The monopoly government-owned banks in Ethiopia remained relatively sound throughout the period of socialist government. This was because: the parastatal sector, to which the banking sector was forced to lend, remained profitable and branch expansion was steady rather than reckless.
Partly as a result, there was considerable financial deepening, helped by real interest rates not being continuously negative, and by public confidence in the banking system not being threatened. Financial sector reform in the 1990s included government development banks becoming commercial banks, and the licencing of new private sector banks.
However, the ability of the reformed banking system to service the rapidly growing private sector was limited because:
- the government-owned banks appeared unlikely to compete with each other;
- foreign participation in banking was forbidden, without which neither the old government nor the new private sector banks seemed likely to have sufficient commercial lending expertise.
New indigenous commercial banks were licenced, but the new banking law laws were inadequate and the central bank had very limited bank supervision capacity, so that this was a high risk policy.