In some sense, we Ethiopians seem to live in the same way that our Aksumite ancestors used to. Consider risk taking, for instance.
Traders involved in the bartering of the time were so sensitive to risks that they used to hedge it by leaving a risk margin within the very commodity under exchange. After the introduction of gold coins, however, the margin was calculated in currency terms and included within the market price.
Even if not as literal as the Aksumite era, our risk sensitivity and management remains traditional in most cases. The way we gauge and hedge risks have gone little further than calculating a risk margin within the market price of goods and services.
Amazingly, in this era of complex risk diffusion, our public services provide little attention to the nature, magnitude and transmission of risks. It is rather seen being equipped with traditional instruments of identifying and managing risks.
My latest exposure to the banking sector has shown me that the culture of oversimplifying risks has diffused even to the most buoyant sector of the economy. My experience involved a detailed discussion with a friend of mine who heads one of the largest private banks in our fair nation.
In our discussion, my friend explained to me about the reluctance among bankers to guard the savings of the public. He told me that bankers are even involved in rationing credits to a selected few buddies on the basis of favouritism.
For lack of a strong regulatory system to supervise the bankers, they are seen undertaking the feasibility analysis of projects looking for bank loans, appraising them, permitting loans and following them up, all by themselves. This friend of mind even told me that most of the staff of credit departments amass wealth by undertaking the feasibility studies that they themselves will appraise as credit officers of the banks. Some even take commission from businesspeople seeking loans.
It is indeed crazy to see careless, dishonest and unprofessional banks gambling on public money as if it is their own. It is disgusting to see a system that was supposed to identify and manage risks effectively reducing itself to a dumping ground of risks.
Certainly, the bankers’ acts disregard the basic principles of project appraisal. In no way should a thoughtful system allow an individual to appraise the very project that s(he) designed. Both direct and indirect instruments of disguising this act ought to be put into place for the sake of depositors.
On top of this prevalent dishonesty, the National Bank of Ethiopia (NBE) is trying to take yet another thoughtless measure of allowing banks to gamble with public money. It is reported that the banks will soon be allowed to invest in non-banking investment activities. Of course, this gamble seems to have already begun with the permission of an interest-free banking window, rather than a fully-fledged interest-free (or Islamic) banking system, which would have embraced strict principles.
Under the interest-free banking window and the upcoming law, the banks will widen their reluctant acts of accumulating risks and will have the opportunity to put public money into investments they see profitable. Unfortunately, the people that will be calculating the risks of these investments will be the same dishonest staff preferring to make money by trading their credibility and professionalism.
It is amazing to see the NBE leaving this speculative process unattended. But what is even more amazing is that we are descending back to the biblical era, in leaving a whole financial system in the hands of insincere individuals. This is whilst the rest of the world is becoming too cautious, advanced and developed in getting it away from them.
Unlike the fully-fledged interest-free banking, our system involves a window of investment wherein public money – mobilised under the traditional banking system – is used as equity in a given investment. The narrow base of investment opportunities in our markets will obviously drive herding, and even speculation.
There is also a high probability that there will be a focus on just a few sectors thought to be lucrative. I do not think we have learned enough from the failures of the real estate sector over the past decade. Therein lies the dumping of risks in one basket.
With the upcoming law, the practice would even be assisted by stronger financial power. Unlike the world of the Glass-Steagall act of separating investment risks from mainstream commercial banking risks, we will be brewing risks of a financial crisis by virtue of leaving our financial system open to dishonest individuals and a visible conflict of interests. I wonder when our madness will end.
What ought to be underlined is that the money in the banks is public money. Lack of prudence within our banks could wipe the hard-earned wealth of the public out in a matter of minutes, days or weeks. This is why we ought to align the regulation of the banking sector with the very objective of guarding public money.
We ought to do all that is possible to ensure that the bankers are honest and professional. But, beyond that, our laws ought to be thoughtful enough not to open windows of new, enhanced and unnoticeable risks to our economy.
If where we stand is where we want to be, however, it is certain that the earth under our feet is full of risks. And crisis is inevitable.
Leave a Reply