As excitement builds ahead of the launch of the Ethiopian Securities Exchange (ESX), banks are already actively trading on its online Interbank Money Market trading platform, launched by the National Bank of Ethiopia (NBE) on 31 October. The electronic trading platform is managed by the ESX and developed and supplied by InfoTech Group.

Private banks Wegagen and Awash International were the first to use the electronic platform. Wegagen provided an ETB 50 million ($399,000) overnight loan to Awash as they responded to an initial auction where participants were offered a total of ETB 6.1bn ($48.7m). The interest rate on the transaction was set at three percentage points above the National Bank of Ethiopia’s (NBE) base policy rate of 15%, according to this 3 November report by Aksah Italo of Addis Fortune.

Mamo Mihretu, Governor of the National Bank of Ethiopia (NBE), told Fortune it is a big step towards financial stability as the country moves towards a monetary framework based on market interest rates: “It’s a significant advancement for our financial system. The online interbank market will enable banks to manage their liquidity more effectively.”

The interbank money market platform allows short-term borrowing and lending among banks with maturities of 1 or 7 days. The aim is to improve liquidity management to cover shortfalls or invest surplus funds and encourage both cooperation and healthy competition, boosting market stability, reducing systemic risk, and offering more stable interest rates.

Banks which have funds to lend (“liquidity surplus”) use the platform to publish (“quote”) the amount of money available and the interest rate they are asking. Banks that need funds (“liquidity deficient”) can choose the most favourable offers on Ethiopia’s new electronic financial trading platform.

Birhanu Balcha, CFO of Awash Bank, told Fortune that he considers the market a promising platform for addressing short-term liquidity needs while allowing banks to use idle funds effectively: “We anticipate taking turns on both ends of these transactions.” Tilahun Kassahun, CEO of the ESX, said in the same report: “We’ve seen substantial liquidity enter the market, particularly from the state-owned bank.”

According to a report on Fana: “This initiative aligns with the NBE’s efforts to modernize the financial sector and foster cooperation among banks, ultimately supporting effective monetary policy transmission and strengthening the implementation of macroeconomic reforms.”

Preparation for the new platform included NBE’s Interbank Money Market Directive (MFAD/IBM/03/2024) and Code of Conduct. These regulatory frameworks provide rules and guidelines, ensure that all participating banks adhere to standardized rules and ethical practices.

All trading is on the ESX trading platform. The NBE has approved the platform and says it ensures “the highest levels of security, efficiency, transparency and comprehensive reporting.” All commercial banks have equal access. Only qualified commercial banks that meet the criteria are allowed to join. The central bank encourages all banks to participate actively.

The NBE says: “Banks participating in the Interbank Money Market are expected to trade within the interest rate corridor set by the NBE, based on the National Bank Rate (NBR). This corridor establishes NBR +3% as the upper limit and NBR -3% as the lower limit for interbank transaction interest rates, ensuring trades occur within the corridor and predictable range. It is expected that interest rates in the interbank market will align with the NBR but, should this not be the case, the NBE will intervene using liquidity management instruments to ensure that the interbank interest rate converges to the NBR.” The NBE can provide lending and deposit facilities to help guide rates to the target range. The minimum transaction size on the platform is ETB 25m.

The NBR is the rate at which commercial banks borrow from the central bank. The NBE set it at 15% in July.

Michael Habte, COO of the ESX, wrote in Capital newspaper the ESX “becomes one of the few African exchanges to introduce interbank trading, setting a new standard for short-term money markets on the continent. With dual regulatory oversight from the National Bank of Ethiopia (NBE) and the Ethiopian Capital Market Authority (ECMA), the ESX is proud to host a modern and flexible trading platform that promotes efficient price discovery, better transparency, and enhances liquidity in the Ethiopian banking sector.

“This enables a more stable, resilient, and adaptable financial sector, one that’s better equipped to support the nation’s long-term growth ambitions.”

He explained: “Money market instruments are generally defined as highly liquid, low risk ‘cash equivalent’ financial instruments that mature in less than one year. In addition to the interbank segment, the money market includes time deposits, Treasury Bills, repurchase agreements (collateralized interbank loan), and commercial papers which are unsecured short-term debt instruments issued by companies to finance short-term working capital.

“The interbank market is an essential prerequisite for the robust development of modern debt capital markets and serves as the foundation for constructing a proper market-based yield curve and building liquidity in the government debt market. An efficient interbank market helps to support government bond markets by optimizing financial institutions’ liquidity positions and helping price short-term debt instruments such as Treasury Bills more accurately in the secondary market.

“The presence of a liquid money market also reduces the risk and expense in terms of storing government securities to maturity as banks can use these securities as collateral in the interbank market – in the form of repurchase agreements (repos) – unlocking valuable implied optionality in Treasury instruments that until now has not been realized in Ethiopia due to the absence of a functional capital market and necessary trading and settlement systems.

“The ESX trading platform will allow trading in both the interbank and debt – both government and private securities – markets and be integrated with the Central Securities Depository (CSD) hosted at the NBE that handles trade settlement, providing an integrated and seamless trade execution process on par with modern exchanges around the globe.

“The significance extends beyond operational efficiency for banks alone however. A regulated trading platform will improve price discovery in the cash market, enhance market discipline, and reduce the cost of interbank borrowing.

“These advancements mean that Ethiopian businesses — from SMEs to large corporates — can access credit more predictably and affordably and provide added flexibility to banks to meet customer credit demands more proactively. The ripple effects can spark increased investment, job creation, and innovation in the real economy, accelerating Ethiopia’s march toward becoming a middle-income economy.”

Development agency FSD Africa, funded by the UK Government, is a key supporter of capital market innovation and improvement in Africa and, with FSD Ethiopia, has been central to the development of the Ethiopian regulated market. Victor Nkiiri, Senior Capital Markets Specialist, commented: “The launch of the interbank markets by Ethiopian Securities Exchange (ESX) marks a critical step towards deepening financial inclusion and driving economic transformation. Exciting times ahead!

“For the team at FSD Africa and FSD Ethiopia, this milestone serves as a powerful reminder of why our transformative work in supporting capital market development is so crucial for Africa’s future. Together, we’re paving the way for sustainable growth and investment across the continent.”

The report on Addis Fortune said the NBE will oversee the platform during its early stages and in future the Ethiopian Treasury Association, made up of treasurers from the banks, will take over responsibilities for compliance. The NBE will publish the interest rates at which banks transact, but the identities of trading parties will remain confidential. In future, the banks, NBE and ESX will decide the transaction fees and the electronic trading platform will contribute to ESX revenues.

The platform still has to be adapted for interest-free banks including to develop trading in compliance with Islamic shari’a principles of ethical finance.

Financial consultant Mered B. Fikreyohannes told Fortune: “It’s a crucial shift to stabilise the financial system, correcting price distortions that have plagued the sector for years.” He added that aligning short- and long-term interest rates will help address negative real interest rates, which he attributed to long-standing distortions in the financial sector.

ESX CEO Tilahun says the platform lays the foundation for price discovery, which will be critical as Ethiopia moves toward developing a full-fledged capital market: “We’re thrilled that ESX’s state-of-the-art trading platform is advancing this national endeavour.”