Financial Sector Overview

The Eritrean financial sector is small, undeveloped and offers only a limited range of financial services. The financial sector is controlled by state-owned banks. The financial industry comprises mostly of the Central bank and two commercial banks. There are four microfinance institutions, and one insurance firm. Since government controls all Banks, the lack of fiscal, legal and fiscal transparency hinders efficient assessment of the domestic financial sector development. The government also exerts strict control over the use of foreign currency. New regulations issued in 2013 aimed at relaxing currency controls have had little economic effect. The Eritrean government has set a law for Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) in addition to institutional efforts to establish a financial intelligence unit, restore faith in the system and build capacity for financial institutions.

Eritrea has long been a cash-based economy with a slight dependence on demand deposits and almost no reliance on term deposits. This makes it difficult to obtain financial sector data. The IMF estimated in 2014 that the M2-to-GDP ratio was around 14.3%, significantly below the sub-Saharan African average (36%). In 2016, reforms introduced an automated payment system, and the old Nakfa (ERN) banknotes were replaced. Hence, citizens were urged to conduct their business through the banking system, and huge sums of money were regulated. In terms of loan access and information on borrowers such as credit history and credit risk, Eritrea ranks low in Africa. The absence of collateral registries and the difficulty of contract enforcement limit bank lending to the private sector. According to the African Economic Outlook – Eritrea conducted by the AfDB, OECD and UNDP (2017), Eritrea ranks 185th out of 190 economies concerning simplicity of attaining credit.

Banking Sector

Eritrea’s banking system was established under Proclamation 32/1993 and later modified under Proclamation 93/1997. The Proclamation pertaining to foreign exchange bureaus was introduced in 1998. There are three state-owned banks in Eritrea: The Commercial Bank of Eritrea and the Eritrean Investment and Development Bank and Housing. Himbol Financial Services, the arrangement by which foreign currency is transferred from abroad, is also run by the sole political party. The Central bank of Eritrea regulates the banking sector. The state-run banks do not publish financial statements and they do not have websites, majority of processes in the banking sector are performed manually. Resulting in severe inefficiency in the business-delivery system and exacerbating public distrust. The Commercial bank of Eritrea is the single banking entity offering complete retail commercial banking.

The banking industry has been rated as poor in terms of the Basel III international regulatory framework, making it more vulnerable to global external shocks such as COVID-19 (Africa Housing Finance Yearbook, 2022). Hence, there is a need to increase capacity in banking supervision, and risk analysis. The mandated capital adequacy ratio in Eritrea requires strict implementation among all banks, as well as continuous enforcement of the Central Bank Law (AfDB, OECD and UNDP, 2017).

Digital Finance

Eritrea’s telecom sector operates under a state-owned monopoly for fixed and mobile services. Partly because of such restrictions on competition, the country has the least developed telecommunications market in Africa. Mobile penetration is only about 11% (compared to 60 phones per 100 inhabitants in Ethiopia, one of the lowest mobile penetration rates in Africa), while fixed-line internet use barely registers. Although the provision of internet services is open to competition, about 2% of households have access to the internet. Mobile money services are not yet available in the country and there is no access to digital banking.

There is also a limited legal and regulatory framework on the development of Information and Communication Technologies (ICTs) in Eritrea. Eritrea is one of the few African coastal countries without an undersea fiber internet connection and there are ongoing discussions to extend Liquid Telecom's 75,000km pan-African fiber-optic backbone network to the country (World Bank, 2021).

Microfinance

The microfinance sector has been actively functioning for many decades in local traditional Eritrean forms of rotating savings and credit clubs known as ekubs and idirs. In addition, moneylenders have been a common source of funds for rural people, but at high, unaffordable rates ranging between 70 and 600% per annum. Semi-formal and formal microfinance programs were developed only recently. Though microfinance has been available in Eritrea for some time, it is still substantially undeveloped. The two largest microfinance institutions are the Southern Zone Saving and Credit Scheme (SZSCS) and the Saving and Micro Credit Program (SMCP). The main objective of the SZSCS is to provide underprivileged people access to credit. The Savings and Micro Credit Program (SMCP) operates throughout the State of Eritrea and was established in 1996 as part of the Eritrean Community Development Fund. Eritrea has several other microcredit schemes run by the government and Non-Governmental Organizations (NGOs). They    owned and operated by individuals who are socially and economically disadvantaged. The small size of loans, absence of asset-based collateral and simplicity of operations are the three distinctive characteristics of the financial services provided by Eritrean MFIs.

Capital markets

Eritrean financial markets have not grown in a way that people and businesses may diversify their investments and raise funds through stocks, bonds, and foreign currency markets. Therefore, there are no formal functioning public market for capital markets in Eritrea or an established stock market. The Eritrean currency (nakfa) is nonconvertible out of foreign ownership and investment are prohibited.

Insurance Sector

There is one insurance firm in Eritrea – the National Insurance Corporation of Eritrea (NICE) established in 1992, shortly after independence. It inherited the portfolio of operations that had previously been part of the Ethiopian Insurance Corporation. The NICE performance has been positive over the years as its gross premium increased by 4% in 2022. However, the bottom-line statistics of Net Profit and Dividend have decreased by 3.71% and 3.56%, respectively, owing mostly to a 66.4% rise in Net Claims incurred compared to 2021. The considerable increase in Net Claims incurred was caused by the regular increase in motor vehicle accidents. On the other hand, the recently implemented Group Life Insurance Scheme's contribution to the company's overall gross premium was encouraging. In 2022, the gross premium accumulated from the whole life business was Nakfa 23.4 million (USD 1.55 million), representing a 57% growth over the previous year (Nakfa 14.9 million (USD 0.99 million) in 2021).

Conclusion and Recommendations

There must be financial-sector reforms in Eritrea that aim to advance access to finance and increase competition, by first introducing ICT in the Eritrean financial sector and diverting the ownership of the banks into private hands. This would enable banks to build on it and increase the access to financial data. Additionally, this could enable mobile phone penetration that induces digital payment, which is an evolutionary path now offered by many mobile money providers to financial inclusion. Mobile money is also considered as having a good impact on closing the gender gap in both access to finance and economic possibilities. Improving the banking sector would also enhance financial inclusion, as many people would have financial institution accounts. Creating such high competition would force the high rates in MFIs to decline and enable many SMEs to get funding.

Contact Details Information of Banks operating in Eritrea