Financial Sector Overview
Eritrea has emerged from twenty years of conflict with Ethiopia and a decade of sanctions imposed by the international community. The country gained formal independence from Ethiopia in 1993 and despite recent progress, it remains one of the least developed countries in the world. Anecdotal evidence indicates that poverty is still widespread in the country where 65% of the population lives in rural areas and 80% depend on subsistence agriculture for their livelihoods. Eritrea has faced many challenges, including lack of financial resources and chronic drought, which have been exacerbated by restrictive economic policies. Apart from mining, Eritrea is almost entirely dependent on agriculture for economic growth. Trade and transportation also play a pivotal role with the Massawa Port serving as an important sea access for landlocked Ethiopia. Foreign Direct Investment (FDI) is largely dominated by the mining sector, accounting for 96% of total FDI in 2017. Copper, potash, and gold production are likely to drive economic growth and government revenue over the next few years. Most medium and large businesses in Eritrea are controlled by either the government or the ruling party. The government however signals it is seeking to privatize some state-owned firms, but little progress has been made. Firms slated for privatization include the telephone company, hotels and some food production and packaging entities. About 58,000 private businesses operate across the country.
Financial Sector Overview
The Eritrean financial sector is small, undeveloped and offers only a limited range of financial services. All Banks are controlled by the government, and 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’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 3 state-owned banks in Eritrea: the Bank of Eritrea, the Commercial Bank, and the Commercial and Housing Bank. Himbol Financial Services, the arrangement by which foreign currency is transferred from abroad, is also run by the sole political party. The state-run banks do not publish financial statements, exacerbating public distrust.
Eritrea’s telecom sector operates under a state-owned monopoly for fixed and mobile services. Partly as a result 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.
The microfinance sector has been actively functioning for many decades in local, traditional Eritrean forms of rotating savings and credit clubs known as the ekubs and idirs. Also, 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. 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 remain the main source of external capital for the poor and micro and small businesses. The later are mostly 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.
There are no formal capital markets and the Eritrean currency (nakfa) is nonconvertible. Foreign ownership and investment are prohibited.