The latest Financial Stability Report offers a reassuring message: Ethiopia’s financial system is sound, resilient, and improving. Capital is strong. Liquidity is ample. Profitability is rising. Growth has rebounded. Inflation is easing. Digital finance is booming.
In short, all is well.
But stability reports are written in calm weather. They measure yesterday’s conditions and project them forward, assuming tomorrow will behave much like today. That is their strength, and their blind spot.
The first question worth asking is a simple one: stable for whom, and under what conditions?
The report highlights a banking system with capital well above regulatory minimums. Comforting, certainly. Yet capital ratios are not a shield against uncertainty; they are a snapshot of balance sheets under current assumptions. When conditions change, when credit deteriorates, liquidity tightens, or confidence wavers, those reassuring buffers can shrink faster than expected. Financial history is littered with institutions that were “well capitalized” right up until they weren’t.
Then there is the matter of concentration. One bank, THE Commercial Bank of Ethiopia, dominates the system to such an extent that it is classified as systemically important. The report notes that it has passed stress tests, which is welcome. But the very need to single out one institution tells its own story. This is not a broadly distributed system of risk; it is a system leaning heavily on a single pillar. When stability depends on one pillar, the system is not diversified, it is concentrated.
Averages, too, can mislead. Industry-wide liquidity appears robust. Yet beneath the surface, a number of banks failed liquidity stress tests and have been asked to submit recovery plans. That detail matters more than the headline numbers. In finance, the average is often where risk goes to hide. A few large institutions can pull the average up while smaller ones are already under strain. Stability, in such cases, is unevenly distributed.
The macroeconomic backdrop is undeniably improved. Growth has accelerated, inflation is declining, and policy reforms are gaining traction. These are real achievements. But they may also represent the easier phase of adjustment, the initial gains that follow stabilization. The harder question is whether this improvement is self-sustaining or dependent on continued policy support and favorable conditions. Growth during recovery is not the same as resilience under pressure.
The rapid expansion of digital finance is another point of pride. Transaction values have surged, expanding access and efficiency. But scale brings its own risks. Digital systems do not eliminate fragility; they can amplify it. The more activity is routed through interconnected platforms, the greater the potential for disruptions, whether from technical failures, fraud, or cyber threats, to cascade across the system.
There is also a quieter shift underway. Domestic institutions, including pension and social security funds, are playing a growing role in financing government securities. This may lower borrowing costs and deepen local markets. It may also increase interdependence within the system. When banks, public funds, and government financing become tightly linked, stability can come to depend on the continued smooth functioning of that entire network. What appears as strength in good times can reveal itself as entanglement in more difficult ones.
None of this suggests that the system is unsound. On the contrary, there has been clear progress. Capital is stronger. Liquidity has improved. Macroeconomic conditions are more favorable. These are meaningful gains.
But stability is not a destination; it is a condition, one that holds only as long as the underlying assumptions remain intact.
And that is the quiet tension running through the report. Beneath the reassuring language lies a system still shaped by concentration, uneven liquidity, growing complexity, and a dependence on confidence that cannot be measured as easily as capital ratios or growth rates.
It is stable, yes.
But like all financial systems, it is stable, until it isn’t.
Editor’s Note : The article appeared first on the writer’s personal SM page
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