The first large banks to be founded in a particular country tended to do a bit of everything. They took deposits, made loans, issued banknotes, distributed securities, and more. These functions may have been fulfilled previously by unique actors but large banking firms brought them under one roof and usually on a larger scale. At the start of the 20th century, Ethiopia formed its first bank, the Bank of Abyssinia. This was a form of ‘universal bank’ in Ethiopia but unlike the contemporaneous banks of other countries, it was operating in a country largely unfamiliar with banking practices.
Money in 19th Century Ethiopia
Prior to the introduction of banks in Ethiopia, banknotes were practically unheard of. The Maria Theresa thaler, a large Austrian silver coin, was the dominant form of money used in Ethiopia, as it was in Ethiopia’s Red Sea neighbors, including Arabia. These began circulating meaningfully in the early 19th century. Ethiopia had been an importer of other foreign coins before; Egyptian, Hungarian, and Venetian coins had circulated earlier. Besides these though, other foreign monies, and even gold, had little acceptance with a few exceptions and even then, only in specific areas.
As with other countries historically reliant on foreign coins, there were concerns about a shortage of money as coins were exported. It was thought that a locally minted coin would be more likely to remain in Ethiopia, increasing the local money supply. A French adventurer in Ethiopia, Pierre Arnoux, pitched the idea of introducing an Ethiopian currency to the Ethiopian emperor, Menelek II, back in 1875. Some progress towards creating a local mint began in 1888 and finally, a new Ethiopian coinage was announced in 1893.
Relatively few coins were minted at first, the most common coin was the 1/8th Birr coin of which just 25,200 were minted between 1894 and 1896. Consider that Addis Ababa alone already had a population approaching 100,000. Eventually, millions of coins were struck, including many in smaller denominations, which the Maria Theresa thaler lacked, but success at encouraging widespread acceptance was mixed. It was believed the creation of a new bank would help popularize the new currency.
Development and Diplomacy
There were other reasons to establish what would become the first bank in Ethiopia; Emperor Menelek II was interested in strengthening the economy. He was convinced that a bank would lower interest rates, which usually ran between 3% and 5% per month on typical loans. So, the Emperor requested assistance from European countries in establishing a bank, dangling a concession over Ethiopian banking in front of them.
As elsewhere, concessions had been granted in Ethiopia to foreign groups to develop the country. Notably, a French group built a railway between Djibouti and Addis Ababa in exchange for a concession to operate it and collect duties on goods imported and exported through the railway. Though Menelek II now preferred to give the banking concession to investors from a different country to balance out French influence.
So, the opportunity came to the attention of a British diplomat in Ethiopia, John Lane Harrington, who relayed his interest in the project to the Foreign Office which in 1904 discussed the possibility with the National Bank of Egypt, a private bank in British Egypt. This bank expressed interest and Britain recommended that the country seek the assistance of the National Bank of Egypt in forming a new bank for Ethiopia.
Bank of Abyssinia
Thus, the Bank of Abyssinia was established, not in Addis Ababa but in Cairo, in 1905 as the first bank to conduct business in Ethiopia. It was a joint venture of sorts between the Ethiopian government and the National Bank of Egypt, which provided at least four of its ten directors, including its chairman who was also the Governor of the National Bank of Egypt. At least two board members were to be Ethiopian, and one each French and Italian. The bank was given a fifty-year concession to operate as Ethiopia’s sole bank minting coins, issuing banknotes and government loans, holding public funds, as well as possessing other privileges.
The Bank of Abyssinia was formed with £500,000 in authorized capital, a quarter paid-in at founding. This amount was divided into 100,000 shares of £5 apiece. Half were taken by an Anglo-Egyptian group, of which National Bank of Egypt was a large participant, and a quarter each by a French and Italian syndicate. Some 45,000 of these shares were offered to the public with great success; there were orders for 610,000 shares.
As a result, the bank’s operations began in 1906. It became profitable for the first time in 1909 but not with great consistency thereafter. Eventually, the bank paid its first dividends, but not until 1918. The Bank of Abyssinia’s early years were plagued by political instability and the First World War which interfered with Ethiopia’s trade. From the mid-1920s on however, the economy strengthened as the volume of Ethiopian exports of coffee, hides, and skins, rose markedly. The bank did very well during these years as a result; its deposits and loan volumes grew.
Unsurprisingly, the introduction of banking, especially deposit banking, had some noteworthy effects on the money supply. Firstly, the bank was given responsibility for minting new Ethiopian coins though it did continue to import Maria Theresa thalers into the country too. Further, the Bank of Abyssinia was given a monopoly as an issuer of banknotes and it spread the use of banknotes and attempted to establish confidence among the public in the notes. Still, banknotes largely circulated only in major cities. The Bank of Abyssinia was also the only deposit bank in the country.
Branches of the Bank of Abyssinia were opened in the country, helping to publicize the bank and make the public familiar with the services it offered. Though, in rural areas especially, few had a good idea of what banking was. The bank also had to contend with people’s preference for coins over banknotes and bank cheques; in its early history, the bank’s clients often made transactions in metal coin. As a result, the bank had to keep large balances in specie in reserve, minimizing the lending it could do. A large portion of its assets essentially had to sit idle.
Demand deposits were made by foreign businessmen and wealthier Ethiopians who appreciated its convenience. Nonetheless, longer term savings deposits were scarce. Returns on other illiquid investments were much higher than the 3% per annum offered by the bank.
Because of this dependance on businessmen and the wealthy, the Bank of Abyssinia was criticized for neglecting poorer prospective clients. This feeling was complemented by a growing desire for a new locally-owned bank. As a result, Menelek II chartered a different bank in 1909, the Societe Nationale d’Ethiopie, to address this shortfall. The Emperor deposited money with the bank but it was similarly unsuccessful in raising small deposits from customers. This bank did make loans at a relatively low 10% interest rate but whether the Societe Nationale d’Ethiopie should be a for-profit bank or a development bank was not clarified early on. For a while thereafter, this bank would focus simply on collecting the loans it had made, perhaps too liberally, in its early history.
The Bank of Abyssinia provided loans, commonly against warehoused goods, and overdraft facilities to its business clients. Interest rates were typically 15% with a guarantor expected to be provided for each loan. By this lending, the bank financed trade in exported commodities like coffee and imports of foreign consumer goods into Ethiopia. Still, not all the bank’s funds were deployed locally; some of its lending was done in Egypt, primarily lending against securities. The bank also provided clients with a means of making international transfers.
At the end of 1930, there was about £88,500 worth of Bank of Abyssinia banknotes in circulation and £250,000 of bank deposits. Against these notes and deposits, the bank was still essentially forced to hold a lot of reserves in idle specie, valued at £164,000. Despite this, after years of growth, the bank was making nearly three times the advances against goods in 1930 as it was in 1926.
Yet, the bank was not to last much longer in its then form. In one of his first projects, the Bank of Abyssinia was nationalized by the new Emperor, Haile Sellassie I, who responded to political opposition to the foreign-controlled bank. Even Menelek II, shortly after establishing the bank, regretted not insisting on more Ethiopian directors for its board. Haile Sellassie had been one of its directors before and had seen the bank as a positive force. Still, to him, taking over the bank was an issue of national prestige.
So, the bank’s assets and liabilities were transferred to the state, which paid the shareholders an amount equal to the book value of the bank, including its buildings and property, plus £40,000 as compensation for terminating its concession approximately midway through the fifty-year term. This was paid in installments and together with interest on this amount the total sum paid by the state was about £204,000. The bank’s banknotes were replaced by those of a new Bank of Ethiopia, chartered in 1931.
This new bank lacked foreign support so the government had to back it almost entirely. Of an expected 30,000 shares of £25 each, of which 12,000 would be offered to the public, only 18,874 were issued, 18,003 to the government and just 874 to the public. The offering brought little new investment to the bank since the government’s shares were issued to it in exchange for transferring to the new Bank of Ethiopia the net assets it acquired from the Bank of Abyssinia and so this did not constitute new investment.
However, this would be a much more Ethiopian bank than the Bank of Abyssinia. All of the bank’s directors were appointed by the government, though a Canadian banker was appointed its first chief executive. The Bank of Ethiopia had close relations with the state. As the sole issuer of paper money with a close relationship to the state and a provider of financing facilities to other financial firms, the new Bank of Ethiopia was something of a central bank, the first of its sort established by a self-governing African country.
The example of the Bank of Abyssinia shows how the introduction of banking can change the meaning of money but only in those areas where banks have reach. Rather than be confined to metal coins, banking activity introduces banknotes and deposits as new forms of money.
However, because banks tend to best serve commercial activity, rather than the needs of ordinary people, the introduction of new forms of money tends to affect commerce first. So, merchants become familiar with banknotes and cheques before the masses do. This can make it rather difficult to introduce poor or remote communities into a modern financial system, especially as established customs there become difficult to replace. Eventually, new technology, particularly in communications, would change this.
More from the Tontine Coffee-House
Read about the issuance of new forms of money in remote parts of Australia and the monetary diversity of 19th century China. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts.
1. Mauri, Arnaldo. “The Short Life of the Bank of Ethiopia.” Acta Universitatis Danubius. Œconomica, vol. 4, no. 4, Dec. 2010, pp. 104–116.
2. Pankhurst, Richard. “Ethiopian Monetary and Banking Innovations in the Nineteenth and early Twentieth Centuries.” Journal of Ethiopian Studies, vol. 1, no. 2, July 1963, pp. 64–120.
3. Schaefer, Charles. “The Politics of Banking: The Bank of Abyssinia, 1905-1931.” The International Journal of African Historical Studies, vol. 25, no. 2, 1992, pp. 361–389.