Deposit Insurance Fund Faces Its First Test

Apr 23 , 2025. By AKSAH ITALO ( FORTUNE STAFF WRITER )

Key Takeaways:

• EDIF has collected 5.2 billion Br in premiums, displaying its role in fortifying financial stability.
• Tapping into Treasury resources, EDIF seeks to bridge the gap between depositor protection liabilities and available funds.
• Microfinance institutions are experiencing notable growth, presenting opportunities alongside risks.
• With the insurance of up to 100,000 Br per depositor, EDIF plays a protective role for depositors.

The Ethiopian Deposit Insurance Fund (EIF), a federal agency responsible for protecting depositors, has discovered that confidence is costly and that its ambitions outstrip its bank balance.

Over the past nine months of the fiscal year, it collected 5.2 billion Br in premiums from 31 commercial banks and 57 microfinance institutions, representing barely 0.3pc of their average deposit balances. Two years after its launch, the agency is left with a gap between the hazards the system faces and the cash set aside to cover them. The Commercial Bank of Ethiopia (CBE), the state-owned colossus that holds almost half of the industry's assets, supplied nearly half of those premiums, a reminder of how concentrated the banking system remains.

“The required funding will be substantial,” said Desalegn Abebaw, CEO of the EDIF.

To plug the hole, EDIF struck a backup deal with the Ministry of Finance that allows the Fund to draw on the Treasury when a failure’s liabilities exceed the premiums already paid.

“Agreements have already been concluded,” Desalegn told Fortune.

The lifeline arrives as the National Bank of Ethiopia's (NBE) stability report warned that if the 10 biggest depositors at each bank pulled their money at once, 20 of the 29 banks would breach liquidity rules.

EDIF insures up to 100,000 Br per depositor, a ceiling revealing the Fund’s modest reserves. Nearly 11.17 billion Br is locked in Treasurybill bonds and 994 million Br sits in a profitsharing Mudarabah account at CBE, bringing the portfolio to a little over 12.1 billion Br. Treasury yields have climbed to 18pc and EDIF has arranged with the Central Bank to redeem its bills on demand, a tradeoff between return and instant liquidity.

However, managers concede the purse is thin.

“We've a shortage of funds to increase the coverage,” said Operations Manager Merga Wakeya. “We need to collect enough funds.”

One path they contemplate is to begin levying premiums on foreign banks, which are preparing to enter the domestic financial market for the first time. Another is to shift toward risk-based pricing so that shakier institutions pay more.

“It has to be done cautiously,” said Merga. "Lenders may protest."

Premiums already pinch the smallest players.

“It affects our liquidity,” said Tefera Tesfaye (PHD), chief executive of Africa Village Microfinance.

His firm, with 600 million Br in assets and 150 million Br in paid-up capital, worries that mandatory payments could curb loan growth as microlenders try to expand.

“There’s been no response yet from regulators to pleas for relief," he said. “A microfinance institution must start with solid lending funds and sufficient resources at hand.”

The financial system’s vulnerabilities are well known. Total financial-sector assets top 3.2 trillion Br, more than a third of the country's GDP, but they are disproportionately held by the government-owned CBE.

Microfinance institutions account for barely two percent of assets yet post faster growth. In 2024, their assets jumped by 21.6pc to 60.1 billion Br, deposits rose by 29.2pc to 31.4 billion Br, and loans expanded by 26.9pc. Nonperforming loans in the segment crept up to 6.3pc, suggesting that rapid growth carries risks.

EDIF’s first real test is already at hand. The Fund is preparing to reimburse customers of One Microfinance Institution S.C., which folded this fiscal year with roughly 1,500 Br depositors. The payout is small, but the episode exposes how quickly liabilities can surface. To speed up future disbursements, EDIF drafted a request for proposals last year to build an automated system, but shelved the idea when the bids came in high.

“Our budget was capped at 35 million Br,” Desalegn disclosed to Fortune. “But the final assessment put the figure at 72 million Br; the cost far exceeded our expectations.”

Desalegn is talking with the World Bank and other financiers about development assistance.

The Fund is betting on better yields. Treasury bills, once a sleepy corner of the market, now offer double-digit returns. Desalegn called it “a key income source” that helps stabilise the balance sheet.

However, experts urge a broader strategy. Tilahun Girma, a veteran consultant, likes the Treasury trade but argued for diversification into high-yield fixed deposit products to hedge inflation. He even floated reinsurance with foreign insurers to spread risk.

“A robust financial sector safety-net is crucial for a healthy financial system,” he said.

Tilahun warned that new threats shadow lenders. He pegs cyberrisk exposure at 1.3 billion Br and says loose management of credit concentrations could push banks “toward insolvency” if left unchecked. He favours risk-based premiums but wants regulators to consider an institution’s size and tenure before imposing higher rates.

“The National Bank should adopt a flexible approach, tailoring premiums based on an institution’s maturity and exposure in the financial market,” he said.

EDIF’s 2024 performance report, unveiled at its headquarters in Zemen Bank’s tower, on Ras Abebe Aregay St., casts the Fund as both a safety net and a reform tool. Legislated by a federal law two years ago and initially capitalised with 50 million Br, part of a 200 million Br commitment from the Ministry of Finance, EDIF was seen as Ethiopia’s answer to lessons from the 2008 global financial crisis.

“We're latecomers,” said Desalegn, noting Ethiopia is the 148th country to adopt deposit insurance.

Federal authorities want deposit insurance to work in tandem with stricter supervision. The Central Bank has rolled out a three-year plan to restore fiscal and monetary stability and won parliamentary approval of a law that enhances its autonomy for the first time in 62 years. According to an IMF study, strong onsite and offsite monitoring — “the eyes and ears” of a healthy safety net — can spot trouble early.

The Central Bank agrees. Its stability report singled out “deposit concentration” as a pressing danger.

Microlenders share that worry from another angle. They fear that a hit to any one institution could ripple through them all, because many rely on the same wholesale funding channels. That prospect makes EDIF’s capacity more than a theoretical question. The Fund covers 100,000 Br per depositor, although the average per capita income is lower than that. Many small savers are fully insured. But the growing middle class often deposits more, especially at the largest banks, and would face losses if a big institution failed.

EDIF says it needs scale. Merga hopes the upcoming capital market will offer new investment vehicles and perhaps allow the Fund to place longer-dated paper for higher returns without sacrificing liquidity. For now, Treasury bills dominate because they can be sold back to the Central Bank at face value, a standing facility EDIF negotiated to ensure cash for payouts.

The Fund also plans to raise premiums once it completes work on a risk-weighted schedule. Institutions with weaker capital buffers or higher non-performing loans (NPLs) would pay up. Resistance is expected, yet regulators argue that fair pricing will reward prudence and discourage reckless lending.

“It's to be done cautiously,” Merga told Fortune, repeating the mantra that reform should not shock the system it wants to protect.

Globally, history backs the case for insurance. The U.S. established the Federal Deposit Insurance Corporation in 1933, after the Great Depression battered confidence, and no insured depositor there has lost a cent since. EDIF’s architects hope to import at least part of that legacy, even if the financial sector is younger and thinner. Total deposits have soared as new private banks mushroomed and mobile money services lure savers. Yet, the same growth stretches supervision and pushes EDIF to build muscle quickly.

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PUBLISHED ON Apr 23,2025 [ VOL 26 , NO 1304]

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