Will Foreign Banks Be Beneficial for Ethiopia?

In early June 2018, the Ethiopian government announced it would allow domestic and foreign investors to take stakes in Ethio Telecom, the state-owned telecoms firm and Ethiopian Airlines, the state-owned carrier. Other state-owned enterprises (SOEs) up for grabs are Ethiopian Power and Maritime Transport and Logistics Corporation. The state would still retain majority stakes in them, however. Regardless, it is a huge change in policy. In a speech to parliament in June, Abiy Ahmed suggested that any sale would be gradual, however; over 10 to 30 years. He was probably being mindful of political sensibilities. A serious plan could not be that long winding certainly.The government added a caveat, however, asserting it would need to do a study over a year or two before any policy move. No such profound pronouncement has been made on the financial services sector, however. For the banking sector, there have been some participation by foreign niche players.

In February 2015, Ethiopian banks launched mobile money services with the help of foreign fintech firms: “helloCash” by BelCash, a firm based in The Netherlands and “M-Birr” by MOSS ICT, another fintech firm from Ireland. Another example of a foreign financial services company long operating in the country, albeit in partnership with Ethiopian banks, is Visa, a credit and debit card company. Since 2004, it has been providing card services to customers of Ethiopian banks. Despite its vintage in the country, however, it has long asked for room to do more.
And as early as 2015, the government indicated it wanted to develop a secondary fixed income market.

There have been some changes in the financial sector, nonetheless. In June, a new governor was appointed for the National Bank of Ethiopia (NBE), the central bank. There is not much to suggest Governor Yinager Dessie. Besides, the government already allows some foreign participation in the banking sector. In April 2016, for example, the Ethiopian legislature made amendments to its banking laws as it joined the African Trade Insurance initiative.

Some foreign banks seized the opportunity when the rules were first relaxed. The European Investment Bank opened an office in July 2015, for instance; lending to mostly state-run infrastructure projects. So did South Africa’s Standard Bank months later in October 2015. Other foreign banks in Ethiopia are Commerzbank, a German bank; the Export-Import Bank of India; Bank of Africa, and so on. The trailblazer was Turkish state-owned Ziraat Bank, however, opening an office in April 2015.

That said, there was similar enthusiasm about these sectors being opened up in early 2015. At a summit in Addis Ababa, organised by The Economist, it was the telecoms sector then that seemed like the government had no plans to consider foreign investment in at all. Instead, it indicated that it would be more receptive to liberalising the banking sector.

Besides, any liberalisation of the banking sector would have to be clear on whether banks would still be required to deploy almost a third of their funds to government bonds. There is also the fear that any privatisation programme could be marred by corruption, as has been the case in other African countries, and in fact, elsewhere.

Regardless, something drastic has to be done to stem the country’s economic troubles. China, hitherto a reliable foreign partner for the erstwhile socialist-styled Ethiopian government, has lately been less enthused.

Perennial difficulties in securing foreign exchange and tapped out indebtedness by the Ethiopian government to its Chinese counterpart, are reported to be making the Asian nation slow down the pace of its investment in what has perhaps been an exemplary African country; especially in terms of its industrialisation and infrastructural development efforts. In the most recent decade, the Chinese have provided loans to Ethiopia in excess of USD13 billion, which were used to develop various infrastructure projects: Roads, railways, dams, industrial parks and so on.

There might be other reasons that China is cooling on Ethiopia. Its ambitions in Africa are expanding. And it is likely finding investments elsewhere to be paying off more. Its first army base in Africa is in neighbouring Djibouti, for instance; a nation which Ethiopia incidentally depends on for a way to the sea. Thus, Djibouti is a more strategic partner than Ethiopia.

If the Ethiopian government is indeed serious about tackling the FX shortage problem, and there are indications it is, the Abiy administration at least, then the two sectors that it must liberalise at the earliest time possible are the telecommunications and banking sectors.

Expertise, Capital and Jobs
A couple of foreign banks have representative offices in the country but are not licensed to conduct plain vanilla banking services; that is, collect deposits and issue loans. The reformist Abiy government has raised hopes that this might change, however.

The key question is whether allowing foreign banks to participate in a country’s financial services sector engenders financial inclusion. The evidence is mixed. In fact, there is probably not much that they do in this regard. There are a few good stories, of course. For instance, some foreign financial firms specialise in microfinancing.

But they are usually a drop in the ocean and not necessarily cheaper or more sophisticated than the local ones. The Ethiopian government is right to prioritise financial inclusion.

According to the World Bank, it is “an enabler for 7 of the 17 Sustainable Development Goals (SDGs)” and reckons it to be crucial to poverty alleviation and shared prosperity. To this end, it has set a global goal of Universal Financial Access (UFA) by 2020, just two years away. Would this goal be reached by then? Probably not. But much progress is being made. More relevant here is whether foreign commercial banks help with this goal.

Quite frankly, financial inclusion cannot be the main reason for allowing foreign banks into a country. Their advantages relate to the new capital they bring for the use of local and foreign firms doing business in the country. They also allow for more seamless trade.

It is much easier to do business with a bank in-country as well as abroad for international trade, for instance. But pushed rightly, foreign banks can help with such idealised goals as financial inclusion. They certainly are able to deplore the latest technologies in this regard.

That is as far as most would go, though. Brick and mortar branches add on unnecessary weight. And increasingly, when foreign banks make a foray to another country, they rely on local deposits to fund local loans.

Their real advantage for a country are big ticket transactions. It is easier to get financing for mega projects by firms if foreign banks operate in the country.

True, while foreign multilateral development financial institutions do provide some funding, commercial ones not backed by their country’s government rarely do. Besides, there is need to differentiate between foreign banks that are from other African countries and those outside the continent. Although, it is the latter than tend to get all the attention, the former have their advantages too.

In any case, South African banks remain dominant on the continent. The largest, Standard Bank, is excited about the Ethiopian opportunity, certainly. With a Chinese bank in its shareholding, it is increasingly the go-to-bank for transactions with the Asian nation. At least, it likes to portray itself as such. That is probably where the opportunity is. That is, pan-African banks looking to expand to Ethiopia.

Otherwise, Western banks have been cutting back on their African exposure. Barclays, a British bank, is a recent example. Curiously, even these Western types might be interested in an Ethiopian venture. Investment banks are certainly keen. A capital market is virtually non-existent. Technology and expertise would probably be the key benefits.

For these to be realised, the Ethiopian government would need to liberalise the sector as quickly and as widely as possible. For if there is any whiff of uncertainty or hesitation in whatever liberalisation policy is announced, there might not be many foreign banks willing to take the risk. Potential investors would also be looking to see a more institutionally-directed and sustainable shift towards reform.

Do Foreign Banks Help?
What has been the actual experiences of countries that allow foreign banks to participate in their financial services sector, African ones especially? International banks have been pulling out of Africa lately. Some of the reasons include a realisation that local banks have a greater edge.

Another is how shallow most African markets still are. Trade finance was the main draw for the increased interest of foreign banks up until the global financial crisis in 2007-08. When commodity prices slumped, however, it became writ large how susceptible most African economies remain to the volatile commodity markets. With problems of their own, international banks began to roll back their African operations to what they deemed to be more realistic levels. And quite frankly, foreign banks were a little surprised by how hard it was to beat local ones.

That said, some remain firmly in place; more agile operations are the norm, though. The few global banks, which seemed determined, are treading carefully nonetheless. In November 2011, JP Morgan, an American bank, started offering some services in South Africa and announced it planned to open representative offices in Nigeria and Kenya. That chief executive Jamie Dimon was still talking about JP Morgan’s plans for Kenya in January 2018, seven years after, speaks to the mixed case for international banks in Africa. Credit Suisse preceded JP Morgan in South Africa, setting up an office in January 2011.

Barclays also moved its Africa headquarters to the continent from the United Arab Emirates in 2012, buying a controlling stake in ABSA, a South African bank; albeit its optimism was short-lived: It recently sold the African business. Another was China’s ICBC, opening an office in South Africa in November 2011.
What was the major attraction? Developed economies were either in recession or growing very slowly and yields were extremely low or negative. But here was a continent with more than 1 billion people, with millions unbanked and much more underbanked. Adding to that, it seemed Africans were beginning to prosper: A supposedly growing middle class was much vaunted.

But the main driver for most global banks’ resilience about their African vision was a desire to hold on to all of their clients’ businesses in every part of the world. Why should a client be allowed to go to another bank for its African business and risk losing it in the process, it was reasoned. It proved to be dearer than planned: The clients did not necessarily do frequent transactions for and with their African subsidiaries. Or better put, the volume of transactions was not so much that they could not be undertaken from the banks’ hub branches, a central African location or both.
Research suggests that foreign banks do not always help the financial development of poor countries. According to an IMF working paper in 2006, in countries with more foreign banks, credit to the private sector and access to credit in general tend to be lower. Consequently, there is also usually slower credit growth. The paper argued that foreign banks tend to be more beneficial to advanced countries. Thus, the Ethiopian government’s caution is not entirely out of place.

However, there are documented benefits for poor countries as well. Arguments in favour range from better economies of scale and supervision, more advanced technology, greater perception of safety by depositors, and lower corruption. Of course, there have been cases lately about the susceptibility of foreign banks too. But in general, these are the exceptions and not the norm. “Several studies find that foreign banks in lower income countries (LICs) lend predominantly to the safer and more transparent customers, such as multinational corporations, large domestic firms, or the government.” This remains largely the case. And when the specific case of African countries is explored, other studies still find that to be the case. Still, it is argued that local banks become more efficient from copying the practices of their foreign competitors; by the adoption of better technology and banking practices, for instance. So, the Ethiopian case, when opened up, is not likely to be any different.

6th Year • Aug.16 – Sep. 15 2018 • No. 65