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Fear Reigns: Meddling Undermines Winning Over Unbanked




With the monetisation of global trade, banks have become icons of national power and development. The Royal Bank of Scotland, Bank of America, and Deutsche Bank, the three biggest in the world with assets totalling 7.12 trillion dollars, are symbols of contemporary civilization in the United Kingdom (UK), United States (US), and Germany, respectively.

No bank in Ethiopia has grown big enough to serve as a national icon, since modern banking was introduced as far back as in 1905 with the establishment of Bank of Abyssinia (BoA). Although the EPRDFites have protectively liberalised the industry, it remains too infantile to serve its purpose.

A top down administration and unlimited state intervention is dragging the prospects of the sector, argue industry analysts. The intervention of National Bank of Ethiopia (NBE) in micromanaging private commercial banks is crowding out innovative entrepreneurs, claims the political opposition. Protecting public interests and regulating the sector along the lines of established standards is essential, states the central bank.

Compounded by a narrow niche market and repetitive business models, the flourishing sector is haunted by uncertainty. Fear reigns in the industry.

The central bank discloses so little about the sector that conspiracies spread like wildfire. As directives and annual reports are the only public disclosures from the central bank, the public does not have any information about the prudence of its financial institutions.

Cognisant that private commercial banks took hold of 40pc of the total deposits made in 2010, the possible consequence of prolonged public uncertainty could be disastrous.

Stress tests and public disclosures are the two most widely implemented policy instruments of central banks around the world. With the world’s top 50 banks holding total assets amounting to 61.8 trillion dollars in 2010, the necessity of public accountability is indisputable, argues Boudin Port, CEO of BNP, the biggest bank in the world with total assets of 2.9 trillion dollars.

The private banking industry in Ethiopia grew by over 20pc in 2010, according to Access Capital. Proportionally, the sector’s profits jumped by 45pc while the returns on equity of stakeholders grew by 27pc. When funds used to buy government bonds are included as advances, then the size of their mobilisation eaten up by the bond reaches a staggering 34pc.

Whereas overall deposits in private banks grew by 28.4pc to reach 38.3 billion Br in 2010, their lending portfolio expanded as well. This is evidenced by the 21.1pc year-on-year growth rate of total loan disbursements in 2010.

The Revolutionary Democrats seem to have the resolve to create a vibrant private banking industry. They understand that banks play crucial roles in economic development by promoting capital formation, investment in new ventures, monetisation of the economy, and implementation of monetary policy. As a result of their tailored policies, the number of private commercial banks reached 12 in 2010, while five others are under formation.

Their unpredictable policy making process continues to surprise the industry, driving up the cost of investing in the industry. One such an incident was the directive issued by the central bank ordering commercial banks to buy government bonds in the value of 27pc of their total disbursed loans. While the state owned Commercial Bank of Ethiopia (CBE) and Development Bank of Ethiopia (DBE) possess huge total assets, estimated at around 84.4 billion Br in 2010, they are excluded from the directive. 

Retrospectively applied to loans extended since July 1, 2010, the directive forces banks to invest in public offerings with a three per cent interest rate and five-year maturity period.

The mounting uncertainty is aggravated by the regulator’s indistinct stand on problems surrounding certain private banks. The case of Awash International Bank (AIB) and Zemen Bank are recent incidents of concealed regulatory interference. Some industry analysts attribute these to inept micro-management and regulatory meddling by the central bank, while others consider them cases of communication failures.

Given that banks are the pillars of the economy, such confusion might infect other sectors. Yet, the EPRDFites prefer silence. With the central bank as the government’s agent (as proven by its list of entrusted responsibilities), it would be futile to interpret the silence as neutrality.

Provided that the majority of the population, a percentage some research puts at 70pc, is financially excluded, a clear policy should have been established on how to bank this section of the population. With banks playing a growingly critical role in business development, banking the unbanked should have been one area the EPRDFites invest their resources in.

However, they remain adamant not to support the financial sector with necessary policy instruments, such as interbank security transactions. Most of the commercial banks are limited to providing domestic and traditional financial services. In an era of mobile banking, investment financing, and securitisation, Ethiopian commercial banks trade with an Everest of paper procedures, albeit with a geometric progression of risks.

The Revolutionary Democrats envision raising access to finance from the 20pc in 2010 to 67pc in 2015, according to the GTP. Yet, the plan does not state the strategic directions through which the objective is to be achieved. Creating uncertainty and pressing the sector’s fear button is not a strategy. Crowding out innovative and reputed bankers is also no way to go about it.

Unlike other sectors, investing in the banking sector involves multiple risks originating from credit, liquidity, as well as market and operational dimensions. Living up to the multitude of risks demands harnessing the smartest and the brightest of minds. Irrefutably, confusing interference by the regulator hinders the ability of banks to maintain reputed managers.

Corrupt bankers must not be tolerated for the sake of the industry’s image, but their case should be made public for others to learn from it, while public investment is secured. 

Policy making should also be transparent enough to build sectoral as well as public confidence. The top down imposition of unprecedented policy measures is in no way a solution. Instead, consultative policy making and dialogue during implementation should be adopted as an industry standard.

In supporting the technological and operational transformation of private banks, the EPRDFites should adopt comprehensive reforms to improve the investment regime. At the forefront of such a plan should be creating an operational climate that is conducive for banks and other financial institutions.

The regulatory capability of the central bank should also be strengthened to enable it to competently administer the country’s financial system.

Above all, the public should be given detailed information about the prudence of financial institutions. Undertaking frequent stress tests on all the private banks and disclosing the information would help to build public confidence. The central bank should also get closer to the public through more frequent reporting, especially in times of confusion.

However, sweeping the fear factor should be the prime objective of all stakeholders, including the EPRDFites.





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