The National Bank of Ethiopia (NBE) has released its third Financial Stability Report, covering the fiscal year from July 2024 to June 2025, presenting a cautiously optimistic picture of the country’s financial system amid a challenging global backdrop.
The report, issued in line with the central bank’s mandate to safeguard the stability and soundness of the financial system, offers a comprehensive assessment of risks, vulnerabilities, and sectoral performance. It is intended to guide policymakers, investors, and financial institutions while reinforcing depositor confidence and supporting sustainable economic growth.
Despite a global environment marked by moderating economic growth, persistent geopolitical tensions, and external shocks, Ethiopia’s macroeconomic conditions showed notable improvement during the review period. Economic growth strengthened while inflation declined, contributing to a more stable operating environment for financial institutions. The transition toward positive real interest rates further enhanced the effectiveness of monetary policy.
Fiscal performance also improved, with lower budget deficits and more sustainable levels of public and domestic debt helping to reduce macroeconomic vulnerabilities and underpin financial stability.
The banking sector remained resilient and low risk, with key indicators—including capital adequacy, asset quality, liquidity, and profitability—showing marked improvement compared to the previous year. Stress tests assessing credit, liquidity, and foreign exchange risks indicate that banks are well positioned to absorb plausible shocks.
The outlook for the 2025/26 fiscal year remains positive, supported by expectations of continued economic growth, single-digit inflation, expanding credit, and rising foreign exchange earnings. Ethiopia’s only systemically important bank successfully passed all major stress tests conducted at the end of June 2025, suggesting that systemic risk remains contained, although regulators noted that concentration risks warrant continued monitoring.
Beyond banking, other segments of the financial sector also demonstrated stability. The microfinance sector posed limited systemic risk due to its relatively small size, while recording improvements in capital adequacy, asset quality, liquidity, and profitability. Capital goods finance companies similarly maintained sound financial positions with low credit risk and adequate buffers.
The insurance sector showed solid performance, supported by strong liquidity, profitability, premium growth, and improved underwriting outcomes.
Meanwhile, the capital market and social security sector are playing an increasingly significant role in supporting liquidity management, lowering borrowing costs, and facilitating investment in government Treasury Bills.
Digital financial services continued their rapid expansion, with transaction values nearly doubling to exceed ETB 18.5 trillion during the review period. While this growth is advancing financial inclusion and efficiency, the report cautions that it also heightens exposure to operational, cyber, and fraud-related risks, underscoring the need for stronger technological infrastructure, human capacity, and risk management systems.
