Contents

 

1. Introduction

2. The Meaning of and International Action for Liberalization of Financial Services

2.1. The Meaning and Nature of Liberalization of Financial Services

2.2. Factors required for Liberalization of Financial Services

2.3. GATS framework for Liberalization of Financial Services

2.4. Basel Recommendations on Liberalization of Financial Services

3. The Potential Benefit and Risk of Liberalization of Financial Service: Theory and Evidence

3.1. Potential Benefit of Financial services liberalization

3.2. Potential Risk Associated with Liberalization of Financial Services

4. The Possible Benefit and Risk of Multilateral Financial Services Sector Liberalization for Ethiopia

4.1. The Ethiopian Financial Services Sector and Recent Reforms: An overview

4.2. Financial Services Sector of Ethiopia: The Regulatory and Supervisory Policy Environment

4.3. Possible Benefit and Risk of Financial Liberalization for Ethiopia

4.4. Maximizing the Benefit and Avoiding Risk of Financial Liberalization in Ethiopia

5. Conclusion and Recommendations

References

Bibliography

Abstract

Ethiopia has requested for the World Trade Organization (WTO) accession, and negotiation is in progress. This essentially infers that Ethiopia’s position to liberalize its services sector in general and financial services sector in particular. This dissertation is therefore intended to analyze the possible benefits and risks of Ethiopia’s making liberalization commitments in its financial services sector in light of the General Agreement on Trade in Services (GATS). Liberalization of financial services sectors may entail benefits of better competition and efficiency and stability of financial system, and ultimately contribute to the rest of economy. Likewise, financial services liberalization may bring about significant risks; could affect domestic financial institutions and ultimately result in financial crisis. The conclusion herein is that financial services liberalization may bring both benefit and risk for Ethiopia. But, cautious and orderly liberalization process, added with sound regulatory and legal framework will be essential to reap the maximum benefits and avoid the threats associated with it.

Keywords

Abbreviation and Acronyms

A Plan for Accelerated and Sustained Development to End Poverty- PASDEP

Asynchronous Transfer Mode- ATM

Basle Committee on Banking Supervision-BCBS

GATS- General Agreement of Trade in Service

International Monetary Fund-IMF

LDCs- Least Developed Countries

LFS- Liberalization of Financial Services

MFN- Most Favored Nations

Micro Financing Institutions- MFIs

Ministry of Finance and Economic Development- MOFED

NBE- National Bank of Ethiopia

NT- National Treatment

OECD - Organization for Economic Cooperation and Development

UNCTAD- United Nations Conference on Trade and Development

United Nations Conference on Trade and Development-UNCTD

World Bank- WB.

WTO- World Trade Organization

Introduction

A financial Services sector liberalization is an important issue in Countries GATS negotiations. The GATS framework has a set of general rules and obligations to which governments have to commit to increase market access or remove discrimination and allow foreign financial service providers to operate more freely. Apart from this overriding objective, the preamble to GATS agreement explicitly states and recognizes the liberalization endeavour should be conducted with a view to stimulate economic activity through guaranteed policy bindings; and promote trade and development through progressive liberalization.

Liberalization of financial services sector according to GATS may entail both benefits and risks in developing countries. The consequence of multilateral liberalization in financial services for LDC’s in general and Ethiopia in particular, however, has remained an issue of debate. To this end, the question of whether financial services liberalization could help Ethiopia to substantially induce economic development takes an interesting dimension in this dissertation, since the country has started negotiation on the degree and sequence of trade in financial sector as a part of its accession to WTO.

This article has four sections. The first section traces the general connotation of international framework for financial services sector liberalization. It mainly concerns the international rules, principles and practices towards the liberalization of financial services sector. The second section provides the brief discussion on the potential benefits and risks of financial services sector liberalization in general. The third section begins by looking at an overview of Ethiopian financial services sector, the legal and regulatory regimes and critically analyzes the main theme of the thesis, the possible benefit and risk of Ethiopia’s liberalization commitment for the financial sector in light of the preceding chapters. The final section concludes the paper by providing some general recommendations.

2. The Meaning of and International Action for Liberalisation of Financial Services

The recognition of the importance of services insists on the inclusion of international services in the Uruguay round of negotiations which ultimately resulted into the GATS agreement of the WTO in 1995.[i] The GATS framework purveys an international legal framework for liberalization of financial services (LFS), through periodic rounds of multilateral negotiations.[ii] A financial service is any service of a financial nature offered by a financial service supplier of a member.[iii] The overriding objective of the GATS is to enhance expansion of trade in service under condition of transparency and progressive liberalisation and as a means of promoting economic growth.[iv]

In light of this, the purpose of this section is to provide conceptual framework as to the meaning and international action for LFS. After having a cursory look at the meaning of and factors required for LFS, the chapter steps on to depicting regulation of LFS within GATS framework. This will compare with the recommendations of the Basle committee on prudential regulation and supervision of financial services.

2.1. The Meaning and Nature of Liberalisation of Financial Services

The notion of LFS is given various meaning in the literature. In broader sense, the notion of LFS essentially involves liberalization of trade in financial services, capital account liberalization and Liberalization of domestic financial services. [v]

The first refers to liberalization of trade in financial service, which means the removal of discriminatory regulations that discriminate against foreign market entry for foreign financial service providers.[vi] The concern of this liberalization process is to increase financial market access and remove discriminatory and other access-impeding barriers across all four modes of supply.[vii]

The second refers to liberalization of capital account, which regards the free movement of domestic and international capital across borders.[viii] It encompasses the elimination of reducing government measures on capital and the tradability of currency.[ix] Capital account liberalization is different from the concept of liberalization of trade in financial service. As a matter of general principle liberalization of trade in financial service doesn’t involve the liberalization of capital account.[x] However, literature indicates the nexus between liberalization of trade in financial services and capital account opening. Accordingly, liberalization of trade in financial services is often linked to the opening of capital account.[xi] This is notably in the context of mode 1, LFS which requires the movement of capital and hence requires some measure of capital account liberalization as an inherent part of the financial service liberalization.[xii] At the same time, action for LFS requires countries not to limit on international payments and transfers, and such requirements sometimes involves capital account opening.[xiii] To this extent, liberalization of trade in financial service involves capital account liberalization, because the efficient implementation of the former capital account needs to be liberalized.

The third stand for domestic financial liberalization denotes measures directed at deregulation of the domestic financial system.[xiv] LFS typically involves lifting of restrictions on domestic financial sectors through, privatizing state-owned financial sectors; freeing interest rates, and exchange rates.[xv] It also accompanies the withdrawal of government regulation on the introduction of new financial instruments by easing the conditions for the participation of firms.[xvi] Furthermore, deregulation involves among other things, the intermediation or integration of the domestic financial institutions.

Even though LFS encompasses a wider process of financial reforms as discussed above, the main focus of this dissertation is liberalization of financial services in the perspective of GATS agreement. In this context, the financial sector liberalization process encompasses the removal or reduction of all types of barriers to the entry of financial services and creation of an equal playing field in terms of regulation between domestic and foreign financial service providers.[xvii] This is not to be confused with domestic deregulation and capital account opening in which their focus is different from liberalization of trade in financial services.

2.2. Factors required for Liberalisation of Financial Services

LFS, whether multilaterally or by other ways, can cause both benefits and risks.[xviii] Hence, for successful LFS, , it is therefore essential that certain prerequisites are in place. This section, tries to identify some key factors required for liberalization of financial service.

To start with, putting in place a sound regulatory and prudential supervisory of financial institutions is important prerequisite before making liberalization in financial services. Prudential supervision, generally speaking, involves government regulation and monitoring of financial system to reduce risk, and ensure the wellbeing and soundness of financial system. (Frederic S.M; 2000, p9). Here, the ultimate objective of prudential supervision and regulation is justified on the ground that it ensures the stability of financial service.[xix] Similarly, prudential supervision helps to improve the administration of financial systems that detect problems at an early stage and thereby limits the probability and degree of risks related to financial service sector.[xx] It is argued that if LFS is accompanied with weak supervision of the financial system, it will potentially result in financial crisis.[xxi]

Similar to these arguments, much of the past financial crisis in Asia and Latin America can be at least partially traced to the lack of sound and prudential regulatory regimes as an essential factor to enhance financial stability.[xxii] These reinforce the point that LFS requires a consolidated regulation and supervision of financial framework.

The mere existence of prudential regulatory and supervisory rules alone, however, is not enough in order to ensure the financial service soundness and limit risk. Effective and efficient supervision of financial system requires adherence to some fundamental factors or elements, which are necessary to ensure the stability of a financial system. These factors include (Bank for International Settlements; 2012, p14, p15 and Frederic S.M; 2000, p22 and p23); the formulation and implementation of appropriate fiscal, monetary and market discipline policies and of appropriate policy framework in relation to financial stability. A well-developed public infrastructure constituting elements such as strong and independent judiciary, compressive and well defined accounting, auditing and payment system with independent, competent and experienced professionals is also needed to ensure the effectiveness of financial service supervision. Effective risk management, resolution and recovery regimes, and the disclosure of information to the public are other preconditions for efficient financial system.

Of course these elements are clearly provided under international supervisory and regulatory standards or best practices recognised by the world’s major financial regulators.[xxiii] The standards and principles for the regulation and supervision are proposed by various international forums.[xxiv] The Basle core principles, the details of which will be discussed in section four, play a great role in this process. Consequently, compliance with the core principles will assist a country’s effort to ensure effective prudential supervision, which is necessary to deal effectively with risk of financial crisis, particularly in the context of financial sector liberalization. However, there is no international framework to create a linkage between LFS and development of sound financial system through the implementation of international financial standards.[xxv]

The second essential factor required for LFS is domestic financial reforms. Domestic structural reforms need to precede liberalization commitments in financial services.[xxvi] Evidence demonstrates that, rushing to liberalization commitments in financial service before the introduction of structural reforms may have adverse consequences.[xxvii] Hence, government should prepare domestic financial institutions in order for future competitive environment, and increase a level playing field among financial institutions.[xxviii] In doing so, domestic financial reforms should focus on the strengthening, broadening and deepening in domestic financial institution and eliminating of financial service trade distorting measure.[xxix] With the same reason, improving the quality of institutional framework, know-how, technological modernization and privatizing state owned financial sectors are also required to make more competitive adjustment.[xxx]

The third factor required for effective LFS, is the establishment of stable macroeconomic policies. A sound fiscal, exchange rate and monetary policies are key factors to achieve the more predictable and stable macroeconomic policies.[xxxi] These factors are essential for macroeconomic stability, and hence important determinants for financial services stability.[xxxii] LFS in unsound macroeconomic policy can lead to adverse inflation, budget deficit and bring balance of payment problems.[xxxiii] For example, excessive or weak monetary policy and inappropriate policy intervention in lending decision of financial sector, by undermining the competition of domestic financial service entail into capital outflows.[xxxiv] Stabilization through, adequate macroeconomic policies, is therefore, an important factor for liberalization of financial services.

Generally, without adequate regulation, prudential supervision, macroeconomic policy and competitive domestic financial system, LFS is more likely to bring negative consequence. In order to avoid the problems, therefore, it is vital to undertake reforms regarding these factors with/before liberalization.

2.3. GATS Framework for Liberalisation of Financial Services

The task of initiation to establish multilateral legal framework for services sector in general and financial services in particular was started in 1986. The main objective behind this start was to realize liberalization of trade in services which would be progressive, and bring greater world prosperity.[xxxv] The creation of GATS structure and the relevant provisions on financial services was a turning point in the achievements of the Uruguay Round in December 1993.[xxxvi] Despite its wide scope and complexities[xxxvii], the GATS agreement comprises of general principles and obligations in regulating the conduct of trade in services sector and annexes dealing with rules for specific sectors. It is supported by a number of specific commitments and the lists of exemptions from most-favoured-nation (MFN) treatment, which countries do make in their schedules.[xxxviii] The GATS agreement also identifies four modes of trade in financial services.[xxxix]

The GATS fundamental principles which deal with discriminatory barriers of trade in financial service are the MFN and Transparency. The GATS MFN rule requires each country to accord immediately and unconditionally one and the same treatment to all financial services or financial service providers of all member countries without discrimination.[xl] This means that if a country allows the entry of a financial service provider from particular WTO member countries, equal opportunities should be given to financial service suppliers from all other members. The GATS transparency framework authorizes countries to publish all actions pertaining or affecting the operation of the GATS agreements in relation to liberalization of financial service.[xli] Each country is further required to establish an enquiry point from which other member countries can obtain information about the regulatory framework in the financial service sector.[xlii]

The GATS framework for LFS also entails specific obligation negotiated by parties with regard to: national treatment (NT) and market access. The NT principle of GATS requires each member state to accord to foreign financial service treatment not less favourable than the treatment it accords to its own financial services and financial service suppliers.[xliii] NT, treatment not less favourable than financial services and financial service suppliers owned by receiving states, in accordance with GATS framework contends both de jure and de facto treatment.[xliv] All the same market access rule of GATS requires members to eliminate quantitative restrictions or legal measures towards foreign financial supplier’s market access, unless specified in a member's schedule.[xlv] In another words, it is not allowed to limit market access for financial service and financial service suppliers of other members other than that provided for under the terms, limitations and conditions agreed and specified in its Schedule.

The GATS further requires a progressively higher level of liberalisation to periodic negotiating rounds.[xlvi] It aims to increase the member’s liberalization commitments in financial service through continuous rounds of negotiations.[xlvii]

From the above discussion it can be argued that, the GATS provide a set of rules that governments have to implement to allow foreign financial service providers to operate more freely. Besides, the GATS framework aims to create maximum competitive opportunities in financial markets.[xlviii] However, this doesn’t mean that states could not be, at all, allowed to exempt some of their financial services from the application of GATS framework. Within GATS framework, there exists an exception for countries to depart from the obligation of GATS framework for prudential reasons. For example, countries may infringe GATS framework for the protection of investors, depositors, policy holders and for preserving the integrity and stability of the financial system.[xlix] It may also be allowed to introduce regulation of a temporary nature in the events of serious balance-of-payments and external financial difficulties or the threat thereof.[l] Furthermore, prudential measure is, inter alia, justified to protect public interest or public morality, human, animal or plant life and to prevent deceptive practices.[li]

Securing unlimited liberalization for financial service is, thus, not the aim of GATS framework.[lii] Quite the contrary, GATS framework is targeted to eliminate adverse discriminatory measures against financial market access.[liii] This suggests that it provides countries sufficient options to introduce prudential domestic regulations in their liberalization process based on their unique needs.[liv] However, this may not be used as a means of evasion from GATS framework with regard to liberalization of financial services.[lv] The problem is, however, practical difficulties in drawing the line between prudential measures and GATS regulatory framework. The ultimate responsibility of prudential regulation and supervision lies on national authorities.[lvi] Moreover, GATS doesn’t expressly mention whether countries must adhere to international standards for prudential regulatory supervision of financial system.[lvii]

Actually, the GATS mandate countries to apply prudential regulations only based on objective, reasonable, impartial and transparent criteria.[lviii] Others on the other hand, suggest that the need for consideration of coherent international standards as a benchmark for determining whether a member’s regulatory controls comply with GATS framework or not.[lix] This may result in using international standards on prudential regulation and supervision for financial service set-out by the Basle committee, which contributes on LFS, to be discussed under the next section.

2.4. Basle Recommendations on Liberalisation of Financial Services

With the aim to control risk associated with financial service liberalization and improve the quality and reach of banking supervision, the committee on banking regulations and supervision were adopted in 1970.[lx] It became known as the Basle Committee on Banking Supervision (BCBS).[lxi] Since then, the Basle committee has developed core principles on liberalization of banking service for national supervisors to adopt.

The Basle committee suggests the need for the cooperation of the host and home state supervisory authorities is a key requirement for prudential financial supervision.[lxii] In this context, banking service regulatory responsibility should be allocated between host and home countries authorities.[lxiii] Each state regulatory authority must assess the ability of other countries regulatory authorities to supervise and carry out their respective roles.[lxiv] Sharing responsibility in this manner should reduce the chance that a foreign branch will completely escape supervision.

With regard to particular responsibilities of the host state, the Basle committee recommends that the host regulatory authority take primary responsibility for the adequacy of the foreign bank’s liquidity.[lxv] If the home states financial supervision is found to be inappropriate, it is recommended by the committee that the host countries supervisory authority should totally or partially limit the participation of banks from home state.[lxvi] The Basle committee also recommends that the host country supervisors need to ensure that the home country authority receives consolidated cross-border banking record or information. Where adequate record and minimum standards are not met to the satisfaction of the host state authorities, it is recommended to impose restrictive measures.[lxvii]

The home country’s supervisory authority should, in turn, be primarily responsible for the solvency of a home country’s bank whilst that bank is operating in a foreign country.[lxviii] In this regard, the home states regulatory authorities should review and monitor the exposure of its banking sector to risks [the quality of assets, and the capital adequacy and concentration of risks].[lxix] This means, the host countries regulatory authorities need to ensure banks maintain adequate record that allows obtaining a true and fair view of its financial condition.[lxx] Again, it should obtain the necessary information about the proposed directors and senior managers to consider individually and collectively their banking experience, personal integrity and relevant skill.[lxxi] As well, if there is no adequate supervision in host state, the home state authority must discourage the operations of host countries banking service in home countries.[lxxii]

The Basle committee also recommends that contact and exchange of information between the supervisory authorities in home and host countries is a key requisite to improve the prudential supervision of overseas banking service.[lxxiii] Supervisory authorities need to eliminate all legal constraints on the transfer of information with each other in relation to all prudential supervisory matters.[lxxiv] This is very crucial for successful cross-border supervision of banking service, and in turn strength financial stability.

Furthermore, the Basle committee proposes countries to adopt the minimum capital adequacy standard and to implement this standard into their jurisdiction. Development of legal framework for capital adequacy requirement helps to prevent systematic risks facing banks when countries liberalize their financial service.[lxxv] It is also used to create a level playing field for financial institutions competing in the international markets.[lxxvi]

Despite supervisory standards recommended by the Basel Committee and other international fora being widely accepted, their effective implementation in domestic regulation, especially in developing countries has remained unsettled questions[E1] . (Sydney. J. K; 1999, p71 and Jonathan W; 2002, p33). There are some reasons for this. First, these standards are informal in nature.(Sydney. J. K; 1999, 69) That is, they are non-binding legal rules that their domestic adoption and implementation varies across countries. Second, as developing countries have no say in designing these principles and it is not appropriate in the circumstances of small economies is still evolving. (Jonathan W; 2002, p37 and p70)

Third, proper implementation of these standards requires powerful and thoughtful supervisors the stock of which is lacking in most developing countries. (Jonathan W; 2002, p14) Similarly, it is argued that the adaption of these standards are not appropriate in the case of developing countries, which is associated to several reasons, ( Jonathan W; 2002, pp24-28) ‘The economic environment is riskier, lower skill involved in the financial actors, weaker legal and financial institutions and the frequent currency and debt crisis and small foreign currency reserve of small economies’. And the minimum capital adequacy in developing countries’ is not compliant with Basel minimum capital requirements. Moreover, because of the absence of independent regulators supervisors, judiciaries and weaker informational capital in developing states’ resulted in weak enforcement of these standards.

Finally, as mentioned above, there is no international framework linking GATS regulatory framework and international financial standards appealed as basic challenges for effective implementation of the Basle standards in harmonized way.

Hence, as the result of the above explanations the appropriateness of the Basel for situation of developing countries’ in general, and LDC’s in particular make the implementation of the standards less effective that need policy change.

International actions have been undertaken to liberalize financial services since Uruguay round. LFS, in this regard involves the process of removing or reducing all discriminatory barriers in trade in financial service. This has enabled the development of international framework called GATS, targeted to place financial services on multinational basis. The GATS framework aims in leveraging the negotiating countries or members to attain progressively greater LFS and realize mutual benefits.

Such LFS needs, however, that a number of factors are implemented by the government[E2] . These relate to, first, the advancement of the regulatory and supervision frameworks. Sound regulatory and prudential supervision framework is a key requisite to an efficient and healthy financial system. To achieve this, and perhaps the more important thing is to adopt international minimum standards and implement in national jurisdiction. Introduction of stable macro-economic policy and the strengthening of domestic financial institutions in order to prepare for increased future competition are also at the heart of LFS.

3. The Potential Benefit and Risk of Liberalization of Financial Service: Theory and Evidence

In the first section, an attempt has been made to show the general platforms of the meaning of and international agreement for LFS. In this context, the vital role that financial services sector are playing in the domestic economy as well as in international trade has received the attention it deserves with its inclusion for the first time in the Uruguay Round negotiations under the aegis of GATS. After then, there has been the wide expansion of liberalization policy in many countries of the world.[lxxvii]

However, there have been conflicting evidences as to the effects of financial liberalization in GATS context. To this end, this section is designed to provide the overall highlight of the evidences, on the potential risk and benefit of multilateral LFS.

3.1. Potential benefit of Financial Services Liberalization

LFS trade is supposed to provide important potential benefits. These relates both to financial markets and to the whole economy. It has been argued that liberalization of financial service would help to bring competitive financial sectors in local economy.[lxxviii] Likewise, by introducing international practices and improving the scale of financial services; competition would increase the efficiency of domestic financial system.[lxxix] This in turn guarantees financial markets improve their service with lower prices and widens choices for consumers.[lxxx] Moreover, it eases country’s access to international capital and this in turn assists to bring much needed capital for productive investment.[lxxxi] Moreover, LFS may have a lion share contribution to countries long run economic development.[lxxxii]

LFS may provide an impetus to an improvement in the financial regulatory and institutional system.[lxxxiii] This is mainly due to financial sectors liberalization inviting foreign players which then enter the domestic economy with greater experience, more sophisticated financial instruments and advanced risk management.[lxxxiv]

There have also been large bodies of empirical evidences that confirms LFS has tended to bring potential benefits. For example, an empirical review on the effects of foreign bank entry shows that opening financial market for Foreign Service Suppliers improve the competence of domestic service in Turkey.[lxxxv] Country specific studies on the impact of foreign bank entry in Philippines, Colombia and Argentina respectively reach similar conclusions.[lxxxvi]

Studies that interrogated the relationship between foreign bank entry and the efficiency of domestic banking sectors of thirty countries during the periods of 1995-2002 also indicated that policy towards allowing foreign bank entry increases the efficiency and diversification of local banks.[lxxxvii] Empirical studiesfrom a sample of eighty countries show that LFS reduces the profitability of domestic financial service and enhances their efficiency.[lxxxviii] Likewise, early case studies using econometric analysis in Latin America reveal similar results.[lxxxix]

Furthermore, empirical study indicates that LFS by providing capital improves the allocation of credit for productive investment.[xc] The evidence from cross-country study on the role of entry of foreign banking service provider in Argentina and Mexico alike concluded that liberalization in banking services appear to contribute a greater stable credit for private sectors.[xci] In similar fashion, an empirical assessment on 3,000 enterprises in 36 developing and transitional economies indicates that liberalization of banking services advances borrowers’ access to loans.[xcii] The study finds that access to loan for firms’ is freer in countries with deregulated foreign bank entry than countries’ which limited foreign bank entry.

The growth enhancing effects of financial liberalization is not mere theoretical conclusion. Many theoretical and empirical studies have also established that there are close association between the two. [E3] In this regard, results from cross-country study confirm that opening services enhances economic growth in both developing and developed countries.[xciii] Results from the study of the growth effect of the LFS conclude that those countries which have opted for an open regime are growing at a higher rate from 1.3 to 1.6 percentage points higher than countries that limit financial sector opening.[xciv] Similarly a cross- country analytical study reveals that controlling for other determinants of growth in countries that fully liberalized their financial services sector grew, on average about one percent per year, faster than countries that opt for non-commitment in liberalization.[xcv] Of course, the benefits of financial liberalization heavily depend on the assumption that liberalization is underpinned by effective regulatory frameworks.[xcvi] LFS short of appropriate infrastructure of law and institutions can, therefore, entail potential risks, which is to be explored in the next section.

3.2. Potential Risk Associated with Liberalization of Financial Services

The preceding discussion has highlighted the fact that multilateral liberalization of financial services can have a significant gain not only for financial sector but also for the whole economy. In this context, liberalization in financial service is seen as a vital component of countries’ overall efforts to secure the potential benefits of liberalization.[xcvii] However, studies have proven that financial sector liberalization entails potential risks. Some of the threats associated with LFS are discussed below.

Theorists and empiricists indicate that LFS has resulted in an increase in financial fragility, and consequently have had a negative impact on country’s economic activity.[xcviii] This holds true in particular, as the past and present financial crisis has indicated, for developing and emerging world.[xcix] This is related to a number of reasons. Firstly, financial liberalization is likely to lead to capital transfer or outflows which, in turn, affect countries’ balance of payment and is often a cause of financial crisis.[c]Another way that LFS can bring about financial fragility is in the case of case of profit repatriation.[ci] This means that, in times of decline in profit and financial crises foreign financial suppliers tend to leave the host country with their capital or reduce loans, and this can result in volatility in the availability of credit.[cii] Another argument for risks of LFS is that tough competition reduces the profitability, market share of banking sector and thereby increases the fragility of domestic banking system.[ciii]

Moreover, the entrance of foreign actors due to liberalization may lead to adverse changes in the allocation of credit among opaque domestic consumers, and thereby likely to increase economic crisis.[civ] A theoretical based study on the effects of foreign banks in poor countries also suggests that opening domestic market for foreign banks hurts small business access to credit.[cv]

The economic crisis in most part of developing nations is substantially related to decrease of credit to local customers, which is the outcome of financial liberalization.[cvi] Analytical research using bank level data also supports the fact that financial market liberalisation policy decreases access to loan for small business for example in Nigeria.[cvii] This is because foreign financial actors have no interest or are reluctant to provide credit to poor group of people; rather they tend to mainly serve the financial needs of large and profitable clients. However, others argued that LFS not only provide loan to wealthiest people but access to finance to poor group is easy with liberalization.[cviii]

The association of LFS and financial crisis has also been confirmed by a number of empirical researches. To mention some of them, empirical study conducted for eight Asian countries, for example, indicates financial service liberalization brings banking crisis.[cix] Similarly, a cross-country empirical study of forty-two countries during the period 1973-2002 shows the positive interplay between LFS and the likelihood of banking crises.[cx] But the relationship between financial liberalization and banking crisis varies from country to country based on their financial development status, types of liberalization and financial regulatory and institutional infrastructures.[cxi] The study finally concludes that financial liberalization may likely accelerate banking crises in developing countries by weak regulatory and institutional framework, while the opposite was observed in developed nations.[cxii]

Despite these cases, other evidence contends to the reverse. It is argued that liberalization does not pose a lethal threat by itself, rather the absence of appropriate legal and regulatory institutions accelerate financial instability and crisis.[cxiii] This suggests LFS doesn’t necessarily cause a crisis; the danger of crisis comes from liberalization added with other factors. Still some other studies have contended that a potential risks from liberalization in financial services is correlated with absence of proper sequencing liberalization, prudential regulation and strong domestic financial institution. An exhaustive and cross-country empirical study, for instance, shows a significant association between crisis associated with financial liberalization and the underdevelopment of suitable prudential policies.[cxiv] Similarly, Turks commitment towards full banking liberalization in the absence of proper regulatory and institutional policy had led banking instability.[cxv]

Putting the series of theoretical and empirical evidences together, it can at least be possible to come to an intermediate position. It is obvious that financial liberalization can contribute to potential gains in the form of competency, efficiency and in the form of a providing efficient capital reallocation for productive investment. These gains can be observed at the level of the financial institutions, the firm, the household, and the whole economy. The available evidence also, however, suggests that the potential benefits associated with LFS do need countries governments to launch prudential regulatory and macro-economic policies. LFS in the absence of adequate prudential policy may, however, lead to risks. It may threaten domestic financial services; will “cherry pick” the huge sectors, capital out flows and cause financial crisis.

However, whether these assertions are relevant or applicable to the developing African countries like Ethiopia is should be questioned. There is no or there exist only a few studies that question whether the implication of LFS in Developed and developing economies have similar effects in LDC’s like Ethiopia with different institutional and political environments. This issue will be strived to be addressed in the next chapter.

4. The Possible Benefit and Risk of Multilateral Financial Services Sector Liberalization for Ethiopia

As elaborated under above, LFS can benefit the consumers, the financial firms and the whole economy through efficiency gains. As a result of this, many countries have been liberalizing their financial sector through GATS framework in last two decades.[cxvi] However, financial services liberalization is not without risks especially if it is undertaken in the absence of prudential regulatory and institutional environment.

Ethiopia has not been yet liberalized its financial sectors. But Ethiopia already submitted a request for WTO accession in 2003 and negotiation is underway for accession.[cxvii] Since the country has started negotiation on the degree of trade liberalization as a part of its accession to WTO, Ethiopia is going to liberalize its financial services. This raises a few questions: What are the specific benefits and risks of liberalization of financial sectors for Ethiopia? Is financial services sector liberalization in Ethiopian condition more beneficial or more risky?

Following this introduction, section two of this chapter is designed to provide the reader with an overview of the Ethiopian financial services sector in general, and legal, institutional and policy environment in particular. Section three evaluate whether financial integration is more beneficial or more risky for Ethiopia from the existing legal and regulatory policy perspectives. This point, particularly the later one is the main theme of this chapter. Finally, what viable action or policy necessitates in order for increasing the potential gains of and circumvents risks of financial liberalization in Ethiopia is also a basic issue to be discussed in this chapter.

4.1. The Ethiopian Financial Services Sector and Recent Reforms: An overview

Based on market economy, efforts of economic and financial sector reforms started in Ethiopia in 1994. In this way, the government is committed to alleviate poverty and achieve economic growth through market economy, particularly through private sector development.[cxviii] Although economic growth is in progress compared to the previous time[cxix], there is no sustainable increase of economic growth in Ethiopia.[cxx]

The private financial services sector has increased, state banks are restructured and interest rates have partially liberalized since 1994.[cxxi] The establishment and ownership of banking sectors, insurance sectors and microfinance institutions are allowed for private citizens.[cxxii] Accordingly, the country’s overall public and private banks reached seventeen in number [fourteen are private and three of them under state ownership]. [cxxiii] Other institutions in the financial services sector include fourteen insurance companies and thirty-one micro financing institutions (MFIs).[cxxiv] Still financial services sectors, especially banks and insurance are in the process of formation in Ethiopia. While recent reforms have been in progress, the financial sector development in Ethiopia is still much less developed compared to other countries.[cxxv] Even though the number of private financial sector has improved, the financial services sector total asset only constitutes 5% of GDP.[cxxvi]

Ethiopia’s financial system is bank dominated with infant money [saving and loan], capital markets and high liquidity ratio.[cxxvii] The banking sector of Ethiopia is dominated by public-owned financial sectors. The largest state-commercial bank is the dominant player in terms of capital (accounts 39%), deposits mobilization (accounts 58%) and branch coverage (accounts 43%), thus crowding out the private financial services sector.[cxxviii] The market share of state banks also dominates in providing a higher loan and deposits than private banks.[cxxix] Even though there has been a progress in private insurance, state-owned insurance firms still play a dominant role in Ethiopia.[cxxx] These characters clearly indicate the dominant state control of the Ethiopian financial services sector.

Financial services coverage in Ethiopia is far below standards compared to other country, and not easily accessible to large segment of the population.[cxxxi] More particularly, the financial services sector is hardly accessible to peoples living out of the main capital city of the country.[cxxxii] This is due to more than half of financial services branches being concentrated in major cities.[cxxxiii] Even though the MFIS has recently been increasing around rural areas, 70 % of the rural credit demand is unmet in Ethiopia.[cxxxiv] The lending practice is biased towards short-term and wealthy groups, at the expense of the poor and important long-term projects.[cxxxv] Similarly, there is very limited credit access to private sector and relatively higher credit is reserved for the government.[cxxxvi] Furthermore, Ethiopia has no formal stock exchange market, and nothing that shows for its preparation yet.[cxxxvii] A domestic financial need is opted to be met through limited Treasury bill and government bonds issued by NBE.[cxxxviii]

Financial foreign investment, in whatever forms is not allowed in Ethiopia.[cxxxix] This means, the banking, insurance (except reinsurers) and microfinance subsectors are not allowed to have foreign financial institutions to invest in Ethiopia.[cxl] Even worse, private person is not permitted to own more than 20% of a banking company’s shares.[cxli] The Ethiopian government maintains strong control over capital.[cxlii] These kinds of policies seem to be too strict, and affect the capital mobilization, competition capacity and efficiency of banks in Ethiopia.

Various arguments have been advocated by Ethiopian government for the continued resistance to inviting foreign financial investment into the country. These include[cxliii] the infant industry argument; the argument that liberalization could lead to financial distress among domestic financial firms as their profits decline.[cxliv] The other is related to the fear of the perceived macroeconomic and financial risks arising from a more open financial sector. One argument alleges that foreign financial institutions facilitate capital flight out of the country. A related argument questions the foreign firms’ commitment to local markets, worrying about the possibility that they would retreat from the host country in response to difficulties at home or in the local market. Still another argument anticipates difficulty in conducting monetary policy when the presence of foreign institutions is substantial in the financial sector. Finally, more relevant would be the argument based on the government’s limited ability to properly supervise and monitor a more complex financial system. Accordingly, foreign entry in to the financial sector is not allowed until domestic banks attain a certain degree of desired competitiveness and the National Bank’s supervisory and regulatory capacity is adequately strengthened.[cxlv]

On the other hand, however, the absence of capital market and limiting opening of financial service market for foreign market can affect credit and capital mobilization in Ethiopia.[cxlvi] This in turn affects the efficiency and competitive advantage of opening financial services sector for foreign participation. This has been confirmed through empirical studies in Ethiopia that shows that, the current financial reform does not enhance credit access for small and medium business.[cxlvii] Moreover, only those who provide collateral to banks have better access to loans compared to those that do not, signifying the importance of collateral for credit in Ethiopia.[cxlviii] The study also reveals that though there is a reform in bank sector, there is no change in efficiency, competition and the bank sector is characterized by a higher liquidity.

Perhaps, the government prefers to seek to strength the financial sectors through domestic capacity building.[cxlix] Others, however, argued that the fact of the infancy of domestic financial system having to compete with the sophisticated foreign financial sectors should not be used as a defense for endless delay.[cl] Multilateral liberalization commitment can serve a country as a catalyst to increase competition and to develop domestic capacity.[cli]

Hence, though the government aimed to undertake financial development of the private sector through efficient financial system since 1990’s, the reform is not moving at an appropriate pace.[clii] Financial services sector of Ethiopia is characterized by state monopoly. Extensive government intervention and monopoly has continued as the usual practice in the majority of the financial services sectors. Foreign investment in financial sectors is not allowed in Ethiopia. This makes the Ethiopia’s financial services sector the most underdeveloped even in the world.

The other ground of assessing whether the Ethiopian financial system is developed or underdeveloped is based on the quality of regulatory and supervisory policy framework. This is a point of discussion in the next section.

4.2. Financial Services Sector of Ethiopia: The Regulatory and Supervisory Policy Environment

The regulatory and supervisory mechanisms in relation to the financial system have been in place in Ethiopian during a transitional period.[cliii] The National Bank of Ethiopia (NBE) is given although not sufficiently independent, the power to supervise the whole financial services sector.[cliv] In addition to supervision, the NBE has been given authority to inspect, examine and sanction all private financial institutions and markets.[clv] The government of Ethiopia also authorizes the NBE on all foreign exchange transactions and to regulate all foreign exchange payments and remittances.[clvi] Likewise, the NBE is authorized to regulate the medium of exchange, provide payment and clearing services to the banks and other financial institutions, and establish, modernize and regulate the national payments, clearing and settlement systems.[clvii]

Although supervisory mechanisms in relation to financial sectors are in place in Ethiopian, there is still serious challenge due to different reasons. Among other things, there is no comprehensive financial regulatory policy that defines the specific objectives of financial regulation in Ethiopia.[clviii] Financial Sector regulation of Ethiopia is designed based on the mere aim to foster monetary stability, maintain a sound financial system and create conditions for rapid economic growth.[clix] The other financial regulatory policy, like consumer protection and efficiency is not included under the objective of regulatory authority of the NBE.

Moreover, the supervisory capacity of NBE is inefficient to manage risks associated with liquidity.[clx] This has associated with dearth of strong regulatory framework and skilled stuffs. For instance, there is no legal and regulatory framework for electronic payments regulation and enforcement in Ethiopia.[clxi] This may hinder the introduction of cost effective modern electronic payment instruments such as Asynchronous Transfer Mode (ATM) credit and debit cards, telephone and internet banking, and has contributed to excess bank liquidity in Ethiopia.[clxii] Likewise, there is no formally established institutional, legal and regulatory policy environment for formal capital market in the country.[clxiii] This may have impact on any evaluation of the value and liquidity of financial investments in Ethiopia.

As shown above, the NBE is given unlimited power to control the administration of all financial services sector operating in the country, which would make the regulation of private financial sector more flimsy.[clxiv]

More importantly, Ethiopia’s financial services sector supervision is not compatible with international regulatory and supervisory standards.[clxv] For instance, the risk assessment, accounting, auditing methodologies of financial service sector seems to be very poor and below minimum standards.[clxvi] It is further stated that because of lack of capacity of NBE, there are no enforcement mechanisms of financial reporting in Ethiopia.[clxvii] This implies the ineffective regulation and supervision of Ethiopia’s financial services sector.

Hence, the financial sector supervisory framework is not efficient in Ethiopia. This prompts a legitimate question as to whether financial liberalization in the context of GATS framework is a pitfall or more useful for Ethiopia. The next section is therefore needed to address this vital issue, by bringing together the experiences of developing and Least Developing Country (LDC) into the Ethiopian context.

4.3. Possible Benefit and Risk of Financial Liberalization for Ethiopia.

As discussed in chapter two above, LFS according to GATS agreement entails both benefit and risk. However, most of the case studies discussed focused more on developing countries and developed nations, while only few on LDC’s, and on Ethiopia in particular. Perhaps it is impossible to analyze benefit and risk of financial services trade in comprehensive way, because financial liberalization in Ethiopia may be in the future. Only the possible impact of financial service liberalization was analyzed by few studies. Relatively one of the most comprehensive works was the study by Stern, et al. (2007), who has assessed the impact of the Ethiopian financial sector liberalization on financial intermediation, economic growth and income inequality both quantitatively and qualitatively. The study’s finding covers; liberalization in financial sector can have positive effects on the development of financial intermediaries, and increases financial intermediary index by 1.35 %.[clxviii] Financial openness, through financial intermediation also increase 0.5 percentage points faster for 1990-2004 if it had the same degree of financial openness as countries classified as an “open” category but, indirectly.[clxix] The study again proof that the development of financial intermediation benefits both poor and rich people equally.[clxx] Further, their assessment finds that the costs of public banks are 1.6 % significantly higher than those of private banks, and the returns on asset and interest rate of public banks are 1.7 %, 1.5% respectively which is significantly lower than private banks.[clxxi] This implies private banks are more efficient than pubic banks in Ethiopia. Finally, the study conclude that financial sector liberalization will have a potential benefits for Ethiopia.[clxxii]

The other non-quantitative study by Kiyota, et al. (2007) seems to confirm the recommendations by Stern et al (2007).The study assessed whether Ethiopia would benefit from allowing foreign participation in the financial sector or not. It finds that Ethiopia’s financial liberalization commitment will bring benefits such as financial efficiency due to high competition, employment opportunity and increase access to credit for the poor.[clxxiii] Based on regression output, the study has also shown that the state owned financial sectors performed lower and have high cost while the reverse is the case for the private ones, and thus recommends more privatization of financial sector in Ethiopia.[clxxiv] The study likewise confirms that financial services will possibly carry uncertainties for Ethiopia, some of which are consistent with the government’s concern which is noted above in section two. Such risks include domestic financial sector distress, financial instability and credit allocation bias towards giant multilateral corporations, at the expense of poor local creditors.[clxxv]

Overall the main finding of these studies is that, LFS for Ethiopia, will seek to improve competition for the domestic market and likely to reduce prices and increase the quality of financial services. At the same time, domestic financial sectors are likely to come under pressure because of severe competition.

On the other hand, despite many LDC’s commitment in LFS, there are indeed countries that did not reap the desired benefits. For example, despite financial liberalization undertaken in Zambia in the early 1990s, the expected benefits of multilateral financial liberalization have not materialized. As of 2005, the financial sector continued to be underdeveloped, the number of rural bank branches fell and credit to private investor decreases, especially for small and medium enterprises.[clxxvi]

Similarly, despite financial liberalization made by Nepal and Bangladesh, access to loan for poor and marginalized groups continued to be limited and there is no loan provided by financial sector for long-term projects.[clxxvii] Moreover, the public banks are incapable of providing performing loan and their profitability and efficiency is continued to decrease even after liberalization.[clxxviii]

Experience from Kenya and Uganda found almost similar result. In spite of financial liberalization efforts made by Kenya since 1980’s, interest rates became negative, the efficiency of financial intermediation decreased and flimsy financial markets.[clxxix] In Uganda, spreads between lending and deposit rates widened, profitability of commercial banks decreased, asset quality worsened, liquidity or solvency problems grew and a number of banks closed after liberalization.[clxxx]

There is also evidence on effects of financial liberalization in LDC’s indicating mixed results. Empirical study on the effects of banking liberalization in Malawi shows that financial depth, increase of credit to public sector and saving mobilization is increased following liberalization of financial sector.[clxxxi] At the same time, LFS has resulted in decrease of interest rate and limited access for public sector.[clxxxii]

The limited available evidence above suggests that the potential benefits of liberalization commitments might not be achieved by the mere fact that they undertake liberalization commitments. But, a country’s inability to reap the potential benefits of liberalization does not only stem from financial liberalization policy. Gains from financial services trade liberalization are constrained by regulatory capacity, and scarcity of infrastructure and skills.[clxxxiii] The regulatory weakness and inappropriate sequencing of liberalization undermines the benefits of LFS in the above countries’ case scenarios.[clxxxiv] It is argued that making financial service liberalization commitments, in the absence of prudential regulatory framework and sequencing liberalization will be potentially failure for the economy.[clxxxv]

From these experiences, we can obtain an idea of the likely scenario that Ethiopia may face from liberalization of its financial services sector within the GATS framework. Achieving the goal of LFS depends on adequate prudential policy measures, the appropriate regulatory and supervisory framework, all of which are lacking in Ethiopia. In the absence of effective regulatory, supervisory regimes and appropriate macroeconomic policies, commitment towards financial liberalization may not have positive impacts. Even worse, liberalization may lead to serious financial crisis[clxxxvi] as has been the experience of other developing countries. [clxxxvii] Hence, in the existing circumstances, weak regulatory and macro-economic policies; and underdeveloped financial system, it is most probably difficult for Ethiopia to reap the potential benefits and avoids the risks of financial services sector liberalization.

However, this is not to say that LFS sector is irrelevant for Ethiopia. As has been shown, they can bring important benefits to the economy provided they are carefully and coherently undertaken. The potential benefits gained from financial liberalization in many developing countries are living proofs to all that.[clxxxviii] Targeted and well directed financial liberalization can potentially advance the domestic financial system, generate employment opportunities and increase sources of capital.[clxxxix]

4.4. Maximizing the Benefit and Avoiding Risk of Financial Liberalization in Ethiopia

This section is devoted to examine for what it takes for liberalization of financial sector to succeed in realizing the benefits and avoid the pitfalls for Ethiopia. Of course, there is no clear cut formula or universal standards for LFS sector in GATS framework. Financial services liberalization policies largely depends on country-specific conditions[cxc], on the basis of which countries could follow different commitment scenarios while they opt for financial liberalization commitments.

Some countries opt for status quo commitments in relation to LFS. This is one scenario of commitments for Ethiopia which make the country to stay at the current level of liberalisation.

Choosing this position may not, however, be feasible to bring a great benefit in Ethiopia, at least at the time of entry into force of GATS due to different reasons. Firstly, liberalization commitments have tended to become more serious over time. This becomes evident especially from the situations that recent acceding LDC’s countries have been required high liberalization commitments compared to early acceding countries.[cxci] For example, Nepal and Cambodia, the two LDC’s that joined the WTO recently, have committed to 76 and 93 sub-sectors, respectively, in financial services in contrast to the 20 sub-sectors that in average LDCs had committed during the Uruguay Round.[cxcii] Secondly, countries that have acceded since 1995, in turn, have on average committed around 104 sub-sectors which are greater commitments made before 1995.[cxciii] Similarly, the current GATS focus requiring meaningful liberalization commitments with the introduction of some limitations indicate in favour of liberalization commitments.[cxciv] Thus, opting for this position would not look feasible to realize successful LFS for Ethiopia.

A few emerging economies opt for binding below the status quo or not to commit itself in any of the financial services sub-sectors. Many developing countries have bound to this position before. Philippines for example, did so with respect to foreign equity participation in commercial banks: binding at 51% when domestic law allows 60%.[cxcv] Korea also stopped short of reflecting in its GATS offer all the present and future liberalisation commitments made at the OECD.[cxcvi] Due to macro-economic instability and regulatory weakness, a number of LDC’s have also chosen this position in their liberalization commitment.[cxcvii]

However, opting for this position would not seem proper for Ethiopia to reap the potential benefits while minimizing the costs of LFS for a number of associated factors. One reason is because the potential benefits of liberalization commitments are maximized and the risks overcome not by rejecting LFS but rather by other actions.[cxcviii] This has to do with proper evaluation of domestic realities in order determine what steps and measures must be taken before and while LFS.[cxcix] Furthermore, the GATS framework requires progressive negotiation for LFS.[cc] This successive negotiations agenda on the LFS has already begun since 2000 which will be continued.[cci] This implies, choosing such kind of scenario could not help countries to reap the potential gain of the process when it is viewed in GATS objective.

Third, many previously and currently acceding developing countries opt for financial liberalization commitments in future, but above the status quo. As shown in chapter one, GATS framework doesn’t require full liberalization at one time, and there is a possibility for a country to make liberalization phase by phase in the future.[ccii] By making GATS commitments that enter into force within a designated time framework, sequencing approach of LFS will provide the needed time to develop necessary regulation and supervision.[cciii] To be bound under this position will also benefit countries’ to prepare for better progressive future liberalization.[cciv] Thus, choosing this liberalization scenario’s is proper for country like Ethiopia, that doesn’t yet developed prudential regulation in their financial services.

Measures and policies towards capital account liberalization also determine countries success or failure, while liberalization of financial sector. As noted before, liberalizing capital account can enhance access to capital and and thereby raise the investment rate, especially in LDC’s where saving and capital fund is too little. However, in the state of wrong sequencing and without proper regulation, liberalization of capital account result may be inappropriate, and can trigger worldwide financial instability and financial crisis.[ccv] This holds true especially, as past and recent financial crisis has indicated, for developing and emerging economies.[ccvi] Even the past and present financial crisis blow up in western developed countries indicate that even though these countries are more stronger in term of human resource and economy, they were not able to block the crisis.[ccvii]

This obviously indicates that capital account opening is more dangerous in LDC’s like Ethiopia. Many previous WTO acceding countries opts for restrictive policy measures towards capital account liberalization.[ccviii] It is also proclaimed that countries with weak financial system may need time to develop financial institutions and markets, before liberalizing their capital account.[ccix] With the same reason, the potential benefit of financial liberalization is higher in the countries which deregulated their domestic financial service first, before going to liberalize their capital account.[ccx] Hence, in existing condition of the country the Ethiopian government must retain the status quo position in relation to liberalization of capital account [ restrictive policy on capital movement], at least for a time being.

Multilateral financial trade liberalization under the auspices of the WTO has thrown opportunities for countries to reap its potential gains. However, gains from financial services liberalization have not been realized much in most of previous developing countries and LDC’s because of domestic policy and regulatory problems. Based on this, it is obvious that in the existing situation of Ethiopia undertaking liberalization in financial services will probably result in a serious danger than gains.

5. Conclusion and Recommendations

5.1. Conclusions

Realizing the importance of services sector in economy, the GATS, the first multilateral agreement to regulate services sector in general, and financial sector in particular was established in 1993. The main objective of GATS is basically to promote the expansion of trade in financial services, progressive liberalization through negotiations, transparency of domestic rules and regulations, and increasing the participation of countries in such a way that it would bring worldwide economic growth. In light of this ground, a number of countries, including few LDC’s have been liberalizing their financial sector in the last two decades.

However, evidence shows that LFS may bring mixed results, according to specific countries at stake. Multilateral LFS sector carries both benefits and risks. Liberalization of trade in financial services, under appropriate regulatory and policy frameworks, may bring economic prosperities through increased efficiency, lower prices and a greater choice of financial services, as well as increased competition at the country level. At the same time, the available evidence indicates that liberalization of financial services can pose serious dangers if a country doesn’t follow proper liberalization and fulfill preconditions discussed under chapter one, section two of this work. The increased likelihood that countries have experienced financial crises in the past when they liberalized their financial sector explains why there is no clear cut conclusion for the premise of liberalization improve countries welfare. Thus, the extent to which a country actually benefits from its financial liberalization depends on its specific condition more than ever before.

Since 1994, economic development in Ethiopia in general and financial sector reforms in particular, has been on the path to competitive environment. Although efforts have been made by government in the light of the urgent needs of financial integration, the competitiveness of Ethiopians financial sector remains weak. Ethiopian financial services sector are at the rudiment stage of development, and far behind their counterparts in the continent. In comparison with the other LDC’s, management capacity and supervision of financial sectors are too weak. Up to date financial sectors scheme evaluation, supervision, credit supervision and application of modern technology are flimsy. Indeed, most of Ethiopia’s existing financial services sector policies are not compatible with the requirements of GATS provisions and International standards. In general, several pre-conditions for the liberalization of financial services sector have not yet been fully met in Ethiopia.

Despite this situation, Ethiopia has recently taken a step for WTO accession by submitting her memorandum of foreign trade regime in January 2003, and after then negotiation on accession process has been ongoing. This obviously indicates about the country’s status of free up its economy in general and financial services sector in particular in the future.

Liberalization of financial sector may increase the efficiency of Ethiopia’s financial sector. LFS may also enhance the competency of domestic financial system and help to overcome the shortage of credit for small and poor peoples. And finally by providing capital for investment, LFS will bring economic prosperity for Ethiopia.

However, financial liberalization will also entails risks for Ethiopia. From the existing situations of Ethiopia’s financial system, LFS may be dangerous; it may kick out the infant domestic industries. It may also cause capital flight which is too harmful in capital lacking countries like Ethiopia, and finally, the severe completion may entail risks of crisis to the whole economy.

Such a state of affairs underlines that financial liberalization may not guarantees the anticipated benefits of GATS agreement for Ethiopia. As already discussed, liberalization commitments in financial services in GATS framework would entail in both benefits and risks where the benefits and pitfalls are prospective based on many factors.

5.2. Recommendations

In the light of the above conclusions, the following measures need to be considered and can help to reap the potential benefits and avoid the pitfalls of financial service liberalization for Ethiopia.

First, given the current status of Ethiopia’s financial system in the context of international financial integration, mainly in GATS framework, the country should make liberalization in financial sector in gradual and closely restricted manner. This will provide the government reasonable period of time for improving the competency and institutional capacity in financial system. To this effect, policy and law makers as well as legal practitioners or any other concerned body should ensure that financial liberalization would help to bring more benefits than risks.

Second, a serious effort needs to be made to improve the legal and regulatory framework for provisions of domestic financial services sector. While developing the legal and regulatory framework, requisites discussed under Chapter- one, section, III and IV of this work should also be considered.

One of a major factor to make financial liberalization works well is the development of strong regulatory and institutional capacities supported by a more transparent policy framework. Therefore, upon or before going to multilateral integration in financial services sector the country should adopt prudential regulatory and institutional framework that conforms to GATS/WTO rules and international practices. This will essentially facilitate Ethiopia’s financial sector for international integration, and by providing a level-playing field, improves the competency of Ethiopia’s financial system.

To this end, Ethiopia may reap the potential gains of and avoid the possible risks of financial liberalization, if, inter alia, the above recommendations are taken into account.

References

[i] Aaditya Mattoo. (1998) Financial Services and the WTO: Liberalization in the Developing and

Transition Economies, Staff Working Paper (WPF) TISD9803, p.7. See further Sydney J. Key. (999) “Trade liberalization and prudential regulation: the international framework for financial services,” 75(I) International Affairs, 61-75, p.61. See also Alexei Kireyev. (2002) Liberalization of Trade in Financial service s and Financial Sector Stability (Analytical Approach), IMF Working Paper WP/02/138, p.4.

[ii] Michael Trebilcock and Robert Howse. (2005) The Regulation of International Trade, New York: Taylor and Francis Group Press, p.349.

[iii] These include all insurance and insurance related services, and all banking and other financial services excluding insurance.

[iv] See, Art. XIX and Preamble of General Agreement on Trade in Services, World Trade Organization Uruguay Round Agreement (hereinafter GATS), (1994).

[v] Kaminsky Graciela L. and Sergio L. Schmukler. (2003) Short-Run Pain, Long-Run Gain: The Effects of Financial Liberalization, NBER Working Paper No. 9787, p. 6-7. See further Massimiliano Cali, etal. (2008) The Contribution of Services to Development and the Role of Trade Liberalization and Regulation, ODI Working Papers No. 289, p.31.

[vi] Marilyne Pereira Goncalves and Constantinos Stephanou (2007) Financial Services and Trade Agreements in Latin America and the Caribbean: An Overview, World Bank Policy Research Working Paper No. 4181, p.5.

[vii] Lee-Rong Wang, etal. (2008) “Financial Liberalization under the WTO and Its Relationship with the Macro Economy”, in Takatoshi Ito, etal. (eds) International Financial Issues in the Pacific Rim: Global Imbalances, Financial Liberalization, and Exchange Rate Policy, The University of Chicago Press, Chicago, p.316.

[viii] Jayati Ghosh. (2005) The Economic and Social Effects of Financial Liberalization: A Primer for Developing Countries, Desa Working Paper No. 4 ST/ESA/2005/DWP/4, p.3.

[ix] Pierre Sauvé and James Gillespie. (2000) Financial Services and the GATS 2000 Round, Brookings-Wharton Papers on Financial Services 423-452, p.450.

[x] Bernard Hockman and Michel Kostecki. (2002) The Political Economy of the World Trading System: The WTO and Beyond, 2nd edition, OUP: Oxford University Press, p.259.

[xi] Apostolos Gkoutzinis. (2005) “International Trade in Banking Services and the Role of the WTO: Discussing the Legal Framework and Policy Objectives of the General Agreement on Trade in Services and the Current State of Play in the Doha Round of Trade Negotiations”, 39(4) The International Lawyer, p.896.

[xii] Robert Cull and Maria Soledad Martinez Peria. (2010) Foreign Bank Participation in Developing Countries: What Do We Know About The Drivers and Consequences of this Phenomenon?, Policy Research Working Paper No.5398, p. 6. See further Wang etal., Supra, Note 7, p.326.

[xiii] GATS, Supra, Note 4, Article XI.

[xiv] Dobson Wendy. (2007) “Financial Services and International Trade Agreements: The Development Dimension”, in Aaditya Mattoo et al. (eds) A Handbook of International Trade in Services, Oxford university press, New York, p.291.

[xv] Constantinos Stephanou. (2009) Including Financial Services in Preferential Trade Agreements Lessons of International Experience for China, Policy Research Working Paper 4898, p.4.

[xvi] Sauvé and Gillespie, Supra, Note 9, p.2.

[xvii] Cali etal., Supra, Note 5, p.31.

[xviii] Myriam Vander Stichele. (2003) Potential Risks of Liberalization of Financial Services in GATS, Stichting Onderzoek Multinational Ondernermingen (SOMO) Paper, p. 2, <available at http://weed-online.org/ visited on 19th September 2012>

[xix] John Eatwell and Taylor Lance. (2000) Global Finance at Risk: The Case for International Regulation, Cambridge: Polity Press, p.238.

[xx] Stijn Claessens and Marion Jansen. (2000) “Overview: Analytical Aspects and Trade Agreements”, in S. Claessens etal.(eds) The Internationalization of Financial Services: Issues and Lessons for Developing Countries, Kluwer Law International, p.12.

[xxi] Sergio.S. Schumekler (2004) “Financial Globalization: Gain and Pain for developing countries”, 89(2) Federal Reserve Bank of Atlanta Economic Review, p. 53. See also in general Asli Demirgüc Kunt and Enrica Detragiache. (1998) Financial Liberalization and Financial Fragility, IMF Working Paper No.98/83.

[xxii] Kern Alexander. (2003) The World Trade Organization and Financial Stability: The Balance between Liberalization and Regulation in the GATS Basel recommendation and GATS framework, Cambridge Endowment for Research in Finance paper, p. 21; Aytül Ganio¤lu. (2007) Prudential Regulation and Supervision of the Banking Sector and Banking Crises: A Cross Country Empirical Investigation, Bankac›l›k Sektörünün Düzenlemesi ve Denetlenmesi, Bankac›l›k Krizi (Central Bank of the Republic of Turkey), G18, G21, G28, p.16.

[xxiii] Dan Juma. (2011) “Tempering Services Liberalization with Regulation: The World Trade Organization and the International Financial Architecture”, 14 International Trade & Business Law Review 249 247-272, pp.250-251. See also <http://www.fsforum.org/compendium/key_standards_for_sound_financial_system.html seen 10th October 2012>

[xxiv] Ibid.

[xxv] Rolf H. Weber and Douglas W. Arner. (2000) “Toward a New Design for International Financial Regulation”, 29(2) U. Pa.J. In t'l. L., pp. 436-37. See further Kern Alexander. (2000) The Role of the Basle Standards in International Banking Supervision, ESRC Working Paper No. 153, p.4.

[xxvi] Frederic S. Mishkin. (2007) “Is Financial Globalization Beneficial?”, 39(2-3) Journal of Money, Credit and Banking 259-294, p. 287. See again Cali, etal. Supra, Note 5, p. 35.

[xxvii] Aadtiya Mattoo and Lucy Payton. (2007) “Services Trade and Development; The Experience of Zambia”, in Aadtiya Mattoo et al. (eds), Palgrave and World Bank, Washington, p.14-32.

[xxviii] Hockman and Kostecki, Supra, Note 10, p. 451.

[xxix] Sauvé and Gillespie, Supra, Note 9, p.7.

[xxx] Schumekler, Supra, Note 21, p.54.

[xxxi] Ibid, pp. 56-60. See further Masamichi Kono, etal. (1997) Opening Markets in Financial Services and the Role of the GATS, WTO Special Studies, Geneva, pp.23-26.

[xxxii] Ibid.

[xxxiii] Kono, etal., Supra, Note 31, p.25.

[xxxiv] Ibid, p.23.

[xxxv] GATS, Supra, Note 4.

[xxxvi] Even though the establishment of GATS framework is finalized in 1993, the GATS became operational only after January 1995 and final Financial Services Agreement (FSA) was concluded on 13 December 1997, and entered into force on 1 March 1999.

[xxxvii] For more details of GATS framework see, Rudolf Adlung and Aaditya Mattoo. (2007) “The GATS” in Aaditya Mattoo, et al. (eds) A Handbook of International Trade in Services, Oxford University press, Washington, pp.48-82.

[xxxviii] Art. XVI, Art. XVII of GATS. See also Arts. 1 and 5, of Annex on Financial Services, WTO Agreement; Second Annex on Financial Services, WTO Agreement.

[xxxix] See, Art. I of GATS, which states modes in which international trade in services takes place, and these include; cross-border supply (Mode 1), consumption abroad (Mode 2), commercial presence (Mode 3), and presence of natural persons (Mode 4).

[xl] Art. II of GATS.

[xli] Art. III (1) of GATS.

[xlii] Art. VI (4 (a)) of GATS.

[xliii] Art. XVII (1) of GATS.

[xliv] Art. XVII (2) of GATS. See also European Communities; Regime for the Importation, Sale, and Distribution of Bananas III (1997) Appellate Body Report (1997), WT/DS27/AB/R, pp. 231-23.

[xlv] Art. XVI GATS.

[xlvi] Art. XIX GATS. See also preamble to GATS which stipulate that members are required to periodically enter into successive rounds of negotiations with a view to achieving a progressively higher level of liberalization on a mutually advantageous basis and with an overall balance of rights and obligations.

[xlvii] Greg McGuire. (2002) Trade in Services-Market Access Opportunities and the Benefits of Liberalization for Developing Economies, Policy issues in International Trade and Commodities study series No. 19, p.7.

[xlviii] Americo Bevglia Zampetti and Pierrs Sauve. (1996) “Onwards on Singapore, Measuring the Contestability of Markets and the new trade agenda”, 19(3) The World economy 333-342, p.337.

[xlix] See, Art. 2 (a) of the Annex on Financial Services, WTO Agreement; Second Annex on Financial Services, WTO Agreement.

[l] Art. XII of GATS.

[li] Art. XIV (a, b and c) of GATS.

[lii] Diemi Dietrich. (2011) Liberalization and Rules on Regulation in the field of Financial Services in Bilateral and regional Trade Integration Agreement, The Essay on Transitional Economic Law, pp. 10-11, <available from: www.jura.uni.halle.de/telk/publikationen.html last seen 29 September 2012>

[liii] Ibid.

[liv] Art. XIX (2) of GATS; at the same time the preamble of GATS framework allow Countries, right to introduce new regulation as exception, in order to meet their domestic policy need.

[lv] Art. VI (2 and 4) of GATS.

[lvi] Mamiko Yokoi-Arai. (2008) “GATS' Prudential Carve Out in Financial Services and Its Relation with Prudential Regulation”, 57 Int'l & Comp. L.Q. 613-648, p.647.

[lvii] James R. Barth, etal. (2006) Foreign Banking: Do Countries' WTO Commitments Match Actual Practices?, WB Staff Working Paper ERSD-2006-11, p.8. See also Kalypso Nicolaidis and Joel Trachtman. (2000) “Policed Regulation to Managed Recognition”, in P. Sauve & R.M. Stern. (eds) GATS, Washington DC, Brookings Institute, at p. 255. See again Kireyev, Supra, Note 1, p.18.

[lviii] Art. VI (1, 4 (a-b)) of GATS.

[lix] Report of the Chair of Trade Negotiations Committee to the General Council 2012, <available at http://www.wto.org/english/news_e/news09_e/tnc_chair_report_17dec09_e.htm seen 26th December 2012>

[lx] Norton Joseph Jude. (1995) Devising International Bank Supervisory Standards, Amsterdam: Kluwer, p.176. See further Richard Dale. (1984) The Regulation of International Banking, Oxford: Black wells, p. 172.

[lxi] Basel Committee on Banking Supervision <available at http://www.bis.ore/bcbs last visited 20th August 2012> See further The Basle Committee on Banking Supervision (19997) Core Principles for Effective Banking Supervision (hereinafter Basle Core Principles).

[lxii] Peter Cooke. (1984) “The Basle Concordat on the Supervision of Banks’ Foreign Establishments”, 39 Aubenwirtschaft, p. 153.

[lxiii] The Basle Committee (1992) Minimum Standards for the Supervision of International Banking Groups and Their Cross-Border Establishments, pp.3-7.

[lxiv] Ibid.

[lxv] Joseph Jude, Supra, Note 60, p.176; Dale, Supra, Note 60, p.172.

[lxvi] Basle Committee (1983) Principles for the Supervision of Bank’s Foreign Establishments (hereafter Revised Concordat).

[lxvii] Supra, Note 63.

[lxviii] Joseph Jude and Dale, Supra, Note 60.

[lxix] Ibid.

[lxx] Basel Committee on Banking Supervision (1997) Core Principles of Banking Supervision, p.21.

[lxxi] Ibid, p.3.

[lxxii] Ibid, p.21.

[lxxiii] Basle Committee (1990) Information Flows between Banking Supervisory Authorities, p. 1. See further Mamiko Yokoi Arai. (2005 “The Basel II in the National Sphere”,) EBRD Law in Transition, p.632 <http://www.ebrd.com/pubs/ legal/lit052d.pdf last visited 7 September 2012>

[lxxiv] Joseph Jude and Dale, Supra, Note 60, p.246.

[lxxv] Yokoi Arai, Supra, Note 73.

[lxxvi] Hal.S. Scott and Shinsaku Iwahara. (1994) In Search of a Level-Playing Field, The Implementation of the Basle Committee Accord in Japan and the United States, New York: Columbia, p.3.

[lxxvii] Luis Abugattas Majluf and Simonetta Zarrilli. (2007) Challenging Conventional Wisdom: Development Implications of Trade in Services Liberalization, Trade, Poverty and Cross-Cutting Development Issues Study Series No. 2, UNCTAD/DITC/TAB/POV/2006/1, ISSN 1815-7742, p.13.

[lxxviii] Cull and Peria, Supra, Note 12, p.10. See also Marion Janson and Yannis Vennes. (2006) Liberalizing Financial Services Trade in Africa: Going Regional and Multilateral, Staff Working Paper (ERSD) No. 3, p.5.

[lxxix] Wendy, Supra, Note 14, pp.297-298, 354-5. See further Herman Kamil and Kulwant Rai. (2009) The Global Credit Crunch and Foreign Banks’ Lending to Emerging Markets: Why Did Latin America Fare Better?, International Monetary Fund (IMF) Working Paper WP/10/102, p.12.

[lxxx] Greg McGuire. (2002) Trade in Services Market Access Opportunities and the benefits of Liberalization for Developing Economies, UNCTAD Trade and Commodities policy study No. 19, ISBN 92-1-112556-1, pp.27-30. See further UNCTAD (2010) The Least Developed Countries Report 2010, New York and Geneva, pp.90-91, <available at <http://www.unctad.org/templates/webflyer.asp?docid=14129&intItemID=5737&lang=1&mode=downloads visited 25th September 2012>

[lxxxi] Supra, Note 14, pp.297-298, 354-5. See in general also Ye Fujing. (2007) “Financial Opening and Financial Security”, 1(4) Chinese Journals of International Politics 559-587<available at http://www.oxfordjournals.org/our_journals/cjip/terms.html visited on 29th October 2012>

[lxxxii] Sulaiman, L.A. (2012) “Effect of Financial Liberalization on Economic Growth in Developing Countries: The Nigerian Experience”, 1(12) International Journal of Economics and Management Sciences 16-28, p.26. See further Peter Blair Henry. (2007) “Capital Account Liberalization: Theory, Evidence, and Speculation’’, XIV Journal of Economic Literature 887–935, pp.915-919.

[lxxxiii] Linda S. Goldberg. (2007) “Financial sector FDI and host countries: New and old lessons”, 13(1) FRBNY Economic Policy Review 1-17, p.10.

[lxxxiv] Ibid.

[lxxxv] Denizer Cevdet A. (2000) Foreign Entry in Turkey’s Banking Sector: 1980-97, The World Bank Working Paper No. 2462, cited in Nihal Bayraktar and Yan Wang. (2004) Foreign Bank Entry, Performance of Domestic Banks and the Sequence of Financial Liberalization, WBIPR Paper First Draft, pp.14-16.

[lxxxvi] Angelo Unite and Michael Sullivan. (2001) The Impact of Liberalization of Foreign Bank Entry on the Philippine Domestic Banking Market, Philippine Institute for Development Studies (PASCN) Discussion Paper No. 2001-08, pp.17-19; Adolfo Barajas, etal. (2000) “The impact of liberalization and foreign investment in Colombia's financial sector”, 63(1) Journal of Development Economics 157-196, p.168. See also George Clarke, etal. (2000) “On the Kindness of Strangers? The Impact of Foreign Entry on Domestic Banks in Argentina”, in S. Claessens et al. (eds) The Internationalization of Financial Services: Issues and Lessons for Developing Countries, Kluwer Law International: The Hague, p.7.

[lxxxvii] Nihal Bayraktar and Yan Wang.(2004) Foreign Bank Entry, Performance of Domestic Banks and the Sequence of Financial Liberalization, WBIPR Paper First Draft, pp.11-13.

[lxxxviii] Stijn Claessens, etal. (2001) “How Does Foreign Entry Affect Domestic Banking Markets?”, 25 Journal of Banking & Finance 891-911, p.905.

[lxxxix] Jennifer Crystal, etal. (2001) “Does Foreign Ownership Contribute to Sounder Banks? The Latin American Experience”, In R. Litan, P. Masson and M. Pomerleano (eds) Open Doors: Foreign Participation in Financial Systems in Developing Countries, Washington, D.C: Brookings Institution Press, pp.217-66.

[xc] Mishkin, Supra, Note 26, p.263.

[xci] Dages B. Gerard, etal. (2000) “Foreign and Domestic Bank Participation in Emerging Markets: Lessons from Mexico and Argentina”, Federal Reserve Bank of New York, 6(3) Economic Policy Review 17-36, pp.22-34.

[xcii] George R. G. Clarke, etal. (2002) Does Foreign Bank Penetration Reduce Access To Credit In Developing Countries?, Evidence from Asking Borrowers, World Bank (WB) paper, pp.12-19.

[xciii] Alan Winters. (2004) “Trade Liberalization and Economic Performance: An Overview’’, 114 The Economic Journal 4-21, pp.4-11. See further Julia Nielson and Daria Taglioni. (2004) Services Trade Liberalization: Identifying Opportunities & Gains, OECD Trade Policy Working Paper No.1, p.2.

[xciv] Majluf and Zarrilli, Supra, Note 77.

[xcv] Aaditya Mattoo. (2001) Measuring Services Trade Liberalization and its Impact on Economic Growth, Policy Research Working Paper No. 2655, pp.17-18.

[xcvi] Rupa Chanda. (2008) Services Trade and Investment Liberalisation, and Domestic Regulation A Summary of Six Country Case Studies, CUTS Centre for International Trade, Economics & Environment, Bhaskar Marg, Bani Park, Jaipur 302 016, India ISBN 978-81-8257-100-6, p.13. See further Patrick Honohan and Thorsten Beck. (2007) Making Finance Work for Africa, The World Bank report (2007), Washington DC, 20433, p.69-75.

[xcvii] Chanda, Ibid, p.1.

[xcviii] Nico Valckx. (2002) WTO Financial Services Liberalization: Measurement, Choice and Impact on Financial Stability, WO Research report (2002) No. 705/022, p.16. See again, Supra, Note 88, p.905.

[xcix] Carmen Reinhart and Ken Rogoff. (2008) Banking Crises: An Equal Opportunity Menace, Discussion Paper, p.23 <available at http://www.economics.harvard.edu/files/faculty/51_Banking_Crises.pdf last seen on 28th September 2012> ; Charles Wyplosz. (2001) How Risky is Financial Liberalization in the Developing Countries?, United Nations Conference On Trade And Development (UNCTD) Discussion Paper Series, New york, pp.12-16 and see further Willi Semmler and Brigitte Young. (2010) Lost in Temptation of Risk: Financial Market Liberalization, Financial Market Meltdown and Regulatory Reforms, Comparative European Politics paper, p.4.

[c] Vander Stichele, Supra, Note 18.

[ci] Ibid.

[cii] Nicola Cetorelli and Linda S. Goldberg. (2010) Global banks and international shock transmission: evidence from the crisis, Staff Reports (2010) No.446, Federal Reserve Bank of New York, New York, p.1-3.

[ciii] Chanda, Supra, note 96.

[civ] Myriam Vander Stichele and Roos Vanos. (2010) Business as Usual? How Free Trade Agreements Jeopardies Financial Sector Reforms, SOMO Paper I, p.2 <retrieved from www.somo.nl seen 12th November 2012>

[cv] Enrica Detragiache, etal.(2006) Foreign Banks in Poor Countries: Theory and Evidence, Paper presented at the 7th Jacques Polak Annual Research Conference Hosted by the IMF, Washington, November 9-10, pp.29-39.

[cvi] Ghosh, Supra, Note 8, pp.13-14. See further Beck Thorsten and Maria Soledad Martinez Peria. (2008) Foreign Bank Acquisition and Outreach: Evidence from Mexico, World Bank manuscript in general, pp.62-71.

[cvii] Obokoh, Lawrence Ogechukwu. (2012) “Examination of the Relationship between Financial Market Liberalisation and the Failures of Small and Medium Sized Enterprises in Nigeria”, 5(1) Journal of International Business Research 182-193, p.188.

[cviii] Mishkin, Supra, Note 26, p.263; Robert Cull, etal., Supra Note 92.

[cix] Asli Demirgüc Kunt and Enrica Detragiache. (1998) Financial Liberalization and Financial Fragility, IMF Working Paper No.98/83, p.14.

[cx] Apanard Angkinand, etal.(2008) Financial Liberalization and Banking Crises: A Cross-Country Analysis, p.17, <available at http://ssrn.com/abstract=1305711, seen November 10th 2012>

[cxi] Ibid, p. 24.

[cxii] Ibid, pp. 24-25.

[cxiii] Ponciano S. Intal. (2002) Managing Risks and Opportunities of Financial Liberalization and Integration: A Macro-Micro Analysis, Pascn Discussion Paper No. 2002-01, p.15. See further Isaksson Anders. (2001) “Financial liberalization and price stability in Kenya,” 23(5) Journal of Policy Modelling 503-510, pp.5-9; Barry Eichengreen, etal. (2009) Capital Account Liberalization, Financial Development and Industry Growth: A Synthetic View, UNCTAD paper, pp. 5-6.

[cxiv] Ibid.

[cxv] Bayraktar and Wang, Supra, Note 87, p.16.

[cxvi] Claessens Stijn. (2003) Benefits and Costs of Integrated Financial Services Provision in Developing Countries, Brookings-Wharton Papers on Financial Services, p.85.

[cxvii]WTO Ethiopia: Status of Accession, <available at http://www.wto.org/english/thewto_e/acc_e/a1_ethiopia_e.htm accessed 20th September 2012> See also Derk Bienen. (2010) Implications of Ethiopia’s international trade negotiations and the private sector-an overarching view, Trade and development discussion paper No. 03, p.6.

[cxviii] Ethiopia Government. (1996) Mid-Term Financial and Economic Policy Framework Paper (1996/97-1998/99), Paper prepared for the Consultative Group Meeting of the Government of Ethiopia, International Monetary Fund, and the World Bank PC-AAA-718, pp. 1-3.

[cxix] For example, the government and the World Bank report indicate an 11% and 10.6% average economic growth respectively.

[cxx] International Monetary Fund (IMF). (2005) The Federal Democratic Republic of Ethiopia: Selected Issues and Statistical Appendix, IMF Country Report No. 05/28, at p. 8.

[cxxi] Licensing and Supervision of Banking Business Proclamation No. 84/1994, Federal Negarit Gazeta, Year 53, No. 44, Addis Ababa.

[cxxii] See in general, Monetary and Banking Proclamation No. 83/1994, Federal Negarit Gazeta Year 53, No. 43, Addis Ababa, 30 January, 1994; Licensing and Supervision of Banking Business Proclamation No. 84/1994, Federal Negarit Gazeta, Year 53, No. 44, Addis Ababa, 31 January 1994; Licensing and Supervision of Insurance Business Proclamation No. 86/1994, Federal Negarit Gazeta, Year 53, No. 46, Addis Ababa, 1 Febuary 1994; Licensing and Supervision of Micro-financing Institutions Proclamation No 40/1996, Federal Negarit Gazeta, Year 2, No 30, Addis Ababa, 5 July 1996.

[cxxiii] The National Bank of Ethiopia, Annual Report 2010/11, p.46.

[cxxiv] Ibid, p.47 and p.51.

[cxxv] Anja Smith and Doubell Chamberlain. (2010) Opportunities and Challenges for Micro insurance in Ethiopia; An Analysis of the supply, demand and regulatory environments, access to insurance initiative report, p.1; Market Potential Assessment and Road Map Development for the Establishment of Capital Market in Ethiopia. Study by Private Sector Development Hub/Addis Ababa Chamber of Commerce and Sectorial Associations. (2008) Vienna, Australia, p.7.

[cxxvi] Gebrehiwot Ageba and Derk Bienen. (2008) Ethiopia’s Accession to The WTO and The Financial Service Sectors, Trade and Development Discussion Paper No.02/2008,p.2.

[cxxvii] Supra, Note 120, pp. 39-40; Emilio Sacerdoti. (2005) Access to Bank Credit in Sub-Saharan Africa: Key Issues and Reform Strategies, IMF Working Paper WP/05/166, p.4. See also Supra, Note 123, pp.6-7.

[cxxviii] Supra, Note 123, p.6 and 49.

[cxxix] See, for example Supra, Note 120, p.40; which reported that Commercial Bank of Ethiopia (CBE) holds 54 % of total loans and 75 % of total deposits of the banking system at end of 2002/03.

[cxxx] Wiedmaier Pfister, et.al. (2008) Access to finance in Ethiopia: Sector assessment study, Document prepared for the German Technical Cooperation within the Ethiopian Engineering Capacity Building Project, Volume 2. July, at p.18.

[cxxxi] Ibid.

[cxxxii] Smith and Chamberlain, Supra, Note 125, pp.7-8.

[cxxxiii] Getahun Nana. (2008) Policy Initiatives for Improved Financial Service Provision: The Case of Ethiopia, NBE paper, pp. 4-5; Supra, Note123, p.6.

[cxxxiv] Sacerdoti, Supra, Note 127, p.18.

[cxxxv] Gebrehiwot and Bienen, Supra, Note, 126, p.7. See further Supra, Note 127, p.40.

[cxxxvi] Ibid.

[cxxxvii] Ministry of Finance and Economic Development (MoFED), Ethiopia: Building on Progress, A Plan for Accelerated and Sustained Development to End Poverty (PASDEP) (2005/06-2009/10), Volume I, September 2006, Addis Ababa, p.60.

[cxxxviii] Supra, Note 127, p.45; Supra, Note 123, p.7.

[cxxxix] Licensing and Supervision of Banking Business Proclamation No. 84/1994, Federal Negarit Gazeta, Year 53, No. 44, Addis Ababa.

[cxl] See, Art. 2(5) and Art. 9 of Banking Business Proclamation No. 592/2008. See also Art 2(3) and Art 25 of Micro-Financing Business Proclamation 626/2009. The same is true for the business of insurance loss assessors, insurance surveyors, insurance agents, insurance brokers and insurance actuaries. See, NBE Directives No. SIB/12/1996, SIB/22/2002, SIB/30/2010, SIB/31/2010 and SIB/11/1996 respectively.

[cxli] Supra, Note 139.

[cxlii] African Development Group. (2010) Financial Sector Integration in Three Regions of Africa; How Regional financial Integration can Support Growth, Development and Poverty Reduction SILDAR, Tunis, p.53.

[cxliii] The Federal Democratic Republic of Ethiopia. (2002) Industrial Development Strategy, published by the Ministry of Information, Addis Ababa (found in Amharic version), pp.111-112.

[cxliv] Patrick Low and Aaditya Mattoo. (??) Is There a Better Way? Alternative Approaches to Liberalization under the GATS, p.14.

[cxlv] Federal Democratic Republic of Ethiopia Ministry of Finance and Economic Development: Growth and Transformation Plan 2010/11-2014/15, Volume I, p.34

[cxlvi] Smith and Chamberlain, Supra, Note 125, p.6.

[cxlvii] Ashenafi Beyene. (2012) “Banking reform and SME financing in Ethiopia: Evidence from the manufacturing sector”, 6(19) African Journal of Business Management 6057-6069, p.6058.

[cxlviii] Ibid.

[cxlix] Supra, Note 145.See also David J. Spielman. (2008) Understanding the constraints to continued rapid growth in Ethiopia: the role of agriculture, International Food Policy Research Institute background Paper, p.2.

[cl] Dale Honeck. (2011) "Expect the Unexpected, LDC GATS Commitments as Internationally Credible Policy Indicators?, The Example of Mali, WTO Staff Working Paper ERSD-2011-07, p.12.

[cli] WTO. (2010) Developmental Aspects of the Doha Round of Negotiations, Note by the Secretariat, Revision, WT/COMTD/W/143/Rev.5, p.17.

[clii] Supra, Note 127, p.51; Wiedmaier Pfister etal., Supra, Note 130, p.19.

[cliii] Supra, Note 122.

[cliv] NBE Establishment Proclamation No. 591/2008.

[clv] Art. 3, 4 (1) and 60 (3) of Proclamation No. 592/2008; Art. 6 of Proclamation No. 86/1994; Art. 4 of Proclamation No. 626/2009; Art. 5(7) of Proclamation No. 591/2008. See further Commercial Registration and Business Licensing Proclamation No. 686/2010, Federal Negarit Gazeta, Year 16, No. 42, Addis Ababa, 24 July 2010; Ethiopian Insurance Corporation Establishment Council of Ministers Regulation No. 201/1994, Negarit Gazeta, Year 53, No. 110, Addis Ababa, 19 September, 1994; Commercial Bank of Ethiopia Establishment Council of Ministers Regulation No. 202/1994, Negarit Gazeta, Year 53, No. 111, Addis Ababa, 22 September, 1994; Construction and Business Bank Establishment Council Of Ministers Regulation No. 203/1994, Federal Negarit Gazeta, Year 53, No. 112, Addis Ababa, 22 September, 1994; Development Bank of Ethiopia Re-establishment Council of Ministers Regulations No. 83/2003, Federal Negarit azeta, Year 9, No. 28, Addis Ababa, 24 January, 2003.

[clvi] See, Arts. 5 (4), 5 (5-10) and 19- 21) of Proclamation No. 591/2008; Art. 28 (1) of Proclamation No. 626/2009.

[clvii] Art. 5 (1-2 and 15), 16 (1c) and 17-18) of Proclamation No.591/2008.

[clviii] Solomon Abay, Yemane. (2011) “Ethiopia’s Accession to the WTO and Financial Market Regulatory Reform”, in Fikremarkos M. Birhanu and Markus Krajewski (eds) Acceding to the WTO from a Least-Developed Country Perspective - The Case of Ethiopia, Nomos publishers, Baden-Baden, Germany, p.174.

[clix] See, Article 4 of NBE Establishment Proclamation No. 591/2008, Federal Negarit Gazeta, Year 14, No. 50, Addis Ababa, 11 August 2008. See further NBE’S Monetary Policy Framework, (2009), p.2.

[clx] Getaneh Gobezie. (2005) Regulating Microfinance in Ethiopia: Making it more Effective, Essays On Regulation and Supervision series No.3, p.7; Wolday Amha. (2001) Revisiting the Regulatory and Supervision Framework of the Microfinance Industry in Ethiopia, DCG Proceedings No. 3, p.5.

[clxi] Gardachew Worku. (2010) “Electronic-Banking in Ethiopia- Practices, Opportunities and Challenges”, 15(2) Journals of Internet Banking and Commerce, p.7; Supra, Note 127, p.43.

[clxii] Gardachew , Ibid, pp.2-3.

[clxiii] Supra, Note 125, p.17 and 27.

[clxiv] Art. 4(1(g, and h)), 6, 12, 14-17, and 24-27 of Proclamation No. 592/2008. See also Arts. 6 (2) and 35 of Proclamation No. 86/1994

[clxv] World Bank. (2006) Ethiopia’s Project Appraisal document, Financial Sector Capacity Building Programme Report No. 36272, pp.20-21; which state that the existing financial sectors services regulation and supervisions in Ethiopia are far incompatible with The 2006 BCBS Core Principles for Effective Banking Supervision and Core Principles Methodology; the October 2003 IAIS Insurance Core Principles and Core Principles Methodology; and the 2010 BCBS ‘Consultative Document on Microfinance Activities and the Core Principles for Effective Banking Supervision, requirements.

[clxvi] World Bank. (2007) Report on Observance of Standards and Codes in Ethiopia, p.7.

[clxvii] Ibid.

[clxviii] Robert M. Stern, etal. (2007) The Impact of WTO Accession on the Financial Services Sector of Ethiopia, Final report Study Commissioned by the Ministry of Trade and Industry in association with Economist Association of Bologna, Italy, for the WTO Affairs Department of the Ministry of Trade and Industry, Project ID No. P050272, p.116.

[clxix] Ibid.

[clxx] Ibid, p.117.

[clxxi] Ibid, p.136.

[clxxii] Ibid, p.136.

[clxxiii] Kiyota Kozo, etal. (2007) The Case for Financial Sector Liberalization in Ethiopia, International Policy Center (IPC) Working Paper No. 565, pp.15-16.

[clxxiv] Ibid, pp.8-12.

[clxxv] Ibid, p.17-18.

[clxxvi] Chanda, Supra, Note 96, p.19.

[clxxvii] Dilli Raj Khanal. (2007) Banking and insurance services liberalization and development in Bangladesh, Nepal and Malaysia: A comparative analysis, Asia-Pacific Research and Training Network on Trade Working Paper Series No 41, pp.19-20.

[clxxviii] Ibid.

[clxxix] R. W. Ngugi and J. W. Kabubo. (1998) Financial Sector Reforms and Interest Rate Liberalization: The Kenya’s Experience, African Economic Research Consortium, No.72, pp.35-36.

[clxxx] Louis A. Kasekende and Michael Atingi-Ego. (2003) Financial liberalization and its implications for the domestic financial system: The case of Uganda, African Economic Research Consortium No.128, pp.17-20.

[clxxxi] Ephraim W. T. Chirwa. (2001) Market structure, liberalization and performance in the Malawian banking industry”, African Economic Research Consortium No.108, p.22, 30, 31, 32 and 36.

[clxxxii] Ibid, p.23, 25, 26 and 27.

[clxxxiii] Fernando A. Broner and Jaume Ventura. (2010) Rethinking the Effects of Financial Liberalization, Conference paper presented at Banque de France on International Macroeconomics and Finance, p.1. See further James Hodge Hildegunn and Kyvik Nordås. (1999) Liberalization of Trade in Producer Services - the Impact on Developing Countries Chr. Michelsen Institute Development Studies and Human Rights Reports ISBN 82-90584-49-0, p.23.

[clxxxiv] Mattoo and Payton, Supra, Note 27, pp.14-32; Udaibir S. Das, etal. (2007) Financial Services Liberalization and Insurance: some key considerations, UNCTAD/DITC/TNCD/2007/4, New York, pp.281-282.

[clxxxv] Juan A. Marchetti. (2004) Developing Countries in the WTO Services Negotiations, WTO Staff Working Paper No.2004-06, pp.10. See also Sang-In Hwang. (2003) “Korea’s Liberalization of Financial Services Trade”, in Akatoshi Ito and Anne O. Krueger (eds) Trade in Services in the Asia Pacific Region, NBER East Asia Seminar on Economics, University of Chicago Press, pp.285, 286,287.

[clxxxvi] Mishkin, Supra, Note 26, p.287.

[clxxxvii] The World Bank. (1998) Strengthening Financial Systems in Developing Countries: The Case for Incentives-Based Financial Sector Reform, pp.11-12, <available at http://www.worldbank.org/html/extdr/pos98/ visited 11th September 2012>

[clxxxviii] James Hodge. (2001) “Liberalization of Trade in Services in Developing Countries”, in Bernard M. Hoekman, etal.(eds) Development, Trade and WTO: A Hand Book World Bank, Washington D.C., p.222 and 223; Cali et al., Supra, Note 5, p.35. See also section two of Chapter 2.

[clxxxix] UNDP. (2009) Policy Space and Investment Rules under GATS: Select Asian experiences, Asia Pacific Trade and Investment Initiative, p.57.

[cxc] Claessens and Jansen, Supra, Note 20, p.20.

[cxci] Peter John Williams. (2008) A Handbook on Accession to the WTO, Cambridge University Press, Cambridge, pp.127-130.

[cxcii] Ibid, pp.50-51.

[cxciii] Ibid.

[cxciv] Aaditya Mattoo. (2002) “Negotiating Improved Market Access Commitments”, in Bernard Hoekman et al.(eds) A Handbook of Development, Trade, and WTO, The World Bank, Washington, DC, p.280.

[cxcv] Mattoo, Supra, Note 1, p.44.

[cxcvi] Ibid, p.45.

[cxcvii] Louis Kasekende and Michael Atingi-Ego. (2003) Sectorial issues (Financial Services) of the

WTO Negotiations on Trade in Services, Paper prepared for the Workshop on Issues of Interest to African Countries in the WTO Services Negotiations ISSN 1728-3256, Geneva, Switzerland, p.89.

[cxcviii] Claessens and Jansen, Supra, Note 20, p.17.

[cxcix] Aadya Mattoo. (2000) Developing Countries in the New Round of GATS Negotiations: Towards a Pro-Active Role, Forthcoming in the World Economy, p.1.

[cc] Supra, Note 46.

[cci] For example, successive round of negotiations have been made on the Doha (2000, 2002) and Cancun (2004) Ministerial Meeting.

[ccii] See WTO website < http://www.wto.org/english/tratop_e/serv_e/serv_e.htm visited 12 November 2012>

[cciii] Goncalves and Stephanou, Supra, Note 6, p.12.

[cciv] Williams, Supra, Note 191 supra, pp.14-15, 52-53 and 144-146; Wendy, Supra, Note 14, p.313.

[ccv] Louis A. Kasekende. (2000 Capital Account Liberalization; The Ugandan Experience, paper presented at the Overseas Development Institute, p.10-16.

[ccvi] Issac Paul. (2010) “The global financial crisis: origin, contagion and impacts on Ethiopia”, 2(1) JBAS, pp.4-6; Stichele, Supra, Note 18, p.2.

[ccvii] Semmler and Young, Supra, Note 99, pp.21-30.

[ccviii] Wang, etal., Supra, Note 7, p.316; Valckx , Supra, Note 98, p.400. See further Marion Jansen. (2006) Services Trade Liberalization at the regional level: Does Southern and Eastern Africa stand to gain from EPA negotiations?, WTO Staff Working Paper (ERSD) No. 2006-06, p.14.

[ccix] Claessens and Jansen, Supra, Note 20, pp.13-14.

[ccx] Bayraktar and Wang, Supra, Note 87, p.8.

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