The Commercial Bank of Ethiopia (CBE) recently announced a revision of its loan interest rates, excluding credit for the agriculture and housing sectors. Executives of the state-owned bank attributed the decision to the changing economic landscape and the need to maintain competitiveness.
Effective as of March 7, 2025, the interest rate revision reflects the bank’s ongoing transformation efforts and its commitment to balancing operational sustainability with customer needs.
In a bid to avoid pressuring the housing sector, CBE has kept rates unchanged for residential condominium loans under the 40/60, 20/80, and 10/90 long-term schemes, maintaining an interest rate of 12 percent. The agricultural sector has been treated in a similar static interest amount of 14 percent.
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Abdulmenan Mohammed (PhD), a financial analyst based in London, observes that CBE has functioned as a policy bank similar to the Development Bank of Ethiopia (DBE) for 17 years rather than a purely commercial bank.
“CBE has operated as a policy arm of the government, providing loans with lower interest rates to promote the agriculture and manufacturing sectors,” Abdulmenan said.
A policy bank’s primary objective is to grant long-term loans that promote economic development.
“However, the recent interest rate revision signals a shift in CBE’s operations,” said Abdulmenan, adding that, “Now, like other commercial banks, CBE will disburse loans and set interest rates based on market demand and supply.”
Unlike CBE, private banks typically charge interest rates exceeding 20 percent. According to Abdulmenan, rising interest rates often lead to lower investment and decreased housing prices in other countries due to affordability constraints.
When interest rates rise, investors may reconsider whether their ventures will remain profitable.
“This hesitation can slow down economic activity, which, in turn, helps curb inflation,” Abdulmenan told The Reporter Magazine.
He also argues that, contrary to popular belief, interest rate hikes do not necessarily cause inflation.
“While many assume higher interest rates drive inflation due to increased production costs, what is often observed in practice is economic slowdown,” said Abdulmenan.
He predicts that Ethiopia’s inflation rate could decline into the single digits, prompting the National Bank of Ethiopia (NBE) to ease its tightened monetary policy.
“Once inflation stabilizes, savings rates will improve, making interest rates more attractive,” he added.
The interest rate hike is expected to reduce the number of borrowers while increasing the number of savers. However, Abdulmenan warned that the move could also force some businesses to shut down due to the increased financial burden.
As the dominant player in Ethiopia’s banking industry, CBE is likely to influence private banks, which may follow suit by raising their interest rates. The decision is also expected to boost savings interest rates, further impacting economic activities, Abdulmenan explained.
Abraham Teriessa, a financial expert, offered a contrasting perspective, emphasizing the challenges faced by businesses in an unstable economic climate.
“It is difficult for CBE customers who have borrowed money to repay their loans amid instability and economic slowdown,” he said. “Businesses are not operating at full capacity due to insecurity and movement restrictions, which in turn could lead to inflation as borrowers increase prices to compensate.”
He predicts the interest rate hike could lead to a rise in non-performing loans (NPLs) as more and more businesses struggle to make repayments.
“The prevalence of security and economic stability are the key factors that determine loan repayment,” he stressed.
If borrowers fail to pay back their loans, banks may resort to foreclosing properties. However, Abraham noted that many investors are reluctant to acquire firms through foreclosure, further complicating the economic impact of rising interest rates.
CBE announced a series of interest rate adjustments aimed at balancing sectoral support with rising operational costs. Short-term agricultural loans, including overdrafts, will remain steady at 14 percent, while medium-term loans are set at 14.5 percent.
Long-term agricultural loans, which include fertilizer financing, will see a one-percentage-point reduction to 15.5 percent from the previous 16.5 percent. These measures aim to sustain the agricultural sector while addressing the bank’s operational cost concerns.
The housing sector remains a focal point of CBE’s policy adjustments. The bank’s decision ensures continued access to affordable financing for homebuyers in an economy where housing costs are a major concern for many Ethiopians.
The bank, on the other hand, also revised its commercial loan portfolio with notable changes. Interest rates for non-export term loans, including short-term overdrafts, will now range between 14 and 16.5 percent. Specifically, short-term loans will carry a 15 percent interest rate, medium-term loans will be set at 15.75 percent and long-term loans will bear a 16.5 percent interest rate. These changes aim to accommodate the increasing costs associated with commercial lending.
For import and microfinance a shift has been observed in loan interest rates on advance import bills (including overdrafts), which have increased from 17 to 18 percent. Meanwhile, short-term loans to microfinance institutions have surged from 11.5 to 14 percent. Medium- and long-term loan interest rates have also increased to 15.5 percent.
Accounting for approximately half of Ethiopia’s banking industry in terms of market share, assets, and deposit base, CBE remains the country’s largest and longest-serving bank. Its extensive geographical presence has cemented its status as a systemically important financial institution. According to the NBE Financial Stability Report published in November 2024, CBE has been instrumental in Ethiopia’s economic growth. However, its historical overexposure to public sector projects has put financial strain on the institution.
Among various sectors, agriculture, building and construction, and manufacturing remain the largest beneficiaries of CBE’s loans. As of June 2024, these sectors accounted for 95.1 billion birr, 167 billion birr, and 345.3 billion birr in loans, respectively. This reflects an annual growth of 6.3 percent, 11 percent, and 23 percent, according to the NBE report.
The lreport highlights that the banking sector’s loans and advances have been relatively concentrated due to historical large-scale lending to major state enterprises and regional governments.
Including such state-owned enterprises, the top 10 borrowers in the banking industry accounted for 14.7 percent of total loans and advances as of June 2024, a notable reduction from the previous year’s 23.5 percent. However, excluding state-owned enterprises, the concentration ratio drops significantly, with the top 10 private borrowers comprising just 3.5 percent of total bank loans and advances.
Large borrowers, defined as those with credit exposure exceeding 10 million birr, represented only 0.5 percent of total borrowers but held a commanding 74.8 percent share of all banking sector loans, an increase from the prior year. A significant portion of these loans was issued to borrowers in urban areas.
Looking ahead, the NBE expects that as banks work to comply with the credit granting conditions outlined in the revised NBE directives, credit concentration risks in the banking sector will gradually decline. Key regulatory changes in this regard include the accurate identification of connected borrowers and adherence to quantitative prudential limits stipulated in the Large Exposures Directive.
On the other hand, CBE’s annual report for 2023/24 further highlights a consistent upward trend in loan disbursement. In the 2023/24 financial year, CBE disbursed new loans totaling 218.2 billion birr, with a substantial 198.3 billion birr (90.9 percent) directed to the private sector, including essential fertilizer imports. Additionally, interest-free banking and financing through CBE Noor accounted for 44.2 billion birr. During the same period, the bank collected a total loan repayment of 171.2 billion birr.
CBE’s latest interest rate adjustments reflect a strategic effort to balance financial sustainability with economic growth. While higher rates may pose challenges for borrowers, they are also necessary to manage risks and ensure long term banking stability. As regulatory measures take effect, the banking sector is expected to become more diversified, reducing credit concentration risks and fostering a more inclusive financial environment. Ultimately, these changes will play a crucial role in shaping Ethiopia’s economic trajectory, ensuring that crucial sectors continue to receive the necessary financial support while maintaining the overall health of the banking industry.
