Catching Up With the World: Ten Things that Ethiopian Banks Should Do to Improve their Global Standing

Living aside the long history of the use of money in Ethiopia that can be traced back more than 2000 years. It is following the demise of the Dergue, that the post-1991 economic policy witnessed a marked departure from the previous Socialist system. This new change in policy brought about a significant change in the functioning of the financial sector. Not only was the financial sector going to serve the private sector, which had hitherto been demonized, but new private financial institutions, also emerged. At the same time the role of the Ethiopia’s central bank, the National Bank of Ethiopia (NBE), was also reformulated. Thus, financial sector reconstruction was at the top of the EPRDF’s government agenda some two decades ago. In undertaking this task the Ethiopian government adopted a strategy of gradualism: gradual opening up of private banks and insurance companies alongside public ones, gradual liberalization of the foreign exchange market, and so on, and a policy of, at least in intent, strengthening domestic competitive capacity before full liberalization. This is, restricting the sector to domestic investors, strengthening the regulatory and supervision capacity of the NBE, giving the banks autonomy, and opening up the interbank money market. In line with this strategy various proclamations and regulations have been passed since 1992.

Despite the proliferation of privately owned companies, following the financial sector liberalization, their relative market share is still small. This is true in terms of deposit mobilization (and loan disbursement). The dominant position is held by the public sector in general and the Commercial Bank of Ethiopia (CBE) in particular. The public sector’s share in the industry did, was falling continuously since 1996/97 while the share of the private banks rising, though the trend seems reversing following aggressive deposit mobilization by CBE, from private and public sources, in the last couple of years. A similar pattern is observed in terms of disbursement of loans, loans outstanding, and loan collection. Yet the trend of the existing data shows that the share of the private banks – both in terms of deposit mobilization and lending – has increased significantly over the years.

In general, given the nascent level of development in using market mechanisms in Ethiopia, the challenge of transition from the pre-reform period to the post-reform period, the relatively good shape in which the existing financial institutions find themselves despite the weak supervision and regulation department of the NBE (which lacks skilled human resources), the government’s strategy of gradualism and its overall reform direction at early phase of liberalization need to be appreciated. However, after more than two decade on this road, one would expect a concession that it should declare when will be the end of that gradual liberalization period; it was supposed to clearly chart out a time schedule/frame for its full or partial financial sector liberalization programme.

This is badly needed as our banks are far behind the global banking practice. This could begin first by exploring the possibility of joint venture schemes with foreign banks. Obviously the government cannot rationally protect the sector forever, and it is time to recognize this and act accordingly. Both the public and private banks need also to consider the following 10 points that I think are important to bridge the gap between our banking practice and the advances in global banking practice, including the banks of our neighbors such as Kenya.

Provide International Level Customer Service

The current banking service in Ethiopia is way behind the customer service internationally offered, the financial product variety available; the efficient IT based service globally available and the aggressive marketing practice of international banking. It is even way below the level of private banks in neighboring countries. This needs to be changed dramatically and in a very short period of time.

Separate the Power of Bank Managers and Bank Board of Directors in Practice

International banking practice dictates that the board is concerned with strategic direction while mangers in managing the business. The managers need to have an incentive structure which encourages them to excel in their trade and, hopefully, graduate to a privileged managerial class. In our banking sector the boards micro mange banks (in particular in credit provision, foreign exchange allocation) and engaging in conflict with managers leading to inefficiency and in-fight in the bank. This needs to be tackled in a decisive manner.

Invest on IT and New Technology (If Possible Collectively)

This awareness seems to sink in Ethiopian banks today, however the depth of IT and Technology use is way behind the global standard, even compared with our neighbors such as Kenya (its success in mobile banking through what the Kenyan call M-Pesa being a world level success story). SMS banking doesn’t mean we are using IT in banking; it is just the tip of the iceberg. Banks need to share technology with other banks since that is less costly – for instance every bank in Ethiopia need not to have its own ATM machine for it can share all ATMS in the country and share the cost accordingly (the NBE was supposed to help in that through regulation).

Engage In and Influence Macroeconomic& Financial Policy Making Collectively

Macroeconomic stability is crucial for the operation of banks. A wrong macro policy such as unpredictable exchange rate policy or monetary and fiscal policy that leads to inflation will lead banks to loss and eventually collapse, since it unduly raise their expenditure (vis-à-vis their planned revenue). Thus, banks need not sit in fold arms for the government to do good since it does make mistakes. They need to monitor and influence policy making with a collective say through bankers’ association or chamber of commerce. This can be achieved by having representative in such policy making committee or conducting research and showing that to the government. They need also to fight collectively discriminatory policies that benefit some banks (say the public ones) and hurt other (eg. the saving policy for government condominium housing project). If the formal channel is not working banks may need to lobby officials too.

Measure Your Performance in a Competitive Framework

There is a tendency to measure success by the total profit of banks only. If Ethiopian banks use the real interest rate (lending rate less inflation) for instance, at times they are actually lending at negative interest rate. The Ethiopian banks survive this because they pay negative real interest to depositors. If depositors knew this and have an alternative and better way of depositing, the Ethiopian banks will be out of business immediately. Moreover, profit per capital invested, earning per share, profit computed in dollar/Euro terms, the relative positions of each bank [relative to domestic and regional banks] is a good indicator of the banks’ performance and future direction. This needs to be adopted by Ethiopian banks.

Target Remittance

The income from handling foreign exchange is becoming an important source of income for Ethiopian banks. It is imperative in this regard to focus not only on exports which is the traditional source of foreign exchange but most importantly on remittance. The country’s export revenue is still small, USD 3.08 billion for the 2012/13 fiscal year, less than my estimate of remittance (both formal and informal), which is above 3.5 billion USD. This should encourage our banks to be creative in getting their hand on it.

Look Regionally

The horizon of our banks is very narrow and limited. However, there are a number of opportunities around our neighbors: a case in point here is Djibouti, Southern Sudan etc. Thus, our private banks need to see beyond the horizon, at least regionally and hopefully in the future globally. They shouldn’t tell themselves that there is already a lot to be done at home as working outside doesn’t contradict with working at home as long as it is more profitable and strategic.

Diversify Your Services and Products

The current level of banking service and banking products in Ethiopia is way behind the international practice. This is an opportunity for banks in Ethiopia because it shows the potential for their expansion. Thus, they need to see the possibility of exploring, investment banking, credit provision for consumer durables, corporate banking service, home banking, electronic purse, clearing system, corporate bond issuing, committed and uncommitted facilities to name but few lucrative businesses.

Have a Strong Marketing and Research Department

In order to realize possibilities inn diversifying products and services and also to actively participate in policy circles, banks need to have a strong marketing and research department. This needs not be a department with a huge staff. A well paid and well-motivated skilled staff of 5 to 6 person can do the trick at initial stage of its operation. Think that allocating huge money in building a headquarter office building is less impressive than spending on such human capital from a strategic point of view especially if the sector is to be liberalized.

Have a 5 to 10 year Strategic Planning and Monitor it Each Year

I am sure all our banks have some sort of strategic planning. In most cases these are generally simple paper works. What I am thinking here is serious strategic plans that will be drawn by the marketing and research staff noted above and can be used to advise the board of directors. This could be complemented by external consultants work. This needs to be gauged and monitored periodically. I highly doubt that existing (if any) strategic plan of our banks has been revised, say, owing to the effect of the rampant inflation in Ethiopia and the unprecedented devaluation of recent past and the liquidity shortage of the present. The answer is most likely in the negative and this is because the strategic documents of our banks are not serious plans and are usually drawn for the sake of having them on paper. Our banks need to get out of such quagmires and draw realistic strategic plan which will be based on key success factors in the industry. This includes: (a) knowledge of market, risks, opportunities, technology and ability to manage them; (b) local presence and extensive network locally, regionally and eventually globally; (c) ability to tackle obstacles that may come from officials, problems of credit concentration, competition and (d) links with high credit quality companies, patience to close lucrative deals and integrity and transparency. I hope these are helpful direction to direct us towards the global and completive banking practice.

2nd Year • December 2013 • No 10