Bewildering Diaspora Account

If anything has cast a pall over the Ethiopian economy, it is the foreign currency shortage, which reached historic lows just three months ago. This has prompted businesses to look for alternative means to alleviate the problem, such as transacting using diaspora accounts. The accounts are offered to non-residential Ethiopians, as well as Ethiopian-born foreign nationals who have been working and living abroad for more than a year. This has opened a window of opportunity for legal as well as illegible account holders to access foreign currency without waiting for the approval of letters of credit. EBR’s Samson Berhane reports.

The scarcity of foreign currency has been hitting businesses operating in Ethiopia hard, especially those engaged in importing goods. One of them is Ayele Girma, (name changed upon request), who is a furniture importer. Frustrated by the foreign exchange shortage, Ayele opened a diaspora account two years ago at one of the private banks after coming back from Djibouti. Although he was supposed to have lived abroad for over a year to be able to open the account, he paid brokers to prepare evidence to prove that he fulfilled the requirements. “Getting foreign currency using regular methods, including through applications for letters of credit, is unthinkable,” he told EBR. “So through a diaspora account, I found a way to promptly access foreign currency, even though it does not fit well for bulk imports.”

Initiated to serve Ethiopians Diaspora who have been working and living abroad at least for a year, Diaspora (foreign currency) accounts allow eligible individuals and companies to make payments in Ethiopia in Birr, to transfer to other foreign currency accounts and to make foreign payments for things like imports and other foreign service payments through electronic payment platforms and cheques.

Other than individuals and companies, foreign embassies, legations, consulates and diplomats are eligible to open diaspora accounts. Since the scheme was launched in 2004, eligible users have been able to perform and access any banking transactions using their accounts. While a minimum amount of 100 dollars/euros/pounds is needed to open the account, it can also serve as collateral to get credit in local currency from domestic banks. There are three types of diaspora account: fixed (time) deposit, current and non-repatriable birr accounts.

Time deposit accounts, which are interest bearing accounts with an agreed maturity of a minimum of three months, can be opened with an initial deposit of USD5,000 while non-repatriable birr accounts are saving deposit accounts, which can pay double the interest of the minimum saving deposit rate set by the National Bank of Ethiopia (NBE). Current accounts, on the other hand, can be opened with check book with an initial deposit of USD100. The experiences of many commercial banks, such as United, Awash, Dashen and Debub Global Bank, show that over 90Pct of the forex account are current.

Account holders, unlike other customers, are not obliged to pass through the foreign currency approval process, which has given a competitive edge to certain businesses. Entities engaged in the import of goods and services are not the only users of the accounts. Hotels and individuals, including those who allegedly try to legalize their foreign currency, are also among the users.

Despite being an old practice in the banking industry, diaspora accounts gained popularity over the past two years in Ethiopia, chiefly due to the foreign currency crunch that has worsened especially in the last few years. This is evidenced by the experiences of Dashen Bank, one of the biggest private banks in the country. Although Dashen started providing the services to its customers a decade ago, close to a third of its diaspora accounts were opened over the past two years. Dashen has 523 active diaspora accounts that have transacted USD8.1 million in the past eight months alone.

Ayelech Daimo, manager of the international banking department at Dashen Bank says the demand for diaspora accounts is on the rise. “As waiting for the approval of LCs might take more than a year, customers are now increasingly seen using diaspora accounts,” she explains.

Indeed, foreign currency shortages have always cast a gloom over the sustainability of the economic trajectory achieved by Ethiopia for over 10 years. The situation got worse over the past two years, particularly due to the incongruent growth of exports and imports, which widened the balance of payments deficit. The impact has been far reaching, since the country’s consumption and local production is highly dependent on imports, which reached USD15.8 billion in 2016/17 while exports remained around three billion dollars. Just three months ago, the country’s foreign currency reserves reached a point where they could not finance even a month of imports.

This left businesses struggling and searching for alternative ways to stay afloat, including illegal means. “There are many account holders who create fake evidence to prove that they have been abroad for over a year. This is especially true for those who bring documents from Djibouti,” argues a senior manager at Debub Global Bank, who asked to remain anonymous.

Ayelech shares this concern but takes a different perspective. “Diaspora accounts were introduced to encourage Ethiopian nationals living abroad to contribute to their nation. However, they are increasingly used for importing goods,” she said. “The banks are not benefiting from it as the account holders are not converting the foreign currency into local currency, or using the money to handle local transactions.”

This trend holds true in other commercial banks too. “We are dragging our feet on diaspora accounts because they don’t serve the intended purpose. Foreign currency accounts are less beneficial than other banking activities,” says the senior manager at Debub Global, which showed no growth in deposits from forex accounts over the last two years, staying static at around ETB 3.5 million (USD 126,811).

Another senior banker at the Bank of Abyssinia agrees. “While we should have benefited from currency conversion, we only end up with service fees,” the manager explained. Abyssinia’s diaspora account deposits reached ETB262 million (USD 9.6 million) in 2016/17 from ETB168 million (USD 6.1 million) during the preceding year.

Experts also observed flaws in the system used to open accounts. Abdulmenan Mohammed Hamza, a financial expert, suggests making the accounts available to more customers so as to avoid unfair practices. “The privilege of opening diaspora accounts is given only to Diasporas. The vast majority of business people who are engaged in imports are not entitled to them. So they benefit very few people,” he explains. “If the government extends the privilege of opening foreign currency accounts to anyone who imports, more foreign currency will flow in and the pressure on banks to supply foreign currencies to importers will ease.”

Even though the NBE amended the directive regulating the accounts over the past two years, demand is far from gone. “It is evident that there are a sizeable number of Ethiopian-born people who are interested in contributing to the betterment of the nation’s economy. So as opening a foreign account becomes easy for them, it is likely to increase. That’s what is happening now,” says a senior exeutive of United Bank, which collected ETB365.4 million (USD 13.3 million) in demand deposits (which are deposits that can be withdrawn without prior notice) from non-resident foreign currency accounts in the 2016/17 fiscal year, an increase from ETB254.9 million (USD 9.3 million).
In spite of the rise in money transacted via diaspora account, a senior execuitive of United still thinks banks are not benefiting from the Ethiopian community who lives abroad. “The embassies are not capable of winning the hearts of the diaspora and pushing them to deposit more foreign currency.”

However, the foreign currency flowing through diaspora accounts in Ethiopia is only a fraction of the currency flows in other countries that are advanced in diaspora banking, such as India. While diaspora accounts are limited to deposits and loans in Ethiopia, almost all commercial banks in India provide several products and services to the diaspora community. This includes saving accounts, deposit accounts, domiciliary accounts, E- Channel Offerings (online Banking, mobile banking, and E-mail alerts), transfers, standing orders, account reactivation, migration of existing accounts, treasury bills, advisory services and diaspora bonds, among others. They are not alone. Other countries, such as China and Mexico, also offer diaspora banking services to tap their diaspora community for their development. Through the provision of efficient banking and other services, the diasporas of the two countries have provided the lion’s share of inward foreign investment.

Other African countries are seeing similar patterns. With a rising competition in the African banking industry, commercial banks are expanding their business to the diaspora population by sourcing deposits from them, through different products and services, such as mortgages, advisory services, mobile banking, credit transfers, direct debits, deposit and lending services, investment, pensions and insurance services. In doing so, commercial banks can earn a better income through diaspora banking include ATM, internet banking and banking commissions, as well as transaction fees and Investment deposits, according to a study, titled ‘The Effect Of Diaspora Banking On Financial Performance Of Commercial Banks In Kenya’.

Mobile banking technology, such as MPESA, also helps banks connect with the diaspora and catalyze their investment. Additionally, the banks initiated other strategies such as marketing their products, as well as recruiting diaspora agents abroad and establishing online support structures to improve their diaspora banking products and services. This, according to the study, helped Kenyan banks create an enabling environment for the diaspora community to invest in their home country from abroad.

By the same token, following the appointment of Prime Minister Abiy Ahmed (PhD), the government, which used to have a tense relationship with the diaspora community, especially with those in North America and Europe, recently undertook different measures to increase the contribution of Ethiopian-born foreign nationals. They established a Diaspora fund, an account opened to engage Ethiopians living abroad through mobilization of financial support for the development of their country. In addition, another amendment, which abolishes the maximum limit of cash (USD5000) transacted through diaspora accounts is also underway, according to sources. The amendment will enable diaspora account holders to transact any amount of foreign currencies without limits, while enabling the bank to mobilize more foreign currency resources.

But Alemseged Tesfaye, formerly vice governor of the central bank and an expert with over three decades of experience in the banking industry, suggests that the regulatory body must undertake a proper study, without rushing to take another amendments. “Making another amendment without a proper study might bring other consequences,” he stresses.

6th Year • Aug.16 – Sep. 15 2018 • No. 65

Samson Berhane

Editor-in-Chief samson.b@ethiopianbusinessreview.net

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