Sow knowledge, Reap Cash

In a little more than two decades since private players entered the banking industry in Ethiopia there is progress. The banks manage to channel and collect savings in the form of deposit to the tune of 27pc of the gross saving potential of the country in 2015.

It is instructive to see the comparability of this figure to banks in other countries. For instance Korean banks’ total deposit reached a staggering 1.04 quadrillion dollars in 2016 which is 50,000pc of the gross saving potential of the country. As much as liberalized and deregulated financial market helps this tremendous disparity shows a real possibility to mobilize deposits.

I will now shun the usual benchmarking with the sub-Saharan Africa in the spirit of a fresh approach to elucidate where we are in terms of savings. As an example, in America 22pc of the population do not have 100 dollars in their accounts to cover an emergency. It is surprising to learn this fact about a country that boasts a well-developed banking and financial system not to mention a deep seated savings culture. Nevertheless, Americans heavily and reasonably rely on the availability of funds somewhere in the financial sector albeit at a higher borrowing cost as a last course of action. Such strategy will likely leave Ethiopians stranded. If the emergency happens to be life threatening, hence the need for savings for at least a rainy day if not for investment. Incidentally, 78pc of Ethiopian do not use any form of financial services.

A nation is built by a generation that sacrifices its immediate needs for the greater good of the contemporary society and posterity for the sake of profitable investment ventures to take place. And if we agree on the premise that banks effectively channel savings and deposits to the most useful projects then personal finances management is the way forward.

There are ways to improve savings. Since earning capacity and savings proportion go in cycles it is crucial to change the attitude of the populace with regards to savings, gain their trust and make them loyal customers of banks.

It is yet for financial education to be delivered at schools at any level. Take myself. When I graduated with a highly quantitative major from university 10 years ago, I had a bank account and no personal finances management knowledge to show for it. I thus squandered my income on consumption that brought nothing but instant gratification. Maybe I am not the best example but if we go out and ask a random person in the city of Addis Abeba the assessment would not be farther from my case.

Think about it, a modest 1pc increase in savings and deposit of the same amount at banks can raise the banks’ lending potential by a magnitude because of the money creation capacity of the banks.

Banks can create money through a system they use when they give loans. The numbers that you see when you check your account balance are just accounting entries in the banks’ computers. These numbers are a ‘liability’ or IOU from your bank to you. But by using your debit card or internet banking, you can spend these IOUs as though they were the same as 100 Br notes. By creating these electronic IOUs, banks can effectively create a substitute for money.

The lack of instruction or awareness raising programs for personal finances management in the formal education sector leaves the responsibility solely on the shoulders of banks and other financial institutions. A financially literate customer saves wisely, deposits at banks, take out loans and spend or invest it prudently. As a result such a customer is also likely to stay away from the list of defaulters.

Banks like any other companies in Ethiopia have an unenviable record of managing knowledge which includes identifying knowledge gaps; designing programs to fill them and making sure they are well preserved and improved up through accessible feedback mechanisms.

Moreover, indifference to the country’s education sector is reflected in the banks measly 1pc (so small that most banks do not mention it in their Annual reports) of their loan portfolio towards the education sector. Certainly banks hold the most profitable mix of portfolio given the prevailing social, political and economic circumstances. However, these financial intermediaries ought to take the initiative to direct funds to the education sector by providing incentives like preferential interest rates.

Ironically, the same institutions are heard complaining about the increasingly falling quality of graduates. I seriously doubt whether they did something to improve a situation that seems to affect them immensely. A data to corroborate the above claim suggests as much as one-third of banks expense is devoted to staff salary, a figure much higher than other countries. As expected, this high proportion is not the result of employees making more.

In introductory Economics, a competitive market equilibrium will be attained when the price of a factor of production is the same as its marginal productivity. Of course Ethiopian banks are in a nascent stage characterized by systemic irregularity, weak leadership, and substandard procedures But, this does not mean the compensation to skilled bank workers should remain above their marginal productivity for the lifetime of the bank. Banks are well advised to evaluate whether the distance between labor marginal productivity and price like salary expenses has widened or shrank over time. A system where motivated and insightful employees are taken seriously would also encourage original and innovative contributions to be made instead of maintaining the status quo while knowing there is a better way to do it which is sadly the rule rather than the exception.

The National Bank of Ethiopia’s mandate to allocate certain share of bank income to training and development rightly attempts to address the acute need in the industry. But when will banks be ahead of the regulator and would not need prodding and supervision when it comes to elevating the capacity of their employees, measure and maintain it with the aim of efficient services provision resulting in profit for the bank as well as a sense of satisfaction for the employees.

As an important sector of the growing Ethiopian economy, the role of banks cannot be discounted. If banks aspire to thrive by leaps and bounds the time is now to sow the seed of knowledge both in their customers and staff to reap the reward in terms of cash-the lifeblood of banks.

By Ben Girma
An independent consultant

Published on Feb 13,2017 [ Vol 17 ,No 876]



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