The launch of Ethiopia’s first interbank market trading platform on the Ethiopian Securities Exchange (ESX) marks a historic achievement as it becomes one of the few African exchanges to introduce interbank trading, setting a new standard for short term money markets on the continent. With dual regulatory oversight from the National Bank of Ethiopia (NBE) and the Ethiopian Capital Market Authority (ECMA), the ESX is proud to host a modern and flexible trading platform that promotes efficient price discovery, better transparency, and enhances liquidity in the Ethiopian banking sector. This enables a more stable, resilient, and adaptable financial sector, one that’s better equipped to support the nation’s long-term growth ambitions.
By Michael Habte
The interbank market forms the key part of a suite of short-term financing instruments in the money market asset class. Money market instruments are generally defined as highly liquid, low risk ‘cash equivalent’ financial instruments that mature in less than one year. In addition to the interbank segment, the money market includes time deposits, Treasury Bills, repurchase agreements (collateralized interbank loan), and commercial papers which are unsecured short-term debt instruments issued by companies to finance short-term working capital.
For years, Ethiopia’s financial sector has operated with limited mechanisms for interbank transactions. One of the primary reasons for this has been the lack of the necessary technological infrastructure which has held back the formation of an effective interbank money market. This lack of infrastructure coupled with the requisite regulatory framework has restrained the capacity of banks to respond effectively to liquidity needs, making lending and investment cumbersome and riskier than necessary.
The new interbank market trading platform changes this landscape, introducing a key financial market infrastructure and global standard regulatory framework that facilitates real-time transactions and more efficient allocation of capital in the wholesale financial sector.Banks can now trade cash amongst each other more seamlessly, ensuring liquidity is dynamically balanced across the system. Importantly, the NBE paved the path for the successful launch of the trading platform by finalizing and publishing the Interbank Money Market Directive (MFAD/IBM/03/2024) which formally regulates the interbank market prior to the commencement of trading in October 2024.
The interbank market is an essential prerequisite for the robust development of modern debt capital markets and serves as the foundation for constructing a proper market-based yield curve and building liquidity in the government debt market. An efficient interbank market helps to support government bond markets by optimizing financial institutions’ liquidity positions and helping price short term debt instruments such as Treasury Bills more accurately in the secondary market. The short-term interbank T-Bill market are inherently linked to each other.
The presence of a liquid money market also reduces the risk and expense in terms of storing government securities to maturity as banks can use these securities as collateral in the interbank market – in the form of repurchases agreements (repos)- unlocking valuable implied optionality in Treasury instruments that until now has not been realized in Ethiopia due to the absence of a functional capital market and necessary trading and settlement systems. The ESX trading platform will allow trading in both the interbank and debt – both government and private securities – markets and be integrated with the Central Securities Depository (CSD) hosted at the NBE that handles trade settlement, providing an integrated and seamless trade execution process on par with modern exchanges around the globe.
The significance extends beyond operational efficiency for banks alone however. A regulated trading platform will improve price discovery in the cash market, enhance market discipline, and reduce the cost of interbank borrowing. These advancements mean that Ethiopian businesses — from SMEs to large corporates — can access credit more predictably and affordably and provide added flexibility to banks to meet customer credit demands more proactively. The ripple effects can spark increased investment, job creation, and innovation in the real economy, accelerating Ethiopia’s march toward becoming a middle-income economy.
It is also important to underscore how this milestone aligns with the nations broader efforts to integrate into international trade and finance following the recently announced reforms in the financial sector. By enhancing liquidity management and promoting a structured, regulated interbank market, a platform that adheres to modern money market norms provides a means to increase investor confidence in the banking system, both local and international.
As we take note of this achievement, we must remain cognizant of the new nature of this business and provide adequate capacity building and resources to market participants in the interbank market. This platform’s success hinges on trust, transparency, and resilience, which must be nurtured through continuous learning and adaptation. With thoughtful stewardship, the ESX Interbank Trading Platform can and should serve as a model for innovation and growth in Ethiopia and across the continent.
Michael Habte is Chief Operating Officer of the ESX
