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Laudable Directive May Draw Talent to Banks

 

 

Dear Editors,

I understand Abdulmena Mohammed Hamza lives in London, hence too far away to see what goes on inside Ethiopian private banks. I have lived here for years, and I am a shareholder in one of the private banks as well as a student of their governance.

Boards of directors are appointed not because of competence. They are there for one of two reasons or for both.

Being a director is a highly lucrative job that pays anything between 100,000 Br to one million Birr annually for attending a maximum of 50 uneventful meetings. Large shareholders place their own person on the board to ensure they have agents to guarantee them a constant flow of millions of Birr in loans and advances.

These are granted without any serious questions of adequate collaterals and sometimes fall outside National Bank of Ethiopia’s (NBE) directives. There is little or no regard for economic sense, bank policies, procedures, or NBE directives in these practices, which are not uncommon in private banks.

Sadly, Abdulmena’s assumption in his opinion headlined, “Directors’ severe pay package can cost banking talent,” (Volume 11, Number 560, January 23, 2011) that the best have been on the boards of directors is far from true.

Large shareholders handpick the directors, sometimes from among their own employees, but often from those outside the shareholding community. They appoint them with no regard for quality, integrity, loyalty to the bank, or proof of any competence in positions of leadership or finance related scholarship.

It is impossible to solve the problem of remuneration through remuneration committees with or without the board, as Abdulmena suggested. The boards and large shareholders are one and the same. Invariably, large shareholders (with as much as 20pc of the bank’s subscribed capital) dominate anyway, anytime, and anywhere.

Directors’ fees running up to one million Birr a year are questionable on other grounds. Shareholders are rumoured to have lost millions in the process.

The new directive from the central bank addresses such problems as well as the important question of checks and balances.

Directors at many private banks cannot possibly get any worse. A number are controlled by a few shareholders and their agents who regard private banks as their private property in spite of holding under three per cent of the bank’s assets.

Abdulmena needs to recognise that Ethiopia does not have deposit insurance to protect its savers from self-centred and reckless directors where short-termism is a real threat. Unlike in the UK, Ethiopia’s banks are not private limited companies, but share companies with shares held by members of the public.

NBE’s recent protection measures should be congratulated and further strengthened.

His fear of the loss of talent is unwarranted for competent professionals rarely existed on the board of directors. Yet, the few that are there do not always go after money. Such professionals may now have the opportunity to come in and make a difference.

Authorities at the central bank should further reshape the environment with new directives to guarantee the independence and competence of directors and external auditors; limit large borrower shareholders from appointing their own agents as directors; and limit large shareholders from dominating such appointments through cumulative shareholdings in a plethora of their private limited companies.

 

 

Andinet Semere
andinnet@yahoo.com

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