banking_61

Banks Gear up with Sales Promotions

Companies can use all the five promotion mixes: sales promotion, advertising, personal selling, public relation and direct marketing. In recent years, commercial banks in Ethiopia have been using sales promotions in the form of prize linked saving and remittance lottery programmes to reach out to customers.Although the strategy appears to be effective for some banks, its impact in helping commercial banks unleash their full potential is debatable. EBR’s Samson Berhane reports.

Last year, Adanech Tumelo received money sent from her sister abroad, through one of the branches of Dashen Bank operating in Hosana, located around 200 kilometres from Addis Ababa. After receiving the money, officers at the branch also gave her a lottery ticket as part of a remittance lottery programme, which Dashen just launched for the fourth time.

She went to Lebanon right after, looking for a job, just like her sister had four years prior. While she was there, Adanech received some news that convinced her to return to Ethiopia: she was one of the winners of the remittance lottery. Her prize was a Hyundai vehicle, worth one million birr.

“Of course, some days stand out from others,” Adanech commented when she and her five siblings went to receive her prize from the Bank last month. “But today is one-of-a-kind.”

Adanech is among the few lucky individuals who have benefited from the relatively new promotional schemes employed by commercial banks in Ethiopia. In fact, prize linked saving and remittance lottery programmes have become the key promotional tools for banks to attract new customers and retain existing ones.

The trend was started by the Commercial Bank of Ethiopia (CBE) seven years ago by launching a prize-linked saving promotion scheme. So far, CBE has undertaken similar initiatives, the latest being the saving scheme kicked off in January 2018 for the seventh time. Under the latest scheme, customers who deposit ETB500 and above until July 2018, will be eligible for a prize.

Most private commercial banks, including Awash International Bank and Berhan International Bank, as well as Bunna Bank and Dashen Bank have followed similar paths. For instance, Dashen has launched four consecutive remittance lottery programs since 2015. On top of that, almost all commercial banks are adopting corporate gift giving mechanisms as promotional tools.

Globally, attracting customers with prizes, lotteries and gifts is a common strategy. Such mechanisms are categorized under the elements of promotion, which is part of a marketing mix theory that emerged in the early twentieth century and has since become one of the most enduring and widely accepted frameworks in marketing. According to E. Jerome McCarthy, who proposed the original marketing mix to provide a framework for marketing decision-making, the four basic factors that should be considered are price, product, place and promotion.

Price is the only variable that has implications for revenue. On the other hand, place considers providing convenience for the consumer and promotion deals with which communication methods to use based on the type of product, market research and distribution channels.

Studies indicate that promotions can be relatively effective instruments to make companies more attractive in the eyes of potential customers by employing different interventions that create and increase awareness about a given product or service. As a result, banks all over the world use lotteries and prizes to promote their services and products.

The banking industry in Ethiopia has been no exception. Especially in recent years, there has been intense competition among commercial banks to mobilize more deposits and foreign currency, as most of the commercial banks in Ethiopia see their financial sources drying up.

Industry insiders believe this isn’t an unexpected move in a country where there are limited financial resources and a raging foreign currency shortage. “Unless banks adopt various promotional tools strategies such as corporate gifts, lottery drawings and prize offering they might lose customers,” a financial expert with 40 years’ experience told EBR
For instance, CBE managed to attract two million accounts holders (12Pct of its current account holders) in five rounds of prize linked programs up until last fiscal year, according to information obtained from the Bank. Ever since CBE started the program seven years ago, it increased its deposits by almost three fold to ETB364.9 billion in the last financial year.

Similarly, Bunna Bank, which started a remittance lottery program in 2016, succeeded in bolstering its income from foreign exchange dealings, particularly remittance transfers. Bunna’s gain in foreign exchange increased by four percent to ETB50.38 million in 2016/17 compared with the previous year. “The need to remain competitive, foster trust and loyalty with clients, as well as build strong lasting business relationships makes such promotional tools important,” argues Tadesse Chinkel, CEO of Bunna. “Instead of adopting a business-as-usual approach, changing tactics is important in the face of recurring shortages.”

Despite adopting various promotional tools such as remittance lottery programs, however, Dashen’s gains in foreign exchange dealings have declined for three consecutive years, dropping by seven percent to ETB266.5 million last financial year compared with the year before. Dashen’s income from foreign exchange dealings is two times lower than its nearest competitor Wegagen Bank, which has not used remittance lottery programs to boost remittance transfer.

“The primary aim of the remittance lottery program is to increase customers that transfer remittances, besides contributing to our efforts in mobilizing foreign currency,” stressed Mulugeta Alebachew, marketing and communications director of Dashen, whose bank’s gain from remittance transfers remains unchanged at around 10Pct of the total income from foreign exchange dealings.

A senior executive of Debub Global Bank, who asked to remain anonymous, argues the impact of such promotional tools is low in Ethiopia’s banking industry. “We have succeeded in increasing our remittance customers without using lottery programs as a strategy,” said the executive. Debub managed to increase its income from foreign exchange dealings by ETB1.5 million to ETB21.8 million in the last financial year.

Financial experts indicate that the effectiveness of various promotional tools depends on the objectives of a given company. Frances Brassington (PhD), programme lead for undergraduate marketing in Department of Marketing at Oxford Brookes Business School, believes that financial institution can use advertising, which is one of the five promotional tools, for achieving short and long term objectives. For instance, a bank can use institutional advertising if its aim is to attain a long-term build-up of its brand name. On the other hand, a bank interested in promoting its unique services in a short period of time will likely to adopt a product advertisement policy.

Sales promotions such as prize-linked saving and remittance lottery programs, which is the second promotional tool available to companies, however, use a unique promotion tactic for realizing goals in a short period of time.

According to Brassington, who has authored multiple books on the principles of marketing, sales promotions have a distinctive advantage. Primarily, sales promotion provides a chance to bargain because the tool provides an additional gain for customers. However, since the strategy appeals to a wide range of customers, many clients tend to be less loyal to the brand in the long run. In addition, if sales promotions are used too frequently, it could make customers insecure about the practicality of the price of the service or product, argues Brassington.

Due to the mixed results of sales promotions, experts advise that financial companies should base their decisions on the relevance of sales promotions and their cost effectiveness. In this regard, Brassington stresses that price based promotions are difficult and dangerous because they can lead to unnecessary expenses, which overshadow the profitability of a given company.

Of course, promotional tools such as prize linked saving and remittance lottery programs bring joy to dozens of winners. But they also bring financial challenges for banks. Dashen, for example, spent an estimated three million birr over the four rounds of remittance lottery programs.

However, Mulugeta says the expenses don’t come without benefits. “The remittance lottery programme is one of the best ways to promote our services across the country. The benefits might not be big in terms of revenue, but it is enough to draw the attention of new customers. A considerable number of people became customers after we started the lottery program.”

Brassington, on the other hand, states that sales promotion becomes most effective when it is used by considering the cultural aspects, the technology intensity of the industry, the competitive environment of the market and various economic factors. The primarily goals of sales promotions is to attract new customers and increase income, which in turn, increases market share. But there is a need to lower the cost of acquiring new customers by avoiding direct price competition with other financial institutions.

Abdulmenan Mohammed, a 16-year financial industry expert, argues differently. “Giving customers a chance to win a prize is a common way of attracting customers in business promotion. The prizes don’t have any link with exchange rates set by the central bank as they are given to a lucky few among thousands,” he said. “So as long as this method of business promotion accessible to all banks, there is no unfair competition.”

Zafu Eyesusswork, an industry veteran, does accept that creating awareness through promotions helps commercial banks to attract the attention of customers who use informal channels, even though he has some reservations. “Although it has some impact in bringing customers back to the formal market, gift lotteries for remit customers destabilize the exchange market,” he explains.

Creating awareness of a bank’s services through such approaches has proved effective in countries like India, where deposits mobilization and remittance flow increased massively in recent years.

Indeed, Asian countries like India and China increased their deposit mobilization and remittance flows partly using various sales promotion services. For instance, India was the top remittance receiving country in 2016, collecting USD62.7 billion, according to a report published by the United Nations, followed by China and the Philippines, which collected USD61 billion and USD30 billion, respectively.

But studies indicate that the frequent and wide use of sales promotions like remittance lotteries and prize-linked saving programs indirectly signal the existence of a macroeconomic imbalance in the country. Macroeconomic imbalances are mostly caused by inflation or inflation expectation and a saving rate that is much lower than the investment rate, as well as high and persistent current account deficit.

Mark Lungu, Principal Economist at the Reserve Bank of Malawi in a research paper entitled ‘Sources of Macroeconomic Imbalances’ noted macroeconomic imbalances exist when there is a major gap between supply and demand or alterations in one or more sectors that have an effect on the entire economy. Basically, macroeconomic imbalances are classified as internal and external imbalances. Internal imbalances mostly indicate a domestic resource gap, for instance, between and saving and investment.

In Ethiopia, there is a wide gap between saving and investment. While the savings to gross domestic product (GDP) ratio stood at 24.1Pct in 2016/17, according to the National Bank of Ethiopia (NBE) investment to GDP ratio has reached 39Pct. The gap between saving and investment is partially attributed to the low interest rate of savings deposit, which remained 5.75Pct on average, last fiscal year.

Since the saving interest rate is much lower than the inflation rate, there are less incentives for bank clients to save. As a result, banks try to attract savers using every available option such as sales promotion tools in the form of prize linked saving program.

On the other hand, external macroeconomic imbalances reflect a disparity in a given country’s accounts with the rest of the world. More specifically, Lungu states external imbalance indicate the existence of a current account deficit, emanating from high domestic demand, which results in high import bills compared to export earnings.

In the last financial year, export earnings reached USD2.91 billion in Ethiopia, showing only 5.8Pct increment compared with the export revenue earned six years ago. Total merchandise import, on the contrary, almost doubled and reached USD15.8 billion in 2016/17. As a result, current account deficit climb by 134.5Pct since 2010/11 and reached USD12.9 billion in 2016/17.

The gap between export and import bills, in turn, creates foreign currency shortage in Ethiopia that has always been a headache to the country. For a country like Ethiopia whose consumption and local production is highly dependent on imports, the instability of the foreign currency market had and is having a big impact on the economy.

In countries like Ethiopia, which follow a managed floating exchange rate system, foreign currency demand is subject to legal restrictions or official price ceilings. When a small network of exchange dealers- the banks, in the case of Ethiopia-are the only ones engaged in the market, the exchange rate is set by the central bank, and the scarce foreign currency will be allowed only for priority areas while significant portion of the economy along with many businesses suffers.

Although the government and banks are trying to bolster foreign currency earnings through boosting remittance flow, which last year reached an estimated four billion dollars, the revenue is still insignificant. In fact, the black market accounts for 78Pct of the total remittances passing through informal networks in Ethiopia, according to a study conducted by the International Organisation for Migration last year. A lack of access to services, high costs of remittance transfer, illegal migration and regulatory obstacles have made the informal channel more powerful than the formal.

The deficit is likely to persist in Ethiopia as the country seems not to be diversifying the economy while export earnings have remained stagnant over the last five years, hovering around three billion dollars.

Scholars like Lungu stress macroeconomic instability will be a major point of anxiety for future economic development and stability. The imbalance also causes insecurity and augments the risk of financial instability, which has negative impacts on economic growth. So identifying the root causes of the imbalance by undertaking in-depth analysis is necessary to find a solution for it.


6th Year . May 16 – June 15 2018 . No.61

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