THE FUND MANAGEMENT PRACTICES IN ETHIOPIAN BANKING SECTOR CAUSES, EFFECTS, AND IMPLICATIONS FOR FINANCIAL STABILITY

Abstract

This study examined fund management practices in the Ethiopian banking sector, focusing on identifying their root causes, observable effects, and broader implications for financial stability. Fund management played a central role in ensuring the operational efficiency and resilience of banks, particularly in developing economies where the financial systems were often vulnerable to external and internal shocks. In the context of Ethiopia’s banking landscape, where financial liberalization and regulatory reforms had been gradually introduced, the significance of effective fund management had become even more pronounced. However, academic and policy-oriented literature on how Ethiopian banks manage their funds and the impact of such practices on overall financial stability remained scarce. This highlighted a critical research gap that this study sought to address.

The objective of the study was to evaluate existing fund management practices among Ethiopian banks, investigate the factors contributing to inefficiencies, and assess their consequences on financial soundness and systemic stability. It also aimed to provide practical policy recommendations for improving fund management at both the institutional and regulatory levels.

To achieve these objectives, the study adopted a mixed-methods research design. Quantitative data were collected from audited financial reports of selected commercial banks, focusing on key indicators such as liquidity ratios, asset-liability maturity structures, and capital adequacy. These were complemented by qualitative data gathered through semi-structured interviews with senior bank officials, regulators from the National Bank of Ethiopia, and financial experts. This approach enabled the study to triangulate numerical trends with experiential insights and institutional practices.

The analysis revealed several critical issues. Many banks experienced a mismatch between short-term liabilities and long-term assets, which strained liquidity positions during market stress. Fund management decisions were often reactive rather than strategic, largely due to inadequate risk assessment frameworks and limited internal capacity. Regulatory inconsistencies and the absence of comprehensive asset-liability management policies further exacerbated the problem. Interview respondents also indicated that mandatory bond purchases and credit ceilings imposed by the central bank reduced banks’ flexibility in managing their funds optimally.

The study’s findings had multiple implications. First, they underscored the importance of developing proactive fund management strategies, supported by dynamic liquidity forecasting and integrated risk management systems. Second, they suggested the need for regulatory improvements, including clearer guidelines on asset-liability mismatches, minimum liquidity thresholds, and the alignment of monetary policy tools with banking sector realities. Third, the findings offered a foundation for banks to build internal capacity in financial planning, improve compliance, and enhance resilience against macroeconomic shocks.

In conclusion, this study filled a critical gap in the literature on banking fund management in Ethiopia and demonstrated that strengthening these practices could significantly enhance financial stability and contribute to sustained economic growth. The results offered valuable lessons for policymakers, bank executives, and development partners aiming to support a more robust and responsive banking sector in Ethiopia and similar emerging economies.