Foreign Competition Deficiency Clogging Financial Sector




One of the fundamental defining characteristics of the Revolutionary Democrats and their developmental state approach to government is the zeal with which they shield the country’s financial sector from foreign ownership. Ethiopia’s policy of barring all foreign nationals, including Ethiopian natives with foreign nationalities, from owning shares in the country’s financial sector has outdated its purpose.

The campaign for even stricter controls over the ownership of banks was introduced last year, with the central bank ordering all commercial banks to update the information on the nationality of all their shareholders. Following the order, dividends have not yet been paid to shareholders who are non-nationals.

A recent central bank letter circulated by its banking supervision directorate to all private banks and insurance companies is the latest indication that the government is continuing with its intransigent policy of shunning foreign capital in taking an active role in the country’s financial sector. The central bank has issued a letter to all banks and insurance firms advising them of its decision to adjust the proclamation on who should be paid a dividend from shares.

Citing challenges in identifying citizenship of and paying dividends to corporate shareholders of banks and insurance companies, the central bank has exempted edirs and religious groups, charities and humanitarian organisations formed by Ethiopians, and private limited and share companies from the imprudent process of ascertaining or checking the Ethiopian citizenship of each and every member. However, for private limited and share companies, this only applies if their respective CEOs produce affidavits testifying that 99pc of their shareholders are Ethiopian citizens; then they are permitted to continue as shareholders and earn their dividends.

This hard line adopted by the government is contrary to its approach in promoting the involvement of Ethiopian natives of foreign nationalities in the country’s development through engagements in various sectors – with the exception of certain untouchables strictly reserved for Ethiopian nationals, such as the finance sector. Wide-ranging government incentives have been put in place, in the form of tax holidays, extensive credit access, customs duty exemptions and export incentives for certain products, to encourage their participation in the economy. Nevertheless, banning these groups from the financial sector fails to envision the contribution they can make to the sector and thereby enhance the country’s overall development.

The government’s financial sector policy has remained pretty much the same when it comes to ownership issues, since it took power over two decades ago. However, the dynamics of the sector have dramatically changed in this time. Currently, there are 16 private and three state-owned banks, 17 private and one state-owned insurance companies and 35 micro-financial institutions operating in the country’s financial sector.

In 2014/15, registering a 22pc increase from the previous fiscal year, the total capital of all private banks in Ethiopia reached 17.8 billion Br. This was 30pc higher than the capital of state-owned banks during the same time. Foreign nationals of Ethiopian origin have ownership of only 48 million Br, a mere 0.26pc of the total capital, highlighting the dwarfed participation of such groups in providing capital to the financial sector in the country.

Calls to open the financial sector up to foreign competition have continued to fall on deaf ears in the country. Policymakers still remain sceptical to ease restrictions and let foreign companies enter the market. More than two decades after domestic banking and insurance industries joined the market, and in light of stern regulation that at times has shrivelled the sector’s growth, the EPRDFites are bent on protecting ‘infant’ domestic banks from external competition.

Given the prominent role state-owned enterprises play in public investment in Ethiopia, representing 29pc of the GDP – even higher from the public debt by two percentage points – the government does not want to risk gaining access to large sums of loans from banks, which might be jeopardised with the opening up of the sector. The state harbours doubts that such moves can further skew credit allocation from large scale public investment projects.

Others also cite the lack of a strong domestic financial institutions’ supervisory body as a factor discouraging the government from opening up the sector. In addition, the authorities also fear capital outflow if foreign companies are to set foot in Ethiopia’s banking and insurance industries.

On the other hand, studies have shown that opening a financial sector for foreign competition accelerates the efficiency of domestic banks and insurance companies. Through the introduction of innovative financial services, progression of the economies of scale, development of the financial market, improvement of the financial system and attraction of foreign direct investment (FDI), opening up the country’s financial sector can bring a meaningful addition to its economic growth and leap-frog the sector into the 21st century.

However, the current policy of the government jealously guards the financial sector and restricts ownership to Ethiopian nationals. This has put the fate of Ethiopians who eventually changed their citizenship, or those who would want to pass on as inheritance their shares to their children or next of kin even after they have changed their citizenship, in doubt now because of the latest enforcement of the law.

This is a short term solution, if not bizarre. An economy starved of capital should have no luxury to exclude capital inflows from Ethiopian natives. What it should rather limit is the amount such groups are allowed to own. It can at least start with a lower percentage of shares by foreign nationals of Ethiopian origin and increase the amount up to a higher percentage in time.

Foreign nationals of Ethiopian origin have capital and the will to contribute to the wellbeing of their native land. But they may not have the time and energy to move here and work. Where they are trapped is they could not find a place of investment as secure and less risky as the one made in the financial sector. Pushing this away is indeed unwise!

The ultimate solution the government should adopt, however, is to implement gradual opening schemes and let the market decide how and by whom financial services are delivered in Ethiopia. Beyond world-class services bringing satisfaction to customers, the economy at large stands to benefit. In the face of the intricate bond of trade and investment in this globalised world, Ethiopia should practice the norms of its adopted market economic model and free its financial sector for foreign competition.



Published on Jul 19,2016 [ Vol 17 ,No 846]


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