Use different parameters to facilitate different banks!

Aiming to improve the stability of the banking industry by creating well capitalized banks that can mobilize massive financial resources that are needed to speed up economic growth, the National Bank of Ethiopia (NBE) recently raised the minimum paid-up capital requirement for banks ten-fold to ETB5 billion with various grace periods. It is not just in Ethiopia where such a push for capital build-up is being implemented. Similar beefing-up has become commonplace globally since the 2007 financial crisis as regulators pursue a more stable banking sector.

Nonetheless, less-developed nations’ experiences reveal the precise impacts of such moves on the banking industry are not as shiny as portrayed. Even where there are large unbanked populations, competition was reduced as new entrants were locked out and the big players got even fatter to the point small banks could not properly operate.

Ethiopian banks have built their capital in the capital and other urban areas where the costs of operation are lower than rural areas. That is how it will remain and there is no reason for these big banks to go rural even if they are capitalized to the tune of ETB5 billion as long as there is enough market where they are located. Add to this our nation’s instability and slowdown of business activity and it becomes clear the difficulty in which younger banks find themselves in.

Who will be served by these well-capitalized banks?
As we know it today, the majority of credit-takers are rich individuals and their big businesses who meet the ever-present surety requirement. The less moneyed and poor will remain spectators in this highly collateralized banking industry. Enforced capitalization will overwhelm relatively younger banks and reduce their capacity to go rural as they will face higher operational costs. But this is where we find the backbone of Ethiopia’s economy as well as the majority of its dwellers.

The new capital requirement sidelines financial inclusion by discouraging the existence of small banks and only supports giant banks, either on their own or through mergers. For a government claiming to implement a pro-poor economic policy, this move is contradictory and erroneous regarding the regulation of the banking industry.

The role of small banks in serving the poor cannot be overemphasized in countries like Ethiopia where the penetration of financial services is low. It is these smaller banks in developing countries that have the willingness and incentive to go to remote areas and serve rural populations. This happens because the market in urban areas is the primary playing field for bigger banks. Small banks would be crushed here and so, by design or for survival, would have to go other areas.

The central bank should end its practice of seeing banks through a single lens. It should rather place legal frameworks to govern banks based on their function and capacity. Specialization is needed. No positive result will arise from forcing large and small banks to be on same platform at the same time. The government should also reconsider its negative outlook regarding the role of small banks.

It is a shame that in Ethiopia, a country with more than 110 million, there are no specialized financial institutions serving the agriculture, retail investment, and mortgage sectors. This should be altered as soon as possible. The caretaker central bank should raise its banks to unique capacities as a mother would her children and not all to one standard. EBR

9th Year • Apr 16 – May 15 2021 • No. 97

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