Banks in Ethiopia: Makeshift Real Estate Companies?

Rising Lease Costs, Regulations Push Private Banks to Construct Acquire Buildings

Though Ethiopia’s private banking sector is still young, competition within the industry is getting stiffer – with companies vying to increase performance vis-à-vis increased capital regulation. This, in tandem with National Bank of Ethiopia (NBE) rules that require annual branch expansion, creates an environment in which financial institutions are scrambling to acquire or construct buildings in prime locations to house their headquarters and ever-growing number of branches. Bank executives say this is good for business, since the cost of rent in major cities is quickly skyrocketing. It also presents the option to lease spare office space and generate revenue. Others, however, think that the rush to buy and develop properties diverts the banks from their primary function as financial institutions, quelling growth in the nascent private banking sector. EBR’s Fasika Tadesse spoke with bank executives and economists to gain insight into the increasing drive for banks to obtain properties and if that is good for the country.

Rapidly mounting operating costs are a reality confronting businesses in Ethiopia. Commercial banks, however, are most affected by it, as branch expansion is a key tool to reach customers. This is particularly true for private banks, which operate under pressure due to government regulations that affect their liquidity and increase expenses.
As a result, the growing cost of expansion, particularly in terms of increasing the number of branches, has forced banks to deviate from their conventional activities and engage in the construction of buildings to house their headquarters and branches. This is important to reduce costs and generate more revenue to survive in an industry where competition is getting stiffer by the day.
An additional motivating factor for the banks to focus on owning buildings is the NBE’s recent regulation requiring them to increase their number of branches by 30Pct every year, which overrides the strategy of some private banks to mobilise more deposits without opening more branches. This would entail agent banking and technological forms like ATM, mobile, and Internet banking, which are common in many other parts of the world, where the brick and mortar model of banking is fading.
Among private financial institutions, two ‘sister companies’ – Awash International Bank (AIB) and Awash Insurance Company (AIC) – are pioneers in terms of building their own headquarters. Both are housed in Awash Towers, twin buildings located in the Mexico business area on Ras Abebe Woldearegay Street, which were inaugurated in 2010.
Other private banks have also begun constructing and acquiring large buildings. Dashen, Wegagen and the Bank of Abyssinia (BoA) are working on finishing buildings that will serve as their headquarters. Wegagen Bank’s 23-storey headquarters will be an ultra-modern complex, which they expect to finalise by November 2016. The edifice will be the tallest bank headquarters in Ethiopia, until the Commercial Bank of Ethiopia finalises their new G+4+46 building, which is currently under construction.
One young and promising financial institution, Oromia International Bank (OIB), also bought a 13-storey building on Africa Avenue for ETB210 million in June 2013. The edifice now serves as the Bank’s headquarters.
Other institutions, like United, Zemen and Nib banks, will soon launch the construction of their buildings on Ras Abebe Woldearegay Street, which is becoming the financial district of the country, with high-rise buildings already taking a sizeable portion of the area. Some of these banks have already awarded their projects to specific contractors, while others are in the tender process to hire construction companies.
Abyssinia and United have also acquired a number of bare plots in prime locations throughout Addis Ababa on which to construct buildings. This shows that the banks are increasingly investing in plots and buildings, amounting to payments that exceed their respective paid-up capitals.
These efforts demonstrate the growing tendency of banks towards owning buildings in Addis Ababa and regional towns. For instance, Dashen owns 27 buildings throughout the country, with three more currently under construction. Data from the Bank shows that the company has invested close to ETB2 billion, which far exceeds its ETB1.3 billion in paid-up capital. That figure means that roughly 8Pct of the Bank’s total assets are geared towards the construction and acquisition of buildings in the capital and in major regional towns such as Adama, Dessie, Hawassa, Bahir Dar and Dire Dawa.
The Bank is also in the latter stages of completing its headquarters, located near the central bank. Another building that Dashen is constructing in Addis is found in Arat Kilo. Its two new buildings in the Lideta and Nifas Silk districts already house some of its units, while the remaining space will be leased.
Bank executives argue that this trend is due to its cost effectiveness. “Our main reason to have our own buildings is [to avoid] the skyrocketing rental prices of buildings,” Asfaw Alemu, President of Dashen, told EBR. “In addition to minimising the expense of rentals for branches, the strategy also generates income [through] leasing the remaining space of the buildings.”
Tabor Wami, Board Chairman of Awash, echoes Asfaw’s assertion. “In addition to the economic advantages of owning buildings, it also develops a positive image among our shareholders as well as for our clients – [this will] let them build trust in [the Bank],” he explains.
Awash owns ten buildings. Furthermore two additional buildings, will be complete by June 2016. In addition to its headquarters, the Bank owns buildings in Adama, Bedesa, Jimma and Harar towns.
Despite the stated benefits of acquiring buildings, executives say that they’re pursuing robust construction and expansion efforts with caution. “We are investing in buildings by taking [into] consideration the National Bank of Ethiopia directive [that] limits a given bank’s investment on buildings to not exceed 10Pct of the total assets of the bank,” says Tsehay Shiferaw, President of AIB.
The two largest private banks – Awash and Dashen – aren’t the only institutions focusing on owning buildings; relatively younger and financially weaker banks are also implementing this strategy.
One such company is BoA, which owns operational buildings in Bahir Dar, Dilla, and Dire Dawa. It also owns two more in Addis Ababa, which are partially used for branches and rented to tenants, but still need finishing work. Abyssinia is also planning to construct a new building in the capital.
One of BoA’s bought buildings, located in Addis Ababa, is a 15-storey unfinished twin tower, which they purchased for ETB400 million from Saca, a sister company of Ayat Real Estate, in June 2014. The building, located in front of the Ethiopian Insurance Corporation’s Laghar branch at the intersection of Gambia and Ras Mekonnen streets, is 60Pct complete. It lies on a 2,900-square metre plot of land. The building has a total floor area of 33,400 square metres. BoA has rented part of the building to some banks, insurance companies and other businesses.
Last year, the Bank hired a contractor to finalise the finishing of this newly acquired building and will relocate there. Its current headquarters is in a leased building that belongs to the Ethiopian Red Cross Society.
Additionally, Abyssinia recently purchased property near the Ethiopian Investment Commission on Bole Road and moved some of its departments from its headquarters to this new location.
Mulugeta Asmare, President of BoA, told EBR that the Bank is planning to construct a new building on the plot that will serve as its IT centre. “We find it necessary to own buildings in major towns that will have a high economic return, since the rental prices in major towns and cities are increasing,” he says. “Owning buildings gives us the opportunity to have wider space to undertake several activities in a certain branch.”
But Mulugeta says engaging in construction is not BoA’s main task. “As a bank, our main target is providing financial services; we do not give a major priority to [engaging in construction],” he explains. “But we are forced to own [properties] since it is difficult to find facilities to house our new branches that are opening in major towns.”
For Alemayehu Geda (PhD), professor of macroeconomics at Addis Ababa University, the current rush of banks to acquire land and construct buildings is not healthy and has macroeconomic implications. In his view, renting the unused parts of the building is becoming another business for banks, which are currently replacing the role of real estate developers instead of improving their major task of providing financial services.
The amount of money the banks have been investing on properties is much higher than money invested in technologies that are important to improve their core service. While many of these banks lag in acquiring and implementing banking technologies, investing their meagre resources on buildings means they function more like real estate companies than financial service providers.
It is not only senior managers of banks that find it necessary to own properties. Rather, the idea is deep-rooted in the hearts of many shareholders. During AIB’s general assembly meeting two years ago, the shareholders and Board of Directors agreed to secure prime locations in Addis Ababa to construct additional buildings.
But Awash will likely not succeed in meeting this plan, according to its Board Chairman. “We cannot win land auctions although we had participated several times and failed because the lease price of land [in Addis Ababa] is very inflated,” he said.
Even if bank leaders say owning property develops the confidence of shareholders, some like Fanuel Dege, who is a shareholder of Awash, has concerns about the costs of such endeavours. “When the Bank puts too much money on buildings its expenses will rise and finally it will have a negative effect on the profit,” he said.
In addition to that, Fanuel is concerned about his Bank’s goals because Awash is missing its target by focusing on the construction of buildings, while it should focus on its primary duty to provide financial services.
Tsegabrhan Woldegiorgis, an economist and lecturer at Addis Ababa University, shares Fanuel’s concerns. “When banks are engaged in constructing several buildings, we can say that they [are pursuing] activities beyond their primary focus area. This trend will not be good for the economy,” he argues. “This is because investing a huge amount of money on buildings limits the amount of loans that will be disbursed for different projects and earn interest also.”
There is one key element that is important to consider, according Alemayehu. From the perspective of the banks, he explains, they are taking the right action in investing their money on buildings. “They are forced to invest on the buildings as the country does not have a stable macro-economy, which has several risks, such as inflation and fluctuation of exchange rate, which exposes their assets to devaluate if it is kept in terms of cash,” he elaborates.
Tsegabrhan agrees that owning a building has its own advantages, articulating what may be the underlying impetus for financial institutions in carving out an edge in Ethiopia’s nascent banking sector. “If banks use the strategy cleverly, it has a great advantage for them as it will minimise their rent expenses while it can be a source of revenue,” he explains. “It will also help banks to diversify their liquid assets to fixed assets.”
Yet Alemayehu believes the heart of the issue is more structural in nature and requires the central bank to take a closer look at its policies, which he says are driving the banks to focus on more property development in lieu of their financial services obligations. Firstly, he suggests the NBE should forgo the regulation that demands banks to increase their number of branches by 30Pct every year, as it is an out-dated banking model being replaced by technological banking. Secondly, it should work on stabilising the macro-economy of the country, by working on the inflation and the fluctuation of the foreign currency, which will push the banks to re-focus their efforts on financial service provisions.
If these changes don’t take place, he says the repercussions could be potentially disastrous for the economy. “From another perspective, we can say that [banks] are using it as strategy to shift towards the real estate business in the future if they cannot continue with the banking business, which is a risk that can affect the country’s unstable macro-economic status.” EBR