Banks Have Feelings Too

It is oft quipped that breweries and banks in Ethiopia are rarely starved for dough. Look at all those expensive, high production value commercials on TV. Or the lotteries banks dole out for those lucky few who use them as remittance channels.

But why even go there, why not just look at their annual profits?

Just in the past few weeks, Lion Bank had released its annual report, exhibiting a profit of over a quarter billion Birr, which according to industry insiders must have been disappointing to the Bank’s shareholders. It is indeed a new day for Ethiopia when a profit by any institution, bank or no, earns this much and still be considered a middling performance relative to the industry it belongs to.

The National Bank of Ethiopia (NBE) may have taken note, or at least this is what could be grasped from the regulatory body’s recent policy decisions. Ever since the central bank devalued the country’s official currency by 15pc, a number of the complementary measures it took to offset the inflationary pressure on the economy have been to thump on banks.

The phenomenon is not in keeping with the central bank’s attitude towards private banks. Sure, it had ordered them to invest 27pc of their gross loan disbursements into the central bank’s bills and had instructed banks to grow their paid-up capital. But, the regulatory has also been amenable to the banks on more fronts. Firstly, it is one of the few big industries lucky enough to be liberalised, at least to the domestic market. The Commercial Bank of Ethiopia (CBE) may be annoyingly well capitalised and profitable than all the private banks, sometimes even combined, but the private sector’s participation in the industry is much more than one could say for aviation, telecommunications and logistics.

Then there is the fact that the government has held off foreign banks from entering the market (they may just be waiting until the CBE becomes burly enough to take them on). Look what happened to cement producers shortly after Dangote, and its gigantic trucks entered the market two years ago. Or the Ethiopian film industry which has seen its death in the satellite channel Kana. The only thing that stands between the private banks continued existence and fierce competition with foreign banks, which the domestic ones are destined to lose, is the government’s decision not to liberalise the industry entirely.

Lately, though, the central bank has been exercising tough love (if it is love at all). Following the devaluation, they were, first of all, asked to turn in all of their windfall gains. And then the regulatory body escalated their deposit interest rates by two percentage points to seven percent. If these were not enough, they were told to limit their outstanding credit limit to 16.5pc, but keep lending to exporters, which the industry insiders’ claim is a recipe for more non-performing loans as the sector has adequate funds.

Such measures by the central bank, at a time when shareholders’ earnings have declined (recently showing little improvements if unaudited results are to be believed), are a bit harsh. It is almost as if the government is channelling the devaluation’s costs to the private banks, much the same way retailers would divert higher prices to customers.

Subsequently, two words banks do not want to hear have become ‘deposit mobilisation’. There was a time, not long ago really, when banks did show the effort, did want more cash in their coffers because it meant they could invest and loan more. They almost did not need the central bank’s directive to grow their branch numbers by a quarter more annually. Not any longer, though, because with seven percent deposit rates and a credit growth cap, their profit margins will decline.

Decision makers at the central bank know they are contradicting themselves; they are just trying to have the best of both worlds. The fact that the regulatory body’s financial inclusion strategy will be complicated, if not completely turn to dust, without the private banks’ expressed desire to bank the populace is apparent. The only thing missing is the initiative to practice what is a no-brainer – never mind that the central bank would lose face – and give in.

One way of doing this would be to allow the banks to finish disbursing loans that are already on-going, even if the bank had by-passed the credit growth cap. The measure would act as a kind of stimulus for private banks that currently find themselves regulated left and right. Another would be to involve private banks in decision-making. Understandably, even hinting of such policy measures as the credit growth cap would repel the purpose of their institution. But at least the central bank could indirectly work with the banks through the simple act of considering their financial circumstances. After all, banks, which play an essential role in the economy by giving credit to businesses and keeping that of depositors safe, are just as crucial to the economy as the inflationary pressure the central bank is so desperately trying to stave off.

By Christian Tesfaye
Christian Tesfaye ( is Fortune's Op-Ed Editor whose interests run amok in both directions of print and audiovisual storytelling.

Published on Nov 11,2017 [ Vol 18 ,No 915]



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