Private Banks Rejoice, Uncertain Future Awaits

This past year, the banking industry has seen itself fettered in the vortex of obstacles from the forex crunch to the political unrests engulfing the country. The crisis, though, did not hold the banks back from breaking the shackles and coming out looking good. They have registered a record high growth rate in six years coupled with accelerated branch expansions. SAMSON BERHANE, FORTUNE STAFF WRITER, gives an insight into the private banking sector which is gearing up for a fuzzy future with the government's latest regulations.

Dawit Kassahun, the 26-year-old manager and shareholder of Agich Corner, a juice and smoothie bar, has been facing testing times in the past year.  Running his business in Ambo, 119Km from Addis Abeba, has been quite tenacious, owing to the recurrent unrests in his town, which recently saw the loss of 10 lives.

Dawit oversees all financial issues of his bar, opened half a decade ago, such as depositing collected revenues and making payments to suppliers. Every day, he visits branches of four different banks to transfer and deposit money.

Recently though, these have become even tougher as the unrests have not receded since last year.

“Whenever there is an unrest, most branches of commercial banks in Ambo close their doors,” Dawit says.

Nonetheless, such inconveniences do not deter people like him to keep their money in banks.

“Although the impacts of the violence on my business are adverse, I still have to make transactions at the banks when the chaos subsides,” said Dawit.

The unrests have not only affected small businesses like Dawit’s, but commercial banks also bear the burnt.

Almost all commercial banks, while reporting their annual performance over the past two months, described the political unrests across Oromia and Amhara regional states coupled with the recurrent forex crunch, as primary hurdles in enhancing deposits.

Against such backdrop and uncertainty in the banking industry though, deposit mobilisation, thereby profit, of most private banks have staggeringly risen.

The total deposits mobilised by private banks have increased by 37pc to 201.8 billion Br. Such massive expansion in deposits has not been reported since 2010. Not only individual banks but the state-owned Commercial Bank of Ethiopia (CBE) also registered growth in deposits by 76.4 billion Br to 365 million Br as of June 2017.

“It was a successful year despite the macroeconomic challenges in the country,” posits Kibru Fonja, president of Nib Bank since 2012, looking good the past fiscal year’s performance.

Such a trend in growth reflects the concentration of deposit mobilisation in the urban parts of the country. Hence, more than half of commercial banks’ branches are located in Addis Abeba.

As a result, the function of commercial banks in deposit growth has not generated maximum results so far, according to a study conducted at the Addis Abeba University last year.

Currently, about 30.7 million people have accounts in 17 commercial banks and 35 microfinance institutions of the country, representing 22pc of the adult populace. The figure is still lower than the average banked population in sub-Saharan Africa although deposit mobilisation by private banks registered a 50-fold increase over the past decade.

The past year’s high deposit rise was much similar to the trend observed across all private banks in the previous years. The growth rate has been between 22pc and 72pc at Dashen and Debub Global banks.

Experts found the growth remarkable and unanticipated.

“This is very impressive,” said Abdulmenan Mohammed, a financial expert having 15 years of experience in Finance & Accounting. “Such exceptional growth must have been driven by monetisation of the economy through massive branch expansion, urbanisation and economic growth.”

A newcomer in the banking industry, the five-year-old bank, Debub Global, managed to register the highest deposit growth amongst all banks in the past fiscal year. This is attributed to its aggressive marketing campaign, expanding its network to 35 branches across the country and the bulge in the number of shareholders.

“The contribution of new shareholders to the deposit growth was also significantly high,” said Addisu Habba, president of the Bank.

Debub, however, failed to repeat its success in another major indicator, loan to deposit ratio (LDPR), which slumped to 55pc in the past fiscal year, showing a 19pc decline compared to the 2015/16 and 12 percentage points lower than the industry’s average. Such a decline, according to analysts, means the Bank whose total loans stand at 794 million Br as of June 30, 2017, was unable generate income from its liquid resources to its full capacity.

Contrastingly, in all private commercial banks, a swell in loans and advances accompanied the deposit growth. These banks have reported increased lending activities portraying a 47.6pc average increase to 135.6 billion Br, while credit given by Debub grew by only 34pc.

The recorded growth rate in the banking industry was between 28pc and 76pc- Bank of Abyssinia having the highest and Zemen Bank the lowest. Such tremendous growth has not been witnessed over the past six years.

Raising its loans by 71pc, Cooperative Bank of Oromia (CBO) was amongst the high performers in both deposit mobilisation and loan disbursement through its aggressive expansion in rural areas in the past fiscal year.

“As strengthening the deposit base was our focus, we massively expanded in the rural parts,” said Belete Wagebeka, Research & Corporate Communications director at CBO. “Linking up with cooperatives and unions in the rural parts of the country also helped us get more customers.”

All private banks, including CBO, have opened 614 branches in the past fiscal year, showing a 30pc growth to 2,664.

“The massive expansion has enormously contributed to deposit mobilisation and to facilitate financial service access for the unbanked,” adds Abdulmenan.

The bulge in deposits across all private banks improved the LDPR of all commercial banks by five percentage points to 67pc. Individual banks and the industry as a whole have shown a remarkable level of LDPR.

Awash Bank is the top achiever with an LDPR of 74pc, whereas Debub Global performed the least.

“Huge mobilised deposits coupled with massive demand for loans and advances as a result of economic growth must have driven lending activities up,” according to Abdulmenan.

The growth in deposits, loans and branches finally reflected on the banks’ profits.

Aggregate profits before tax of all private banks have soared by 33pc to almost eight billion Birr in the past fiscal year, six billion Birr lower than CBE’s. The growth rate in profits hit a record high in recent years, mainly driven by increased lending.

The primary beneficiaries of this development in the industry were Awash, Dashen, Bank of Abyssinia, Wegagen and Nib. Awash leads ahead in the private banking industry in all parameters commanding total deposit of 30.5 billion Br, loans and advances reaching at 22.5 billion Br and total assets worth 42.2 billion Br. It is only followed by Dashen Bank and Bank of Abyssinia, which close in with average gap of five billion Birr in the three variables.

A businessman in logistics industry who own shares in a couple of private banks is particularly impressed by the growth seen at Awash Bank.

“Awash has become a leader among the leading banks in the country,” he said.

Yet, CBO reported the highest growth rate in profit amongst all banks, registering a seven-fold rise to 331 million Br in the past fiscal year. This is a significant improvement for the Bank that saw its profits plummet by 10 folds in 2015/16 due to an enormous collection of money from letters of credit and telegraphic transfers.

Despite the blossoming figures in the past fiscal year, some believe attaining such achievements will be difficult from now on due to the recent macroeconomic measures, including the 15pc devaluation, taken by the government.

“I doubt that we can repeat such success in the years ahead,” said an executive working in one of the mid-sized banks. “As most of the banks generate a large chunk of their incomes from loans, the credit cap, despite being lifted off  the manufacturing sector, will impact our profit growth.”


Published on Dec 20,2017 [ Vol 18 ,No 921]



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