Building Ethiopia’s Digital Financial Services Ecosystem: Barriers and Opportunities

  • February 03, 2022

  • Addis Ababa, Ethiopia

Yaa Asamoah Boateng
Communications and Knowledge Management Specialist


In 2016, Ethiopia's Council of Ministers (i.e., the Cabinet) ratified the National Financial Inclusion Strategy (NFIS) as a firm indication that it recognizes financial inclusion for all as a strategic priority. That commitment has received a further boost due to the ongoing review of the strategy following challenges during its implementation. Further, the country has also developed the National Digital Payments Strategy to complement the National Financial Inclusion Strategy.

However, in building Ethiopia's Digital Financial Services (DFS) ecosystem, perhaps, the biggest challenge that persists and needs to be addressed is its comparatively low penetration levels as opposed to other least developed countries in the East and Southern Africa Regions. This is mainly due to the low performance of the mobile money environment, which is the primary driver of accessing and using digital financial services in the region.

Ethiopia has one of the lowest rates of financial institution account ownership and its equality gaps like the other countries pertain to education, income, and employment. Based on the World Bank 2017 Findex report, the UN Capital Development Fund (UNCDF) has conducted an account ownership gap analysis. It shows that those with primary education or less, adults whose income falls in the lowest 40 percent of earners, and those not in the labor force have lower likelihoods of account ownership. There are also gaps in account ownership for rural people, youth (ages 15-24) and women, but they are not as severe as those mentioned above.

Additional supply side data on account ownership is not readily available after 2017 and the figures might have shown change. New updated data is expected in 2022. When comparing the 2014 and 2017 Findex reports, it showed that the gaps in account ownership in education, income, employment level, and gender perspective have widened over time. If equality was to be achieved, attention needs to be paid to these factors. Conversely, the age and rural gaps over that same period had slightly declined.

Other significant impediments to financial inclusion in Ethiopia include the lack of infrastructure, a need for more conducive regulations, limited competition with state-owned enterprises and a shortage of mass-market financial systems like agent networks.

A critical assessment of the digital finance landscape also reveals that mobile network connectivity is high across the country but with low internet speeds and usage. Global System for Mobile Communication (GSMA) reports that mobile handset ownership is low, and that affordability is an issue. However, Ethio telecom reports more robust figures and states that a sizeable portion of its user base has transitioned to smartphones (44 percent according to the Ethio telecom 2020/21 annual report).

Access to electricity is low, especially in rural areas. Financial distribution networks are primarily limited to urban areas, are limited in size, and the quality of service is unknown but thought to need significant improvement. Levels of financial and digital literacy are also considered low given the low penetration of services and low levels of average education.

On its payment systems, the country's Network Security Agency has launched an aggregation platform, Derash, which is expected to interface all bill payments and associated payment terminals. While this could accelerate financial inclusion, its actual impact will depend on the value of this platform to a market with other platforms offering similar services.

Various studies have shown that policy and regulatory environments are critical enablers for DFS ecosystems to thrive with resultant scalability in digital finance access and usage. Currently, the government supports the industry through multiple directives that have improved service delivery. However, there are still some challenges. These include a lack of clarity on the impact of the privatization of Ethio Telecom, particularly on the agent network. A lack of enabling laws for digitization of payments and remittances. Restrictions on foreign investment in banking and financial institutions (including DFS providers) despite its benefits to the DFS ecosystem, specifically, mobile money issuance by non-banks.

FinTechs have the capability of propelling the usage of DFS, to this fact it is important to highlight Ethiopia's growing FinTech landscape. Most of them are engaged in mobile money transfer in the form of bill payment, money transfer, airtime purchase, cash in and cash out services. These operators provide FinTech platforms directly to customers via existing financial institutions, including microfinance institutions, while some of them are now providing electronic money issuance and other services by themselves.

While there is an enormous opportunity to grow Fintechs, they face significant challenges, which needs detailed assessment and mitigation mechanics. At the same time, they need access to partnerships with government agencies, which at the moment are limited to some financial institutions.

UNCDF, together with its partners, the EU (European Union) and OACPS are supporting the growth of digital financial services by providing a platform that unites stakeholders in a Working Group. This DFS Working Group will provide the much-needed coordination role in delivering a robust ecosystem.

In the second part of this blog, we share details on how the DFS Working group will collaborate to remove the existing barriers and accelerate the opportunities in line with the broader goal of the Digital Financial Services 4 Resilience Programme.