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Are Ethiopian Banks Prepared to Compete with Foreign Investors?

Ethiopian Banks

Yinebeb Bahru
Kuch, Ethiopia

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.

Summary
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.

Conclusion
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.


About Author

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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12 COMMENTS

  1. My answer to the question is ‘most probably NO’. They are basically small time peddlers, like ordinary traders in Merkato. They all use virtually the same paper receipt for deposits and withdrawals, hand write account books, etc. And their customary services are non-existent or horrendous. Their simple clerks act as if they are doing favors to customers, rather than providing required services. I do not like them at all.

    I asked a major share holder of one of the older banks about where the ‘profits’ came from, and he told me from use of customers’ money to engage in none bank related trading, not from the spread between deposit rates and lending rates. He was not eve sure how much of the loans are repaid, and the percentage of ‘none performing loans’.

    The local banks are robbing their depositors big time. They pay very low rates on deposits, which are fixed at 7% by the central bank, and charge at least double that for their loans. With inflation running at more than 30%, savors are losing 27% on their hard earned money by depositing that in local banks. The eventual consequence of that would to discourage saving and local capital mobilization, which is bad for private sector investment and development.

    I suspect foreign banks would not be interested to open branches in Ethiopia, if the government continues to directly interfere in their businesses. In the unlikely event they do, virtually all local banks could be wiped out quickly. They may choose instead to engage in export financing (where they can control recovery of their money), or other risk free ‘financial services’ where local availability of foreign exchange for revenue repatriation would not be problematic.

  2. The pros & cons provided above in opening up the Banking sector of Ethiopia, the huge benefits as well as the risks, are stated well.

    In fact in September of this year the Commercial Bank of Ethiopia president has stated the unpreparedness of the Ethiopian Banking sector to compete with international Bankers, and the risks involved, what need to be done to micro manage the opening to be gradual, as well as to add legislative barriers to combat illegal activities (money laundering) & restricting capital out-flow.

    Here is partly what he said:
    “gradual opening of the sector to international competition to ensure that local banks are building up strength to the competition.

    He says that international competition could create exposure to draw lessons from international practices. But to avoid harm to local banks, there is a need to limit shares to expatriate banks.”
    Link: borkena.com/2022/09/04/commercial-bank-of-ethiopia-president-advised-caution-in-opening-up-banks-to-foreign-investors/

    Both the “Summary” and “conclusion” provide solid guiding principles.

    1) “The need for a strong industry wide regulations & national legislations.”
    2) “The national bank of Ethiopia create comprehensive regulatory and legal frameworks to govern foreign banks.”
    3) “The regulations should consist of some incentive actions for domestic banks to protect themselves, and to withstand the tough competition with the foreign giants.”
    4) “foreign banks enter Ethiopia, instead of entering independently, they should enter by merging with local ones until local banks.” (PPP, foreign banks limited to 40% ownership only.)
    5) ” Increasing the (“foreign banks”) minimum paid-up capital to get a bank license compared with local banks”.

    “Gradual Opening”, is the key.

    Plus there are lessons to be learned from other nations who have successfully regulated foreign-Banks operations, such as Canada & Switzerland.

    Canada : “The country has managed to have zero banking failures even during the period of the Great Depression.”

    Switzerland : “Banks in Switzerland are required by law to have high capital requirements and strong depository protection in order to protect themselves in case of a financial crisis.”

    passportsymphony.com/countries-with-the-safest-banks/

    advratings.com/north-america/foreign-banks-in-canada

    Great article , thank you!

  3. By the way the Chinese haven’t opened their Banking sector vas yet, for good reason. Once you open up the banking-sector, the Foreign Central bankers FIAT $$ “Printing system” is geared to overwhelm developing nations entire economic system via the eatery through the “banking systems”, therefore it is very dangerous.

    That is why despite the ongoing request from the West to “open up” China is resisting the push strongly.

    All the other Chinses economic sector open only via PPP, the government is the senior investor 51% + (“majority holder”) , and all foreign investors/ companies have to have “local-partnership” as an entry requirement. The main reason China’s 40 years miraculous economic growth was a possibility. Without that control mechanism, it wouldn’t have done so.

    Ethiopia should follow the same path.

  4. We can’t bundle Ethiopia with other countries and play copy-paste to please the White Supremacist West [WSW]. Most WSW proposals are recipes for Ethiopia’s demise.

    Bottom Line: Ethiopia’s National Security Risk Institutions should be OFF LIMITS to foreigners, i.e., Banking, Telecom, Defense/Law Enforcement, Aviation/Airport, Major Air/Rail/Sea/Land Transport, Mining/Petroleum/Energy, University/Research, etc.

    Countries which may ONLY benefit from foreign banks on their soil are former colonies whose economies are still Proxy-Run by former colonizers in a neo-colonial manner.

    NB: The WSW doesn’t come to Ethiopia to help. Their ‘Aid’ is a façade as a means to an end for their long-term goals. Ethiopia should be vigilant with the fine prints in deals.

    • Agree completely.

      2 reasons why I suspect the Banking-sector is put forward now, and the new deal with EXIM, since the US-Africa summit “U.S. EXIM bank sees U.S. job creations from loan to Ethiopian Airlines” move seem to suggest:
      (1) There is a push the PM could not resist… or
      (2) There is an inclination to follow Singapore’s development strategy since the 1970’s to work here in Ethiopia; the problem with this line of thinking is, we live in a changing & shaky-Geopolitical environment, especially since the start of 2022. Going forward economic-development strategies need to move away from the “Old” & dying to the “New” and dynamic Asian century of economic-reality. Therefore, the old path-taken no longer is right one.

      Link to support #2:
      1) youtube.com/watch?v=O7ohgYsVZpU

      2) youtube.com/watch?v=BnJu7MCP7TA

      3) youtube.com/watch?v=TeKeGzeZ_6Q

      After watching the last 2 videos one easily can understand why they (West) thought our “Europe & US educated African elite” to instill-conflict between people in their respective nations to put in place the appropriate-conditions for the West to keep rape Africa.

      Did you know all the TPLF founders were students of “General Wingate”, most certainly an MI6 training ground. Perhaps, some future historian or a leaked “spy paper” might confirm the connection…

      • Thanks T, for the important, informative, and very educational links. I wish Borkena.com posted this one in particular: youtu.be/BnJu7MCP7TA?t=7

        Economic Hit Man – EHM: USA’s EHM in Ethiopian Hat is Dr. Yonas Birru who posts article-after-article preaching that Ethiopia is DEAD without US, EU, WB, IMF, etc.

        Vladmir Putin: Although he is neither a politically correct nor a morally correct leader, he saved Russia from begging bread from the West and restored Russia’s pride and glory.

        Ethiopia’s Currency/Gold Reserve: Why don’t NBE, CBE, Embassies, etc. buy the major currencies and gold en masse whenever exchange rates tumble? It’s Ethiopia’s Insurance.

        Ethiopia’s Gold Reserve: When the TPLF-EPLF Duo invaded-and-occupied Ethiopia in 1991, they carted away NBE’s gold bullions. Later, TPLF sent some of it back as ‘Gold mined from Tigray’. TPLF made billions from illicit gold export via its ‘embassy mules’.

        • Gold & Silver are the best hedge for the coming economic slow down in the West..

          Gold is at its lowest price right now (has been suppressed for a number of years, so that the Bankers can load-up and expand their holdings at a cheep price…) soon as the economic condition in Europe deteriorate ( industries closing due to energy cost…) Stock market might slide (except energy & commodity stocks) and GOLD & Silver prices expected to rise…

          USD is going to rise due to European Capital rushing for safety in US stock market.. for 2023 and early 2014. If the USD use as “Reserve Currency” start to diminish as the BRICS trade using local Currencies or the BRICS GOLD-backed Reserve Currency within BRICS, the USD might lose ground and tumble in Price.
          Until then holding USD is safe, holding Russian Ruble< Chinses Yuan (which has taken 2nd place thrashing the Euro recently)

          Gold, Silver, Ruble, Yuan, and USD for 2023 only is what the financial industry has been focusing on as of late.

          What the Ethiopian Gov and its European Embassies (with the help of FM office in collaboration with Electric Power Corporation of Ethiopia ) must work hard to attract European manufacturing industries (that is desperate and looking for alternative Energy source at the moment…) to migrate to Ethiopia for limitless Cheep & renewable Energy ( Electric Power), as well as a large supply of trainable-Workforce in Ethiopia that is central to the world markets to ship their finished products… Using PPP the Ethiopian government could score great manufacturing partnerships with industries from Germany, France, UK, etc…

          European Manufacturing industry is closing its doors due to energy cost since the Ukraine War started and in some cases they are in the planning stages of moving their shops to the US & China or elsewhere in search of less expensive energy cost.

          Europe manufacturing is up for garbs, and Ethiopia is fully equipped (with cheep electricity, educated workforce, 13 months of Sun shin, & great location (Red sea) to take advantage of these opportunities… and the Gov. must double its effort & must pursue it aggressively at the present time.

  5. US FED has been buying “Corporate & Government Debt” since 2008 financial crash, is now it is holding 8.87 Trillion on its balance sheet (Some say the actual # could be $ 11 trillion).

    In 2008 it was $0.98 trillion, and grew to $ 8.8 trillion, most economists and finance professionals argue with the growing inflation this debt bubble the FED is holding is a financial time bomb worst than the 2008 or any other previous crash.
    No body is buying US Gov Bond, in fact even those who used to buy US G. Bond such as Japan are selling what they are holding let alone to buy new, therefore only the FED is buying it.
    The US $ is rising because European investors are buying USD in fear of EURO crashing, due to economic slowdown due to Energy shortage & price hike.

    Link = richmondfed.org/podcasts/speaking_of_the_economy/speaking_2023_01_11_balance_sheet

    Financial discussions :

    1) Don’t Get Distracted: How Central Banks Are Looking To Make You a Slave to the System
    Link = youtube.com/watch?v=0H2uiyDb0HE

    2) This Is How the Fed Will Seize Your Money in 2023: Gerald Celente
    Link = youtube.com/watch?v=6bLkIquA6HQ

    3) Major Market Meltdown Is Coming, Here’s What They Aren’t Telling You About Inflation Levels
    Link = youtube.com/watch?v=X1NAMQfKLGw

    4) ‘Major Wipeout’ Of Fiat Currencies This Year To Cut Dollar In Half? | Alasdair Macleod
    Link = .youtube.com/watch?v=rNR851IFhWQ

    In this environment to OPEN/ Privatize the Ethiopian “Banking-Sector” is TOTAL Madness. The Economy will be wiped out with International-Banking-wizards (“thieves”) from the West.

    “Careful what you wish for”.

    Be Well !!!

  6. Happening Now.

    Egypt’s Currency Crisis ! [Jan 13, 2023]

    Link = youtube.com/watch?v=RkhJrQyP0QQ

    Egypt allowed its pound to tumble to a new low this week as the country struggles with a foreign currency crisis that is hurting businesses.

    The slump in the currency comes after Egypt agreed to move to a flexible currency regime as part of an IMF €2.94bn bailout intended to help relieve its foreign currency shortage.

    Since the central bank said it would move to a flexible currency rate in October, the pound has lost a third of its value as it has allowed it to devalue in phases. Analysts warn that it has further to fall until supply-demand equilibrium is restored to the foreign exchange market.

    The weakness of the Egyptian pound is adding to the pain of millions of Egyptians as it fuels inflationary pressure.

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