“We Are Not Ready.”

Addisu Habba, president of Debub Global Bank (DGB) is the current president of the Ethiopian Bankers’ Association (EBA). He was re-elected by the professional association of bankers in March 2018 to continue in the post for the next three years. Addisu, a married father of two, has had immense experience in the banking sector. He is a graduate of Economics from Addis Ababa University and holds Master’s degree in Banking and Finance from Italy. In the past, Addisu held several positions at the former Construction and Business Bank, including as a credit clerk and internal auditor, before rising to the post of President. He then became president at the Bank of Abyssinia and served for five years. Three years ago, he joined DGB, one of the later entrants into the banking sector. EBR’s Samson Berhane sat down with him to learn more about the challenges and successes of the industry, as well as the activities of EBA.

EBR: The last fiscal year was challenging for banks in Ethiopia due to factors ranging from regulatory restrictions, and the devaluation of the local currency, to political unrest. Yet many banks managed to register robust growth. How is that possible?
Addisu: Yes there were many challenges. After the devaluation, banks had to surrender 30Pct of their foreign exchange earnings to the National Bank of Ethiopia (NBE). There was also a lending cap imposed on banks until the end of the financial year. The cap was intended to push banks to focus on the manufacturing and export sectors. Despite all this, banks have registered growth in almost all parameters, such as deposit mobilization, credit and profit. This shows that the country is under-banked. In addition, the performances of the previous years’ helped banks register this growth. On average, deposits grew by 30Pct in the banking industry last year. Banks tried to disburse as many loans as possible despite the credit cap.

Even the performance of the banking industry in the first quarter of the current fiscal year is better. If these challenges were not in the picture, banks could have achieved so much more.

One of the major strategies adopted by the banking sector to mobilize more deposits is massively expanding branch networks. But this method is becoming expensive due to the rising rent and other administrative costs.

The target set by the NBE for commercial banks was to raise deposit mobilization by 25Pct per year. The performance of some banks has even exceeded the target. When it comes to branch expansion, it is relatively rewarding to open branches in Addis Ababa where most transactions take place. Although it is difficult to say all the branches that have been opened are doing well, it is safe to say those in the capital are doing relatively better.

For instance, Debub Global Bank (DGB) has 40 branches in the country. However, not all the branches are profitable, but they still contribute a lot to the overall performance of the bank, for instance, by mobilizing deposits. It takes two to three years to make a branch stand on its own feet.

But there are other innovative, and less costly ways.
Opening more branches is important, as in Ethiopia, the ratio of commercial bank branches to the population is low. The branches are also concentrated in urban areas. Yet in order to realize the government’s vision of expanding financial inclusion, it is necessary to use electronic payment systems, particularly internet, mobile and agent banking. Although the initial investment is huge, electronic payment systems are easy to use and are less expensive after installation.

Eventually cash based transactions will decline dramatically. But it is impossible to stop them totally. So branches are still needed to facilitate case-based transactions. When banks established ET Switch, the intention was to use electronic payment systems in considerable manner by modernizing the national payment system.

Financial inclusion is still in its infancy in Ethiopia. Are there any policy and institutional reforms to reach at least to the level that neighbouring countries have achieved?
The financial inclusion policy is already in place. Although it is hard to talk about the results, the government is trying to implement the policy by collaborating with stakeholders. In neighbouring countries like Kenya that have mobile phone-based money transfers, financing and micro financing service like M-Pesa, the security issues still poses a threat. We should learn not only from the success of countries like Kenya, but also try to avoid the complications and problems that come with the system. This is because there is a need to safeguard the nation’s economy, as well as the public interest.

There are complaints about the requirement for private banks to buy NBE bills worth 27Pct of their outstanding loans. What has been the response from the central bank?
Through the Association, we regularly discuss this requirement with the NBE. We have been saying 27Pct is too much for banks. If we are allowed to lend the money by ourselves, we could support the economy, as well as reaping the benefits. Although the initial plan was to channel the money to the Development Bank of Ethiopia (DBE), which in turn diverts the money to prioritized projects, the disbursement has not been as expected. The money diverted from private banks to DBE is around ETB75 billion while the money disbursed by DBE is close to ETB35 billion. Considering this, we have argued that we could have done much better than DBE.

On top of this, there is the issue of the interest rate. Although we mobilize money paying a minimum of five percent, the interest rate we are earn from buying NBE bills is three percent. This should be increased to at least cover our cost of interest on deposits mobilized. During the recent discussion we had with the governor and top officials of NBE, we talked about these issues. They told us the issues will be resolved step by step and I believe they will act accordingly.

Until recently, the NBE and commercial banks were engaged in a ‘cat and mouse game’. Has there been any change in this regard after the appointment of Prime Minister Abiy Ahmed (PhD)?
In the past, there was plan to hold a discussion between banks and the central bank every two months. Although we could not meet as planned, we have been discussing many matters, including issues like supervision. Although we believe the supervision of NBE is necessary, there are areas that don’t need it. We outlined these areas in detail and sent them to officials of NBE. We also did the same thing after the appointment of the current Prime Minister. We are aware that a reform committee has been set up to look into these issues, and we are expecting change.

The new administration seems to be in favour of liberalization. Is the banking sector ready for this?
If we combine the capital of all the private banks together, it can only match a single medium bank operating in middle income countries. We are not ready. So much needs to be done. This is why we complain about the restrictions imposed by NBE because we need to grow by reinvesting our profits to compete with foreign banks when the time comes. The experience of other African countries that have liberalized the financial sector reveals that the possibility of domestic banks being dwarfed by foreign banks is high. Foreign banks have strong capital backing and qualified manpower. Even countries like China opened their doors after establishing strong local banks.

Of course, there is debate concerning the issue. Some argue that liberalization of the financial sector will force domestic banks to build their capital. They also say the public will benefit from quality service as well as diversified and innovative products. But as it stands, indigenous banks operating in Ethiopia will be swallowed if the sector is liberalized.

Even if indigenous banks grow at the current rate, it takes many years to become competitive in the global stage. In light of this, don’t you think merger among local banks is the best and quickest way?
Although banks are developing, due to challenges the growth is not like before few years ago. For instance, the average earning per share of the industry used to be around 40Pct. Now it stood at 20Pct. So, to strength the local banks merger can be instrumental. But, merger has its own advantages and disadvantages. So, we need to learn from best practices.

For instance, in Nigeria the central bank increased the minimum capital banks should have eight years ago. At the time there were close to 200 banks in Nigeria. Those banks that managed to increase their capital in specified period of time continue to operate independently until now. But some of banks that failed to do so merged with each other while others exit from the business. Ethiopia should follow the same path. Local banks should be give time to strengthen themselves by increasing the minimum paid up capital before rushing to merger.

In fact, the country does not have the necessary infrastructure to make merger a reality. We don’t even have secondary market. Without knowing the exact value of shares, it is difficult to go with this method. Under the current scenario, it will be like combining oil with water.

The government has been trying to resolve the foreign currency crisis repeatedly. But none of its actions made any change. In your opinion, what is the solution to the problem?
It is all about mismatch between demand and supply. So, the main task should be increasing the supply of foreign currency. Since the Dergue regime, Ethiopia has never had enough foreign exchange to cover its import bills. When I was studying at the university, the export earnings could only cover 25Pct of the import bill. Currently, this figure even declined further.

The solution is to focus on our items that have comparative advantage in the global market. Of course, we are price taker because we mainly export agricultural commodities. However, we can compensate this by increasing the volume of products that shipped from the country.

The other is increasing the export of manufacturing products. Because their price at the international market is relatively stable, exporting more manufacturing items will help to balance the merchandise trade balance. Import substitution should not be ignored when we talk about developing the manufacturing sector also. Ethiopia not only imports capital goods and other essential items that are not available in the country. The country also imports products that can be produced locally. So, import substitution has spectacular power to solve at least part of the problem.

Tourism can play a vital role. So, there is the need to attract more tourists. Focusing on the Diaspora community and foreign direct investment is also important.

There are many allegations against banks when it comes to allocating foreign currency in accordance with the law of the country. Some even stress that the foreign currency that comes from banks is used to finance contraband trade.
There are many attempts to administrate the foreign currency that is channeled through banks in an orderly manner. The central bank also registers the day to day transactions. But wherever there is a shortage, there are people who abuse the system and prosper themselves.

But in the first place, foreign currency rarely came to banks due to the massive contraband trade. No one brings hard currency to the bank while there is a black market that can give a better exchange rate.

What about legalizing the black market? Can it be a solution?
This requires a lot of caution.

Currently, banks are struggling with excess liquidity.
I don’t know about other banks, but speaking behalf of DGB, the bank’s loan to deposits ratio; it is approaching to 70Pct on average. This shows that there is no excess liquidity at the bank. Of course, the slowdown observed in the construction and public sponsored projects might have an impact on the liquidities of banks. But, I think it will be resolved when the harvesting season starts. The current season is a time when we give loans for coffee growers and exporters.

Most of the banks in Ethiopia are established along with ethnic or religious lines. Do you think the banking sector will flourish in the future with such traditional way of establishing a company?
Of course, initially that was the case. But step by step, this arrangement is being diluted. As banks grow and the need for raising capital becomes a necessity, the composition of shareholders is becoming diverse. This will be intensified at larger scale after the introduction of stock market because shares will be traded openly available for everybody.

Even if many of its members are well-heeled, many argues that the Ethiopian Bankers’ Association (EBA) done little so far.
The aim of the Association is to facilitate and coordinate the activities among banks. Information exchange, creating financial literacy awareness and to safeguard the interests of banks by lobbing as well as discussing with the central bank are among the objectives of the Association. We have done many things in this regard.

Although the members of the Association are wealthy, the operation of EBA is financed by the limited contribution that comes from banks. So, by its own the Association cannot go further. But what it can do is by coordinating banks, the Association can do many things. For instance, the EBA is a big player while establishing ET Switch. Currently, we are working to establish a training centre. We already hired a consultant for that. We also hired a consultant to prepare real property estimation manual. The Association also played a big part when banks adopted International Financial Reporting Standards.

8th Year • Jan.16 – Feb.15 2019 • No. 70