A wake-up call for Ethiopian Banks: sink or swim

By Yared Nigussie

Ethiopia is one of the last few countries in the world that kept its financial sector closed to the world. Following the political and economic reform programs being undertaken by Prime Minister Abiy Ahmed’s administration the government signaled its plan to open up the financial sector to international banks and insurance companies.

The government has already liberalized the country’s telecom sector that was dominated by a state monopoly for over 126 years.  

Last February Prime Minister Abiy revealed the government’s plan to open up the banking industry to foreign competition as soon as parliament passes policies permitting it.

But the details of foreign banks entry into Ethiopia are still debatable.  Scholar and banking sector gurus provided their opinion and forwarded suggestions regarding the matter on the East African Finance Summit, held on Wednesday, May 11, 2022.

The Summit was held at the United Nations Economic Commission for Africa (UNECA) Conference Hall under the theme “Reshaping the Future of Finance Sector: in the Age of Disruption.”

Yared Haile-Meskel, an investment consultant, presented his survey titled “Ethiopian Financial Sector: surviving and thriving against liberalization, virtualization and digitalization of currencies”.

Though some of the banks boosted their capital last year but there is no bank that accumulated more than 10 billion Birr ($200 million) paid-up share capital, a data from Yared’s survey shows.

This paid-up capital is too low in the banking sector. “Last week European Euro Million Lottery was 226 million. That means “If you win a Euro million Lotto you could be able to buy the biggest Bank in Ethiopia, if one looks in terms of paid-up capital” Yared said, adding, “That’s how local banks are facing dangers. “I mean, some banks in Kenya could be able to buy most of the banks,” he further argued.

He argues that “the Ethiopian banks face three challenges. The first one is liberalization, which means international and regional banks can come and compete for the market share”

The second challenge comes from virtualization of banking services.  Now FinTech and telecom companies can provide banking services without having bank branches through virtual world.  Virtualization has removed a barrier to entry to banking sector. Fintech and telecom companies do not need big capitals, bankers and buildings —the oldest bricks and mortar model of banking.

“So, telecom companies like Safaricom, telebirr and M-Pessa. Alipay, ArifPay can take part of the baking sector business”.

The third challenge is from digitalization of currencies. Blockchain based Cryptocurrencies are taking away 300 years monopoly of central banks printing money.  This is not affecting not only the central banks but also banks in general.  One of the functions of banks is to store value.  People bring their paper money for safe keeping and get interest on their deposits. At the moment cryptocurrencies are stored on network of computers and the value stored in cryptocurrencies do not come to in the banking vaults. When citizen store their values on their computer the banks will start to lose deposits.

Fear of digital currencies has triggered many governments to start their own digital currencies called Central Bank Digital Currencies (CBDCs).  China is the leading one with e-yune. This also reduce the banks role as a safe house for cash.

Richard Ketley, Director at Genesis Analytics and Owner, Genesis Analytics also presented a survey on “Impact of Foreign Banks during Banking Sector Liberalization”.

The difficulties, according to Ketley, are because there are two or three classes of local banks, or, those that go through a difficult period, but eventually managed to compete effectively with the incoming banks, those that struggle on their own and destroy shareholder value, and those that sell at a premium to the foreigners who want to get into the market.

“So, you’ve some very difficult choices to make in the coming years,” he warned Bankers who attended the summit.

According to Ketley’s survey, the benefits of foreign banks to the economy are decreasing financial intermediary cost and increases quality; enhance access to financial services, and increase economy and financial performance of borrowers.

Serving as a state-of-the-art-technology and providing sophisticated financial instruments and techniques are too its merits.

When it comes to the welfare of people, human resource development through training, higher remunerations and stronger corporate governance practices are also the expected advantages from foreign banks entry.

However, Yared warned bankers on the threats of financial liberalization.

Ethiopian Banks have lower capital; less developed virtual platform services and very focused on retail banking only.  They lack experience in areas of consumer goods lending, corporate/commercial banking, global banking, private banking, investment banking, mortgage services, wealth management, credit & debit cards and overdraft services, said Yared, who is also a Managing Director and Consultant at YHM Consulting PLC.

Ethiopian banks are not that much risk-taker compared to the global competitors, said Yared, adding, “Therefore, when global banks enter into the Ethiopian market, the local ones could face a threat particularly in all areas except retail banking”.

He recommends that, “Local banks have to work hard to solve the possible dangers”.

Fikru Tsegaye, Executive Officer for Strategic and Business Development, Ethiopian Re-Insurance Share Company on his part stressed the need to set up an independent regulatory body that regulates the insurance industry even prior to liberalizing the financial sector.

Likewise, Eyessuswork Zafu, the insurance guru explained his efforts to set up an independent insurance regulatory agency during the initial years of 1990s, when the EPRDF allowed formation of private banks and insurance companies.

In favor of the financial liberalization, Eyessuswork insists a well-thought, planned, and sequential liberalization process.

Another financial sector that possibly be affected by the financial liberalization is the insurance sector.

Yared Molla, President, Association of Ethiopian Insurers, said the sector is demanding a policy framework because it has its own characters and risks.

“The absence of such a policy has retarded the growth of the sector,” Yared complained.

He added that, “There’s a tendency of seeing banking and insurance industries through a single lens, which prompted implementation of laws and directives in both sectors at the same time”.

“Such execution of laws and directives has thwarted the growth of insurances,” he opines.

Yared also explained that the insurance companies are in favor of financial liberalization measures to be taken by the government.

Ahmed Shide, Minister of Finance, who was the guest of honor at the Summit, explained that the government is under preparatory stage to liberalize the financial sector. He also told local banks to get ready for global competition.

“The government needs not only robust banks but also competitive insurance companies,” Ahmed said, adding, “We are ready to give attention to innovative ideas to make the insurance industry stronger”.

But, Yared went on to went off the association’s complaint over the restrictions imposed on insurance companies. “Inflation is eating us and we’re not allowed to invest our own money,” he lamented.

Melaku Kebede, CEO of Hibret Bank, on other hand is in favor of merger of local banks.

“I’m very optimistic about the liberalization though we don’t know when it will happen,” he said, adding, “A merger will be inevitable, we need to have few and stronger banks than having many weaker and smaller banks”.

Melaku opines macroeconomic problems such as inflation should be tamed before the financial liberalization measures.

Frezer Ayalew, Director of Banking Supervision at the National Bank of Ethiopia (NBE) dismissed the threats feared by local banks. “I don’t think the government will permit the foreign banks to wipe out the local ones,” he said. Frezer reiterates the government’s plan to liberalize the finacial sector. But he refrained from revealing firm dates when that would happen.