What Ethiopian Banks Can Do to Increase Digital Financial Adoption

There is a need for commercial banks in Ethiopia to address internal challenges, such as outdated policies and fragmented mobile money solutions, to further enhance DFS adoption. Addressing these gaps, digitizing key services, and fostering collaborations can drive progress. 

This article is provided by AKOFADA (Advancing Knowledge on Financial Accessibility and DFS Adoption), a project working to increase knowledge and transparency within Ethiopia’s DFS ecosystem. Featured Image Source- Digital Banker Africa.

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Reviewing developments in Ethiopia’s digital financial services is a key part of my weekly routine. As a dedicated professional in the banking sector specializing in digital banking at the Commercial Bank of Ethiopia, I focus on leveraging digital solutions to enhance operations, transform customer interactions, and elevate service delivery.

This requires staying informed about global fintech trends while closely monitoring local advancements. It’s no exaggeration to say I have all the banking apps installed on my phone. Evaluating new features, assessing UI design, and analyzing the customer journey have become second nature to me whenever an app is updated, or a new one is launched.

Ethiopia has made remarkable strides in adopting digital financial services. In the past fiscal year alone, digital transactions reached 9.7 trillion birr, a 129% increase, while the number of digital accounts across platforms grew to 204 million nationwide.

However, the sector is not without its challenges. While industry stakeholders often attribute barriers to external factors like inadequate infrastructure and low financial literacy, I believe banks have significant opportunities to drive change from within.

There are numerous untapped opportunities—both quick wins and ambitious strategic initiatives—that commercial banks can pursue to increase DFS adoption at their respective institutions. Commercial banks can address critical gaps in the areas of internal regulatory hurdles, bureaucratic inefficiencies, and exclusionary practices that often hinder access to financial services.

The State of Financial Institutions in Ethiopia

32 commercial banks, all of them domestic, operate in Ethiopia. The sector is made up of the Development Bank of Ethiopia, four fully fledged interest-free banks, six former microfinance institutions (MFIs) that graduated to commercial banks, and 22 conventional commercial banks, including the country’s largest bank, the Commercial Bank of Ethiopia (CBE).

Meanwhile, 56 microfinance institutions (with a total of 1,138 branches) operated in Ethiopia at the end of June 2024.

The banking sector dominates the financial sector, with its total assets accounting for 96.1 percent of total financial sector assets at the end of June 2024.

Based on asset size, NBE distinguishes three types of commercial banks: large, medium, and small banks. The only large bank in the country is the state-owned CBE, with total assets and deposits constituting just under half (47.9 percent and 47.1 percent, respectively) of the whole banking sector as of June 2024.

In terms of digitization, commercial banks in Ethiopia have come a long way since the first ATMs were deployed by CBE in 2001. This journey has been slow but progressive, particularly in the last couple of years.

However, digital access points have not shown a significant increase, as there are just 10,551 ATMs and around 14,000 POS terminals active in a country of above 120 million. In addition, nearly 47% of ATMs and 77% of POS machines were estimated to be in Addis Ababa and in proximity to bank branches, according to NBE.

Addressing Internal Regulatory Hurdles

Let’s take mobile banking activation as the first example. Some banks still require customers to visit the branch where they originally opened their accounts.

This requirement, which was initially justified when digital adoption was in its early stages and banks were more risk-averse, now feels outdated. Many major banks have done away with this rule, recognizing that it no longer serves a practical purpose. However, some commercial banks still enforce it.

Consider a merchant from the Oromia region who initially opened an account there but has since relocated to Addis Ababa. Requiring them to return to the original branch to activate mobile banking services is neither practical nor equitable.

Such policies often push customers to continue operating in cash or open new accounts at other banks with fewer restrictions.

Similarly, certain banks still require customers to close existing accounts and open new ones if they lose access to the mobile number linked to their mobile banking service. This outdated approach discourages digital adoption and creates unnecessary obstacles in the customer journey.

Another instance is the continued reliance on passbooks for cash withdrawals in some banks, even though customer information is stored digitally, and verification can be completed using an ID card.

Beyond these specific examples, there are still several services that unnecessarily require branch visits. Account opening, mobile banking activation, service renewals, PIN resets, card blocking, account linking, and checkbook requests are processes that can and should be digitized.

Streamlining these services through digital platforms will not only enhance operational efficiency but also support greater financial inclusion. By renewing outdated internal policies, banks can better meet customer needs, drive digital adoption, and solidify their role in Ethiopia’s rapidly evolving financial landscape.

Consolidating Fragmented Mobile Money Solutions

The other strategic move banks can make is consolidating fragmented mobile money solutions by working collaboratively with other banks and MFIs. Currently, CBE Birr, telebirr, and E-Birr dominate the market, accounting for 93% of mobile money wallets in the country.

Several mobile money solutions operated by private banks and microfinance institutions (MFIs) are struggling to gain momentum due to their limited networks and fragmented approaches.

Imagine wanting to send a file via Viber in a country where Telegram is king. Having many lesser-known applications is not enough if your intended recipient isn't using the same platforms. Similarly, until full mobile money interoperability is achieved, including merchant interoperability, critical mass is crucial to ensuring wide adoption and effective service delivery in the mobile money sector.

However, these platforms often operate independently with different pricing structures, marketing strategies, and service offerings, which reduces their collective effectiveness and limits their ability to compete in the growing digital financial services market.

To address this, banks should consider consolidating these small, fragmented mobile money products into a single, unified entity with a new name and a cohesive strategy. This consolidated platform could adopt a different business approach, leverage a larger network, and even issue an IPO to raise additional resources. By pooling resources and creating a more robust offering, banks can not only strengthen their position in the market but also effectively compete with fintech companies that are rapidly gaining ground.

A unified mobile money solution would provide banks with the scale and efficiency needed to reach unbanked and underserved populations in both urban and rural areas. It would also allow banks to invest in broader agent networks, improved digital infrastructure, and innovative financial products, ensuring they remain significant players in Ethiopia’s evolving financial ecosystem.

A notable example is the Cooperative Bank of Oromia and Kaffi Microfinance Institution, both of which utilize the E-Birr mobile money platform provided by a third-party fintech firm. E-Birr boasts over 18 million users and has facilitated transactions exceeding 2 trillion birr. Recently, Wegagen Bank also joined the platform, further expanding its reach.

Corporate-Startup collaboration 

Globally, many banks hold innovation and fintech challenges to provide support to organizations developing innovative solutions to social and economic challenges faced by low-income communities worldwide.

This move is not only philanthropic but also strategic and benefits banks. While banks have internal departments dedicated to innovation and product development, they can simultaneously tap into outside resources.

For example, Citi Bank organizes multiple challenges across the globe, inviting fintechs with relevant innovative solutions—ranging from existing companies to early-stage startups—to participate. Winners receive not only cash prizes but also institutional support from the bank, such as infrastructure and integration opportunities with the bank's services.

Ethiopian banks should take inspiration from such initiatives and play a more active role in the country’s nascent startup ecosystem. By offering the fintech community opportunities to showcase their ideas, banks can contribute to the development and growth of fintech companies in the region.

This growth would have both direct and indirect impacts on banking operations. Innovative solutions could be seamlessly integrated into banks’ digital platforms. Additionally, direct involvement in supporting fintechs could accelerate the launch of new products, with banks providing testing environments and technical expertise.

Currently, only a few commercial banks in Ethiopia are active in this support ecosystem. Awash Bank, for instance, runs its Tatariwochu/Qaxaleewwan youth business training program, while Dashen Bank’s Kefita Entrepreneurship Contest is in its third phase. These competitions target small business owners and entrepreneurs, offering cash prizes as high as 1 million birr.

Such initiatives should be replicated and scaled to include the fintech sector, enabling a broader impact on the economy and fostering innovation in digital financial services.

Another area of collaboration banks should consider is external consultations. In my experience as a trainer in the banking sector, I have encountered instances where banks have faced challenges due to ill-informed decisions. These range from purchasing core banking software without a full understanding of its features and limitations to selecting unsuitable vendors. Such choices have often hampered their ability to deliver effective digital banking solutions to customers.

Although these decisions were made with the best intentions and knowledge available at the time, they lacked the valuable perspective of external experts who could have provided strategic guidance on these significant investments.

If smaller banks develop a culture of engaging specialized consultants, particularly for major decisions like investments in digital banking solutions, they can mitigate potential challenges and make more informed, impactful choices.

In conclusion, accelerating growth and boosting DFS adoption requires commercial banks to proactively address internal obstacles, such as outdated policies and inefficient processes. Consolidating fragmented mobile money solutions and fostering collaboration with fintech startups are also pivotal strategies. By embracing innovation, optimizing operations, and prioritizing customer-centric solutions, Ethiopian banks can remain competitive while playing a transformative role in advancing DFS across the country.