Only Modernisation and efficiency can [boot] profit

As President of the Bank of Abyssinia (BoA), Mulugeta Asmare has overseen its growth and been at the helm of some impressive feats, not least of which include a 27Pct growth in profits last year. With 600,000 clients and 190 branches, he’s looking towards the future, with plans to increase paid-up capital and the use of banking technologies.
Perhaps his boldest decision to date has been to significantly increase the salaries of BoA employees. This increase, many argue, will have a significant impact on the pay scales of other banks and increase their operating costs. In the first of two interviews with private bank presidents this issue, we discuss the overall implications of the BoA’s decision to increase benefit package for employees.
The first of the two leaders we speak to, Mulugeta believes his bank’s pay increment is a positive development, arguing that it will lead to overall growth in the fledgling banking sector. EBR’s Ashenafi Endale spoke with him to learn more about his decision to increase employee pay and the overall state of affairs in Ethiopia’s banking sector.

How do you see the progress of the banking industry with regard to its competitive advantage vis-à-vis foreign banks?
So far local banks are limited in their ability to compete. This limitation has a big impact on the growth of the industry. The banks buy and sell money only in the local market, which is an old trend.
International banks have decades of experience, trained human capital and [technology]. If they were allowed to operate in the country, they could play us out of the local market easily. Our industry is in its infant stage and giving it time to grow before opening it to foreign competition is a good decision by the government. Of course, there are many things we lose because [the economy] is not open.
Still, we need time to build capacity to invest in human resources, raise capital and acquire technology. Therefore, the protection has to continue for some time. Even the Commercial Bank of Ethiopia (CBE), which is the largest bank in the country, is very small compared to international banks, even other African banks. We lack many things and expertise-based service is yet to come to Ethiopia.

Where do you place Bank of Abyssinia (BoA) in this overall progress?
We registered a record profit increment of 27Pct last year. We have 600,000 clients and 190 branches. The customer base will increase soon, since we are changing our operating systems. Our capital has reached ETB1.5 billion, which we plan to raise during our next general assembly. Our deposit balance reached ETB14.3 billion; it was ETB13.6 billion last year.
Abyssinia has been in the industry for the last 20 years. It is the third private bank to be established [after the partial liberalisation of the industry in 1994]. The bank has gone through many challenges. It operates in a resource-scare environment. Through that, it could not grow at the expected rate and there are many things to be done in increasing capital and technology. Even some of the late entrants in the industry exceed BoA in technology.

However, new banks take the experienced employees of older banks with a higher salary.
Yeah, but how long will that last? They are paying more than what the industry can give and what the employee does not deserve. Many banks have taken experienced employees from BoA.
Now we have introduced a new strategy that aligns with the country’s second Growth and Transformation Plan, especially the goals of modernising the banking sector, increasing its client base, providing satisfactory service and increasing our market share.
I believe that investing in human capital must be the duty of any company in the service sector. Employees are the best asset of a company and you must create trust for that to happen. If you train them, you must use them.
There is big gap of knowledge, [skill and attitude] and BoA has a long-term plan in [bridging that gap]. Huge investment is needed in human capital development to introduce new services and [improve] the current services. Automated and modern services are desperately needed.
Financial inclusion is also important. The population is large, but that doesn’t mean it can only be reached through branches – it can be done through technology. There are ATMs that can deposit money. Banks can do a lot with technology.
Agent banking is also being introduced to the industry, which is good. It must not take us the time it took in developed countries to grow. We can simply copy from them. However, expertise is needed even to do that. The growth of other sectors also must be fast to pace the growth of the banking industry.

What are the impacts of operating costs on the profit and growth of banks?
In order to grow a bank needs investments. In order to invest, banks need capital. You cannot invest shareholders’ contribution or mobilised deposit. Therefore, you have to raise the capital of the bank. At the same time, you have to pay good earnings per share. If a bank profits, modernises and pays good earnings per share, people buy shares.
This all escalates the operating cost of a bank. This increment in operating cost can cause bankruptcy if the return isn’t covered quickly. Therefore, you have to create a competitive and sustaining bank in the market. If its market share grows, then you can decrease the operating cost and grow.
Only modernisation and efficiency can [boost] profit. But most of our services are not automated yet. Most of them are done manually, which increases operating cost and [breeds] inefficiency. You cannot cut operating cost but there are unnecessary costs.

Which expenses have the biggest impact on BoA?
Salary and benefits are the highest expenses, followed by deposit interest, promotion and general administration expenses. Salary and benefit expenses have a big impact, unless they are controlled. If [well-managed] they can have big returns.
However, there is unethical and unnecessary competition that increases operating costs. If the increased salary is for the right person, it can increase efficiency. If you acquire the right technology, it can also manage the operating cost. If you give your deposit for a non-returning loan, it increases the operating cost. You have to move wisely. You have to open new branches, and that increases the cost. If you open the branch in a bad spot and there is inefficiency, you lose.
Currently banks’ operating costs are increasing because of unjust expenses for office rent. All banks are in unethical and unnecessary competition regarding employees and office rent.

BoA recently introduced a new salary scheme, in which employees’ monthly wages increased significantly. Did this decision consider the industry?
Our salary and benefit increment has no impact on the industry. We just introduced a new salary structure that can help the implementation of the bank’s new strategy. We introduced it only for BoA; it cannot affect others. I do not think that the salary increment should be a hot issue.
Of course, the resource is limited and competition is getting stiff, so this can increase the operating cost in the industry. But this is natural. The sector is immature and the rise of operating cost is expected. Where there is scarce resource and the competition is stiff, it is hard for innovation and it takes years to modernise existing services.
Now BoA is expanding, so we will recruit more people. We are creating a fertile condition for that, by revising our salary scheme and introducing different benefit packages. We have introduced good benefit packages for the future. We cannot attract more experts without doing so.

What should banks do in order to decrease operating costs and maximise their profit, grow and become internationally competitive?
Producing capable human resource in the industry is not the duty of one bank; it needs to be a combined effort. Universities also have to consider the industry. The shortage of capable human resource in the industry is significant; therefore the banks, the NBE and banks’ association must exert a concerted effort to create an institution that can be led by studies and produce specialised experts like bank managers, operators and technicians.
Deposit management must be strict, and operation capacity, innovation and discipline are necessary.

How do you compare the increment rate of operating costs with the rate of banks’ profit growth?
It is parallel. Few big banks are highly penetrating into the market and getting good profit.
Copying developed countries and providing customer-focused services are decisive to grow in such situations. Nowadays, customers demand excellent and sophisticated services. Therefore, you must be innovative and provide technology-based services. Our banks have not reached the point to let the costumer follow them; instead, the banks are following the customer.

Will the increasing operating cost reflect on the earning per share and service charge of the bank?
For a bank, profitability is important to survive. And not all profit is for shareholders. You have to control the operating cost in order to be profitable. At the same time, the shareholders want dividends. However, if a bank continues its profitability, the shareholders can get it tomorrow. Banks have to create healthy and continuous growth. Shareholders must not lose hope during such big investments and lower return. Working on the saving demand and fulfilling the increasing demand is the first task, then managing and controlling the operating cost is another. EBR

4th Year • October 16 2016 – November 15 2016 • No. 44