Ethiopia’s banking industry has had a lukewarm progression since the Bank of Abyssinia became a pioneer as the first bank of the country a century ago. In 1932, a directive from Emperor Haile Selassie ordered the British-owned bank’s demise and the establishment of the Bank of Ethiopia, as the first locally owned bank.
During the Italian occupation, the country was host to experienced foreign banks in the likes of Banco Di Roma and Barclays Bank. At the end of the occupation, Development and Commercial Bank of Ethiopia emerged as the leading banks of the country. In time, the Addis Ababa Bank S.C. ventured into the industry as a privately owned bank. In the Dergue era, all banks were nationalized, foreign-owned banks merged and were incorporated as entity of the Commercial Bank of Ethiopia.
It was in the early 1990’s that the EPRDFities allowed the establishment of private banks in the country. This was done under the economic policy founded on market oriented values under the then new government. As a result, there are now 16 private banks operating in the country and their total capital is valued at 43 billion Birr at the end of June, 2016. Among these, only six have an above one billion Br of paid up capital.
This is as the international banking industry, with better resources, systems and networks are setting up local representation offices and building their infrastructure to eventually join the local banking sector.
In the backdrop of the merging of the Commercial and the Construction banks of Ethiopia, the National Bank of Ethiopia (NBE) is challenging all private banks to expand their capital, merge or exit the industry altogether. There is to be an ambitious threshold by way of a more capitalized profits and a minimum set of loan disbursement by the end of the second generation of the GTP. It will be an uphill battle for the local banking industry, whose profit stands at no more than six billion Birr (266 million dollars) a year.
This is as international banks look at the local banking industry as their next frontier.
While the regulatory body has set this capital target to prepare the local banks against the potential international banks hoping to benefit from the opening up of the financial sector in Ethiopia, very few of the local banks will be able to meet the target set for next year. The total capital raised value of the entire Ethiopian private banking industry is estimated to be 22 billion Birr. In neighbouring Kenya for instance, which has slightly less than half of Ethiopia’s population at 44 million, all banks have a mobilized deposit amount of about 17 billion dollars (440 billion Birr), equal to Ethiopia. Kenya currently has 42 commercial banks, which two are in receivership.
Facing a threat of inflation, shrinking resources, government regulations and competition, the majority of the local Ethiopian banks are struggling to meet the capital suggestion by NBE. To date Awash International Bank is the only local bank that has surpassed the two billion Birr mark. As is, the local banking industry will be challenged by foreign investors with deep resources when they are finally allowed to enter into the market.
A recent Deloitte study noted how the local industry lags in terms of “innovation and technology, banking services, customer centricity and banking practices.” The Ethiopian banking industry, isolated from international competition, is about to drastically change as the country pursues foreign investment and attempt to join the World Trade Organisation (WTO).
Payments in Ethiopia are still over 95pc cash based, which is changing at a snail pace. Whereas the latest report by the central bank of Kenya puts the latest number of mobile payments in the month of September 2016 at 130 million transactions, with over 33.4 million subscribers for 40 million populations. In the same month the number of transactions from cards (debit/credit/gift/prepaid) across ATMS and POS machines was well over 17.6 million. It is easy to see what a potential 90 million population brings, when these numbers can be achieved with a population of 40 million people.
The local banking industry faces numerous challenges to compete adequately, including limitation of products and services with very little innovation (majority of the banks generate more than 80pc of their revenues from the same products and services (they provided when they first started operation). It has demanding responsibilities to the state that is forcing it to invest in government infrastructures, limiting it from investing in the private market, regulatory costs and unavailability of skilled human resources that has regional or international expertise or exposure.
As many foreign banks are competing to merge, acquire struggling banks to better boost their businesses, the local banking industry is intent on keeping the status quo alive. The number of branch network in the country stands at 3,187, a small improvement from 2,693 recorded last year. The bank branch to population ratio is now 1:28,932 as of the last fiscal year.
Awash is the only bank which achieved the two billion Birr paid up capital target set by the National Bank of Ethiopia. It is followed by Wegagen and Nib with 1.7 billion Birr and 1.5 Billion Birr respectively.
The total capital of the banking system rose by 40pc to two billion dollar by end June 2016, two times less than kenya’s banks capital. The total capital of Commercial Bank of Ethiopia is two times higher the capital held by the two big private banks of the country, Awash and Dashen. In line with a rise in branch network, deposit mobilized by banks reached at 440 billion Birr last year. Of these saving deposit constitutes close to 50pc of the total deposit. The share of private banks in deposit mobilization showed a modest increase from 32.2pc in 2015/16 to 33.6pc in the preceding fiscal year. CBE alone mobilized 66pc of the total deposits banking system owing to its large branch network.
Bigger does not always necessarily equal better customer service or capabilities to serve the public. The integration of each of the acquired and merged banks takes years to combine and create a brand. However, mergers and acquisitions are known to produce likely successes, than not, as international banks have experienced. The local banks are yet to grasp the potential benefits.
While international banks generally merge as a result of immediate financial crises, smart long-term vision allows banks to build the mechanism needed to stay competitive and not fail in the future. Many international banks have used acquisitions and merger mechanism as a means to produce desired results and expand their reach, in customers; resources expand their operations, produce a smaller but efficient workforce, and afford to build technological advancements, by way of a merger.
The local banking industry is best advised to follow the later. To them, it is not about profits that should concern them, but their foundation and survival. If they do not take the necessary and calculated risks, they might not have the chance to construct a better infrastructure to make them competitive. They would need to build a strong bond to compete and survive, not just among themselves but the world. There are plenty of benefits, and some disadvantages in a merger and acquisition option.
It will be best if they were to explore their options and advantages around the idea of mergers and acquisitions, not out of circumstances, but choice as the world is knocking on their doors, not out of curiosity but market potential. Unless they do that, the local banking industry, will ultimately give in to competition from foreign banks when they finally enter the market.
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