Two private banks became the first financial institutions to transact on an electronic platform managed by the Ethiopian Securities Exchange (ESX) and developed by Info-Tech Group.

In an initial auction where participants offered a total of 6.1 billion Br, Wegagen Bank extended a 50 million Br overnight loan to Awash International Bank (AIB). The interest rate on the transaction was set at three percentage points above the National Bank of Ethiopia's (NBE) base policy rate of 15pc, marking the country's move toward an interest-rate-based monetary framework. The shift is directed by Governor Mamo Mihretu, who views the platform as a major stride toward financial stability.

"It's a significant advancement for our financial system," Governor Mamo told Fortune. "The online interbank market will enable banks to manage their liquidity more effectively."

The ESX platform is designed to facilitate daily lending and borrowing among banks, with maturities ranging from one or seven days. It offers a centralised digital marketplace where banks can post their cash availability, interest rates, and maturity dates. Other banks are required to respond to these postings within 24 hours, facilitating a more efficient and transparent financial ecosystem.

"All banks can participate in the trading now," said Tilahun Kassahun (PhD), CEO of ESX. "The platform's transparent setup will promote trust among banks and create a centralised price discovery mechanism for the financial sector."

The NBE has set an interest rate corridor for these transactions, capping rates at three percentage points above or below the base rate. The mechanism is intended to facilitate price discovery while limiting interest rate volatility. According to a directive issued by the NBE three months ago, trades are limited to overnight or seven-day terms, with a minimum transaction size of 25 million Br.

Last week, NBE invited five banks — Commercial Bank of Ethiopia (CBE), Hibret Bank, Gadaa Bank, Awash Bank, and Wegagen Bank — to a pilot trial of the electronic platform. These banks have since been engaging in short-term trades using liquidity from their reserves, testing the market through overnight quotes.

"Although we initially intended to lend, we found ourselves borrowing," said Awash Bank's Chief Financial Officer (CFO), Birhanu Balcha.

He considers the market a promising platform for addressing short-term liquidity needs while allowing banks to use idle funds effectively.

"We anticipate taking turns on both ends of these transactions," he told Fortune.

Awash Bank recently borrowed an additional 25 million Br from another commercial bank, demonstrating the platform's potential to facilitate liquidity in the banking industry. However, Birhanu was candid about his concerns over market stability, particularly when all banks might experience liquidity crunches, and no single bank can act as a lender.

"If every bank is stressed, the system itself could be strained," he said.

The platform's introduction comes at a time when liquidity concerns have dominated industry-wide discussions. A Central Bank report from last June revealed that 56.3pc of total deposits, amounting to over two trillion Birr, were held by a mere 0.5pc of depositors. The report uncovered that if the 10 largest depositors were to withdraw their funds simultaneously, nearly two-thirds of commercial banks would suffer a bank run, posing a systemic risk to the industry.

The interbank platform is expected to reduce such systemic risks by facilitating online money trading and providing a centralised structure for liquidity management. The ESX offers live transactions, enabling commercial banks to initiate short-term trading to balance liquidity in the banking ecosystem.