Ethiopian Business Review

“Either You Limit Your Natural Growth or Re-strategize; Zemen Has Decided to Keep the Growth’’

When Zemen Bank’s idea of a single-branch business model was announced back in 2006, it seemed quite odd for many. Bankers and business analysts questioned the viability of the model.  However, the Bank registered robust growth year-on-year with a high rate of return on investment. Even though the Bank has been operational for only six years, it ranked 6th among the top private banks in Ethiopia for high-earnings per share, according to a survey by EBR last February. Although the Bank states that it will stick to its founding principles and business model, there are signs that Zemen’s strategy might be changing. The Bank recently opened its second branch in Hawassa and a third in the Bole Business District in Addis Ababa. It is also preparing to expand into other regions. EBR’s Amanyehun R. Sisay spoke with Ermias Eshetu, Zemen’s Vice President for Marketing and Corporate Services, about the company’s changing business model and where the Bank is headed. Next is an excerpt:

EBR: Tell me briefly about Zemen Bank.

Ermias: The idea of establishing Zemen Bank was initiated in 2006. The bank aspired to provide a higher level of customer service through technology, innovation and financial services. The mobilization of funds was completed in four months and within two years the bank finalised all preparation and licensing to start operation in October 2008. 

Zemen offers three tiers of regular banking services: Personal, Prestige and Z-Club, where it requires account holders to have a minimum deposit of 25,000, 100,000 and 500,000 Birr, respectively. Members receive all services free of charge if they fulfil the required deposit. 

The Bank has grown tremendously year-after-year, with an average of 45Pct return on equity. Now the Bank has over 675million Birr in capital base, including its reserves. We can now be considered a middle-sized Bank.

Zemen has gone five years with its single branch model of operation, but you opened a branch in Hawassa last December and in the Bole area of Addis Ababa last April. You also have plans to open up branches in major cities such as Bahir Dar, Adama, among others. What motivated Zemen to change its model of banking?    

We are not changing our model, nor are we changing our strategy; it’s just that the Bank is growing bigger.  We started with about 60 staff at our headquarters in Kazanchis and now the Bank has over 300 staff. With the current capacity of our headquarters, we can’t grow anymore in that building. Either you limit your natural growth or re-strategize. Zemen has decided to keep the growth. I would say that it is the result of the Bank’s natural growth rather than a change of its core business model. 

I know that 45Pct of your client base is located in the Bole area, is that what forced you to open the Bole branch?

You can consider the Bole banking centre  is a location we opened to share the load from the Head Office.

How about your plans to branch out to other regions in Ethiopia?

It is the same as what I said before. Our clients in Addis Ababa who have businesses in other regions often request our presence at certain key localities. The relationship and the acquaintances we have built with such corporate and institutional customers is such that we are constantly listening to what they say. So when we set up something in Hawassa, it is not just intentionally located on the high streets; rather, we are inside Haile Resort. That tells you that we are not changing our business model or branching out as it may look. The business model remains intact: where we go is where our customers are.

I have seen your customer list; it includes many flower farms, most of which are located outside Addis Ababa, such Zeway and other towns along the Rift Valley. How do you work with them since some of them don’t have offices in Addis Ababa? 

We use a multi-channel banking approach; one that we devised to reach out to every client. A customer can do business through our ATMs, our Internet channel, our call centre or our door step banking facility. So we have a mechanism where each of those customers can reach Zemen Bank’s products and services. 

If, for example, Mr. X has 1500 employees at a Zeway flower farm and wants to pay their salaries, then we have the debit/payroll card system to meet that requirement. They have ATM access within their farm parameters, including incoming and outgoing payment handling in which there is constant engagement with the customer. So we believe that we have a business model that covers the whole sphere of financial solutions.  

Have there been any challenges so far in your operations?

I must say, we still have a long way to go, but we have done quite well. I don’t have any one incident or any one major issue to mention, but certainly we have the usual technological challenges because we heavily depend on technology and reliable internet connectivity. These challenges have more to do with infrastructure than with our business model.

How about the legal environment? The National Bank of Ethiopia (NBE) requires commercial banks to surrender 27Pct of their loan disbursement to buy treasury bills. Every private bank presents this as challenge to their operations; in fact, the Commercial Bank of Ethiopia is not required to do so. It seems as though there isn’t a level playing field. Has this been a challenge to your operations?    

It might have been, but when compared with what the government has done to protect the sector from foreign competition, the challenge is really small. If we were to be exposed to international competition, we would cease to exist. Thanks to government protection, private banks continue to grow. And perhaps it could be the case that private banks are being challenged to be more innovative and find workable solutions so that they develop the strength to withstand stiff competition later if and when foreign banks are allowed to operate.

So far how much money has Zemen spent as a result of this NBE requirement?

Zemen so far has over 900million in NBE bills.   

Zemen Bank specifically targets the business community, right?

The notion that Zemen Bank is only for businesses or the rich was a misperception much earlier during the establishment of the bank; but in reality that is not the case. We serve a wide range of individual customers, businesses and other institutions. 

How about the requirement that individuals need to have a minimum of ETB 25,000 deposit in their account; don’t you think that this limits the number of people coming to your Bank for services, making it difficult for anyone who isn’t affluent to bank there??    

This is one of the misconceptions of Zemen’s business model. If a regular walk-in customer that does not have any association with the Bank wishes to open an account, we offer online banking, debit cards, ATM and all our top notch services free of charge. But, in return, we expect that a minimum monthly balance of 25,000 Birr be maintained or a fee of 200 Birr is charged. 

The technology, Internet, ATM and other resources we use incur high costs for the Bank. So our business model is very straightforward in that the market segment that we are prepared to serve needs to get quality service which actually has a cost associated to it.

Every bank in this country, including Zemen, operates using the same old collateral-based financing. Mr. Vice President, where is the innovative sprit of Zemen?  

Banks asking for collateral is normal. I wish there were more platforms to talk about banking so that people can understand why we ask for collateral. Banks are handling public money which has to be protected. By the sheer authority delegated from the Central Bank, we are managing those funds under certain strict guidelines and regulations so that the public’s money does not get wasted. So asking collateral is a risk mitigation approach to carefully manage the small fund at hand.

While promoting the formation of the Bank, there was this idea of advancing loans without collateral for winning business ideas.

The broader context of demanding collateral in all banks is being completely misrepresented. It is an element of risk management. At Zemen Bank we do give clean loans [loans granted by the Bank without accepting any security] in some limited cases. But if we were to finance every project, it wouldn’t be a business. We would simply be perhaps like a very generous NGO, which we aren’t.

At this time, we are the only bank that provides car loans. You won’t get a car loan at any other bank in Ethiopia, but if you come to Zemen, as long as you have an income, you are welcome. We will take care of you. If you are buying a house or if you have a house that you want to finish, we will provide you with a loan; all you have to justify is that you are able to pay your monthly repayment. 

I understand why you prefer to be cautious, particularly in light of what happened last year where you have 98.6million Birr in doubtful loans. This was higher than the 94.1 million Birr profit you announced. So do you have any mechanisms in place at the moment to avoid such large amount of doubtful loans?

This answers what I was trying to explain earlier. In our five years operation we have learned to be cautious while advancing loans.        

Zemen was envisioned, promoted and led for a number of years by the same person who envisioned and established the now-defunct Access Real Estate, which has been going through a series of unfortunate turn of events that had to do with abuse and misappropriation of innocent house seekers’ money. Has that affected you in any way?

Ato Ermiyas Amelga championed Zemen Bank; he championed the vision, values and objectives of the bank and served as chief promoter and later Chairman of the Bank. There are a lot of good things that he has done for Zemen, which include starting the Bank and getting it up running, and by no means am I in a position to disregard that. And I can’t comment on any other companies that he is associated with. I really have no authority.

By sheer association of Ato Ermiyas with Zemen bank, the public might think that Zemen and Access Real Estate, or any of the companies he is associated with, are sister companies, which is untrue. When the Central Bank rejected the idea of naming the Bank, Access Bank , back in 2006-2007, and advised that the Bank be defined by its own character, it was a blessing in disguise. Later on, as Ato Ermias resigned, his association with the Bank was decreasing.

Did he resign or was he pushed to resign by the NBE?

Well, he was required to resign, but Ato Ermiyas had overtime relinquished a lot of his responsibilities at the Bank and a lot of the [legal] associations we had, like what the Bank could lend to his ventures, had been clearly demarcated, meaning the amount of loans given to those institutions he led had been strictly controlled. It has been over-publicized that Zemen Bank might have owned something in Access’ ventures and that is not true. We do not own any of that. So when some of the companies he is associated with have had problems in the past, people had that instinctive reaction of thinking that Zemen Bank might also be part of that problem, but that was never true. 

But there are issues of brand association; hasn’t that affected the Bank?

We hear about it and it is sometimes over-sensationalised by the media. But no, it is not affecting the Bank at all. You can see the robust growth of Zemen from its year-on-year performance, including last year.  

Businesses do have corporate social responsibilities to undertake. As a bank, what do you do in that area?

We undertake our corporate social responsibilities every year. Last year, we gave about one million Birr to children, education and environment-related social activities. But we are not interested in talking about it.

Let us talk about the future of your bank. Where is Zemen heading?

We will stick to our principles, core values and vision to ensure our services and products offer unparalleled satisfaction to our customers. We will continue to be as innovative as we have been in the past to ensure the continued robust growth. We will continue to reach out to our valued customers, delivering truly competitive financial solutions.

Can you name where you will be opening branches?

You never know, but rest assured that our ATMs will come closer to you day by day. Our range of banking services are available online, just a click away from your mobile or desktop.

2nd Year . June 2014 . No.15

Amanyehun R. Sisay

EBR Staff Writter

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