The evolution of Ethiopia's commercial banking sector is marked by a rise in total assets, shifts in deposit trends, and an increase in digital transactions. However, the industry needs to remain vigilant to maintain this positive trajectory and ensure sustainable and inclusive growth.

Recent years have shown a distinct evolution in the banking industry, with a substantial expansion of assets and liabilities charting new terrains in the country's economic growth. Analysis of the banks` balance sheets, digital transactions, and deposit trends provides an intriguing lens to examine Ethiopia's economic course and financial stability.

As of 2023, the commercial banking industry reported a remarkable surge in total assets, signifying a strengthening financial sector and a buoyant economy. According to data from the National Bank of Ethiopia (NBE), total assets swelled by an impressive 30pc year-on-year, reaching 2.3 trillion Br, compared to 1.7 trillion Br in the previous year. A surge in assets of this magnitude could reflect domestic and international investors' confidence in the country's financial sector.

Equally notable is the growth in loans and advances, which saw a sharp increase of 35pc, reaching 1.4 trillion Br in 2023. Credit growth is a key indicator of a thriving business sector. It suggests increased capital investment and an expansion of the private sector, which are critical components of a growing economy.

The increase in loans and advances coincides with a shift in the type of deposits held by commercial banks. Time deposits saw a 25pc increase, reaching 600 billion Br, suggesting a growing preference for longer-term savings plans. Demand deposits, however, saw moderate growth of 15pc, totaling 400 billion Br. This shift towards time deposits indicates improved financial literacy and suggests that depositors are becoming more comfortable locking their savings for longer periods, a positive sign for the banks.

The savings deposit experienced a significant increase of 40pc, hitting the 800 billion Br mark.

Amidst this substantial growth, the commercial banking industry also saw a digital revolution. The past few years witnessed an explosion in digital transactions, making Ethiopia a rising star in Africa's digital banking scene. In 2023 alone, digital transactions increased by a staggering 50pc, signaling a rapid shift towards a cashless society and revealing the population's increasing comfort with and access to digital technology.

Not to be overlooked is the stability of the commercial banking industry, which has been maintained in spite of this substantial growth. The reserve ratio—a key indicator of a bank's financial health—remained steady at five percent. Despite the aggressive expansion, banks are still well-cushioned against potential financial shocks.

The year-on-year performance of the industry appears to be consistent with the picture that has emerged over the decade. Since the last decade, the total assets of Ethiopia's commercial banks have exhibited a striking surge.

At the end of 2022, total assets saw a considerable leap from 645 billion Br in 2013, according to data from the central bank. The 194pc increase in assets points to an economy in expansion, with banks playing a crucial role in accumulating capital for investments and ensuring financial intermediation.

Accompanying the growth in total assets, the banking industry also witnessed an upswing in loans and advances. From 30pc shares in total assets in 2013, the loans and advances have reached 40pc shares in 2022. A thriving business sector, with banks showing an increased willingness to provide credit to businesses, facilitate economic expansion.

However, the expansion of loans must be analyzed in conjunction with the Non-Performing Loans (NPL) ratio. It stood at 2.7pc in 2022, marginally higher than the 2.2pc in 2013, but still well within the range of the global average. While banks are more open to risk, they effectively manage these risks to prevent financial instability.

The increasing prevalence of digital transactions also paints an interesting narrative. Mobile and Internet banking transactions jumped from a mere two percent of total transactions in 2013 to a whopping 30pc in 2022. This rise in digital transactions demonstrates the banks' adaptability to technological advancements and consumers' evolving preferences, suggesting an increase in the overall efficiency of the banking sector.

A shift in the type of deposits also emerged over the years.

Demand deposits, which comprised 40pc of the total deposits in 2013, were reduced to 32pc by 2022. Conversely, savings deposits saw an increase from 30pc to 40pc in the same period. These changes signal the public's rising confidence in the banks, with consumers showing a greater propensity to commit their funds for longer.

The banks' financial stability also manifested in the form of the reserve ratio. Despite the industry's rapid expansion, the banks' reserve ratio stayed consistent at 10pc over the past decade, meeting the requirements set by the central bank. Their ability to maintain adequate cash reserves to meet immediate withdrawals ensures financial stability.

To provide some perspective, the commercial banking industry's growth appears to have positively influenced Ethiopia's overall economic growth. The country's GDP grew by an average of 6.8pc annually over the past decade, a figure well above the Sub-Sahara African average.

The credit growth within the banking industry is clearly correlated with this robust economic performance. As banks continue to lend more, businesses get more opportunities to invest and expand, propelling the economy's wheels. 

Despite these promising indicators, challenges persist.

The high levels of non-performing loans and the decrease in deposit mobilization suggest that Ethiopia's banks may face significant challenges. While these issues are not insurmountable, they would require a comprehensive strategy involving stricter credit risk management, initiatives to improve financial literacy and inclusion, and possibly financial sector reform to ensure the long-term viability of Ethiopia's financial sector.

While the growth in digital transactions marks progress, it also exposes the industry to new risks, such as cyber-attacks.