## INTRODUCTION — 1ethea2020003

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### A. Mission background and objectives
- STA provided technical assistance (TA) on financial soundness indicators (FSI) to the National Bank of Ethiopia (NBE) during June 15-July 10, 2020, conducted remotely via video conferences due to the COVID-19 pandemic.
- Main objectives:
  - Review source data, institutional coverage, and accounting and regulatory frameworks supporting FSI compilation.
  - Provide guidance for mapping banking-sector source data to the FSI reporting templates FS2 and FSD and prepare metadata.
  - Agree timeline to begin regular reporting of FSIs for deposit-takers to STA.
- Additional TA: compilation of net open positions in foreign currencies.
- Prior context:
  - First STA mission on FSIs for the NBE; Ethiopia does not report FSIs to STA but shares a subset with AFR.
  - Ethiopia received an MFS mission in January 2019 assisting SRF 1SR and SRF 2SR compilation.
  - Ethiopia under ECF/EFF arrangements with proposed financial sector reforms and requested emergency financial assistance under the RFI in May 2020.
- COVID-19 supervisory measures:
  - Temporary measures require commercial banks to assess individual borrowers’ conditions when loans are renegotiated/restructured and temporarily suspend provisioning requirements by delaying supervisory classification for borrowers affected by the pandemic.

### Summary of mission outcomes and capacity to report
- Reporting capability and outputs:
  - NBE positioned to report quarterly FSIs to STA in line with the 2019 FSI Guide.
  - Mission and BSD staff compiled 22 FSIs for deposit takers (DTs) and two FSIs on OFC sector size from existing source data.
  - Coverage: 17 commercial banks covering 90 percent of the entire DTs sector.
  - FSIs compiled cover capital adequacy, asset quality, earnings and profitability, and liquidity.
- Source data access and validation:
  - Mission accessed aggregate banking sector data for June 2017 to December 2019 and bank-by-bank data for December 2019.
  - Assisted mapping to the FSI workbook and validated aggregated data from bank-by-bank data for December 2019.
  - Reviewed balance sheet, income statement, and supervisory data from June 2019 to December 2019; recommended improvements.
  - Supervisory data on large exposures and net open position in foreign currencies available only for quarters ended June 2019 and December 2019; BSD needs to compile remaining quarters.
- Shortfalls to address:
  - Disaggregate private sector into nonfinancial corporation, household, and nonprofit institutions serving households; record transactions with nonresidents as a separate sector.
  - Adopt common definitions for classification and sectorization of financial instruments consistent with the Monetary and Financial Statistics Manual and 2019 FSI Guide.
  - Correct inconsistencies in detailed breakdowns of revenue and expenses and main income and expense statements used in FSI compilation.
  - Strengthen collection of net open position in foreign currencies.
  - Strengthen NBE validation and reconciliation across call reports to ensure consistency, accuracy and completeness—particularly for state-owned banks.
- Accounting and regulatory framework:
  - Commercial banks follow a modified Basel I framework and have adopted IFRS and IAS where applicable.
  - IFRS9 adopted by commercial banks since July 2018 in parallel with NBE Directive No. SBB/69/2018.
  - Mission assessed adequacy of definitions for capital, liquidity, and NPLs.
- Reporting timeline agreed with BSD; BSD can compile quarterly FSIs for DTs using the mission’s workbook.
- As of March 2020, data for 143 countries are posted on the IMF’s FSI website for cross-country comparisons.

### Priority recommendations and selected milestones
- High-priority (H) and medium-priority (M) selected items with target completion dates and responsible party (NBE unless stated):
  - H — Implement quality control checks for data submitted by commercial banks. Target completion: 11/30/2020.
  - H — Finalize and report FSI sectoral financial statements (FS2), sectoral FSIs with underlying series (FSD) with quarterly data beginning 2017: Q2, FSI institutional coverage (FS1) with annual data starting 2017, and FSI metadata (FSM). Target completion: 11/30/2020.
  - H — Start regular reporting to STA of FSD and FS2 with quarterly data starting 2017: Q2 and FS1 with annual data starting 2017; report FSM periodically. Target completion: 12/31/2020.
  - H — Report net open position in foreign currencies historically using on-balance sheet position only, switching to on- and off-balance sheet when off-balance data collected. Target completion: 12/31/2020.
  - H — Redesign DF001 call report to collect more granular FX position data. Target completion: 12/31/2020.
  - H — Collect data on regulatory risk reserve and on non-performing loans and advances & provisions returns. Target completion: 12/31/2020.
  - M — Collect maturity profile of demand, saving, and time deposits separately in maturity call report. Target completion: 12/31/2020.
  - H — Provide clear instructions to banks on completing regulatory capital and risk weighted assets call reports (QC001, QI001, QO001). Target completion: 06/30/2021.
  - M — Additional instructions and breakdowns for supplementary capital items and supervisory deductions. Target completion: 06/30/2021.
  - M — Configure the BSA to generate aggregate data for commercial banks and generate FSIs from the BSA once collection is automated. Target completion: 06/30/2021.
  - H — Adopt common definitions for classification and sectorization of financial instruments consistent with the Monetary and Financial Statistics Manual and 2019 FSI Guide. Target completion: 12/31/2021.
  - H — Reconcile call reports on income and expenses with main income and expense statements and update compilation spreadsheets. Target completion: 12/31/2021.
  - M — Revise balance sheet to incorporate financial derivatives and exclude L/C commitments. Target completion: 12/31/2021.
  - M — Calculate spread between reference lending and deposit rates based on updated interest income and expense report forms. Target completion: 12/31/2021.
  - M — Collect residential and commercial real estate loans data in line with 2019 FSI Guide definitions. Target completion: 12/31/2021.

---

### B. Ethiopia’s financial system structure and key statistics (end-December 2019)
- Legal/institutional:
  - NBE Establishment Proclamation (#206 of 1963), last amended 2008; NBE mission includes price and exchange rate stability, fostering a sound financial system, and acting as fiscal agent in relations with the IMF.
  - NBE supervises ODC sector (except SACCOs), insurance companies, and capital goods finance companies.
- System-wide size and concentration:
  - Total assets of the financial system (excluding NBE): Birr 1,630 billion, equivalent to 46 billion U.S. Dollars, representing 60 percent the country’s gross domestic product (GDP).
  - Commercial banks constitute close to 90 percent of deposit-takers’ market.
  - Commercial Bank of Ethiopia (CBE) state-owned: almost 65 percent market share of financial assets and credit; 62 percent of deposits.
- ODC sector composition and shares:
  - Commercial banks: 17 licensed commercial banks (16 private, 1 state-owned CBE); CBE has subsidiaries in Djibouti and South Sudan; no foreign ownership of any bank in Ethiopia.
  - Development Bank of Ethiopia (DBE):
    - Accepts current accounts, time and savings deposits from social security funds, state-owned enterprises, DBE staff, and DBE’s private sector borrowers.
    - Requires borrowers to make equity contribution of 30 percent of project value before approving credit facilities.
    - Share of total financial system assets: approximately 4.5 percent.
  - Microfinance Institutions (MFIs):
    - 39 MFIs operating with about 5 percent of total financial system assets.
    - Five largest MFIs control 90 percent of the market share; eleven MFIs owned by regional governments.
    - Customer deposits about 40 Birr billion at end-2019.
    - DBE provides funding to MFIs through government schemes.
  - Savings and Credit Cooperatives (SACCOs):
    - Supervised by the Federal Cooperative Agency (FCA) and regional cooperative bureaus; source data not available to mission.
- Interest-free (Shariah) banking (December 2019):
  - Share of interest free banking products: 1.6 percent of total loans.
  - Share of interest free banking products: 4.7 percent of total deposits.
  - Licensing: six new banking license applications under consideration; one newly licensed bank in process of starting activities.
- OFC and insurance sector:
  - OFC sector includes 18 insurance companies and 6 capital goods finance companies supervised by NBE.
  - Insurance sector small and mainly general insurance; largest insurance company state-owned with roughly 35 percent market share.
  - CGFCs: provide leasing and hire purchase; ~one third of assets are prepayments to acquire fixed assets for leasing; liabilities mostly commercial borrowings from commercial banks or DBE.
- Consolidation basis and institutional coverage:
  - FSIs for DTs compiled on a “domestic consolidation” (DC) basis; includes all 17 domestically incorporated commercial banks (~90 percent of depository corporation sector assets).
  - Remainder not covered: DBE, MFIs, SACCOs.
  - Recommendation: incorporate MFIs into DT compilation once data quality and timeliness improved.

### Box 1 — DBE inclusion considerations (selected comparative FSIs, end-December 2019)
- Regulatory capital to risk-weighted assets: DBE Included 17.2; DBE Excluded 17.7
- Regulatory Tier 1 capital to risk-weighted assets: DBE Included 17.2; DBE Excluded 17.7
- Nonperforming loans net of provisions to capital: DBE Included 15.3; DBE Excluded 7.7
- Nonperforming loans to total gross loans: DBE Included 5.5; DBE Excluded 2.7
- Liquid assets to total assets: DBE Included 13.8; DBE Excluded 11.6
- Net open position in foreign exchange to capital: DBE Included 28.4; DBE Excluded 28.9
- Return on assets: DBE Included 2.9; DBE Excluded 2.9
- Return on equity: DBE Included 21.7; DBE Excluded 20.6
- Interest margin to gross income: DBE Included 65.0; DBE Excluded 66.3
- Noninterest expense to gross income: DBE Included 54.0; DBE Excluded 56.9
- Capital to assets: DBE Included 8.0; DBE Excluded 8.0
- Personnel expenses to noninterest expenses: DBE Included 47.1; DBE Excluded 47.7
- Customer deposits to total (noninterbank) loans: DBE Included 144.8; DBE Excluded 157.7
- Foreign-currency-denominated liabilities to total liabilities: DBE Included 3.1; DBE Excluded 2.4

---

### Accounting and regulatory frameworks underpinning FSI data
- Accounting standards and valuation:
  - Commercial banks adopted IFRS and IAS; IFRS9 implemented from July 1, 2018 in parallel with NBE Directive No. SBB/69/2018.
  - Financial instruments valued at amortized cost or FVTPL/FVOIC per IFRS9; Level 3 measurement common.
  - Equity investments measured at fair value under IFRS9.
- Nonperforming loan (NPL) definition and provisioning:
  - NPLs defined as loans past due for 90 days or more (except overdrafts with additional conditions); IFRS9 has a rebuttable presumption for >90 days but NBE’s regulation makes the 90-day backstop non-rebuttable in practice.
  - NBE minimum provisioning (SBB/69/2018):
    - Pass (Less than 30 days) — Minimum Provisions: 1
    - Special Mention (30–90 days) — Minimum Provisions: 3
    - Substandard (90–180 days) — Minimum Provisions: 20
    - Doubtful (180–360 days) — Minimum Provisions: 50
    - Loss (More than 360 days) — Minimum Provisions: 100
  - Mapping to IFRS9 stages: Pass = Stage 1; Special Mention = Stage 2; Substandard/Doubtful/Loss = Stage 3.
  - Regulatory risk reserves: banks must transfer excess/shortfalls between IFRS9 provisions and supervisory provisions to/from regulatory risk reserves; regulatory risk reserves not included in regulatory capital.
- Capital adequacy and risk weights:
  - National computation follows a modified Basel I; minimum capital adequacy ratio set at 8 percent (primary capital to risk weighted assets).
  - Primary capital comprises paid-up capital, share premium, general reserves and legal reserves; no Tier 2 prescribed; retained earnings and revaluation gains excluded.
  - Total risk-weighted assets = sum of on- and off-balance sheet exposures multiplied by fixed risk weight coefficients.
  - No capital requirement for market risk.
  - NBE risk-weight coefficients by claim type:
    - 0 percent — Cash in hands; Claims on or guaranteed by the NBE; Claims on or guaranteed by Federal Government of Ethiopia
    - 20 percent — Claims on or guaranteed by banks with maturity < 1 year; Claims on or guaranteed by Regional Government of Ethiopia
    - 50 percent — Residential mortgage loans
    - 100 percent — Claims on or guaranteed by banks with maturity > 1 year; Loans other than residential mortgage loans; Investment in securities and equity other than government; Fixed assets; Other assets
- Liquidity requirement:
  - NBE Directive No. SBB/57/2014 requires liquid assets ≥ 15 percent of net current liabilities.
  - Approved liquid assets: cash, deposits with the NBE, net deposits with local and foreign banks, treasury bills; NBE bills excluded.
- Large exposures and FX position:
  - Large exposures defined as loans/advances to single borrower/group >10 percent of primary capital; regulatory aggregate credit exposure limit to single borrower or group: 25 percent of total capital.
  - NBE definition differs from BCBS Large Exposures Standard; realignment recommended.
  - Daily net open position in foreign currencies limit: 15 percent of total capital (Directive No. SBB/27/01).
  - DBE specific: 15 percent capital requirement (net worth to risk weighted assets); DBE follows its own loan classification and provisioning; adopting modified IFRS9 consistent with debtor ageing.

---

### Source data, reporting practices, and compilation framework
- Reporting forms used for FSI compilation:
  - PL001, BA001, BE001, BS001, QC001, QI001, QO001, MA001, LP001, NL001, DF001, LBOO1LB (see list in source).
- Timeliness:
  - Quarterly call reports due within 20 business days of quarter end.
  - Monthly call reports: within 10 days; weekly: within 7 days; daily: within one day.
- Data gaps and sectorization needs:
  - Need further sectorization of loans and deposits into nonfinancial corporations, households, nonprofit institutions serving households, and nonresidents; disaggregate loans to nonfinancial corporations by ISIC activity.
  - Gaps: geographical distribution of loans and breakdowns of commercial and residential real estate loans.
- BSA and data collection:
  - BSD began electronic collection via Bank Supervision Application (BSA) in 2017; BSA currently generates high-level summary reports only.
  - Recommendation: configure BSA to generate aggregate data for commercial banks and FSIs once data collection fully automated.
  - Transitioning microfinance and insurance call reports to BSA planned.
- Compilation work by the mission:
  - Developed compilation spreadsheets mapping source data to IMF FSI sectoral financial statement templates using bridge tables.
  - Assisted NBE in compiling 11 core FSIs for DTs, 11 additional FSIs for DTs, and 2 OFC-size FSIs.
- FSIs not compiled or limited by data:
  - Core FSIs missing: common equity tier 1 to risk-weighted assets; loan concentration by economic activity; liquidity coverage ratio; net stable funding ratio; residential real estate prices.
  - Additional FSIs missing: geographical distribution of loans to total loans; spread between the reference lending and deposit rates; credit growth to the private sector.
  - New core FSI on provisions to nonperforming loans not compiled but can be calculated as specific provisions divided by nonperforming loans.
  - Main methodological differences due to adherence to 2019 FSI Guide: reclassification of general and other provisions, annualization of income/expenditure, use of average capital and total assets where appropriate.

### Income statement and balance sheet adjustments
- Income statement:
  - Restated from fiscal to calendar year: cumulative from January 1st to quarter end for earnings/profitability FSIs.
  - Annualization method for net income before/after tax and averaging for ROA/ROE specified (example for 2019 quarters preserved in source).
  - Discrepancies: treatment of prorated income and FVTPL gains/losses; no separate detailed line for dividend income in breakdown of income.
  - Recommendation: reconcile detailed breakdowns with main statements and update compilation spreadsheets.
  - Treatment of accrued interest and recoveries: accrued interest on NPLs not capitalized when >90 days; recoveries adjust provisions; interest from recovery credited to interest income.
- Balance sheet:
  - Deposits with domestic and foreign banks mapped to interbank loans.
  - Incomplete counterparty information prevents proper sectorization; further breakdowns required for sundry debtors/creditors, suspense accounts, un-cleared effects.
  - Payment and settlement accounts mapped to currency and deposits due to inability to separate from excess reserves.
  - Customer deposits definition: all deposits excluding central banks, governments, or financial institutions; deposits from governments, non-bank financial institutions, pension funds excluded from customer deposits.
  - Letters of credit and acceptances should be off-balance sheet; adjusting for this reduced total assets by 6.2 percent as of December 2019.
  - Financial derivatives not currently included; recommendation to revise balance sheet to incorporate derivatives and exclude letters of credit/acceptances.

### Supervisory series: specific issues and recommendations
- Regulatory capital and risk-weighted assets:
  - National definition uses primary capital only; RWA compiled net of provisions.
  - Banks misreport on-balance sheet exposures across asset classes and risk weight buckets, inhibiting reconciliation.
  - Recommendations: clarify asset classification and risk weight reporting; provide instructions for QC001, QI001, QO001; provide breakdowns for supplementary capital and supervisory deductions.
- Nonperforming loans and provisions:
  - Calculated based on IFRS9 in parallel with supervisory approach; regulatory risk reserve not currently collected, preventing provisioning adjustments.
  - Specific provisions = provisions on NPLs per 2019 FSI Guide.
  - Recommendation: collect regulatory risk reserve data in BS001 and NL001 forms.
- Liquidity indicators:
  - Liquid assets per local definition consistent with 2006 broad measure; 2019 Guide eliminated core/broad distinction.
  - Components: cash; deposits with NBE; deposits with local and foreign banks; treasury bills; NBE bills excluded.
  - Short-term liabilities currently include all time deposits due to lack of maturity profiles; recommend collecting maturity profiles in MA001.
- Large exposures:
  - Compiled per NBE directive: exposures >10 percent of primary capital; corporate bonds not included in credit exposure definition.
  - Recommendation: realign with BCBS Large Exposures Standard to include broader exposures.
- Net open position in foreign currencies:
  - Preferred numerator: on- and off-balance sheet measures (Basel-consistent); NBE compiles with on- and off-balance sheet per its directive, but off-balance items overestimated by including non-binding commitments to sell FX.
  - Recommendation: report historical data using on-balance sheet only and switch to on- and off-balance sheet when off-balance data are granular and consistent.

---

### Net open position in foreign currencies — detailed findings and recommendations
- Current DF001 call report lacks granularity on on- and off-balance sheet FX assets and liabilities; off-balance sheet FX risk items not listed by product.
- DF001 does not include “other items (+ve)” and “other items (-ve)” for currencies not listed.
- NBE regulation currently requires using the closing buying rate to convert FX positions to local currency; mission notes inconsistency with balance sheet conversion approach.
- Recommendations:
  - Report historical net open position using on-balance sheet only, switch to on- and off-balance sheet once off-balance data available.
  - Redesign DF001 to collect granular FX position subcomponents and list off-balance sheet FX products (commitments, L/Cs, trade finance contingencies).
  - Include “other items (+ve)” and “other items (-ve)” fields for unlisted currencies.
  - Use mid buying and selling rates to convert FX positions to local currency, consistent with balance sheet reporting.

---

### Other targeted recommendations and follow-up
- Spread between reference lending and deposit rates:
  - BSD receives static spread data from MFID over last 18 months; recommendation to calculate spread from updated BA001 and BE001 once data quality improved.
- Real estate market FSIs:
  - Residential and commercial real estate loan FSIs not compiled due to insufficient breakdowns and unclear definition of construction loans; recommendation to collect real estate loan data per 2019 FSI Guide.
- New FSI report forms and presentation adjustments:
  - 2019 FSI Guide phased out extraordinary income/expenses; extraordinary items mapped to other income/expenses in PL001 to assist transition.
  - Provisions on performing loans/other assets currently in other liabilities but should be reported under “General and other provisions” when new forms introduced.
  - Recommendation to introduce other comprehensive income (OCI) line in income statements consistent with IFRS9 implementation.
- Metadata and reporting:
  - Draft FSI metadata developed; deviations from 2019 FSI Guide should be documented and updated.
  - NBE to finalize and report FS1, FS2, FSD, and FSM templates to STA with recommended historical coverage (quarterly from 2017: Q2; annual from 2017).
- OFC FSIs:
  - Two OFC FSIs compiled: OFC financial assets to total financial assets and OFC financial assets to GDP.
  - OFC sector small: insurance sector <1.5 percent of financial system assets; CGFC asset share ~0.1 percent.
  - Recommendation: monitor OFC sector developments.
- Resources and training:
  - Recommendation for NBE officials to participate in IMF FSI training courses to improve methodological skills.

---

### Key FSIs and selected statistics (selected figures, preserved as in source)
- Regulatory capital to risk-weighted assets: 21.8 (Jun-17), 23.2 (Dec-17), 22.3 (Jun-18), 21.0 (Dec-18), 19.9 (Jun-19), 17.7 (Dec-19)
- Nonperforming loans net of provisions to capital: 2.1 (Jun-17), 7.4 (Dec-17), 11.6 (Jun-18), 12.6 (Dec-18), 4.8 (Jun-19), 7.7 (Dec-19)
- Nonperforming loans to total gross loans: 2.4 (Jun-17), 3.4 (Dec-17), 2.8 (Jun-18), 3.6 (Dec-18), 2.2 (Jun-19), 2.7 (Dec-19)
- Interest margin to gross income: 64.0 (Jun-17), 74.0 (Dec-17), 69.3 (Jun-18), 68.3 (Dec-18), 69.7 (Jun-19), 66.3 (Dec-19)
- Noninterest expenses to gross income: 48.7 (Jun-17), 54.8 (Dec-17), 50.7 (Jun-18), 50.0 (Dec-18), 54.6 (Jun-19), 56.9 (Dec-19)
- Liquid assets to total assets: 13.4 (Jun-17), 11.1 (Dec-17), 13.0 (Jun-18), 11.7 (Dec-18), 13.0 (Jun-19), 11.6 (Dec-19)
- Spread between reference lending and deposit rates (basis points): 7.4 (Jun-17), 7.4 (Dec-17), 5.5 (Jun-18), 5.5 (Dec-18), 5.5 (Jun-19), 5.5 (Dec-19)
- Customer deposits to total (noninterbank) loans: 165.3 (Jun-17), 168.6 (Dec-17), 176.5 (Jun-18), 166.9 (Dec-18), 169.4 (Jun-19), 157.7 (Dec-19)
- Foreign-currency-denominated liabilities to total liabilities: 2.0 (Jun-17), 2.4 (Dec-17), 2.3 (Jun-18), 2.3 (Dec-18), 2.3 (Jun-19), 2.4 (Dec-19)
- OFC's financial assets to total financial assets: 1.8 (Jun-17), 1.9 (Dec-17), 1.9 (Jun-18), 1.8 (Dec-18), 1.7 (Jun-19), 2.1 (Dec-19)
- OFC's financial assets to GDP: 0.9 (Jun-17), 1.0 (Dec-18), 0.9 (Jun-19) — (values presented with gaps in source)

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*Source: 1ethea2020003 - INTRODUCTION (IMF staff and National Bank of Ethiopia data as presented in the supplied content).*

### INTRODUCTION _________________________________________________________________________________ 9

### INTRODUCTION

### A. Background
- The IMF’s Statistics Department (STA) provided technical assistance (TA) on financial soundness indicators (FSI) to the National Bank of Ethiopia (NBE) during June 15-July 10, 2020.
- The mission was conducted remotely via video conferences due to the COVID-19 pandemic.
- Main objectives of the mission:
  - Review the source data, institutional coverage, and accounting and regulatory frameworks supporting the compilation of FSIs.
  - Provide guidance for mapping source data for the banking sector to the FSI reporting templates FS2 and FSD and prepare the metadata.
  - Agree with the authorities on the timeline to begin regular reporting of the FSIs for deposit-takers to STA.
- The mission also provided technical assistance to the NBE on the compilation of net open positions in foreign currencies.
- Prior context:
  - This was the first STA mission on FSIs for the NBE; Ethiopia does not report FSIs to STA but shares a select subset with AFR.
  - Ethiopia received an MFS mission in January 2019 that assisted in compiling monetary and financial statistics in standardized report forms (SRFs) for the central bank (SRF 1SR) and ODCs (SRF 2SR).
  - Ethiopia is under ECF/EFF arrangements with proposed financial sector reforms and requested emergency financial assistance under the RFI in May 2020.
- COVID-19 measures by NBE:
  - Temporary measures require commercial banks to assess individual borrowers’ conditions on a case by case basis when loans are renegotiated/restructured, and to temporarily suspend provisioning requirements for those loans by delaying supervisory classification, applied to borrowers affected by the pandemic.

### Summary of Mission Outcomes and Key Findings
- Reporting capability and outputs:
  - The NBE is now in a position to report quarterly FSIs to STA in line with the 2019 FSI Guide.
  - Together with BSD staff, the mission compiled 22 FSIs for deposit takers (DTs), and two FSIs on the size of OFC’s sector from existing source data.
  - Coverage includes 17 commercial banks which cover 90 percent of the entire DTs sector.
  - The FSIs for DTs cover capital adequacy, asset quality, earnings and profitability, and liquidity.
- Prior practice and discrepancies:
  - BSD previously compiled some FSIs for AFR’s financial stability analysis but not always consistent with the 2019 FSI Guide.
  - Discrepancies were found in key indicators including nonperforming loans (NPLs) to total gross loans, interest margin to gross income, noninterest expenses to gross income, and capital to assets (Appendix III).
  - Mission recommended compiling FSIs in line with the 2019 FSI Guide.
- Source data access and validation:
  - Mission had access to aggregate banking sector data for June 2017 to December 2019 and bank-by-bank data for December 2019.
  - Assisted NBE in mapping to the FSI workbook and validated aggregated data from bank-by-bank data for December 2019.
  - Reviewed source data from balance sheet, income statement, and supervisory data from June 2019 to December 2019 and made recommendations to improve collection of source data.
  - Supervisory data on large exposures and net open position in foreign currencies were only available for quarters ended June 2019 and December 2019; BSD needs to compile remaining quarters.
- Source data shortfalls to address:
  - Disaggregate the private sector into nonfinancial corporation, household, and nonprofit institutions serving household sectors and record transactions with nonresidents as a separate sector.
  - Adopt common definitions for classification and sectorization of financial instruments consistent with the Monetary and Financial Statistics Manual and 2019 FSI Guide.
  - Correct inconsistencies in detailed breakdowns of revenue and expenses call reports and main income and expense statements used in FSI compilation.
  - Strengthen collection of net open position in foreign currencies.
  - Strengthen NBE validation and reconciliation of data among different call reports to ensure consistency, accuracy and completeness—particularly for state-owned banks.
- Accounting and regulatory frameworks:
  - Commercial Banks follow a modified Basel I framework and have adopted IFRS and IAS where applicable.
  - IFRS9 adopted by commercial banks since July 2018 for valuation of financial instruments, asset classification, and provisioning in parallel with NBE Directive on Asset Classification and Provisioning (No. SBB/69/2018).
  - Adoption facilitates international comparability of FSIs; mission assessed adequacy of definitions for capital, liquidity, and NPLs.
- Reporting timeline and outcome:
  - Timeframe for reporting FSI data and metadata to IMF discussed and agreed with BSD officials.
  - BSD officials can compile quarterly FSIs for DTs using the workbook developed by the mission.
  - As of March 2020, data for 143 countries are posted on the IMF’s FSI website for cross-country comparisons.

### B. Ethiopia’s Financial System — Structure and Key Statistics
- Legal and institutional:
  - Functions, responsibilities, and mandate of the NBE are contained in the National Bank of Ethiopia Establishment Proclamation (#206 of 1963), last amended in 2008.
  - NBE mission: maintain price and exchange rate stability, foster a sound financial system, and undertake other functions conducive to economic growth; acts as fiscal agent in relations with the IMF.
  - NBE has regulatory and supervisory authority over the ODC sector (except SACCOs), insurance companies, and capital goods finance companies.
- System-wide size and concentration (as of end-December 2019):
  - Total assets of the financial system (excluding NBE): Birr 1,630 billion, equivalent to 46 billion U.S. Dollars, representing 60 percent the country’s gross domestic product (GDP).
  - Commercial banks constitute close to 90 percent of deposit-takers’ market.
  - The Commercial Bank of Ethiopia (CBE), state-owned, holds almost 65 percent market share of financial assets and credit to the economy and 62 percent of deposits.
- ODC sector composition and shares:
  - Commercial banks:
    - Licensed by NBE; provide deposits, business and mortgage loans, and basic investment products.
    - 17 licensed commercial banks: 16 privately owned, 1 state owned (CBE).
    - CBE has subsidiaries in Djibouti and South Sudan; no foreign ownership of any bank in Ethiopia.
  - Development Bank of Ethiopia (DBE):
    - Operates as a financial development institution; accepts current accounts, time and savings deposits from social security funds, state-owned enterprises, DBE staff, and DBE’s private sector borrowers.
    - Requires borrowers to make equity contribution of 30 percent of project value before approving credit facilities.
    - Share of total financial system assets: approximately 4.5 percent.
    - (See BOX 1: The Development Bank of Ethiopia.)
  - Microfinance Institutions (MFIs):
    - Take deposits; regulated by Proclamation 1164/2019.
    - 39 MFIs operating with about 5 percent of total financial system assets.
    - Five largest MFIs control 90 percent of the market share; eleven MFIs owned by regional governments.
    - Customer deposits about 40 Birr billion at end-2019.
    - DBE provides funding to MFIs through government schemes.
  - Savings and Credit Cooperatives (SACCOs):
    - Cooperative financial organizations owned and operated by members; supervised by the Federal Cooperative Agency (FCA) and regional cooperative bureaus.
    - Two major types: institution-based SACCOs and community-based SACCOs.
    - All SACCOs lend only to their members.

### Priority Recommendations and Action Plan (Selected milestones and dates)
- Mission recommended a detailed action plan with priority recommendations. Selected high-priority (H) and medium-priority (M) items with target completion dates:
  - H — Implement quality control checks for data submitted by commercial banks and closely work with them to explain reporting requirements and resolve data discrepancies. Target completion: 11/30/2020. Responsible: NBE.
  - H — Finalize and report to STA for review the FSI sectoral financial statements (FS2 template) for DTs, including balance sheet, income statement, and memorandum series; the sectoral FSIs with underlying series (FSD template) for DTs with quarterly data beginning from 2017: Q2; the FSI institutional coverage (FS1 template) with annual data starting from 2017; and the FSI metadata (FSM template). Target completion: 11/30/2020. Responsible: NBE.
  - H — Start regular reporting to STA, for posting on the IMF’s FSI website, of the FSD and FS2 templates with quarterly data starting from 2017: Q2, and the FS1 template with annual data starting from 2017. Also report the FSM template periodically. Target completion: 12/31/2020. Responsible: NBE.
  - H — Report net open position in foreign currencies for historical data using on-balance sheet position only and switch to on- and off-balance sheet position once granular and consistent off-balance sheet data are collected. Target completion: 12/31/2020.
  - H — Redesign the call report on net open position in foreign currencies (DF001) to collect more granular data on banks’ foreign exchange positions to facilitate reconciliation with the balance sheet. Target completion: 12/31/2020.
  - H — Collect data on the regulatory risk reserve in the balance sheet and on non-performing loans and advances & provisions returns. Target completion: 12/31/2020.
  - M — Collect information on the maturity profile of demand, saving, and time deposits separately in the maturity of assets and liabilities call report. Target completion: 12/31/2020.
  - H — Provide clear instructions to banks on how to properly fill-in their regulatory capital and risk weighted assets call reports (QC001, QI001 and QO001 forms). Target completion: 06/30/2021.
  - M — Provide additional instructions and breakdowns for reporting supplementary capital items and supervisory deductions. Target completion: 06/30/2021.
  - M — Configure the BSA to generate aggregate data for commercial banks from detailed call report inputs to facilitate compilation and validation of FSIs in the workbook; generate FSIs from the BSA once collection is fully automated. Target completion: 06/30/2021.
  - H — Adopt common definitions for classification and sectorization of financial instruments (including deposits) in balance sheets across BSD and MFAD consistent with the Monetary and Financial Statistics Manual and 2019 FSI Guide. Target completion: 12/31/2021.
  - H — Reconcile call reports of detailed breakdowns on income and expenses with main income and expense statements and update compilation spreadsheets accordingly. Target completion: 12/31/2021.
  - M — Revise the balance sheet to incorporate financial derivatives on both asset and liability sides and exclude L/C commitments from the balance sheet. Target completion: 12/31/2021.
  - M — Calculate the spread between reference lending and deposit rates based on updated interest income and interest expense report forms. Target completion: 12/31/2021.
  - M — Collect residential real estate and commercial real estate loans data in line with definitions provided in the 2019 FSI Guide. Target completion: 12/31/2021.

*Source: 1ethea2020003 - INTRODUCTION*

### 15.      Currently there are no DTs in receivership or liquidation in Ethiopia. The FSI Guide

### 1ethea2020003 - 15.      Currently there are no DTs in receivership or liquidation in Ethiopia. The FSI Guide

### Overview: DT distress and FSI compilation guidance
- Currently there are no DTs in receivership or liquidation in Ethiopia.
- The FSI Guide recommends including DTs in distress if they hold significant positions and to compile FSIs both including and excluding these DTs.

### Financial sector structure (as of end-December 2019)
- National Bank of Ethiopia — Total Assets: 470.4 Birr Billions; Percent of GDP: 17.4; Percent of total financial system assets: 23.2
- Depository Corporations — Total Assets: 1,523.3 Birr Billions; Percent of GDP: 56.5; Percent of total financial system assets: 75.2
- Commercial Banks (17 institutions) — Total Assets: 1,345.7 Birr Billions; Percent of GDP: 49.9; Percent of total financial system assets: 66.4
  - o/w Government owned (1) — Total Assets: 829.6 Birr Billions; Percent of GDP: 30.8; Percent of total financial system assets: 41.0
  - o/w Private commercial banks (16) — Total Assets: 516.2 Birr Billions; Percent of GDP: 19.1; Percent of total financial system assets: 25.5
- Development Bank of Ethiopia (1) — Total Assets: 91.8 Birr Billions; Percent of GDP: 3.4; Percent of total financial system assets: 4.5
- Deposit-taking microfinance companies (39) — Total Assets: 85.7 Birr Billions; Percent of GDP: 3.2; Percent of total financial system assets: 4.2
- Other Financial Corporations — Total Assets: 31.8 Birr Billions; Percent of GDP: 1.2; Percent of total financial system assets: 1.6
- Insurance Companies (18) — Total Assets: 28.7 Birr Billions; Percent of GDP: 1.1; Percent of total financial system assets: 1.4
  - o/w life insurance companies (10) — Total Assets: 2.3 Birr Billions; Percent of GDP: 0.1; Percent of total financial system assets: 0.1
  - o/w non-life insurance companies (8) — Total Assets: 26.4 Birr Billions; Percent of GDP: 1.0; Percent of total financial system assets: 1.3
- Capital Goods Finance Companies (6) — Total Assets: 3.2 Birr Billions; Percent of GDP: 0.1; Percent of total financial system assets: 0.2
- Note: Data on saving and credit cooperatives were not available to the mission.

### Interest-free (Shariah compliant) banking
- As of December 2019:
  - Share of interest free banking products: 1.6 percent of total loans
  - Share of interest free banking products: 4.7 percent of total deposits
- Licensing activity: six new banking license applications currently under consideration, and one newly licensed bank in the process of starting its activities.

### Other Financial Corporations (OFC) and insurance sector
- OFC sector includes 18 insurance companies and 6 capital good finance companies supervised by the NBE.
- Insurance sector characteristics:
  - Small and mainly provides general insurance.
  - Composite insurance companies must report separate financial statements for life and non-life operations.
  - Largest insurance company is state-owned and has roughly a 35 percent market share.
  - One reinsurance company exists.
- Capital Goods Finance Companies (CGFC):
  - Provide leasing and hire purchase facilities.
  - Almost a third of their assets are prepayments to acquire fixed assets for leasing.
  - Liabilities are mostly commercial borrowings from commercial banks or the DBE.

### Consolidation basis and institutional coverage
- Ethiopia’s FSIs for DTs are compiled using a “domestic consolidation” (DC) basis (appropriate given minimal nonresident operations).
- The DC basis includes resident DTs and their resident branches/subsidiaries in the same sector.
- FSIs for DTs cover all 17 domestically incorporated commercial banks, representing approximately 90 percent of the assets of the depository corporation sector in Ethiopia.
- Remainder of sector not covered includes the DBE, MFIs, and SACCOs.
- Recommendation: incorporate MFIs into DT compilation once data quality and timeliness are improved.

### Box 1 — Development Bank of Ethiopia (DBE): inclusion considerations and comparative FSIs
- DBE qualifies as a deposit-taking institution for FSI compilation purposes; scope exists to include DBE in FSIs in the future.
- DBE regulatory differences should be documented in metadata if included.
- Financial Soundness Indicators with and without the DBE, end-December 2019 (selected core and additional FSIs):
  - Regulatory capital to risk-weighted assets: DBE Included 17.2; DBE Excluded 17.7
  - Regulatory Tier 1 capital to risk-weighted assets: DBE Included 17.2; DBE Excluded 17.7
  - Nonperforming loans net of provisions to capital: DBE Included 15.3; DBE Excluded 7.7
  - Nonperforming loans to total gross loans: DBE Included 5.5; DBE Excluded 2.7
  - Liquid assets to total assets: DBE Included 13.8; DBE Excluded 11.6
  - Net open position in foreign exchange to capital: DBE Included 28.4; DBE Excluded 28.9
  - Return on assets: DBE Included 2.9; DBE Excluded 2.9
  - Return on equity: DBE Included 21.7; DBE Excluded 20.6
  - Interest margin to gross income: DBE Included 65.0; DBE Excluded 66.3
  - Noninterest expense to gross income: DBE Included 54.0; DBE Excluded 56.9
  - Capital to assets: DBE Included 8.0; DBE Excluded 8.0
  - Personnel expenses to noninterest expenses: DBE Included 47.1; DBE Excluded 47.7
  - Customer deposits to total (noninterbank) loans: DBE Included 144.8; DBE Excluded 157.7
  - Foreign-currency-denominated liabilities to total liabilities: DBE Included 3.1; DBE Excluded 2.4

### Accounting and regulatory frameworks underlying FSI data
- Accounting standards:
  - Commercial banks have adopted IFRS and IAS for financial statements and quarterly reports used for FSIs.
  - Beginning July 1, 2018, banks started implementing IFRS9 in parallel with NBE’s directive (SBB/69/2018) on Asset Classification and Provisioning.
- Nonperforming loan definition:
  - Loans classified as nonperforming when past due for 90 days or more (except overdrafts with additional conditions).
  - Under IFRS9 there is a rebuttable presumption for >90 days, but the NBE’s prescriptive regulation makes the 90 days backstop non-rebuttable in practice.
- NBE minimum provisioning requirements (Asset Classification and Provisioning No. SBB/69/2018):
  - For performing loans:
    - Pass (Less than 30 days) — Minimum Provisions: 1
    - Special Mention (30–90 days) — Minimum Provisions: 3
  - For nonperforming loans:
    - Substandard (90–180 days) — Minimum Provisions: 20
    - Doubtful (180–360 days) — Minimum Provisions: 50
    - Loss (More than 360 days) — Minimum Provisions: 100
- Interaction with IFRS9 stages:
  - “Pass” corresponds to IFRS9 Stage 1; “Special Mention” to Stage 2; “Substandard”, “Doubtful”, “Loss” to Stage 3.
- Regulatory risk reserves:
  - Banks must transfer any excess/shortfalls of provisions derived from IFRS9 models to/from regulatory risk reserves accounts.
  - Regulatory risk reserves account is not included in regulatory capital.
- Valuation:
  - Financial instruments valued at amortized cost or FVTPL/FVOIC per IFRS9.
  - Level 3 measurement approach commonly used due to absence of secondary markets.
  - Equity investments measured at fair value under IFRS9 (previously at nominal value under IAS39).
- Capital adequacy framework:
  - Current computation follows a modified version of Basel I.
  - Minimum capital adequacy ratio (primary capital to risk weighted assets) set at 8 percent for commercial banks.
  - Primary capital consists of paid-up capital, share premium, general reserves and legal reserves; no Tier 2 element prescribed.
  - Retained earnings and gains on revaluation of fixed assets are excluded from primary capital.
  - No supervisory deductions applied to intangible assets such as goodwill, and investment in unconsolidated subsidiaries.
  - Total risk-weighted assets are sum of on- and off-balance sheet exposures multiplied by fixed risk weight coefficients.
  - No capital requirement for market risk.
- Summary of NBE risk-weight coefficients by claim type:
  - 0 percent — Cash in hands; Claims on or guaranteed by the NBE; Claims on or guaranteed by Federal Government of Ethiopia
  - 20 percent — Claims on or guaranteed by banks with a maturity of less than 1 year; Claims on or guaranteed by Regional Government of Ethiopia
  - 50 percent — Residential mortgage loans
  - 100 percent — Claims on or guaranteed by banks with a maturity of more than 1 year; Loans other residential mortgage loans; Investment in securities and equity other than government; Fixed assets; Other assets
- Liquidity requirement:
  - NBE Directive (No. SBB/57/2014) requires commercial banks to maintain liquid assets of not less than 15 percent of their net current liabilities.
  - NBE has approved only cash, deposits with the NBE, net deposits with local and foreign banks, or treasury bills for calculation of liquid assets; NBE bills are not included.
- Large exposures and limits:
  - Large exposures defined as loans and advances to a single borrower or group exceeding 10 percent of primary capital.
  - Regulatory limit on aggregate credit exposures to a single borrower or group of connected borrowers: 25 percent of total capital.
  - NBE definition differs from BCBS Large Exposures Standard; realignment recommended to include broader exposures (e.g., corporate bonds) and adopt BCBS definitions of counterparties and connectedness.
- Foreign exchange position:
  - Commercial banks must maintain a daily net open position in foreign currencies of 15 percent of their total capital (NBE Directive No. SBB/27/01).
- DBE regulatory specifics:
  - DBE subject to a 15 percent capital requirement (ratio of net worth to risk weighted assets).
  - DBE follows its own loans classification and provisioning; medium/long-term loan provisioning less stringent than for banks.
  - DBE is adopting a modified version of IFRS9 for loans classification and provisioning consistent with debtor ageing.

### Source data and reporting practices
- Source data for FSIs for commercial banks include income/expense statements, balance sheets, call reports relevant for supervisory series (regulatory capital, liquidity, net open position, nonperforming loans, provisioning).
- Most source data reported quarterly; net open position in foreign exchange reported daily.
- NBE collects high level summary balance sheet data monthly.
- Quarterly call reports are due within 20 business days of the end of the reporting period.
- Gaps: a few series not available, most notably geographical distribution of loans and breakdowns of commercial and residential real estate loans.
- MFIs reporting and regulation:
  - MFIs subject to a 12 percent capital adequacy ratio.
  - MFIs subject to a 20 percent liquidity ratio.
  - Reporting formats for MFIs differ from DTs; some MFI reports do not fully comply with IFRS/IAS due to capacity constraints.
  - NBE redesigning MFI call reports and shifting from hard copy to electronic collection.
- SACCOs:
  - Source data on SACCOs not available due to lack of formal agreement between NBE and the FCA.
  - Regulatory framework for SACCOs not fully aligned with commercial banks and MFIs.
  - Recommendation reiterated: NBE and Federal Cooperative Agency should enter into a memorandum of understanding to share source data on SACCOs.

### Key recommendations (extracted)
- The NBE to begin regular reporting of FSIs for commercial banks according to the 2019 FSI Guide using the workbook developed during the mission.
- The NBE to include MFIs in the compilation of FSIs for DTs once the data quality, timeliness, and reporting formats are enhanced.
- Realign the definition of large exposures with the BCBS Large Exposures Standard to ensure consistency with the 2019 FSI Guide (including extending credit exposure definition to cover corporate bonds).
- NBE and Federal Cooperative Agency to establish a memorandum of understanding to share source data on SACCOs.

*Source: IMF staff and National Bank of Ethiopia data as presented in the supplied content.*

### 33.      FSIs in Ethiopia are calculated using the following reporting forms:

### 33.      FSIs in Ethiopia are calculated using the following reporting forms:

### Reporting forms used for FSI compilation
- PL001: Profit and loss statement (quarterly)
- BA001: Breakdown of income accounts (quarterly)
- BE001: Breakdown of expenses (quarterly)
- BS001: Balance sheet (quarterly)
- QC001: Capital adequacy report (quarterly)
- QI001: Capital adequacy – on balance sheet (quarterly)
- QO001: Capital adequacy –   off-balance sheet (quarterly)
- MA001: Maturity of assets (Weekly)
- LP001: Loan classification (quarterly)
- NL001: Non-Performing Loans and Advances & Provisions (quarterly)
- DF001: Foreign currency positions (daily)
- LBOO1LB: Large exposures (quarterly)

### Sectorization and data granularity
- Further sectorization of loans and deposits is needed to disaggregate private sector loans into:
  - nonfinancial corporations
  - households
  - nonprofit institutions serving households
  - transactions with nonresidents as a separate sector
- Loans to nonfinancial corporations should be disaggregated by economic activities (e.g., agriculture, construction, tourism) using the United Nation’s International Standard Industrial Classification of All Economic Sector Activities (ISIC).
- Sectorization may be extended to other financial instruments on the asset and liability sides (including deposits) to align with Monetary and Financial Statistics compiled by MFAD.
- The 2019 MFS mission recommended collecting disaggregated data on “sundry debtors” and “accounts payable” to identify positions with nonresidents, insurance companies, other depository corporations, and clearing/settlements relevant for FSIs.
- Reporting timeliness expectations:
  - Monthly call reports: within 10 days
  - Weekly call reports: within 7 days
  - Daily call reports: within one day

### Recommendations on classification and sectorization
- The BSD and MFAD to adopt common definitions for the classification and sectorization of financial instruments (including deposits) in the balance sheet (BS001 Form), consistent with the Monetary and Financial Statistics Manual and 2019 FSI Guide.

### Data validation, call reports, and the Bank Supervision Application (BSA)
- Identified discrepancies across call reports needing resolution:
  - Income and expense statement and detailed breakdown of income and expenses do not always reconcile
  - Provisioning figures in the call reports and balance sheet do not match
  - Components of regulatory capital and risk weighted assets do not align with their value on the balance sheet
  - Letter of credit on the assets and liabilities of the balance sheet cannot always be offset
- Recommendation:
  - The NBE to implement quality control checks for data submitted by commercial banks and closely work with them to explain reporting requirements and resolve data discrepancies
- Transition to electronic submissions:
  - BSD began collecting supervisory data electronically via the Bank Supervision Application (BSA) in 2017
  - Phasing out hard copy submissions would improve timeliness and accuracy
  - Microfinance and insurance supervision departments plan to shift call report collection to the BSA gradually
  - Once migration is complete, NBE may incorporate MFI data with DT data for FSI compilation and start compiling FSIs for insurance corporations
- BSA configuration and output:
  - Currently generates high-level summary reports only; manual aggregation of granular call-report data is required for FSI compilation
  - Recommendations:
    - The NBE to configure the BSA to generate aggregate data for commercial banks from detailed call report inputs to facilitate compilation and validation of FSIs in the workbook developed by the TA mission
    - The NBE to generate FSIs from the BSA once collection of data is fully automated

### Compilation framework and scope of FSIs produced
- Mission developed compilation spreadsheets mapping source data to the IMF’s FSI sectoral financial statement template using bridge tables; these were provided to the NBE
- The mission assisted NBE in compiling:
  - 11 core FSIs for deposit-takers
  - 11 additional FSIs for deposit-takers
  - 2 additional FSIs relating to the size of OFC subsectors
- Core FSIs for deposit-takers not compiled: 
  - common equity tier 1 capital to risk-weighted assets
  - loan concentration by economic activity
  - the liquidity coverage ratio
  - the net stable funding ratio
  - residential real estate prices
- Additional FSIs not available:
  - geographical distribution of loans to total loans
  - spread between the reference lending and deposit rates
  - credit growth to the private sector
- The new core FSI on provisions to nonperforming loans was not compiled but can be calculated as specific provisions divided by nonperforming loans
- Most uncompiled FSIs await implementation in new report forms under development by STA
- Main methodological differences between BSD’s existing FSIs and mission’s FSIs stem from adherence to the 2019 FSI Guide, including:
  - reclassification of general provisions and other provisions to other liabilities
  - annualization of income and expenditure figures
  - use of average capital and total assets where appropriate

### Income statement: adjustments and issues
- Income and expense statements adjusted from fiscal to calendar year: figures now cumulative from January 1st to the end of the reporting quarter for earning and profitability FSIs (consistent with 2019 FSI Guide)
- Discrepancies identified:
  - Unclear reporting treatment of prorated income and gains and losses on financial instruments valued at fair value through profit loss (FVTPL): separately or in other income
  - No separate detailed line for dividend income in the breakdown of income
- Recommendation:
  - The NBE to reconcile detailed breakdowns on income and expenses with main income and expense statements and update compilation spreadsheets accordingly
- Treatment of accrued interest and recoveries:
  - Accrued interest on nonperforming loans is not capitalized when loans are past due more 90 days; it is kept in a suspense account in memorandum items
  - Recoveries on previously written-off nonperforming loans should be adjusted in provision accounts in the income and expense statements and not recorded in other income; any interest income from recovery credited to interest income accounts, consistent with 2019 FSI Guide
- Annualization and averaging methodology explained for ROA and ROE (example for 2019):
  - Annualizing net income before/after tax reported on a cumulative basis:
    - 2019Q1 = (2019Q1)*4
    - 2019Q2 = (2019Q2)*2
    - 2019Q3 = (2019Q3)/3*4
    - 2019Q4 = (2019Q4)
  - Averaging total assets and capital:
    - 2019Q1 = (2018Q4+2019Q1)/2
    - 2019Q2 = (2018Q4+2019Q1+2019Q2)/3
    - 2019Q3 = (2018Q4+2019Q1+2019Q2+2019Q3)/4
    - 2019Q4 = (2018Q4+2019Q1+2019Q2+2019Q3+2019Q4)/5
  - ROA: annualized net income before tax divided by average total assets
  - ROE: annualized net income after tax divided by total equity
  - 2019 FSI Guide recommends net profit before tax for ROA and net income after tax for ROE

### Balance sheet: mapping, gaps, and recommendations
- Deposits with domestic and foreign banks on the asset side are mapped to interbank loans (consistent with 2019 FSI Guide)
- Incomplete counterparty information prevents proper sectorization; further breakdowns needed for:
  - sundry debtors, suspense accounts, un-cleared effects (asset side)
  - sundry creditors and resident foreign currency account disaggregation into government, bank, and non-bank counterparties (liability side)
- Payment and settlement accounts mapped to currency and deposits due to inability to separate from excess reserves with the NBE
- Customer deposits definition and mapping:
  - Customer deposits = all deposits on liabilities side except deposits from central banks, governments, or financial institutions
  - Deposits from federal or regional government, non-bank financial institutions, or pension funds excluded from customer deposits and mapped to other deposits
  - Deposits from domestic and foreign banks mapped to interbank deposits
  - Deposits to financial and non-financial cooperatives and associations currently mapped to other deposits until more granular data allow separation
- Recommendation:
  - The NBE to align sectoral classification of deposits, including the balance sheet (BS001 form), with the 2019 FSI Guide
- Letters of credit and acceptances:
  - Should be reported off-balance sheet for FSI calculations
  - Adjusting for this reduced total assets of the banking sector by 6.2 percent as of December 2019
  - Discrepancies found between letters of credit/acceptances in other assets and other liabilities preventing offsetting
- Financial derivatives:
  - Not currently included in the balance sheet; banks do not engage in derivatives so omission has had no consequences to date
  - Recommendation:
    - The NBE to revise the balance sheet to incorporate financial derivatives on both asset and liability sides and exclude letters of credit and acceptances (BS001 form)

### Supervisory series: regulatory capital, NPLs, liquidity, large exposures, and FX position
- Regulatory capital and risk-weighted assets:
  - Capital adequacy ratios calculated using national definition: regulatory capital comprises primary capital only; risk-weighted assets compiled net of specific and general provisions
  - Banks do not always report on-balance sheet exposures under correct asset classes and risk weight buckets, inhibiting reconciliation with balance sheet
  - NBE needs to clarify reporting rules for asset classification and risk weight buckets and ensure:
    - Components of primary and supplementary capital are adequately reported
    - Supervisory deductions are applied
  - Recommendations:
    - The NBE to provide clear instructions to banks on completing regulatory capital and risk weighted assets call reports (QC001, QI001 and QO001 forms)
    - The NBE to provide additional reporting instructions and breakdowns for reporting supplementary capital items and supervisory deductions (QC001 form)
- Nonperforming loans and provisions:
  - Calculated based on IFRS9 in parallel with a supervisory approach
  - Provisions derived from financial statements; regulatory risk reserves (difference between IFRS9 and supervisory provisions) should be carved out from retained earnings and allocated to other provisions within other liabilities
  - NBE does not currently collect data on regulatory risk reserve, preventing provisioning adjustments in balance sheet presentation
  - Specific provisions = provisions on nonperforming loans (consistent with 2019 FSI Guide)
  - Provisions on performing loans and other assets mapped to other liabilities
  - Recommendation:
    - The NBE to collect data on the regulatory risk reserve in the balance sheet and on non-performing loans and advances & provisions returns (BS001 and NL001 forms)
- Liquidity indicators:
  - Liquid assets calculated according to local definition consistent with broad measure from 2006 FSI Guide; 2019 FSI Guide eliminated core/broad distinction so broad measure is consistent with 2019 definition
  - Components of liquid assets: cash, deposits with the NBE, deposits with local and foreign banks, and treasury bills (NBE bills excluded)
  - Short-term liabilities = sum of all liabilities with residual maturity of not more than 90 days
  - Time deposits currently lack maturity profile; all time deposits were included in short-term liabilities after discussion with BSD staff
  - Going forward, time deposits with maturity more than 90 days need to be excluded for cross-country comparability
  - Off-balance sheet liabilities are not reported in short-term liabilities
  - Recommendation:
    - The NBE to collect maturity profile information for demand, savings, and time deposits separately in the MA001 form
- Large exposures:
  - Compiled according to NBE’s directive: aggregate of all credit exposures to a single or groups of connected borrowers when these exceed 10 percent of primary capital, per Directive (No. SBB/53/12)
  - Credit exposure defined as total outstanding amount of loans and advances only; corporate bonds not included
- Net open position in foreign currencies:
  - FSI on net open position in foreign currencies to capital can use either on-balance sheet or on- and off-balance sheet measures; the latter is preferred (consistent with Basel)
  - NBE currently compiles ratio using on- and off-balance sheet positions as numerator and total capital as denominator as defined in NBE’s Directive
  - Off-balance sheet items are overestimated by inclusion of commitments to sell foreign currencies to customers (these commitments are not binding and should not be included)
  - Due to absence of granular data, historic exclusion of these commitments may be impractical
  - Recommendation:
    - NBE to report to STA the net open position in foreign currencies using on-balance sheet measures for historic data, then switch to on- and off-balance sheet measures once granular and consistent off-balance sheet data are available

*Source: 1ethea2020003.*

### 65.      The current call report for the collection of data on net open position in foreign

### 1ethea2020003 - 65. The current call report for the collection of data on net open position in foreign

### Net open position in foreign currencies — findings
- The current call report lacks granular information on the subcomponents of on- and off-balance sheet assets and liabilities in foreign currencies, making it difficult for the NBE to verify the accuracy of data submitted by individual banks.
- Off-balance sheet items that give rise to foreign currency risks are not listed by product (such as commitments, Letters of credits and other trade finance contingencies).
- The call report does not include “other items (+ve)” and “other items (-ve)” to record currencies not listed, risking omission of FX transactions with non-listed currencies.
- The NBE regulation currently requires the use of the closing buying rate to convert foreign exchange positions to local currency; the mission notes inconsistency with the approach used for balance sheet reporting.

### Net open position — recommendations
- The NBE to report net open position in foreign currencies for historical data using on-balance sheet position only and switch to on- and off-balance sheet position once granular and consistent off-balance sheet data are collected.
- The NBE to redesign the call report on net open position in foreign currencies (DF001) to collect more granular data on banks’ foreign exchange positions to facilitate the reconciliation of the data with the balance sheet.
- Off-balance sheet items that give rise to foreign currency risks should be listed by product (such as commitments, Letters of credits and other trade finance contingencies).
- The reports should include an “other items (+ve)” and “other items (-ve)” to record all currencies not listed in the call report.
- When calculating the net open position, the mid buying and selling rates should be used to convert the foreign exchange position to local currency, consistent with the approach to convert foreign currency positions to the local currency used for reporting balance sheet positions (note: currently NBE regulation requires the use of the closing buying rate).

### Foreign-currency-denominated balance sheet components (examples listed)
- On-balance sheet assets: foreign currency notes and coins, balances with banks abroad, interbank loans, loans and advances, financial derivatives, other assets.
- On-balance sheet liabilities: deposits, short and long-term borrowings, financial derivatives, other liabilities.

### Spread between reference lending and deposit rates — findings and recommendation
- Finding: The BSD receives data on the spreads between lending and deposit rates from the MFID. The data submitted by the MFID have been static during the last 18 months, which may not yield an accurate estimate.
- Recommendation:
  - The NBE to calculate the spread between the reference lending and deposit rates based on updated the interest income and interest expense report forms (BA001 and BE001) once the data quality of these forms is improved.

### Real estate market — findings and recommendation
- Finding: FSIs on residential estate loans to gross loans and commercial real estate loans were not compiled due to insufficient breakdowns and an unclear definition of other loans to the construction sector.
- Recommendation:
  - The NBE to collect residential real estate and commercial real estate loans data in line with the definitions provided in the 2019 FSI Guide.

### New FSI Report Forms — key adjustments
- The 2019 FSI Guide has phased out extraordinary income/expenses from the presentation of income statements. IAS1 no longer allows the reporting of extraordinary items in presentation of profit or loss and other comprehensive income statements.
- Extraordinary items in the profit and loss statement (PL001) are mapped to other income if positive, or other expenses if negative, to assist transition to the new FSI template.
- Provisions on performing loans and other assets are mapped to other liabilities in current report forms, but should be reported under “General and other provisions” on the liability side when new FSI report forms are introduced.
- The 2019 FSI Guide recommends reporting other comprehensive income (OCI) as an additional line item in income and expense statements. Because Ethiopia has been implementing IFRS 9 since 2018, comprehensive reporting of the income statement would necessitate the introduction of other comprehensive income.

### FSI Metadata — findings and recommendations
- Finding: Metadata are needed to complement FSI data to allow interpretation and cross-country comparisons. Deviations from the 2019 FSI Guide should be explained in metadata and updated when necessary.
- The mission developed FSI metadata for DTs based on information provided by the authorities; the draft metadata should be updated when changes are observed (e.g., accounting and regulatory framework changes).
- Recommendation:
  - The understanding of how key underlying series are calculated is important; adjustments and national practices that differ from the 2019 FSI Guide should be documented.
  - The mission completed the FSI metadata template in Excel for reporting together with FSI data to STA for posting on the IMF’s FSI website.

### FSI data reporting — scope and recommendations
- The NBE aims to regularly report sectoral FSIs to the IMF with quarterly frequency, to be posted on the IMF’s FSI website, upon NBE management’s approval.
- The NBE can compile and report all 11 core and 11 additional FSIs for deposit-takers as well as two additional FSIs on the size of OFC subsectors on a quarterly basis.
- The mission completed the FSI institutional coverage template (FS1 template) with information on the number of reporting DTs and branches, split by ownership, and their total assets; FS1 should be reported to the IMF for dissemination.
- Recommendations:
  - The NBE to finalize and report to STA for review the FSI sectoral financial statements (FS2 template) for DTs, including balance sheet, income statement, and memorandum series; the sectoral FSIs with underlying series (FSD template) for DTs with quarterly data beginning from 2017: Q2; the FSI institutional coverage (FS1 template) with annual data starting from 2017; and the FSI metadata (FSM template).
  - The NBE to start regular reporting to STA, for posting on the IMF’s FSI website, of the FSD and FS2 templates with quarterly data starting from 2017: Q2, and the FS1 template with annual data starting from 2017. Also report the FSM template periodically.

### FSIs for Other Financial Corporations (OFCs) — findings
- Two FSIs for OFCs were compiled: OFC financial assets to total financial assets and OFC financial assets to gross domestic product.
- The OFC sector currently represents a quite small share of the financial system.
  - The insurance sector—the largest OFC subsector—has less than one and a half percent of the assets of the financial system.
  - The asset share of capital goods finance companies is around 0.1 percent.
- Recommendation: Developments in the OFC sector should be monitored.

### Resources, training, and technical cooperation — recommendation
- Recommendation:
  - Support NBE officials’ efforts to participate in IMF FSI training courses to improve their methodological knowledge and skills in compilation and interpretation of FSIs.

### Other issues — follow-up items
- The mission followed up on MFS mission recommendations pending since January 2019. The MFID is consulting with NBE management on the MFS recommendations and providing further clarifications on monetary data based on SRFs.
- The mission encouraged data sharing and consistency checks with BSD, including for sectoral bank loans data.
- Ethiopia’s Financial Access Survey (FAS) reporting: Ethiopia was a FAS reporter until its most recent data submission in 2012. The mission clarified contact information and the NBE provided an updated list of contact persons.

### Key FSIs and statistics (selected figures from Appendix I)
- Regulatory capital to risk-weighted assets: 21.8 (Jun-17), 23.2 (Dec-17), 22.3 (Jun-18), 21.0 (Dec-18), 19.9 (Jun-19), 17.7 (Dec-19)
- Nonperforming loans net of provisions to capital: 2.1 (Jun-17), 7.4 (Dec-17), 11.6 (Jun-18), 12.6 (Dec-18), 4.8 (Jun-19), 7.7 (Dec-19)
- Nonperforming loans to total gross loans: 2.4 (Jun-17), 3.4 (Dec-17), 2.8 (Jun-18), 3.6 (Dec-18), 2.2 (Jun-19), 2.7 (Dec-19)
- Interest margin to gross income: 64.0 (Jun-17), 74.0 (Dec-17), 69.3 (Jun-18), 68.3 (Dec-18), 69.7 (Jun-19), 66.3 (Dec-19)
- Noninterest expenses to gross income: 48.7 (Jun-17), 54.8 (Dec-17), 50.7 (Jun-18), 50.0 (Dec-18), 54.6 (Jun-19), 56.9 (Dec-19)
- Liquid assets to total assets: 13.4 (Jun-17), 11.1 (Dec-17), 13.0 (Jun-18), 11.7 (Dec-18), 13.0 (Jun-19), 11.6 (Dec-19)
- Spread between reference lending and deposit rates (basis points): 7.4 (Jun-17), 7.4 (Dec-17), 5.5 (Jun-18), 5.5 (Dec-18), 5.5 (Jun-19), 5.5 (Dec-19)
- Customer deposits to total (noninterbank) loans: 165.3 (Jun-17), 168.6 (Dec-17), 176.5 (Jun-18), 166.9 (Dec-18), 169.4 (Jun-19), 157.7 (Dec-19)
- Foreign-currency-denominated liabilities to total liabilities: 2.0 (Jun-17), 2.4 (Dec-17), 2.3 (Jun-18), 2.3 (Dec-18), 2.3 (Jun-19), 2.4 (Dec-19)
- OFC's financial assets to total financial assets: 1.8 (Jun-17), 1.9 (Dec-17), 1.9 (Jun-18), 1.8 (Dec-18), 1.7 (Jun-19), 2.1 (Dec-19)
- OFC's financial assets to gross domestic product: 0.9 (Jun-17), 1.0 (Dec-18), 0.9 (Jun-19) — (values presented with gaps in source)

### Appendix IV — selected metadata points on FSI compilation
- Residence: Foreign-owned companies incorporated in Ethiopia are classified as residents in line with System of National Accounts (2008 SNA).
- Consolidation basis: FSIs for deposit takers (DTs) in Ethiopia are compiled on a domestic location (DL) basis.
- Institutional coverage: FSIs for DTs cover all 17 commercial banks (as of December 2019); 39 deposit-taking MFIs and one development bank are classified as deposit-takers but not yet included; SACCOs data not available.
- Regulatory framework: All banks operate under a modified version of Basel I for supervisory reporting.
- Accounting framework: Commercial banks adopted IFRS (notably IFRS9); IAS21 used for conversion of foreign currency accounts; interest is not accrued on nonperforming loans.
- Definitions:
  - Tier 1 capital: paid-up capital, share premium, general reserves, legal reserves; retained earnings and gains on revaluation of fixed assets are not included; no deductions applied to Tier 1.
  - Total regulatory capital equals Tier 1 capital; NBE regulation does not prescribe any element of Tier 2 capital.
  - Risk Weighted Assets is the sum of on- and off-balance sheet risk weighted assets; no additional capital requirement for market risk.
  - Broad measure of liquid assets includes cash, deposits with the NBE, deposits with local and foreign banks, treasury bills; NBE bills excluded.
  - Short-term liabilities include demand, savings, and time deposits without maturity breakdowns and other liabilities with remaining time to maturity of three months or less.
  - Nonperforming loans (NPLs) defined as loans past due for more than 90 days.
  - ROA: annualized net income before tax divided by average total assets.
  - ROE: annualized net income after tax divided by average capital and reserves.
  - Net open position in foreign exchange: Prior to September 2020, off-balance exposures are excluded from the calculation.
- Source data: Income and expense statements, balance sheets, and other call reports; financial year runs from 1 July to 30 June; income and expense statements restated to calendar year; banks required to submit quarterly returns by the 20th business day after quarter-end.

*Source: TA Mission report text provided in the content unit.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1ethea2020003.pdf_