On September 02, 2022, Ethiopia’s Council of Ministers adopted a new policy that will liberalize the banking sector to foreign investors. This means that foreign banks can open branches in Ethiopia. Many people suspect that foreign investors own shares in Ethiopian banks instead of foreign banks opening branches. However, according to the Ethiopia Investment Proclamation: “Foreign Investor” means anyone who has invested foreign capital in Ethiopia such as a foreign national, an enterprise in which a Foreign citizen has their stock, or an enterprise incorporated outside of Ethiopia by any investor.
Two key benefits are expected by nations when they liberalize their banking sector. The first is economic access to the global financial market and modernized financial industry, which is expected to improve efficiency and boost interbank competition. Second, foreign banks will give access to a global banking network and they can contribute to the economic progress of developing countries.
Recently foreign banks such as Kenya’s biggest bank KCB, and Standard Bank the biggest lender in Africa shown their eagerness to join the banking sector in Ethiopia, so what were the potential benefits, and the risks to caution against regarding the deregulation of the banking sector in Ethiopia, in this article I will try to cover advantages and disadvantages of banking sector privatization along with my professional opinion on the issue.
Advantages of Foreign Bank Entry
Increased Domestic Banking Efficiency: the involvement of foreign investors in Ethiopia’s finance industry pushes local banks to modernize their services, giving customers access to the latest financial tools, technology, and operational techniques from around the world. In addition, banks may support the development and spread of new financial products by importing new Fintech products.
Enhanced International Market Access and FDI: Foreign banks are expected to increase foreign currency inflows into the country and FDI, in addition to local banks will have a chance to get a greater experience and expertise from foreign banks.
Knowledge and Technology Transfer: international trade allows countries and businesses to access the newest financial instruments, technological advancements, and operational methods from around the world, resulting in increased industry efficiency and effectiveness. Another benefit is the development of human capital, which is understated by local banks.
Disadvantages of Foreign Bank Entry
May Smash Domestic Banks: In October 2021, the National bank of Ethiopia amended new law that increases the minimum paid-up capital required to get a bank license from 500 million Ethiopian Birr shall rise to 5 billion Ethiopia birr, which shall be fully paid this means that banks established before October 2021 also should reach the minimum requirement until October 2024. Surprisingly, only 3 banks surpassed the minimum paid-up capital : Awash, Abyssinia, and Dashen, the remaining 25 banks have not met the minimum initial capital, and in my opinion, it’s very difficult for those banks to mobilize in the remaining two years. As an example, Wagagen Bank, which was one of the leading banks two years ago, due to the civil war in northern Ethiopia, closed more than 60% of its branches & decreased its profit from 1 billion Birr to 193 million birr, furthermore Addis international Bank announced for its shareholders that the board directors considering to start looking into the prospect of a merger with other banks if the Bank is unable to mobilize the minimum national bank requirement 5 billion Birr until October 2024. Just like Wagan and Addis International, other banks have also been highly affected by the civil war and other problems, this shows that it’s difficult to fulfill the minimum paid-up capital in the upcoming 2 years. On the other hand, foreign banks have huge capital and they can easily fulfill the minimum capital requirements. This shows that foreign banks can easily smash domestic banks, and as a result, domestic ones are out of the market unless they get various legal restrictions from the national bank of Ethiopia.
(Note: $1 is approximately 53.75 Ethiopian Birr.)
Illegal capital outflow: For the last four years, the Ethiopian government has not had effective control over the country, with a full-scale civil war in northern Ethiopia and a hidden war in western Ethiopia which broke the government structure and chain of command specifically in wollega Oromia region still at large. It is argued that foreign banks will be more likely to shift their funds to more attractive and peaceful markets during a crisis. Political instability inevitably disrupts the smooth running of businesses and the free flow of goods, which in turn pushes foreign banks to limit their operations. This could finally culminate in clients committing illegal acts like money laundering.
Probability of Modern-day Economic Colonialism: Foreign banks can easily control the financial industrial capacity of a developing nation partially or wholly. They can rate the service charge, interest rate, and the profit margin of IFB branches as they want. Another concern is that when banks allow foreign currency for imported items, the banks may give priority to their home country’s products, this makes Ethiopia a destination of a dumping ground for unwanted or expired products.
So, are domestic banks ready?
There are several points to note regarding the performance of home-grown banks in Ethiopia. The first is the underdevelopment of human capital. If you go to one of the major public or private banks in Ethiopia, you have a chance to meet employees with more than 10 years of working experience who have, surprisingly, they don’t receive any training after they joined the industry. Currently, 28 banks are operating in Ethiopia, the banking industry may appear to be growing, especially with the increase in the number of banks from 18 to 28 over the past few years. However, over 70%, or almost 84 million unbanked. While this shows that there’s a huge market opportunity for new entrants, Unfortunately, as we saw for the past one and half decades domestic banks have simply been snatching the same customers from each other rather than expanding their customer base. Another key point is the lack of digital transformation in Ethiopia. Digital transformation is the process of using the latest technologies to offer online and digital services and shift its services from manual to automatic. In the 21st century, digitalization isn’t an option for any industry. You know that it’s a matter of survival to stay in the market. Ethiopia banks face several challenges related to this, among them lack of skilled manpower, organization or cultural transformation, leadership commitment, efficient and effective data management system. In my opinion, the banking industry in Ethiopia didn’t offer world-class services, hence the urgent need to initiate capacity-building measures to modernize the whole system. With a growing number of import-export businesses and increasing international trade and relations, the current banking system is unable to provide efficient and reliable world-class services.
The entry of foreign banks into Ethiopia can produce strong gains, such as technology and knowledge transfer. Moreover, it will also create job opportunities for new employees, including for existing and qualified bank employees. The presence of foreign banks in the country can reduce friction and overlapping payment systems. If the industry is regulated and governed by law, it may modernize the country’s banking sector. In general, by introducing a modern system, transferring new capital from abroad to the country, and enriching capital, deposits and foreign currency supply can be facilitated and economies of scale can be increased.
To this end, I highly recommend that the national bank of Ethiopia create comprehensive regulatory and legal frameworks to govern foreign banks. The regulations should consist of some incentive actions for domestic banks to protect themselves, and to withstand the tough competition with the foreign giants. I hope the national bank of Ethiopia will do this. Example of incentives; When foreign banks enter Ethiopia, instead of entering independently, they should enter by merging with local ones until local banks develop their capital, managerial, Fintech, and human resources abilities. In addition, Increasing the minimum paid-up capital to get a bank license compared with local banks.
Yinebeb Bahru, graduated in International Trade and Investment Management Studies in 2021, now pursuing MBA, and currently working as a customer service officer at Awash Bank, he’s passionate about Fintech, technology, research & development, startups, innovation, MSMEs, and content creation.
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