They Just Want to Take the Trained Ones from another Bank, with Higher Salary
After an illustrious career with the Commercial Bank of Ethiopia, Abie Sano Mohammed has been leading Oromia International Bank (OIB) since 2009. Despite its relatively recent establishment, it’s already proven to be a formidable force within the private banking sector – with a paid-up capital of ETB950 million, OIB is the tenth largest private bank in the country. Abie, however, says there’s more growth to be done, including their goal to increase paid-up capital to ETB3 billion within four years.
As the second of the two bank presidents we speak to this issue, Abie provides a differing perspective on the topic of increasing operational costs and what they mean for the banking sector’s overall development. He says that there are more pressing issues facing the industry – like technological development and resource mobilisation – that need to be addressed systemically to strengthen the sector and make banks more competitive. EBR’s Ashenafi Endale spoke with Abie to learn more about OIB’s growth trajectory and his thoughts on the future of the sector.
How do you evaluate the progress of banks regarding the targets set by the National Bank of Ethiopia (NBE) to increase their branches, deposit and overall competitiveness?
The targets set by the NBE are just initiatives, they are not even directives. Therefore, I do not think that it means banks will be closed if they cannot achieve [them]. It is just a matter of aligning the banks plan with national targets. The targets are just to motivate banks to work towards those goals.
What is the status of OIB in achieving these goals?
Achieving the NBE’s plan is not a problem for OIB because we had a [more ambitious] plan than theirs. However the issue now is that the targets banks have are similar. Now all banks are working towards the same goals and that affects our assumption.
OIB is the 13th bank overall in terms of age and the 10th private bank. However, as of June 2016, we have the 3rd highest number of branches among private banks. We are also among the leading banks in terms of investment. Branch expansion has a big impact in increasing operating cost; however, it is a good way to reach the people.
Our paid-up capital reached ETB950 million and deposits were ETB9.6 billion. We’ve decided to raise the bank’s paid-up capital to ETB3 billion in the next four years.
Our goal is to maintain this level of investment and growth. We have short and long-term plans to reach out to large portions of the population.
The total branch in the industry has reached 4,000, up from 600 some six years ago. This is not a small figure; it would have been more than enough for Ethiopia had they been evenly distributed. Now banks are saturated in the capital. The NBE’s regulations should promote even distribution, but not through force because the market itself will lead the banks outside the saturated areas. But still, banks’ physical presence is not enough; [it must be] supported with technology.
Do you think the NBE’s initiative doesn’t bring unwanted competition?
The NBE’s growth prospects have affected our targets. We could not proceed with branch expansion at the pace we were going. If we [continued with] the fast pace, there would not have been enough human resource in the market to fill all the branches.
This is also bringing an unjust salary [war] in the industry. Unjust payment does not mean more productivity. It affects the service quality in the industry. Banks should be led by the market.
Regulators must push banks to invest in technology, but it should not go beyond showing them the directions. If it enforces [such measures], it will highly increase banks’ operating costs. However, if there is healthy supply and demand, banks can operate even with less operating cost than what they currently have.
The total number of branches increased from 600 to 4,000 over the last six years, which is too much. It takes about eight years to train and groom a recent graduate to a branch manager position. You cannot hire recent graduates for all those management levels in the new branches. Therefore, every bank snatches employees from the scarce market with a higher salary. The rate of salary increment in the industry is unbelievable and never considered the industry. [Some] banks do not want to train fresh employees; they just want to take the trained ones from another bank by paying a higher salary.
Sometimes, they do not even consider that the institution has to be sustainable. They [may] pay well today, but [can they continue] paying the same tomorrow? The employees should get what they deserve without affecting the institution.
What are the highest expenses at OIB?
Salary and benefits have taken the first place at the moment. I believe this is what is happening in all small and medium-sized banks. Since the market is narrow and one bank’s actions have an impact on the industry, every bank must work for the common good.
The other problem is renting prices in Addis Ababa. Many banks are occupying buildings that are under construction and office owners are asking for up to ETB600 per square metre. Not only that, they are asking for a five-year advance payment. The impact of the increasing operating cost is on the banks and on the population. It also affects interest and dividends. Technology is necessary to minimise operating costs. But that requires huge investment.
So far, there is no innovation in utilising technology. In order to move to total technology service, the business practice also needs improvement. There is increment in the coverage of technology infrastructure in the country but still there are uncovered and insecure areas. There are areas that don’t have banking services because they have no electricity, road, telecom network, or reliable security. These areas can contribute towards resource mobilisation, but they require large investments and years [to get a return].
As far as OIB is concerned, we have branches in remote areas like Gode, Gambella and Humera. It is hard to manage employees in these branches from Addis Ababa. There are also transportation and security issues in these areas, which increases operating costs. It is possible to provide loans to clients in remote areas, but it is difficult for a bank that wants to come close to the public if we don’t have a physical presence.
The Commercial Bank of Ethiopia has support from the government and they have huge public deposits. Private banks don’t have that. We have no duty-free privileges for the vehicles we import to reach these remote areas. For private banks, there is no support from the government. Individual effort alone cannot influence the growth of the industry.
The government has already protected the banking industry from foreign competition. Other sectors of the economy don’t have this privilege. Mr. Abie, why do you need more privileges?
OIB is not opening branches only in towns where it can make high profits. We are opening branches in very remote areas as well contributing to the financial inclusion of the country by banking a bulk of the unbaked society. For us, that is social work. Remember, we are a private bank and have profit motives. So it’s only fair to ask for incentives as we contribute to the financial inclusion targets of the government.
And the closure of the industry from foreign competition is not necessarily good for the industry. If the details of how foreign banks would operate in the country are meticulously spelt out, it could be beneficial for the country and we could compete with them.
How do you reconcile the difference between higher operating costs in branch expansion and its importance for deposit mobilisation vis-à-vis the need to invest in technology?
Branch expansion must be complemented with technology. I would say more than 50Pct of the branches in Addis Ababa can be replaced with technological services.
But still, technology cannot totally replace branches because there are places where a physical presence is needed. In Ethiopia, it is difficult to assume that cash will be replaced by technology. A cashless society is still far [from becoming a reality]. However, there is huge cash in the pockets of people. The infrastructure must be supportive of bringing that cash to the banking system.
How will Bank of Abyssinia’s salary increment affect your bank?
No new thing can come just with increasing salary, unless affecting the industry. Abyssinia might have increased the salary because it has planned a better target. However, that only works if other banks did not plan for the same target. Employees talk about everything in the industry and the mobility of employees is high. By Ethiopian standards, the banking industry pays the best, but it is still far below other countries.
The industry employs a large number of people and changes in salary and benefits at one bank trigger an industry-wide increase for all employees. Most banks do not want to train fresh graduates. And employees always go to where there is better salary, which causes instability in the industry.
How does increased operating costs reflect on the earnings per share and service charges of OIB?
The increasing operating cost can have impact on service charges, but if you increase your service charge beyond the industry average, you will lose your customers. The impact will also reflect in the decrement of dividend, gradually. So far, Ethiopian banks are good in dividend payment. But this will come down to a reasonable figure – 50Pct dividend is not proper. This is because banks give loans with 12Pct or 13Pct interest.
How do you compare the increment rate of operating cost with the increment rate of banks’ profit?
On average, the increment of the operating cost is ahead of the increment of the profit. This is even challenging the profit growth. The profit is growing with 5Pct to 25Pct, while operating cost will grow from 40Pct to 50Pct.
For sure there is growth. But banks are investing in IT and branch expansion; therefore, the increment rates of operating cost and profit do not match each other. When the investment is over and the industry is stable, where the only cost will be administrative, it will be possible to compare healthy rates of the two.
What is the impact of economic issues outside the banking industry on the profit and growth of banks, like the lacklustre export sector and foreign currency shortage?
Export is falling but banks’ investment is still increasing. We are using the foreign currency generated previously. The foreign currency shortage is a big problem for the industry. It is affecting banks’ profits.
Furthermore, Ethiopia is not properly collecting remittances because of the growing parallel market. There are illegal operators networked from where the Diasporas live to everywhere in Ethiopia. This has a big impact on the economy. There is also under [and over] invoicing, which all affects the overall foreign currency situation.
What should banks do to decrease the operating costs and maximise their profit growth and competitiveness globally?
A national payment system and interbank services are important. The NBE has to work on that. We have agreed with other banks on the importance of such services, but some banks think the system aims to take their cash or customers. We even have prepared loan procedures that can enable all banks to work together. Despite this, they keep setting different prices.
We have also prepared a manual with the banks’ association, which saves banks from guessing prices. Banks are still manipulating each other. It is also better to hire unemployed graduates and train them, rather than snatching the few experts in the industry. This must also be supported with investment in technology.
The requirement that the NBE set to allocate 2Pct of their annual expense on investment on human capital is a good thing. At OIB, all our employees are [trained] as recent graduates; only a few come from the industry. EBR
4th Year • October 16 2016 – November 15 2016 • No. 44