Despite a drop in foreign exchange in the country, remittances are becoming an important and fairly stable source of income for millions of families and of foreign exchange to Ethiopia. It is the number one contributor of the country’s foreign reserve followed by export. Now, with the aim of gaining foreign exchange, most private banks of the country are showering gifts on remittance customers. For most of the bank which markets directly to consumers, gifts are becoming a dominant form of promotional material, reports SAMSON BERHANE, FORTUNE STAFF WRITER.
Yenework Abera is a customer service officer of Berhan International Bank (BIB). She is responsible for transacting foreign currencies at the hectic Bole branch of the Bank.
She believes the remittance flow has significantly improved after the Bank started to give gifts to customers who transfer money through the Bank.
Customers who remit money from overseas to their loved ones in Ethiopia through any of the remittance services are offered attractive gifts when they collect money from Berhan.
Berhan is offering recipients of remittances the chance to win many gifts- from smartphones to a three bedroom apartment – in its promotion unveiled a month ago. Those who receive remittances through Berhan from March 14 to June 14, 2017, will automatically go into a series draws to win prizes.
“Compared with last Holiday, I can say it has doubled,” said Yenework, who has observed the remittance flow for about 10 holidays. “Before using the service, almost all customers check whether gifts are available or not.”
Since the beginning of the lottery, Berhan managed to collect remittances close to 300,000 dollars at its Bole branch alone. This, according to Yenework, is a record high since she joined the Bank one and a half years ago.
“It is becoming an efficient strategy to gain customers’ attention,” she said.
Most private banks of the country are showering gifts on remittance customers. For most of the bank that market directly to consumers, awards are becoming a dominant form of promotional tool. The banks began such systems after getting permission from National Lottery. They must also make a down payment to the National Lottery.
With the aim of increasing earnings made from forex, Berhan is the latest Bank to offer different gifts to its remittance customers.
Previously, Commercial Bank of Ethiopia (CBE), Dashen Bank, Awash International Bank (AIB), Bank of Abyssinia and Bunna Bank used the same strategy to get more remittance like Berhan.
“It is the best way to bring customers from using an informal channel to the formal ones,” said a senior executive of Berhan. “Most people tend to choose the black market over the legal ones because the former pays better than the latter.”
After the Bank had unveiled gift to remit customers, about 156 customers came to the Bole branch of Berhan to collect money sent from abroad.
Last year, Berhan gained foreign exchange of 74.4 million Br, of which around five percent is from remittance. The amount is the highest since the Bank joined the industry eight years ago.
Berhan, which has 150 branches in the country, has partnerships with six money transfer companies such as Western Union, Money Gram, Dahabshii, Riyadh, Transfast, and Express Money.
In the case of Berhan, among the money transfer service providers, Western Union and MoneyGram control over 75pc of the remittance coming to Ethiopia. The same trend holds true in the case of the industry as well.
Nationwide, remittances sent home surpassed the nation’s export revenue by close to two billion dollars during the 10 months of the last budget year, reaching four billion dollars. Two years ago, it was 3.7 billion dollars going up from 1.5 billion dollars earning in 2014.
Nevertheless, the growth in remittance had not been without challenges.
The greatest challenge of banks during remittance mobilisation was a surge of the exchange rate at the black market.
“Appealing customers with gifts and donations is a common market strategy to gain customers’ attention,” said the executive of Berhan.
Despite the punishing costs of black market dollars to banks, the informal market is becoming a preferred option to exchange currencies for customers.
“In purely commercial terms, people cannot come and sell dollars to banks,” the executive added.
Even if Ethiopia has a strictly controlled exchange market, the black market is thriving. The currency has been in a state of robust growth in recent months, leading to a significant disparity between official and unofficial exchange rates. One United States dollar selling price is 23.1 Br at Ethiopia’s official exchange rate, but it is sold 27.4 Br at the black market.
The 45 years old Muluneh Beyene, a father of two, lived in the United States for two decades. He comes to Ethiopia every two years to visit his loved ones. He usually prefers to use black exchange market over banks.
Last week, he went to a black market located around Addis Abeba Stadium along Ras Desta Street.
“I cannot afford to lose four birr on every dollar I exchanged,” Muluneh, said. “The offers of sellers in the black market always grows at an astonishing rate.”
He believes that the introduction of gifts and donations will not bring any change in remittance mobilisation.
“Unless it is a small amount, I don’t think anyone chooses formal channels over informal ones, hoping to get a prize,” Muluneh added. “The chance of winning an award is one in a million.”
Corporate gift giving is a serious business in the banking industry. As part of a well-considered program, for many companies, it helps to establish or enhance critical relationships with customers.
Some believe it might be a cost-effective means of recognising activities that benefit the business.
A senior Executive of United Bank, who wishes to remain anonymous, believes that gifts and donations will bring a positive outcome if it is implemented cost effectively.
“The banks should do a particular calculation before showering customers with gifts,” he said. “Otherwise, it might lead to a surge in administrative expense and a decline in profit growth.”
Unlike Berhan, United is among no more than 10 banks who give small gifts such as wallets to its customers.
“Spending a high amount of money for gifts won’t bring any significant change to remittance flows,” said the executive. “The best way to shift customers to the formal channel is doing an aggressive awareness campaign.”
Awareness creation programs have created a better exchange market in some countries such as India, who has seen a surge in customers who are using formal channels such as banks.
About 99pc of households in India have at least one member with a bank account, according to the State Bank of India. The penetration of banks in the same country increased from 35pc to more than 55pc over the past five years, which is three times lower compared to Ethiopia.
“Considering such nations, the regulatory body should work on raising numbers of bank users,” said the executive of United.
Currently, the bank branch to population ratio in Ethiopia has reached one to every 33,448 people.
On the other hand, Zafu Eyesuswork, a veteran in the financial industry is a pessimist about the competition for foreign exchange through gifts and lotteries.
“It will destabilize the exchange market,” said Zafu. “When the bank offers gifts, it means they are paying more than the rate set by the regulatory body.”
“From the list of gifts on offer by some banks and the costly media campaign they launch, it is millions, if not tens of millions of Birr,” Zafu added. “Such banks are prepared to spend to obtain hard currency – albeit at effective rates higher than those fixed by the central bank.”
Over the past two years, the real exchange rate of Birr against dollars soared drastically to 80pc. This rate, according to World Bank, affects the country’s export competitiveness in the global arena, which has declined for the third year in a row. In the first half of the current fiscal year, export earnings amounted 1.3 billion Br, which is four percent lower compared with the same period last year.
Following the decline in export, the Bank started to look for other options, such as gifts and donations, to mobilise forex.
“The advent of such strategies indicates the banks are desperate to get foreign currencies,” said Tassew Woldehanna (Prof.), an economist and a lecturer at Addis Ababa University. “It is rational for the banks to compete for remittance even though it hurts the exchange market.
Tassew thinks that the banks’ new strategies of using gifts will have an effect on the devaluation of Birr.
“The banks are indirectly devaluating the value of birr,” he said. “The regulatory body should put a limit on the types of gifts or should directly devalue Birr.”
Meanwhile, the private banks aim to attract many customers through different modalities, remittance contributing no more than 10pc to their total forex earning of 1.63 billion Br in 2016.
However, a huge gap of foreign currency remains in the exchange market, and the demands of the businesses in particular still have not been met.
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