“Prizes are Not Sustainable Tools to Beef up Remittances.”

Tadesse Chinkel, president of Bunna International Bank

Ever since the Commercial Bank of Ethiopia introduced prize linked saving promotion mechanism seven years ago, many commercial banks have followed suit by launching similar promotional schemes. This includes the almost ten year old Bunna International Bank, which started offering prizes, ranging from smart phones to a tractor worth more than a million birr, to its remittance customers. EBR’s Samson Berhane sat down with Tadesse Chinkel, president of the Bank, to discuss the results achieved from such promotional tool so far and the way forward.

EBR: It has been almost three years since Bunna adopted a remittance lottery program as a key promotional tool. What factors pushed the Bank to do so, instead of pursuing other promotional methods?
Tadesse: Prize and lottery promotional methods are the best way to collect foreign exchange when there is a stiff competition in a given industry. It is crucial to encourage customers to use formal channels whenever they receive money from their loved ones living abroad. Our aim is to let customers know that they have a chance at winning prizes, which means they can encourage the remittance sender to use our bank. In other words, it is a convenient and cheap way of advertising our service through word of mouth. It’s a win-win situation for both the bank and its customers.

In the banking industry, whenever a certain bank adopts a new product or marketing and promotional tool, others tend to follow rather than creating their own. The same can be said of prize linked saving and remittance lottery programs.

That is true. For instance, we started using gifts as a promotional tool after witnessing the success of Commercial Bank of Ethiopia (CBE), which was the first to use such methods. At the time, when CBE first introduced the scheme, we saw our customers switching to them. That had an impact on deposits as well as gain from foreign exchange. We were then pushed to adopt the same strategies to bring back our customers. It would not be fair to sit and wait while other banks became successful by adopting these mechanisms.

But, can the gains be worth giving away something like a tractor?
Yes, because it is a critical issue. It might be difficult to quantify the benefit as we did not have a disaggregated data. But for sure, the income that we earned without using lottery programs is lower than our income generated after we adopted the tool, let alone its benefits in raising the amount of customers and deposits.

Do you believe such promotional schemes can be sustainable solutions to raise remittance flows?
Remittances are a big source of income for millions of individuals. But its importance is underestimated. For instance, other African countries, including Nigeria, Sudan, Egypt, as well as Asian countries such as China and India, get billions of dollars from remittances every year. Boosting remittance flow goes hand in hand with encouraging saving as well; many people send money home to build houses as a security for the future. But, prizes, lotteries and gifts are not sustainable promotional tools to beef up remittances.

So, what is a viable way?
Prizes are temporary solutions to attract people who choose informal transfer channels as opposed to the formal ones. Unless banks and the government work to raise peoples’ awareness about the benefits of using the formal channel, using prizes might even destabilize the market if the tool is implemented for a longer period. Most importantly, a nationwide study should be conducted to discover a sustainable way of bringing people from using informal channels to formal ones.

There are bankers and experts who argue that using prizes and lotteries can lead to unfair competition. They criticize banks for selling foreign currency at a rate higher than the ceiling set by the central bank.
Even though prizes and lotteries can be employed to weaken the black market in the short term, I fear it might encourage unfair competition in the long term because it will distort the foreign exchange market. Obviously, showering gifts on customers mean the banks are paying more than the ceiling set by the central bank.

While apprehension over the use of prize linked saving and remittance lottery programs as a promotional mechanism lingers, what attention has the central bank been giving the issue?
So far, I have not seen any effort exerted by central bank. The regulatory body tends to turn a deaf ear to it, although it is aware that there are concerns over the usage of gifts, prizes and lotteries as a promotional tool.

In its latest study conducted on the remittance flow in Ethiopia, the International Organisation for Migration suggested that measures should be taken to allow undocumented migrants to send money via formal channel. Have there been any efforts to make that happen?
Yes, we are trying to partner with agencies licensed by the Ministry of Labour and Social Affairs, to set up a platform where migrants can easily send their money via formal channels. In doing so, we can reach undocumented migrants as well. But, most importantly, to ensure sustainable remittance flows, Ethiopian citizens abroad should trust the government, and there is no reason why they shouldn’t if theyhave opportunities for safe political and social involvement in their country. We know that there are people with political motives who are calling for a remittance boycott against the government. To change the situation, I believe the government should have discussions with people who live abroad. Otherwise, it will have a significant impact on future remittance flows.

Prize linked saving programs have proved to be an efficient way of mobilizing more deposits. For instance, CBE, in five rounds of prize linked saving programs, has attracted more than two million customers. Is Bunna using a prize-linked saving program?
We have not yet decided to adopt prizes as a deposit mobilization strategy, although there are banks that have found it effective. Nonetheless, the most important thing is delivering service to our customers in the way they want. I know most of us [commercial banks] use business-as-usual approaches towards deposit mobilization. In order to stay afloat in the banking industry, medium banks, including Bunna, have to come up with new ideas. In fact, we are in better shape than the big banks were at our age. To keep this speed of growth, we are trying to move in line with the country’s current situation. For example, our services are provided digitally to attract the younger generation. Other services targeted to certain segments of the population, such as women, will be also implemented.

Do you think using prizes and lotteries as a promotional tool instigates unfair competition in the banking industry?
I do not think it will cause unfair competition because even though providing incentives to customers’ means banks are paying more than the interest rate, the banks have the right to pay whatever interest rate they want on deposits, as long as it is rewarding. For instance, there are times when banks pay three or four times of the minimum interest rate in case of fixed time deposits.

Can we say banks use lotteries and other such methods to reach more customers with fewer branches because the cost of opining new branches is getting higher?
No bank would stop expanding branches because it started using lotteries as a promotional tool. To begin with, it is a regulatory requirement to expand branches by 25Pct annually, which has been par for the course over the past three or four years. What’s more, in the long term, expanding branches would help to mobilize more deposit and collect more remittance than lotteries and prizes.

Economists have linked the aggressive use of lotteries and other promotional tools with the country’s unstable macroeconomic situation, including low saving rate and negative balance of payments.

The currency crisis has been so challenging especially in the recent years and it got worse after the political instability reached its peak. On the other hand, we haven’t seen any significant changes after the birr was devalued last October, in spite of the government’s hopes.

The higher difference observed in the official and parallel markets is also another factor exacerbating the foreign currency crisis. Although the interest rate offered in the two markets narrowed four years ago, it started getting wider, especially after the political unrest started in the state of Amhara, Oromia and Ethiopian Somali. Whenever instability flourishes, people tend to convert their money in dollars or other foreign currency because they lose their confidence in the local currency. That is the moment the black market thrives and banks grapple with a shortage of foreign currency. Even the central bank failed to narrow the gap. Nonetheless, with the restoration of peace and stability in the country, we hope the problem will be resolved.

The rate of investment surpasses the rate of saving enormously in Ethiopia. This is despite the fact that commercial banks registering remarkable success in deposits mobilization.

Individuals’ deposits have been showing a significant increase every year, despite unrest and intense competition in the banking industry. But it’s a different story among large investors. In fact, most investors in Ethiopia don’t have much deposit because they have an issue of liquidity. Most of them use their deposits for their day to day operations.

So, does that mean there is a cash shortage in the economy?
Yes, of course. The shortage is a problem faced by almost all major economic players. It was highly felt during the political unrest when individuals and investors withdrew their money from banks as they lost confidence in the country.

6th Year . May 16 – June 15 2018 . No.61