Corporate or institutional banking is a segment of the industry where specific deals and attention are provided in a specially designed way. These services include handling the loans as well as accounts of big economic players. Although corporate banking is one of the biggest business segments even in many developing countries, it is still in its infancy in Ethiopia. Almost all existing banks pursue mass marketing approaches and basically collect retail savings and lend to businesses. EBR’s Ashenafi Endale investigates new developments in the banks’ clientship landscape.
When the Primary Labor Union of Ethiopian Airlines recently openly invited all commercial banks operating in Ethiopia to provide a mortgage loan package at lower lending interest rates, the Cooperative Bank of Oromia (CBO) offered a rate of 7Pct, which was the lowest at less than half the industry’s average of 14.5Pct.
“CBO is the only bank that offered a reasonable consumer loan arrangement for our employees,” said Telila Deressa, President of the union, after signing the agreement with CBO on February 9, 2021. CBO, a member of the International Cooperative Banks Association, now provides low- interest loans to cover the purchase or construction of homes, automobiles, medical expenses, and household equipment for union members.
Following the agreement, the airline moved the union’s account from the state-owned Commercial Bank of Ethiopia (CBE) to CBO. “However, CBE only lost some of the airline’s accounts to CBO, others remain with CBE,” says Muluneh Aboye, CBE’s Vice President for Risk and Compliance.
Ethiopia’s undisputed banking behemoth, which has been offering the lowest lending interest rates in the industry, recently changed its lending policy. As a result, CBE’s average rate increased from 8.63 to 9.8Pct.
Ahbabu Abdela, Chairman of the organizing committee of the under-establishment interest-free Hijra Bank, argues that lending interest rates are increasing due to inflation. “For long, many banks were not considering the impact of inflation. But now, CBE has taken the lead to adjust its rates to inflation. This will create a domino effect throughout the industry.”
The giant state-owned bank increased its lending rates despite the fact that its 2019/20 interest income jumped to ETB45.6 billion from ETB37.3 billion in the previous fiscal year—a growth of over 22Pct. On the other hand, however, its interest expense increased from ETB14.7 billion to ETB20 billion in the same period—a growth of 36Pct. Interest related expenses grew much faster, perhaps causing the bank to revisit its rates.
Abie Sano, President of CBE, agrees and provides data from a longer time frame. “Over the last five years, CBE’s interest-related income grew by 26Pct on average, while its expenses grew by 39Pct. The bank has been providing some services free or for a minimal fee. We had to increase lending interest rates to assist the services we provide.”
“It has been two years since CBO started working with Ethiopian Airlines, mainly owing to the latter’s produce and service sourcing. For instance, it buys agricultural produce from the Meki-Batu Cooperative Union. All cooperatives and unions in Oromia region, including Meki-Batu, work with CBO. Hence, the national flag carrier had to work with the bank to work with cooperatives,” says Tadele Tilahun, Director of Strategy and Business Communications at CBO.
It is not only CBO that is trying to expand its corporate customer base. As of the last two years, commercial banks have been investing time and effort to attract more institutional customers. Zemen Bank is perhaps the only bank in Ethiopia established with a distinctive business model that primarily provides a dedicated service to large corporates with high cash turnovers. Zemen even limited its account opening deposit to above ETB25,000, when it started operation. Big corporates and embassies are its clients.
Dashen and Abyssinia banks have opened special branches with dedicated officers to handle big clients. Abyssinia has a comparatively better reputation of handling big clients such as USAID, the US Embassy, Sunshine Investment Group, while Dashen handles MIDROC Ethiopia Group. However, such branches have proven ineffective in attracting large clients. Rather, low lending rates, longer loan repayment periods, and informal networking seem more instrumental in creating and strengthening relations with the big players.
“Setting up specialized branches to attract corporate clients is an old model that doesn’t currently work because these clients do not go to the banks,” argues Muluneh. “Banks acquire institutional clients after knocking on their door daily.”
Even CBE, the largest Ethiopian bank with the leverage and wherewithal to handle large state accounts, has limited command over heavy-hitter banking where arm-twisting features. CBE’s institutional clients currently number around 100,000, a small fraction compared to the two million businesses licensed in the country or its 30 million individual clients.
“CBE finances almost all state-owned enterprises (SOEs) but their deposits are insignificant relative to CBE’s total deposits. Close to 80Pct of CBE’s deposits is from just 3Pct of its depositors,” says Muluneh. “Out of that 3Pct, 70Pct are private firms while 30Pct are SOEs.”
Currently, CBE’s deposits total ETB700 billion, of which 20Pct or ETB140 billion, is from retail or small-scale savers. This is more than what all private banks combined have managed to collect from depositors.
“Following the surge in demand for institutional and corporate banking, CBE recently established a separate institutional banking department targeting these players,” reveals Muluneh. However, the bank mainly follows the mass marketing approach as we have over 30 million accounts and 1,700 branches.”
Although big organizations such as the World Food Program and Ethio Telecom have been working with CBO, Tadele informs that institutional banking has only found recent attention. “CBO just started to focus on corporate banking as of the last two years. So, our corporate clients are limited. Our client base is chiefly made up of retail customers.”
In Ethiopia, lower lending rates and longer repayment periods are the major factors that attract big organizations. “Cost and settlement times are at the center, when selecting a bank to work with. Lower rates are preferable,” says Dereje Atnafu, Export Manager at Belayneh Kinde Import Export Company.
But this is not the usual trend. “Since we need timely funds for investment and working capital, we pay whatever rates banks ask,” Dereje argues. “Paying high lending rates is less costly than squandering big investment projects and businesses.”
Muluneh agrees by saying lending interest rates do not have a big impact on big businesses. “The major problem is getting loans on time. People and businesses borrow money from usurers at high rates just to access timely funds. Banks currently charge around 20Pct, insignificant in the eyes of borrowers,” said Muluneh.
The average saving rate in the banking system is 8Pct while loans are given out around 14.25Pct, according to the National Bank of Ethiopia. However, the maximum lending rate jumped to 24Pct from last year’s 18Pct, above the prevailing 20.6Pct inflation rate.
The gap between saving and lending rates is continuously expanding. This is mainly because banks draw over 70Pct of their income from interest charges. The difference between saving and lending rates, is between five and seven percent, in most East African countries. But in Ethiopia, it reaches 16pct. Although Ethiopian banks remain highly profitable through high lending rates, industry players say banks’ operating costs have increased exponentially. “Salaries have doubled while rent and other expenses have also surged,” argues CBO’s Tadele.
Banks are not competing to attract corporate clients by virtue of better-quality service, but rather by fractionally manipulating lending rates, according to Dereje. However, Tadele says this is not entirely true, arguing that “CBO is becoming the choice of many because it is providing services untapped by other banks.”
Muluneh says institutional clients give significant benefit to banks. “Foreign currency mainly comes through corporate clients. NGOs and multilateral and bilateral institutions also significantly contribute to banks’ deposits and foreign currency generation. Corporate saving is good for banks because they deposit for the future. But small-scale savers, mostly individuals, save only for short periods. Corporate saving is less volatile than retail.”
Ahbabu from Hijra Bank, however, argues the biggest savers are retail customers rather than big companies. “The lion’s share of banks’ saving always comes from individual savers. Retail business is the best way for a bank to mobilize sufficient savings.”
According to Ahbabu, institutional banking is risky. “If a bank disburses half a billion to a corporate that consequently goes bankrupt, the bank loses everything. But if that amount is disbursed to thousands of retail customers, the bank will not lose all at once.” EBR
9th Year • Apr 16 – May 15 2021 • No. 97