Local banks, experts wary of foreign banks entry

Foreign banks entry to Ethiopia began during his imperial majesty Hailesilassie I regime. During the Italian invasion of Ethiopia in 1935, the Italians established branches of their main Banks namely Banca d’Italia, Banco di Roma, Banco di Napoli and Banca Nazionale del lavoro and started operation in the main towns of Ethiopia. However, they all ceased operation soon after liberation except Banco di Roma and Banco di Napoli which remained in Asmara. In 1941 another foreign bank, Barclays Bank, came to Ethiopia with the British troops and organized banking services in Addis Abeba, until its withdrawal in 1943, according to the National Bank of Ethiopia (NBE).

There were two other banks in operation namely Banco di Roma S.C. and Banco di Napoli S.C. that later reapplied for license according to the new proclamation each having a paid up capital of 2 million Birr.

The first privately owned bank, Addis Abeba Bank Share Company, was established on Ethiopians initiative and started operation in 1964 with a capital of 2 million Birr in association with National and Grindlay Bank, London which had 40 % of the total share. In 1968, the original capital of the Bank rose to 5 million Birr and until it ceased operation, it had 300 staff at 26 branches.

Following the declaration of socialism by the Dergue Regime in 1974 the government extended its control over the whole economy and nationalized all large corporations. Organizational setups were taken in order to create stronger institutions by merging those that perform similar functions. Accordingly, the three private owned banks, Addis Abeba Bank, Banco di Roma and Banco di Napoli Merged in 1976 to form the second largest Bank in Ethiopia called Addis Bank with a capital of 20 million Birr and had a staff of 480 and 34 branches.

Took power in 1991, the Ethiopian People’s Revolutionary Democratic Front (EPRDF) it declared a liberal economy system and allowed establishment of private banks. For over 30 years however the government followed a protectionist approach, which was against entrance of foreign banks to Ethiopia despite repeated calls from international companies and prominent individuals.

Such a government policy has changed after Prime Minister Abiy Ahmed (PhD) took office in 2018. And recently Abiy’s cabinet approved a policy that allows entry of foreign banks to Ethiopia.

Recently, Kenya’s KCB Bank expressed its desire to engage in the Ethiopian financial sector, becoming the latest bank to show such an interest in Africa’s second most populous country with an estimated population of 120 million people.

But foreign banks entry to Ethiopia has been the most contentious matter. Executives of local banks and scholars have debated over the entry of foreign banks to Ethiopia at the business panel discussion focusing on “Opening of the Domestic Banking Sector to Foreign Banks: Opportunities and Challenges”, organized by Addis Abeba Chamber of Commerce and Sectorial Associations (AACCSA) on Friday, October 28, 2022.

The panel discussion held at Hilton Hotel.

Professor Alemayehu Geda, a renowned Economist, mentioned during the panel discussion entry of the banks will be an enabling factor for accelerated competition through interest deregulation implementation.

However, Alemayehu stressed that, “There’s no wrong time more than this to allow foreign banks entry while we are witnessing macroeconomic problems of inflation, budget deficit, shortage of foreign currency and lingering impacts of the local war.”

The House of People’s Representative approved a budget of 786.6 billion Birr for the 2022/23 fiscal year. However, there’s a budget deficit of 213.4 billion Birr, which the government is planning to finance it loans from internal and external sources.

Safaricom’s MPESA, a mobile money service, is expected to launch operations following a grant to Safaricom license to launch services from Ethiopia’s government.

The announcement was made by Ahmed Shide, Minister of Finance, at the national service launch of Safaricom Ethiopia in Addis Abeba in the presence of Prime Minister Abiy and Kenyan President William Ruto (PhD) on October 6, 2022.

“Not only foreign banks but also the telecom sector will be in the competition list because of MPESA,” Alemayehu said. For him MPESA’s entry is similar with “entry of a sustainable digital banking.”

MPESA’s banking services growth rate stood at 50% from the previous rate of 33% take. “Therefore, MPESA’s competition needs to be considered seriously,” he says.

There’s a dearth of latest international banking experience in Ethiopia. Even there’s a policy gap to share international experiences from the government side.

“The role of local banks has been restricted to financial mobilization,” said Eshetu Fantaye, President of Ahadu Bank Share Company.  “There’s no policy-side intervention from the government side on a modality of sharing the international banking experience for local banks.”

“In this case, we’re forced to compete with a senior athlete and we’ve weak muscle to compete with them” he complained.   “These banks would be more beneficiaries than the local ones basically stemming from their experience in money and foreign exchange markets management,” he opines.

He went on saying that, “The foreign banks ought to bring their own resources, which will be used to their loan disbursements, and they shouldn’t be deposit taker banks for such purposes.”

Foreign banks have some merits through.

Foreign banks entry increases the efficiency of the domestic banking sector. Increased competition tends to reduce costs and to increase profits, according to the World Bank.

The presence of foreign banks helps to build a domestic banking supervisory and legal framework, and enhance the overall transparency. It is expected foreign banks to provide more stable sources of credit since they may refer to their parents for additional funding and they have easier access to international markets.

Melaku Kebede, President of Hibret Bank Share Company, too argues that liberalizing the sector for foreign banks is beneficial to the inflow of foreign currency.

At the same time the same time these banks will bring new products and services to the industry.  “Therefore, banking as usual will not work anymore,” he says.

The policy, which was approved by the Council of Ministers to let foreign banks in, bets on banking sector liberalization as a positive step to strengthen the regulatory capacity of the NBE.

However, a panelist rejected this point.

“I don’t personally accept the rationale of foreign banks entry is to boost capacity of the NBE; the reverse is true,” Asfaw Alemu, President of Dashen Bank Share Company on his part argues.

In somewhat similar point of view, Fekadu Petros (Assistant Professor), a Lawyer by Trade, and other panelist, argues for improvement of system and regulation by NBE.

Pertaining to regulation of banks, whether their supervision should be executed at their main branch abroad or locally has to be a point put into consideration, according to Fekadu.

 “From the regulation perspective, I am not clear with the proposal of branch opening as other nation’s institutions,” said Fekadu. He further suggested partial subsidiary with local banks than wholly owned subsidiary. “Branch opening should be allowed gradually,” he says.

Another panelist criticized the way NBE enforcing banking operations.

“The NBE forced banks to have the same interest and exchange rates without any competition among themselves,” Yared Haile-Meskel, Managing Director at YHM Consulting PLC on his part argued.

Yared believes that the strict supervision by the NBE is a dangerous move which makes competition among foreign banks difficult.

He also stressed that there’s a pressure from the International Monetary Fund (IMF) on liberalizing Ethiopian economy. He mentioned the market liberalization, devaluation of Birr, ceasing government’s subsidy, reducing the number of universities as some of the requirements imposed from the World Bank and IMF.

“Due to the devaluation of Birr in terms of US dollar, our debt soared to 760 billion Birr,” said Yared. “A debt of $14 billion has been added to our debts.”

Ethiopia’s foreign debt was $25 billion in 2017.

Yared further criticized local banks for poor capital competitiveness.

“Our banks capital base is very weak,” he says, adding, “For instance if I subscribe a share worth 10 billion Birr, which could be the biggest in a bank, that’s equal to the amount a lottery winner can get in Europe—a lowest slice compared with international banks.”

In addition, he warns that, “If these banks are not included in the stock market and they’re sold without their true valuation, they would be under sale.”

Yared is a proponent of sequential liberalization as an important step to be followed similar with Professor Alemayehu.

Alemayehu raised the East Asian nations gradualism approach of liberalization in the banking sector, which was a successful experience characterized by swift correction when mistakes occurred.

By ethionegari@gmail.com

Leave a Reply

Your email address will not be published. Required fields are marked *