Fitter Corporate Governance, Alternative to Defeatism Over Liberalisation

Since the fall of the left-wing military junta that was the Dergue, and the partial liberalisation of the financial sector, private banks have come a long way. As one of the fewest commanding heights of the economy open to local private players as well as state enterprises, the banks have invigorated a critical sector that otherwise would have remained passive and inconsequential to economic development.

Of course, beyond the multi-storey buildings, nice-looking income statements and the thousands of branch offices sprayed across the country, the financial sector leaves much to be desired. There has been little in the way of governance to ensure better administration of services and the introduction of new financial products.

This though was not the theme of the Second Annual East Africa Finance Summit held last week at the United Nations Economic Commission for Africa (UNECA). Experts of the industry were more cross with the lack of a stock market in Ethiopia. One study by Fairfax Africa Fund, presented by its Chairman, Zemedeneh Negatu, indicated that the nation has the potential to generate over 200 billion Br in Initial Public Offerings (IPOs) within four years. Such capital could be allocated to productive sectors more efficiently, for optimum returns, supporting the structural economic transformation efforts of the country.

Indeed, a stock market would have numerous advantages to the economy, in encouraging businesses to go public, serving as an indicator of the economy’s vigour, and in reducing banks’ monopoly in the securities market. Akin to the secondary capital market whose launch the National Bank of Ethiopia (NBE) rescheduled a couple of months ago, it is a step further for the financial opening up in the nation.

Granted, Ethiopia remains the only one of the five largest economies in sub-Sharan Africa without a stock exchange, but it will not be atypical to wonder if establishing just that would not be running without learning to walk.

Or better yet, whether debating this issue would be glossing over the reality that what ail the financial sector are not solely issues arising from the policies of the central bank. It is similarly unconfined to the government’s shortfall in allowing alternative sources of savings and investments such as mutual funds and private pension companies.

Misguided policies such as the 27pc of gross loan disbursements private banks have been mandated to invest in central bank’s bills and much of the measures taken shortly after the devaluation of the Birr a couple of months ago deserve their fair share of criticism. But much of the private firms’ unassertiveness in challenging the central bank for the obstacles the regulatory body puts in their path can be traced back to pedestrian leadership.

It has given way to weak institutions unable to withstand competition with overseas firms, thus passive to a government that keeps competition at bay. And the paralysis is propagated by the fact that the financial sector rarely sees profits decline, consequentially failing to see the purpose in changing their ways.

The past fiscal year, deposits have increased by 37pc, which must have been pleasant news to the ears of the authorities at the central bank for whom financial inclusion is a key policy initiative. Likewise, credit by private banks has increased by an average of close to 48pc. Here the banks deserve recognition for almost all of their loans were used to finance Ethiopia’s ailing private sector.

Although new central bank requirements for higher paid-up capital necessitated more capital injection, which in turn reduced shareholders’ returns, the latter have little to complain about for some banks have shown better returns.

But the financial sector is not without its setbacks. Only 22pc of the adult population is banked at the moment. Compare this to the 34pc banked population of sub-Saharan Africa of three years ago, according to Global Findex, which collects data on financial inclusion, signifying that deposit mobilisation efforts have a long way to go.

Here, the private banks have shown no qualms in meeting the demands of the central bank to increase their branch numbers by a quarter of their overall amount annually. There were 2,837 of them by the fourth quarter of the past year, having grown by 30pc compared to the same period the previous year. Creditable as it may be that they have expanded their reach, though, brick and mortar investments have meant expenses in office equipment, staff salary and rent, an effect that is felt on the returns of shareholders.

It is in contrast to the investments made in mobile and Internet banking that amongst other things would have improved the diversity of the services that customers would be able to choose from. Inefficient services across the board have likewise meant that banks instead compete, not through the provision of better services or the introduction of new products, but through advertising and raffle campaigns focused on surefire means of profit maximisation such as foreign currency transactions.

The insurance industry does not fare better either, where risks are rarely taken and new policies introduced. Cutthroat competition bordering price war is the primary means of competition, and few products outside of auto insurance are available. It remains an industry unequipped to protect businesses in the nation’s developing service sector and manufacturing and construction industries.

And as the government deliberates accession into the World Trade Organisation (WTO), which will entail the liberalisation of parts of the Ethiopian economy, banks remain underprepared for the competition that will lie ahead. There will be little that capitalisation and mergers can achieve to attract customers in the face of a limited scope of products delivered at a haphazard quality.

But in a country where access to finance is a hassle, and where doing business as a result of political uncertainty and weak telecom and transport infrastructure is risky, robust financial institutions could fill a gap where policymakers have proved themselves unfit for the challenge. With 16 private banks and just as many insurance companies in the country that have a combined capital of over 30 billion Br, the influence these firms could exert over the economy cannot be understated.

Turning the tide then is a matter of choosing the right type of leadership in managerial and governance positions. There is not much in the way of innovation and upswing if merit fails to dictate who fulfils roles that impact the direction of a bank. Where affiliations overshadow competence and experience, the financial sector is bound to get the short end of the stick that trade liberalisation could afford the country.

Eliminating such weaknesses that have given rise to ineffective governance likewise allows the firms’ leaders to be assertive in the face of the authorities of the central bank. It would permit them the courage to fight against policies detrimental to shareholder’s returns, or bottlenecks that impede domestic firms from being competitive. Otherwise, notwithstanding the government’s repeated deferral of WTO membership, financial institutions have a precarious existence.

Published on Dec 23,2017 [ Vol 18 ,No 921]



With a reformist administration in charge of the executive, there has b...


The new electricity tariffs that became effective on December 1, 2018,...


Who it is that midwifed the rapprochement between E...


Egyptian companies are about to sue the federal government over their i...


A recent photo between Prime Minister Abiy Ahmed (PhD) and George Soros...


The future is bleak. Millennials and younger generations who will inher...

View From Arada

There is heated debate on the propriety, decency and morality of breast...

Business Indicators


Editors Pick