Banking like Germany (Kebour Ghenna) 

By Kebour Ghenna

In the developed world, the banking sector has seen a trend towards greater market concentration and a reduction in the number of banks. This shift, driven by market power, economies of scale, and the too-big-to-fail doctrine, has resulted in the emergence of larger, more complex, and increasingly opaque banking institutions. These large banks have exploited financial safety nets and engaged in risky behaviors that have jeopardized economies. The widespread bailout of big banks during the recent financial crisis has sparked discussions about the potential benefits of smaller banks, particularly in local economies.

It is interesting to note that when Prime Minister Abiy called for bank mergers, there was little commentary on whether the dominance of finance is healthy for Ethiopia’s economy and society. Perhaps this lack of discussion stems from a belief that this trend is the natural order of things, which is a misconception.

Let’s take Germany’s banking system which is characterized by its three pillars – public sector banks, cooperatives, and commercial banks – presents a unique model. These pillars differ in terms of ownership and objectives. Public sector banks, which include ‘Landesbanken’ (state-owned banks), ‘Sparkassen’ (savings banks owned by local governments), and development institutions, operate commercially but with a public mandate and government guarantee. Cooperatives serve the interests of their members, who are both depositors and borrowers. As of 2022, there were 1,458 credit institutions in the country; Germany has far more credit institutions than any other country in Europe.

Sparkassen operate on three core principles: autonomy, local implantation, and public service. Their focus on local implantation is particularly significant. Historically, the core activity of banks involved taking local deposits and granting loans to local businesses. However, the rise of international finance has led many big banks to drift away from these local activities. Sparkassen, in contrast, have maintained their resilience by emphasizing the qualitative assessment of risks, especially for business loans, based on an intimate knowledge of their clients. This local focus allows them to benefit from improved access to information and better serve their home market. Moreover, they excel at connecting their local clients to the global market, embodying the concept that the future lies not in regional banks, but in regionally-based banks.

The impact of large banks on the real economy is complex and politically contentious. In postwar Germany, increases in bank size did not correlate with faster firm growth; in fact, opaque borrowers often grew more slowly. Larger banks did not see increases in profits or efficiency but instead took on riskier borrowers. Bank managers, however, benefited through higher salaries and greater media attention. Newly digitized microdata on German firms and their banks reveal that bigger banks do not necessarily drive real growth and can actually harm certain borrowers. This underscores the need to address questions related to banking supervision, deposit protection schemes, and crisis management options.

The underlying assumptions of Prime Minister Abiy’s proposed banking mergers are questionable. Such mergers may not serve the interests of small businesses in Ethiopia, which represent over 90% of the economy. The success of Germany’s savings banks, which adhere to the principles of subsidiarity, proportionality, and unity in diversity, contrasts sharply with these assumptions. The stable business model of the savings banks, even during crises, has significantly benefited the German economy, particularly small and medium-sized enterprises. This stability highlights the value of smaller, locally focused banking institutions in supporting economic resilience and growth.

it’s absolutely crucial for the Ethiopian government to rethink its banking strategy to support a more diverse and resilient economic structure that leverages the strengths of smaller, community-oriented banks.

Editor’s note :The article appeared first on Kebour Ghenna’s Personal Social Media page. 

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