The prospects of liberalizing the financial sector

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Educated in the UK Yared Haile-Meskel, is an investment consultant based in Addis Abeba, Ethiopia. Yared is the founder and CEO of YHM Consulting, a transaction advisory company.
Yared Nigusie of Origins Business sat down with him to discuss the liberalization of the Ethiopian financial sector and other related issues.
Excerpts:

Origins Media: What are the possible advantages and demerits of liberalizing the financial sector of Ethiopia?

Mr. Yared Haile-Meskel:  
Depending on how you take this liberalization measures, it has both advantages and disadvantages. If measures are taken to prepare the banks ready to face the challenges; of course, this is an opportunity to grow. A good example is my own experience with regards to liberalization of financial sector for domestic investors in 1994. Before liberalization of 1994, if you arrive at 3:00 PM in the afternoon, the banks were already closed— staffs often say they are closed to count money. There was no ATM or mobile transfer and you have no option but to come back on the next day to the same bank to withdraw your money since branches weren’t networked.                       

After liberalization, banks have to work hard and invest to outbid each other to improve services by working longer hours, providing ATM, online banking and now mobile banking. This is a result of competition.
In 1994 European calendar, the financial sector was partially liberalized for local investors. People with small amount of money have to come together and create banks. I think, in that time the investment requirement was 50 million Birr. Now, we have 16 big banks in relative terms.
Private Banks now have 50,000 to 60,000 employees, and even more excluding the state-owned commercial bank. These banks created high paying jobs and developed the human capital of the banking sector.

We can now say 100,000 direct jobs and more indirect jobs providing sector to the banks. These indirect jobs include IT support, Agent banking, Fintech, property rental, printing, suppliers of goods and services to the sector. The banking sector have also many birr millionaires who invested in the banking sector while providing loan and banking services for growth of the economy.
The asset of these companies is also estimated to many billions USD.

These banks are in stiff competition. There are banks working 24 hours; if you go to Hilton Hotel, Hibret bank is providing 24 hours service unlike previous times. Besides, Commercial Bank of Ethiopia (CBE) is aggressively investing. They are expanding digital banking services; they have ATM cards and CBE Birr services. They’re competing basically not to lose the market share.
Therefore, competition is a good thing. The Ethiopian Airlines is a good example of competition- it has never been protected from competition. It was left to compete with big global players such as British Airways, Lufthansa, Alitalia, Egyptian, South African, Kenyan, Emirates and so on. But they managed to succeed and win. So, we don’t have to be afraid of competition. Because 28 years protection for local banks from foreign ones is a long time; they should be in a position to be competent so that these companies could be able to create more wealth and prosperity.

When it comes to demerits of liberalizing the financial sector, if these institutions are not prepared for this challenge, they will lose. Banks now are engaged with LC settlement, foreign currency exchange & retail banking. In retail banking, people deposit the money and then the other people will borrow money, and then they get interest out of the money they lent and then they will pay you interest on that money. That’s the model. They don’t provide loan for consumer goods, they don’t provide corporate banking, private banking, investment banking. They don’t have experience in global banking, mortgage services, wealth management, Credit & Debit Cards, overdraft services and other banking services. These areas the most profitable parts of banking that are not protected. So, these can be easily be filled by foreign banks, which will be very difficult for banks to compete.

No bank provides services for household goods. For instance, if someone wants to purchase a TV; the banks don’t provide personal loan, or overdraft credits services that are higher interest rate loans. If you go to European or US stores, they will check your credit record on the spot let the goods on 12 months or 24 months installment.

I bought my first car in Europe without deposit and my house just putting 5%. The money supposed to be paid for rent goes to my mortgage. In this way one will own a home in 25 years’ time.

Hence, local banks do not have experience to compete in those areas of banking sectors.
Foreign banks provide credit cards. We are about to have a stock-market but our banks do not have experience in investment banking, to value companies and float them on the stoke-market.

Corporate banking is a specialized division of a commercial bank that offers various banking solutions, such as credit management, asset management, cash management, and underwriting to large corporations as well as to small and medium-sized enterprises (SMEs). This is another area that Ethiopian banks do not have experience.


So, the banking sectors need to open desks for these kind services to train employees and build the skill matrix and portfolio of the banks.


And the other big challenge is Ethiopian banks have very low paid-up capital. For example the biggest bank sold 10 billion Birr but in dollar term, it just $200 million. This is very low and is equivalent to some of rollover lotteries prizes of Europe or America.


On the contrary, the 14 biggest banks of China have asset valuation of 17 trillion and the 12 USA banks are valued around 15 trillion USD. In dollar terms one Kenyan banks has assets bigger than share capitalization of 16 Ethiopian private banks. M-Pesa is now a bank in all senses. It’s transaction has reached around $314 billion, 51 million customers, 504,000 agents in Democratic Republic of Congo (DRC), Egypt, Ghana, Kenya, Lesotho, Mozambique and Tanzania.

Smaller of the Ethiopian banks have sold shares less than 50 million dollars which will make them an easy target for hostile takeover.

Origins Media: Can Ethiopia’s banks cope up with negative impacts of the financial sector liberalization?

Mr. Yared Haile-Meskel:  Yes, if shareholders open-up to sell shares to increase their capital. Develop employee’s retention strategies like share-option for employees before the new banks start recruiting and draining the industry.

Focus on the business of banking rather than ethnic based banking model. Foreign banks will not see the color, religion or ethnicity of a client or employee to do business.
The Management of bank need to avoid the knowledge & power illusion. Ethiopian banks are too small. That is why the management should start acting fast like the house is on fire. No room for complacency. The management need to invest on virtualization and digitalization of the services.

The banks managers need to push for stock-market to get market valuation of the banks. Establish a strong banking association to lobby for favorable regulations. Furthermore, the managers need to invest on Fintech’s, which will be the biggest growth area in the coming many years.

The National Bank of Ethiopia too needs to re-balance between regulation and innovation. It has to let the banks to innovate, implement and grow. Allow local banks to compete with each other not on ethnicity but banking instruments such as variable interest rate, foreign exchange margins, new products like credit cards, corporate banking and other services.

It is also good to allow big banks to invest on smaller banks for strategic takeover of the smaller banks without forced marriage. Even hostile takeover must be allowed. That will help the banking sector to consolidate before opening up of the market for foreign banks.
The banks also need to prepare for the three challenges.

The first challenge is liberalization, which will bring regional and international banks with huge capital. The biggest challenge will be mainly regional banks from African and the Middle East.

Some of the Kenyan, Middle East and South African banks have offices in Ethiopia in preparation for liberalization. Fintech’s like M-Pesa and telecom companies are in banking business and they will put big challenges. Some of these banks will come to take the market share.

The second challenge comes from virtualization. The barrier to entry for banking is removed. Fintech companies can provide the same banking services without having big capital, bank branches and bankers.

Mobile banking companies like M-Pesa can provide banking services through mobile phones.

Some countries are providing in e-residency to open virtual companies, virtual business and virtual banking services for non-residences. Estonia, Dubai, Brazil, South Africa, USA, Singapore, Japan and other countries are providing these services.

Through this technological advancement, anyone can make payments without using the traditional banking channels. Virtualization is a big challenge and traditional banks can’t stop it except adopting the system to provide the same service.

Origins Business: When it comes to the economy, despite the challenges, the government recently predicted that Ethiopian economy will register a growth rate of 6.6%. Drought, war and war in the Northern part of Ethiopia were the main challenges. What sort of impacts these challenges will have?

Mr. Yared Haile-Meskel:  Considering all the problems the country had 6.6% growth is too high to accept it. That is the reason a lot of countries have independent institutions— we need to build independent institutions to verify government data. Independent institutions give an independent view on the interest rate, inflation, jobs creation, number of new starts-up, number of companies closing and other economic data.  This is not a problem of the Ethiopian government only but all politicians’ all over the world tends to exaggerate their achievement and try to bury bad results.

So, I always doubt any data that is coming from government offices. People should not be allowed to rate their own performance.  If students were allowed to mark their own exams. I am sure; all students would score 100%.

We were in war. We used to farm about 16-million-hectare land and out of which about 3.5 million farm land in Tigray, Gonder and Wello wasn’t cultivated.  Ogaden and Bale had suffered from famine and cuttles were dying.

That is why we need to ask “where did this growth come from?”  We need to see the figures.  GDP is a total value of goods and services produced in a country. The war and covid had disrupted not only production but also people mobility, construction and the service industry

Besides, close to 322 manufacturing industries have curtailed operations constrained by lack of foreign currency. On top of that, we have been removed from the African Growth and Opportunity Act (AGOA), a quota and tariff free export opportunity for some African nations to the US market, which came in affecting our exports in a production and export in industrial towns. Thereupon, if the manufacturing sector is not picking up where development is emanating from? We can mention service industry, Ethiopian Airlines and restaurants, among others were also affected by first and second quarter of the year from July to January because of Covid and war.

Inflation has reached to 36.6%, according to the data from the Central Statistics Authority (CSA) and one of the reasons for high inflation is a drop in supply mainly agricultural products. If agriculture had grown by 6.6% then we wouldn’t have experiences shortage to become one of the ten countries with high inflation.

Simply high inflation means the supply is not meeting the demand and growth of 6.6% wouldn’t lead to 42% food inflation in any country. Industrial production was down because many of the factories in Tigray wasn’t producing and places like Kombolcha’s manufacturing facility was destroyed. Even manufacturing facilities as close as Debre-Berhan wasn’t producing.

Probably a million productive forces from their farms and industries were called to take part the national defense to go to training camps.   We do not have a military industry to say our tank and missile production had increased due to the conflict.

We were under various sanctions and pressure and there was no new investment or aid flowing to stimulate the economy.  Russia is a big country with a big military industry but the Russia economy believed to have contracted by negative 12% in the first 3 months. So, how our economy can be different to fly against gravity? That is need to have independent institutions to be established to verify government claims.

Origins Media: The other thing the government referred was the impacts of Russia-Ukraine war. What are the possible impacts of the war on Ethiopia’s economy?

Mr. Yared Haile-Meskel: The biggest impact will be inflation.  For instance, crude oil price increased from around $70 per barrel before the war to $120 per barrel. Wheat price has increased from $370 per ton to $490 per ton and fertilizer price from $700 per ton to $940. When transportation and other services are added inflation increase will be significant. On top of that birr purchasing power had been declining for last few years.

All these factors contribute to inflation and decline of living standard in Ethiopia.

In addition to Russia-Ukraine conflict the government is reducing subsidy on fuel import which will push price higher. Ministry of Trade revealed a decision to hike fuel prices by 16 percent starting from May 8, 2022. 

As a result a liter of Benzene, increased from 31.74 Birr to 36.87 Birr. Therefore, fuel price hike means you must calculate the increase in transportation costs and impacts on inflation of most products. If the Russia-Ukraine war and embargo levied by western nations on Russia continue, the fuel price will remain high. So eventually, we might be forced to absorb all the consequences. Fuel price without subsidy can go to 50 Birr or more. The solution is out of the hands of the government and now it is more of in the hands of WB/IMF.

Origins Media: Tell us what sort of mechanisms should the government employ?

Mr. Yared Haile-Meskel: I think the government should listen. Knowledge is power but in Ethiopia we think power is knowledge. That’s what I’m saying because it’s not an issue of ego or something — there are a lot of people with good ideas as well as recommendations. We heard many recommendations on The East African Finance Summit. Most speakers supported liberalization but have concerns on the rate and sequence of liberalization. No government has a monopoly of knowledge. So, they have to listen and then adapt to the situation.

 As a saying goes “If a problem has no solution, it wasn’t a problem after all”. When you have darkness in the evening, the light is a solution—that’s as simple as that.

Dubai and Israel don’t have water resources. But these countries don’t have problems in water provision services. These countries took the seawater, and make it so useful for every purpose. Israel has got 1.7 billion cubic meter of water. Ethiopia has 139 billion cubic meters of water. But you don’t worry about having shower in Dubai or Israel.

On the other hand, we suffer from drought and other predicaments. Ethiopia is a very wealthy, extremely big country —the twenty-seventh biggest country in the world in terms of area of land. It’s the size of France Germany and UK combined. We have about 111 million hectare of land, of which about 84 is suitable for cultivation. We have only developed 16 million hectares of land we have around 68 million hectares of land to develop. 

There is huge potential of irrigable land to be used for agriculture, forestry and fruits development. We have more than enough fresh water and what it need is knowledge and investment to use it for irrigation and urbanization growth. Our water goes to Egypt to feed the whole population. They don’t starve. And then exports items to Europe and the Middle East. Our water feed significant part of the population of Sudan. They don’t die of starvation. And then they export to Middle East as well as Europe while we are living on food aid.

Our source of suffering has nothing to do with the rain or land shortage but wrong government policies and problem-solving skills. We have blocked movement of capital, labor and goods within our country.

 We say land belongs to the people but citizens cannot plant on unutilized lands because land in the true sense belongs to the political cadres. We have less than 1 million people working in the manufacturing sector but 12 million unproductive political cadres. What we need is 12 million productive citizens and 1 million cadres. 

That is why we need to change. We need to bring laws and polices that would bring land, water, labor and capital to develop our agricultural lands, expand our value adding manufacturing basis, we need to have policies to encourage and innovate the service economy including virtualization and digitalization of currency. We have to listen to abandon the false believe that government can develop a country. It is the citizens who can innovate and prosper under the right economic and political freedom. For that the government needs to avoid the knowledge and power illusion.

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