New Trend in Banking

Banks Move to Enhance Capacity and Service

VUCA is what the banking sector is, according to Adam Steyn, director, Financial Service Industry at Deloitte, a consultancy firm hired by Wegagen and Bank of Abyssinia to help chart its future course for a more competitive era. VUCA is an acronym for volatility, uncertainty, complexity and ambiguity.

“The environment of the banking sector in Ethiopia is changing, and the one that we have now will be different from what we will have in five years – just like six years ago is no more the same as what we observe today,” he asserted.

The fact that there is now stiff competition in the sector and that there is technological evolution integrated with the sector, are some of the factors pushing banks to develop strategies for the future, says Adam. The banking sector has been relatively isolated from competition for a long time, staying relatively underdeveloped.

The fact that local banks are a little bit protected makes them lag behind in terms of technology, services, customer centricity and banking practices, he argued.

Consultancy firms like Deloitte, mostly give advice on new financial areas, creating new markets, use of information communications technologies, improving customer services, risk assessments, better ways of raising finance and mobilising deposits and human resource development.

There is now threat of foreign banks being allowed to operate in the domestic sphere, so it is the social responsibility of banks to expand and give more services. These are the driving forces for banks to conduct a study and use the input to change the way they operate, argued Adam.

Recently, Deloitte signed an agreement with Bank of Abyssinia (BoA), the details of which were not disclosed.

Mulugeta Asmare, president of the Bank, argues that it is better for banks to prepare themselves for more competition. There is a new demand created by the economy – companies that are flowing to the country come with international experience so we need to upgrade the way we deliver services, Mulugeta told Fortune.

BoA was established in 1996. It has 400,000 account holders, and has generated 270.71 million Br profit after tax, in the fiscal year 2013/14.

The Bank now has 132 branches, an increase of 32 from last year. Its paid-up capital has also reached to 1.5 billion Br and its deposit, 11.1 billion Br.

Banks do not stand out by just opening branches anymore, Mulugeta says, but also by the quality of service they deliver.

Now customers have more power and decide what they want, and banks need to be customer oriented, adds Adam.

Moreover, the fact that there was a limited circulation of foreign currency due to a decline in the amount of revenue collected from trade, has forced banks to study themselves in order to become effective in the use of such limited resources, says an accounting lecturer at the Addis Abeba University, who has observed some of the consultancy deals.

Wegagen Bank is already implementing a strategy developed for it by Deloitte in a deal signed a year ago. It is now working to centralise the way it provides loan and foreign exchange services in departure from the old way where branches only gave out documents to be filled out and forwarded to the head office.

Credit services have been divided into two categories – analysis and relation management: the branches will receive the request and the central management will analyse the request.

As part of the new change, the bank is adding two more vice presidents, aiming for a total of four to head corporate, IT services, operations and resources departments.

It is part of our service and organisation restructuring programme, said Wondifraw Tadesse, acting vice president of corporate service at Wegagen.

For improved customer services, bank personnel will be assigned to follow-up each customer’s cases and facilitate the delivery, said Fikru Aschalew, director of Marketing & Corporate Communications at the Bank.

The fact that many international banks are opening their representative offices here shows, that down the line, they could begin full operations in Ethiopia, said Wondifraw.

“We have to work on capacity building of our banks,” he added.

But Abdulemenan Mohammed Hamza, an analyst working at Portobello Group Ltd. does not agree with the opinion of Wondifraw.

The chance of international banks operating in the local banking sector in the foreseeable future is not likely, Abdulemenan argued, attributing the reason to more domestic factors.

He argued that major trends that have been observed in the banking industry over the past decade, aggressive expansion of Commercial Bank of Ethiopia and a number of new banks joining the sector have made the competition intense among private banks.

As a result, the well-established private banks are losing ground, according to Abdulemenan. Among the banks that are trying to develop new strategies, the market shares of Dashen, Abyssinia, and Wegagen have been declining over the years. The capital share of Awash, Dashen, Wegagen and BoA was seven percent, 6.4pc, 6.7pc and 3.9pc, respectively. In the same season in 2012/13 these banks registered seven percent, 7.7pc, seven percent and 3.8pc, according to the central bank’s 2013/14 report.

The combined net profit after tax of the four banks has gone down to 54pc from 65pc of the total private banks over the past five years.

Similarly, earnings per share (EPS) as well as dividend per share of the major banks have been in constant decline, as have their share of their assets, loans, deposits, interest income and non-interest income.

Yet another bank, Awash International Bank S.C. is among the group that has hired a consultancy firm. On June 25, 2015, Awash signed an agreement with KPMG East Africa Ltd, a Swiss firm providing audit, advisory and tax services.

The two parties agreed for KPMG to design a transformation strategy roadmap, 2015-2025, which aims to become internationally competitive. It will assess the political, economical, social and legal context of the country.

The study will provide inputs for the bank to develop its business model and business objective.

Our focus area will be determined by the study, a high ranking official at the Bank, told Fortune.

Moreover, fierce competition has also made doing banking business expensive. Staff and general administration expenses have soared. Now, private banks spend 32 cents to earn one Birr whereas it was 27 cents five years ago.

“We had previously conducted studies in-house and through local consultants. But now as the competition is getting stiff, we prefer to have a broader scope of study with an international firm,” says the official at Awash.

The study will cost the banks approximately 300,000 to 500,000 dollars, according to Abdulemenan.

Established in 1994, Awash’s recent performance indicates that total assets stand at around 26 billion Br and total deposits at around 19 billion Br. The Bank has 200 branches, 100 automated teller machines (ATMs) and 500 point of sale (PoS) machines.

Over the past two decades, the sector has been known for supplying limited financial products, expensive branch expansions, low levels of technology utilization, huge reliance on manual work, and concentration on urban areas.  Private banks cannot continue doing business using such traditional business models in this very competitive industry.

“Private banks should make improvements in regard to the number, flexibility, and pricing of financial products – flexibility in terms of security, types of finances, length of financing, currency types, interest rates. Prices (interest rates) should reflect the risks inherent in the lending. The speed and quality of loan assessments should be improved using better credit assessment methods such as credit scoring, data sharing and other statistical methods,” Abdulemenan advised.

Easy access to banking services, he adds, could be improved using ICT.


Published on Jul 20,2015 [ Vol 16 ,No 794]



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