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en introduced since 1994 and private banks were allowed to be re-established, the three large state-owned banks continue to dominate the market in terms of capital, deposits and asset (Ghirmai T Kefela, 2008).

The Ethiopian economy would benefit from financial sector liberalization, especially from the entry of foreign banks and the associated privatization of state-owned banks. Kiyota and others observed that the key elements of financial openness which includes domestic market competition, foreign ownership, and limited capital controls are lacking in Ethiopia. That is, high bank concentration indicates a lack of competition in Ethiopia’s banking sector. Foreign banks are not permitted to enter the market in any form, and the Ethiopian Government maintains strong control over international capital movements. This highly closed nature of the Ethiopian financial negates the positive effects that would otherwise come from greater financial intermediation. This makes Ethiopia unique from its East African neighbors (namely Kenya, Tanzania, and Uganda) and many other developing countries. That is why Ethiopia’s financial sectors remain closed and they are less developed than its neighbors (Kiyota, 2007).

Although Ethiopian government and policy makers understand the potential importance of financial liberalization, they strongly refused to open the financial sector for foreign investors. They believed that liberalization may result in loss of control over the economy. Since the NBE is not in its potential to control the well organized, equipped and financially strong foreign banks, permitting foreign investors to invest in the financial sector may leads to economic crises. In addition, they believed that the Ethiopia financial sector is too young to compete with foreign banks i.e. the domestic sector will be out of game and the foreign completely control the financial system of the country. In this case the former prime minister of Ethiopia, Meles Zenawi, clearly stated in his writing entitled, African Development: Dead Ends and New Beginnings, those financial reforms takes place before result in high incidence of non-performing loans and excess liquidity in many African countries. This excess liquidity reflected the failure of banks to effectively mobilize savings and promote lending. He completely argued that in this stage of economic and financial sector development, complete liberalization doesn’t work for Africa including Ethiopia.

6. Measurement of financial development

6.1. Is financial sector development measurable?

A good measurement of financial development is vital in evaluating the advancement of financial sector development and understanding the corresponding impact on all over economic performance of a country. However in practice, it is difficult to measure financial development given the complication and extent it encompasses. There is no general consensus in the literature about the factors that should be taken into account in explaining financial development, nor what indicators of that development are most reliable. Practical works so far are usually based on standard quantitative indicators accessible for a longer time period for a broad range of countries.

IMF (2004), explain that using conventional measures of financial deepening, such as the level of real interest rates and the ratio of broad money to GDP, may give misleading sig