It is easy to get carried away in good times. With the impressive economic growth of late, the impetus to be overly bullish may be creeping into the mentality of banks. As profits are to be reaped in a variety of sectors, granting credit to companies of all colours seems to be the norm for a number of banks.

Pulling in the reigns on runaway loan extensions may seem unnecessary in such markets. But the signs of turning tides usually appear after it is too late for the majority. In seeking more of the same good times, optimism may blind even the traditionally prudent bankers.

Now is not the time to be overly worried, however. Profit margins for Ethiopian banks are some of the highest in the world. Week after week positive annual reports are proudly presented to shareholders with glowing responses.

This is to be expected in an infant industry relatively untapped according to some measures. The ratio of bank branches to population, around one to165,000, is still one of the lowest in the world. This is despite the slew of recent additions to the industry as well as new branches for existing institutions popping up every week.

Four new banks are in the process of entering the market, though they will have their own challenges to face.

These new entrants face two important difficulties: a glaringly low level of human resources and troubling prospects to attract deposits.

The numerous vacancies dotting newspapers bode well for the qualified applicants, but speak to the trouble human resource departments have in filling positions. Banks find themselves competing in trying to lure prospects away from one another. This will inevitably lead to higher salaries and increased overhead costs that may cut into these profits, possibly to the point of pushing them out of equilibrium with the skill sets they are compensating.

The usual culprit of brain drain is in part to blame, though recent regulations on boards of directors from the National Bank of Ethiopia (NBE) are also straining the competition. A closed financial system immune from international mega-banks will keep this situation in place in the near future. Nonetheless the push for World Trade Organisation (WTO) membership could put an end to this cosy arrangement.

Troubles attracting deposits is deeply-rooted in a largely informal economy with low bank coverage. The negative real interest rate is in part to blame as well.

But despite all these challenges, banking is a good industry to be in currently. Four consecutive years of double-digit gross domestic product (GDP) growth has been fuelled in part by a booming construction industry. Banks have been keen to fund building and infrastructure projects.

This could lead to trouble, though, if banks are not wary of overextending themselves. Construction booms are notorious for leading to painful busts. The East Asian financial crisis is a prime example of how credit can dry up as fast if not faster than it flooded in. The international nature of the late 90s catastrophe made it even worse as capital moved out of the region completely.

While the closed account of Ethiopia is immune to such drastic fluctuations, its domestic system is vulnerable. Many banks have a troubling ratio of outstanding loans marked as long-term. Combining this with low deposit levels could spell danger to come.

It is always difficult to make future predictions for these financial institutions. Forecasting using historical trends and trying to account for recent developments tends to run into difficulties of making overly rosy projections in good times. Until some of these newly constructed buildings begin filling up with sustainable businesses, the chickens should not be counted before they hatch.

Recent developments involving a slew of foreclosures and chasing after assets from big name businesspeople seem to be isolated incidents for now. These troubles for individuals could start adding up and hit deeper into the country as a whole. At the least, they are potentially signals for deeper problems.

The regulator of state financial institutions, which control about 50 billion Br in assets, the State Financial Enterprises Agency, seems the have awoken to the potential hazards. Long considered dormant and relatively inactive, the Agency is co-hosting a workshop with the United Nations Development Programme (UNDP) next week on risk management. Inviting international banking experts, it aims to train executives on modern risk management techniques.

While workshops occur all too often with little in the way of results, this at least shows concern and may raise awareness. With state banks lending out about 17 billion Br, over 50pc of total deposits, there is a lot of credit floating around.

Bringing in international expertise is to be welcomed in the fledgling sector liberalised shortly after the overthrow of the Derg in the early 90s. Re-examining these portfolios in light of new techniques or the latest in financial analysis from industry leaders may shed some light on how to keep the good times rolling.

The Development Bank of Ethiopia (DBE) has shown commendable improvements in reducing their non-performing loans (NPLs), though many other banks have not shown as positive of movements. Long-term credit extensions leave the possibility of NPLs increasing unless roaring markets persist and avoid cyclical downturns.

One of the biggest difficulties for financial institutions is that the real indicators of future prospects are hidden deep beneath a pile of figure.

Take for example Nib Bank's recent annual report. On the surface, the shining record profits seem to signal huge success; in part it does. But beneath the glamour is the loan to deposit ratio that exceeds recommendations of the central bank. This is not the immediate concern of shareholders, but is rather cause for concern over the long run.

But overall the outlook is bright for a country with nowhere to go but up. Starting from a low capital base, the state financial institutions that now control 6.5 billion Br in combined capital can continue to improve. This is what will come of sober consultations with experts like the one being held this week.

The cornerstone of any risk management package is diversification. Investing in a wide range of industries allows risk to spread throughout sectors that bear little in the way of interrelated cycles. Determinants for success in the budding flower industry are not necessarily the same as they are for the leather sector with huge potential.

These sectors will be leaders at present though sustained growth will only come if the country is able to harness its potential in an array of fields. The banks must spur this growth through prudent lending decisions which allocate capital to projects with high potential.

It will take time, though, for the banks to see profitability in areas past the infrastructure and building projects that provide the foundations for later development. If they are choosy now, the picture for the future will be bright.

Developing this wise approach to lending will be aided if private banks follow the State Financial Institution Agency's lead and begin to seek more from foreign experts in the realm of consultations. Development agencies like UNDP can add a helping hand too in facilitating such knowledge-sharing.

For now, it is friendly as competition is domestic. But once the long-term inevitability comes and the market opens up, it is these types of forums that will prepare the country for the future. Then the banks can continue to play the positive role in growth they have done so marvellously at in recent times.