The National Bank of Ethiopia (NBE) has directed 16 commercial banks to submit recovery plans to shore up liquidity after they failed a stress test, as the regulator tightens oversight of a sector newly opened to foreign investors.

 

The 16 lenders failed the liquidity stress test for the financial year ended June 2025, down from 20 in 2024. This comes despite an overall improvement in the sector’s liquidity position.

NBE said the affected banks must actively manage assets and liabilities, strengthen internal liquidity tools and improve contingency planning to ensure they can meet withdrawals, maintain profitability and withstand shocks.

Liquidity stress testing assesses a bank’s ability to meet short-term obligations under adverse conditions.

In its Financial Stability Report dated March 2026, NBE flagged potential funding gaps from sudden deposit withdrawals, market shocks or asset devaluation, testing whether institutions can absorb losses.

The post-shock ratio of liquid assets to deposits improved from 9.3 percent to 17.3 percent, remaining above the 15 percent regulatory minimum.“This indicates that the commercial banking industry as a whole passed the liquidity stress test and registered excess liquidity of 68.5 billion birr ($435.71 million) during the fiscal year. The liquidity risk for the commercial banking industry was low during the fiscal year. The liquidity of commercial banks at 30.4 percent was at its best position compared to preceding years, recording twice the minimum regulatory threshold,” NBE said.“When it comes to individual banks, 16 of them failed the liquidity sensitivity stress test versus 20 in the same period of the previous year.”Foreign lenders entryEthiopia’s banking sector comprises 32 lenders, including one development bank.

The directive comes as Ethiopia opens its banking industry to foreign participation. On June 25, 2025, NBE announced that foreign banks and investors could apply for licences as part of reforms led by Prime Minister Abiy Ahmed since 2018.

Under regulations passed in December 2024, foreign investors can establish subsidiaries, branches or representative offices, and acquire up to 49 percent stakes in local banks.

According to NBE, sector fundamentals have strengthened. Key indicators, including capital adequacy, non-performing loans, liquidity and profitability, have improved, with net income rising 60 percent to 93 billion birr ($591.54 million) in 2025, from 58 billion birr ($368.92 million) a year earlier.

However, competition is reshaping the market. Smaller banks are losing share in assets, loans, deposits and capital, prompting consolidation pressures as larger lenders extend their dominance.

The Commercial Bank of Ethiopia (CBE), the country’s only systemically important bank, accounted for nearly 50 percent of industry assets during the period.

Its market share in assets rose from 47.9 percent to 49.1 percent; loans and bonds from 45.2 percent to 51.7 percent; and deposits from 47.1 percent to 48.1 percent.“The declining market share for medium- and small-sized banks in terms of major balance sheet items indicates the existence of stiff market competition,” NBE said.

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