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Over the past sixteen years, a number of private banks have joined the
banking industry posting a double-digit profit
growth and high returns following the emergence of
the country from mono and state-owned banks to
markets opening up in line with the thrust of the
government’s economic policy. Year after year, more
and more private banks are joining the banking
industry, in which investors are attracted by bumper
profits and high dividend payouts. Thus, buying bank
shares has become an attractive investment.
As a result, there are about sixteen private banks currently in the
business and more than a dozen of banks are in the
offing to join the industry. With the renewed
capital requirement, nevertheless, the banks are
poised to look into how to raise the required
capital and stay in business with healthy and strong
balance sheets.
The initial capital requirement of 50 million Br at the beginning of
1990s, equivalent to about 5.6 million dollars at
that time, and the subsequent raised capital
requirement of 75 million Br, may have been
appropriate to the then economic and business
environment.
With the country’s stellar record of stable macroeconomic management,
continued solid growth and an increased capital
requirement to operate a business, however, small
banks with little capital may not meet the growing
demand for financial services. So they would not be
able to underpin modern products required by
investors, entrepreneurs, companies, individuals,
households, and consumers.
The National Bank of Ethiopia (NBE) has raised the capital threshold
that banks must have by June 2016 to 500 Br million,
having realized the need for banks to build up their
capital. It amounts to a capital requirement of 30
million dollars with the current exchange rate.
Given the current capital level of most private banks, the requirement
may look a bit large in today’s value of Birr. But
if we consider the value and exchange rate of Birr
in five years, it will not be large enough for banks
to maintain lending for small and medium
enterprises, companies to build new factories and
expand their operation, consumers to buy new car,
real estate developers to develop land, individuals
to build houses or households to buy modern
appliances.
Although the banks’ current profitability is strong with double-digit
growth, they must have adequate capital and
liquidity reserve to fall back on if their
profitability falls due to an unfavorable economic
and business environment. The banks cannot
adequately maintain their prime business of
increased lending with small capital and liquidity
reserves if the economic situation becomes
unfavorable for them.
No doubt that the long-term prosperity of the nation cannot be
ascertained if banks cannot lend enough money to
investors as required by the growing economy of the
country. Therefore, the need to press banks to
build their capital and liquidity position, and
boast their capital adequacy ratio, is necessary for
the health of the financial system and the economy.
To remain afloat in the business and protect themselves against risks
or losses from their operation, banks must always
improve their liquidity positions and raise their
core tier-one capital ratio; which is a key measure
of strength. They need to ensure that the ratio does
not fall below the crucial threshold set by the
Basel standard. This is what we see is happening in
the emerging market economies of South East Asia and
Latin America. Some countries even have a banking
sector with an average capital ratio of above 10pc,
which is well beyond the Basel III standard.
The growth of internet banking, mobile banking, credit cards and an
array of investment products for depositors and
borrowers demands that banks be ready for
intensified competition in the banking business.
The stiff competition they will have to face in the
long run, when the banking industry to becomes open
to foreign competition, should also not be
overlooked.
Thus, there should be no disagreement with the move to press the banks
to build their capital over a five-year period to
the new level. The moot question is how the banks
will raise enough cash to meet the requirement.
The first option would obviously be to go public and issue shares to
raise money from the market. This, of course, would
not be an easy task as many of the established banks
that have been in the business for several years and
those in the offing would be in a rush to issue
considerable shares in order to raise sufficient
cash from the public market. Cashing in by going
public would require conducting research and
developing a marketing strategy to attract investors
with significant cash or wealth, and the lower and
middle income class of society to buy the floated
shares.
Noting the current bumper profit of banks and the impressive yield of
bank shares, in which their profitability and high
investment return is the envy of other share
companies in the economy, this group of investors
may go out and buy the bank shares right away and
earn a decent return on their real financial assets
holdings.
Recapitalization could also be undertaken by cutting dividend payouts
of shareholders until the capital requirement is
raised to the required level. A third possible way
would be to mull over the possibility of mergers.
This is more applicable to banks that are finding it
difficult to gain access to public resources within
the required time frame.
In effect, Ethiopian banks need to grow bigger by building their
capital and liquidity position as the economic
resilience and long-term prosperity of the nation
highly depends on a healthy financial system. It
also depends on the evenhanded balance sheets of the
banks.
All the unfolding circumstances in the international financial system
dictate this; although, not so evenly in developed
and emerging market economies. The new capital
requirement has, therefore, begun to write a new
chapter for the future of the banking industry and
the nature of the financial sector in Ethiopia.
Banks need to wake up to the call by the central bank and develop a
well-planned strategy to meet the capital
requirement over the fixed time horizon. If so, it
might be possible to see strong banks and a vibrant
financial sector that provides an array of modern
services in an economy that is enjoying a growth
rate beyond most of the emerging markets for over
seven consecutive years. |
