A Bank Built to Deliver Growth Shouldn't Be A Fiscal Sinkhole

Dec 20 , 2025
By Abreham Tesfaye

---

As Ethiopia moves forward with financial sector reforms and seeks to attract private and foreign investment, the strength and credibility of its public banks will come under greater attention. A reformed DBE - focused, transparent, and professionally governed - has the potential to drive inclusive growth. Without reform, the Bank may remain an expensive lesson that good intentions alone do not guarantee good results.

---

Development banks exist to take on risks and provide long-term financing where private lenders fear to tread, especially in areas such as industry, exports, agriculture, and infrastructure. Development banking demands space from short-term political pressure.

The Development Bank of Ethiopia (DBE) has long stood as a symbol of the country’s ambition to drive economic transformation, financing sectors that struggle to attract commercial investment. It was created to address market failures, support long-term investment, and act as a catalyst where private lenders hesitate. However, several decades after its creation, a gap persists between its stated mission and actual performance. The expectation was that DBE would become the financial backbone of economic ambitions.

Despite its large balance sheet and prominent place in government policy, questions linger about whether DBE fulfils its promise. Its effectiveness has been diluted by policy overload, shifting mandates, and repeated episodes of financial distress.

DBE’s objectives have rarely remained unambiguous or long-lasting. Instead of sticking to a disciplined framework for picking projects based on economic feasibility and social return, the Bank’s lending decisions have often mirrored government urgencies. From large-scale manufacturing to state-run industrial parks and commercial farming, DBE has been pulled in multiple directions, frequently stretched beyond its technical capability. This lack of focus has weakened its impact.

Governance problems have made matters worse. As a state-owned entity, DBE is deeply influenced by policy priorities and has limited institutional autonomy. Its board structure, executive appointments, and lending strategies are closely tied to the state, allowing little room for professional judgment or independent risk assessment. The projects it supports are typically long-term and risky, and their benefits may not be apparent for years. Without independence, DBE risks becoming a channel for policy lending rather than a disciplined financier.

Financial performance has mirrored these problems. DBE has faced recurring crises involving non-performing loans (NPL), liquidity troubles, and capital losses. Large projects have often faltered due to weak feasibility checks and poor borrower capacity. Monitoring has been insufficient, letting problems linger. To keep the Bank running, government bailouts and restructuring have been regular features, but these actions have also bred a sense of moral hazard. When the state routinely absorbs losses, the incentive to manage prudently drops.

This cycle has a real cost for taxpayers, who directly or indirectly fund development banks through capital injections, government guarantees, or forgone opportunities for other public investments. The public bears the burden of the Bank’s underperformance, even as the developmental payoff (in jobs, exports, productivity, or financial inclusion) remains unclear. Evidence of proportional benefits is often lacking.

DBE’s public reporting on performance, loan quality, and developmental results is limited. While commercial banks face growing disclosure requirements, DBE is not held to the same standard of public accountability. In other countries, development banks are judged not simply by financial results but by rigorous impact assessments. So far, DBE’s governance has not fully embraced this culture of transparency.

Questions are being raised about whether the DBE’s model still fits the changing economic landscape. The country now has a more diversified industrial base, a growing number of private banks, and a financial sector that is opening up. The rationale for a large and all-purpose development bank is weaker than in the past. What should be required is a more targeted and specialised intervention, such as climate finance, export credit, smallholder agriculture support, and risk-sharing for infrastructure projects.

These call for technical expertise and narrowly focused tools, not broad lending based on shifting policy priorities.

Reforming the DBE should not be seen as shrinking the state’s developmental role. Instead, the task is to redefine and sharpen it. The Bank needs a narrower mandate based on real market failures. Policymakers should improve, ensuring professional decision-making through an independent board, transparent appointments, and sound risk management. Loans should be connected to measurable results, and the Bank’s performance and impact should be reported regularly to the public.

It is also essential to clarify DBE’s relationship with the financial sector. The Bank should complement, not compete with, private lenders. Co-financing, guarantees, and risk-sharing mechanisms can help leverage private capital. Development banks work best when they bring in additional resources, not when they replace them.

The question should not be whether a development bank is relevant. It is whether the DBE, in its present structure and governance, can effectively serve the public good. An institution meant to drive development cannot afford repeated governance lapses, drifting mandates, or a lack of accountability. When development finance loses focus and discipline, it becomes little more than another vehicle for public risk.

---

PUBLISHED ON Dec 20,2025 [ VOL 26 , NO 1338]

---

[ssba-buttons]