening the channels for investment, innovation and inclusive growth, writes Aminu Nuru (aminunuru@yahoo.com), a financial analyst based in Doha, Qatar.

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The domestic financial system is growing rapidly, but the latest financial stability report released by the National Bank of Ethiopia (NBE) revealed that this growth masks a structural weakness. The issue should not be viewed as growth alone, but the shape and quality of growth.

The system is heavily tilted toward banks, leaving non-bank financial institutions with only a narrow role. That imbalance concentrates risk, limits financial inclusion, curbs innovation and leaves the economy with too little capacity for long-term investment. The report uncovered that banks hold about 87.5pc of total financial system assets. Non-bank financial institutions, including microfinance institutions, insurers, pension funds and other financial entities, account for the remaining.

This structure differs sharply from patterns seen elsewhere. In many advanced economies, financial systems are more market-based, with non-bank institutions playing a much larger part. Even in Africa, some countries have moved further toward balance. Kenya, for instance, has built a system in which non-bank institutions account for between 35pc and 40pc of total financial assets.

A sector so dominated by banks can magnify systemic risk, because a shock to the banking industry can spread quickly through the wider financial system. The danger is made greater by concentration within the banking industry itself. The Commercial Bank of Ethiopia (CBE), the state-owned giant, alone controls about 43.1pc of the market. Its lending is focused heavily on state-owned enterprises and public-sector projects.

Credit is also concentrated across the sector. The top 10 borrowers account for 12.4pc of total lending, mainly state-owned enterprises and regional governments. That creates a two-layer concentration problem, both in the industry's structure and in the composition of loan books.

The Central Bank’s stress test revealed further weakness. According to the report, if the top 10 depositors at each bank withdrew their funds simultaneously, 16 banks would fall below the minimum regulatory liquidity requirement. That may sound like an extreme scenario. But it shows how exposed the financial sector has become. In practice, liquidity is already tight in several banks, signalling that even smaller shocks could ripple through the system more broadly.

A bank-centred system also tends to favour large and well-connected borrowers over wider participation in the economy. Much bank lending is concentrated in a small circle of corporate clients and large depositors.

The result is a narrower flow of credit across the economy. Small and medium-sized enterprises have limited access to finance, and financial inclusion remains restricted. Capital is steered toward less diversified sectors. The imbalance is especially visible in agriculture. Though the sector employs nearly 75pc of the workforce, it receives only about eight percent of total bank credit. Such gaps hold back inclusive growth and leave the financial sector more exposed to shocks in a few sectors.

The dominance of banks also slows the development of other sources of finance, including venture capital, private equity and startup funding. Without such channels, innovation is constrained and new businesses, especially those led by younger entrepreneurs, struggle to raise capital. That weakens job creation and slows structural transformation.

Another cost is the shortage of long-term financing. Banks usually prefer short- to medium-term lending backed by collateral, which leaves several important sectors short of funding. Housing, infrastructure and industrial manufacturing are among the areas most affected. Without long-term financing instruments, large projects face funding gaps that can slow economic growth.

The causes of this imbalance are broad. They include underdeveloped capital markets, a weak insurance industry, limited pension-fund development, regulatory conservatism, the dominance of state-owned banks, and low financial literacy and income levels.

Fixing the problem will require gradual and carefully sequenced reform. In the near term, regulators need to strengthen bank liquidity frameworks, improve credit risk management, and encourage greater sectoral diversification in lending. Over time, broader reforms will be needed, including continued capital market development, expansion of the insurance industry, greater use of pension funds, support for microfinance institutions, and policies that promote financial innovation and alternative financing.

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PUBLISHED ON Mar 28,2026 [ VOL 26 , NO 1352]

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