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,
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
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
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
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
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
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
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.