Agency and Bank Liberalization: The Case of Ethiopia

Abstract

This paper extends the agency theory of Jensen and Meckling (1976) to the Ethiopian financial sector, analyzes the degree of the sector's fragility and raise the reform issues of the day. Based on grounded theories and following a qualitative methodology, the paper confirms that Ethiopia's finance sector is dominated by a single state owned bank (SOB), finds that the form of agency relationship is complex, and argues that the draft banking law needs to aim at addressing the problems of ownership and managements on one hand and capital structure on the other hand. The paper proposes that the Commercial Bank of Ethiopia be privatized in a specific way and optimal board size and significant influence criteria be applied in sorting out board structure and ownership conceration in all banks.

Keywords: bank, liberalization, Ethiopia

JEL Classification: G18, G21, G32, G33