Is the Ethiopian banking Sector at a Crossroads?

As per the Prime Minister’s speech on the inauguration ceremony of the Head Quarter building of the Commercial Bank of Ethiopia (CBE), the government plans to open up its banking industry to foreign competition. As per his word, the banking industry has been protected for decades. But it will not continue to be so. Therefore, commercial banks need to be prepared to keep pace with the growth of our world and to compete with the banks of other countries as well.

In an attempt to facilitate this strategy and in order to eliminate macroeconomic imbalances so as to create a stable macro-economy, strict management has been put in place over the past two years and key focusing areas have been identified by the government in the macro economic reform plan. The ultimate objective of the plan is ensuring financial stability, financial inclusion, promoting productivity and competitiveness of the private sector. Finally, these measures are expected to solve structural financing constraints of the economy by encouraging domestic savings and facilitating credit supply for the private sector investments.

As the 10yrs plan document further stated, in order to achieve this goal, it was found necessary to undertake market-oriented financial sector reform, through which the financial sector will eventually promote market-based interest rate and foreign currency exchange rate determination and of-course establishing then expanding capital markets. It is also expected to strengthen the monitoring and regulatory capacity of the National Bank of Ethiopia (NBE).

The move is the most radical step in a reform plan that the government hopes will bring a shove up to much-needed foreign investment in the banking & finance sector and in other parts of the economy. Most actors in the industry thought that it will take some time before foreign banks are permitted to fully operate in Ethiopia. But now the time seems to be coming. The entry of foreign investment into the Ethiopian banking sector is encouraged; but the question “how?” should be well thought out.

Some in the sector say the reform should consider local financial sectors much further. The main reason for this is that the banking and finance sector in Ethiopia has a long way to go compared to other countries. Keeping the existing trend of protecting the home grown banking and finance sector will help the country to have a sustainable and consistent economy. One of the main objections given for the current plan to open the sector to foreign actors is that it will dwarf and weaken existing domestic banks and financial institutions. It is also feared that the process will gradually turn into a monopoly on unfair competition. For that reason, it is suggested that the sector should remain closed to foreign investors.

According to a study conducted by Africa Business, few Ethiopian banks are among the top 100 banks in Africa in the last fiscal year 2021. Because of that, there are those who argue that if the sector remains closed to foreign investors for some years ahead, there will be even better results. The country should be proud of the fact that the banks have been able to achieve this level of maturity through leadership and the combined efforts of the management and staff of the bank at all levels. All existing banks are run exclusively by Ethiopians and that it has many advantages to the country at large. Big banks in various African countries are being run by non-African investors and that the share of Africans in the ownership and in the decision-making areas of the banks is declining day by day. Thus, the obtained opportunities and the faced challenges of other African countries need to be carefully weighed against the growing influence of Neo-colonialism in the sector.

Proponents of the direct involvement of foreign banks in the Ethiopian economy have argued that the support given to local banks is more than enough and that it would be detrimental to keep the sector closed much further. In fact, on the other hand, making it open helps banks to make the most of their potential. It is real that being protected by the government will keep them in the Comfort zone, prevent them from innovating, and make them less aware of the state of the technology in the sector.

While this reform may have significant advantages over foreign investment into the banking sector, there are also many factors that need to be considered. Most of the globally operating banks and financial institutions investing in various countries are shifting their focus from Retail Banking to Corporate Banking. Serving the general public, with bank branches set up at different locations in different cities which handles retail customers daily is not their major concern by now. However, it is difficult to encourage domestic savings without retail banking in developing countries like Ethiopia. Therefore, the Government’s detailed implementation guidelines should be considered in the context of Retail and Corporate Banking.

Each move of the reform should also be transparent and considerate of the existing actors in the sector. Lack of transparency can leave banks unaware of what to do in a timely manner. Therefore, it is important to help them prepare for the upcoming market competition following the participation of foreign investors in the sector. This helps them at-least to save their resources, anticipate potential changes of laws related to the reform, to lay out proper technological advancements and make adequate preparations for human development. Transparency not only provides guidance for the existing banking & finance firms on how and where to go, but also helps them to be prepared for the fiercest challenges and competitions that they will face in their short and long term journey. In this way, the existing banks need to develop a fast and timely strategy, bring their human resources to the forefront and keep pace with the country’s plans.

There are a variety of ways in which a company can enter a foreign market. No one market entry strategy works for all international markets. Direct investment may be the most appropriate strategy in one market while in another you may need to set up a joint venture, partnership or any other form, depending on the case. Thus, immediate exposure to competition is not appropriate for a sector that has not been compared to international financial institutions for a long period of time. Because of this, it is vital to carefully weigh the protection of domestic banks in relation to the benefits of foreign investments. Instead of introducing foreign banks directly to the Ethiopian banking sector, priority should be given to let them buy some shares from the existing local banks, in which the share may grow eventually. This lets the foreign banking firms experience the macro environment of the economy while sharing technology and knowledge of their own to the sector.

10th Year • Apr 2022 • No. 106