Risky Times Necessitate Dynamic Financial Sector

Mar 12 , 2022
By Asseged G. Medhin

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Ethiopia has been observing emerging risks for over half a decade, from political uncertainty to the COVID-19 pandemic. The broad spectrum of risk has mainly been affecting the financial sector. The relevance of the insurance sector for the overall stability of the financial system by outlining the sources of risk and vulnerability facing the industry, at this juncture, is not only the prerogative of players in the financial sector. We need to craft a seasonal strategy to manage emerging and existing risks, integrating our maximum assessment and treatment.

Our financial litmus paper should indicate whether there is a growing inter-linkage between insurers and banks, if socio-economic balance can be maintained during unrests, and whether risk behaviour of individuals and organisations can be analysed in a different scenario. We have to decide if we need an integrated effort under public-private modality, discussion, orientations and creating the way forward for financial stability.

These approaches and strategies will save national resources from human-made catastrophes, and provides a comprehensive input to catalyse transformation. The rationale behind this is all about pinpointing and identifying some key challenges for the insurance industry.

During unrest, financial systems become ever more complex. Other stockholders, including the media, should play important roles in financial stability by creating awareness on risk management, deposit mobilisation and the consequences of unrests in the economy. The government should also provide more space for discussion to derive new insights.

How can situations of financial stability and the role of the central bank be characterised?

It has too often been taking care of daily routines. A different thought process needs to take root in terms of operational standards to utilise the optimum benefits from transformational agendas and the enhancement of stringent criteria to safeguard the most liquid assets in the financial sector, which are highly exposed during unrest. The country's economic foundations can only be sustainable if its roots are stronger than ever during times of risk, such as national elections.

The sources of risk and vulnerability facing the banking and insurance industries are not only political, as new entrants to the sector are increasing with potential resources. A dynamic approach of regulation and management has to be vigilantly expedited.

If we review recent developments in the Ethiopian insurance industry, especially compared to commercial banking, we find that it has become more inefficient, and the growth is tamed. This implies that less attention is given to the insurance sector in terms of the broader capability of the sector for the economy and the institutionalising of risk management.

Financial stability is a somewhat elusive concept as it is demonstrated by the absence of a widely recognised definition. While it is evident when a financial system is unstable or in a crisis situation, it is much more difficult to assess whether the system is moving towards instability in normal circumstances. The perspective underpinning financial stability work at any central bank is whether the system can withstand shocks without giving way to processes that impair the allocation of savings to investments and the processing of payments in the economy.

This emphasises that in a situation of instability, the financial system is unable to perform its basic task of providing the financing needed to support real economic processes. It also stresses that the system should be resilient to potential shocks to safeguard financial stability.

Central banks have a natural role to play in ensuring financial stability and have a strong interest in fostering it for several reasons. A stable financial system, sufficiently vigorous to efficiently allocate financial resources in the economy, is a precondition for successful monetary policy implementation.

We do not need to invent a new machine or establish a new system, but there must be integration. Different stakeholders should challenge the system positively without any fail at this season, if we all want to prosperity. True wealth is achieved by understanding the contexts of all stakeholders in the economy, particularly the financial sectors. We should be more vigilant to manage any unrest which has a paramount effect on the nation as a whole since those unrests and emerging risks devastate the economy and destabilise the financial sector.

The Ethiopian financial system is overdue for a transforming, liberalising shock. It is a must. We deserve a dynamic financial system supported by modern and digitised networks and platforms, which would best help us address risks.

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PUBLISHED ON Mar 12,2022 [ VOL 22 , NO 1141]

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