Economists, as well as multilateral institutions, have urged the need to take stringent measures to address the weaknesses of the financial sector – itself a contributor to the worsening macroeconomic situation of the nation. It was in his since famous speech to legislators two weeks ago that Prime Minister Abiy Ahmed (PhD) struck a similar cord, even if he stopped short of prescribing remedies.
Those actives in the financial sector have not been unstable. Regardless of what goes on the macroeconomy, banks and insurance firms have enjoyed growing profit portfolios as well as higher dividends, with some rare down years. They have broadened their branch network, often satisfying the National Bank of Ethiopia’s (NBE) demand that they expand by as much as 25pc. Most have galloped past the half a billion Birr capital requirement the central bank has put on them.
Such accomplishments though dissipate in the face of inadequacy to meet demand from the public. It was most evident during the last religious holiday, Easter, on Sunday. Many ATMs were out of cash even as early as Thursday, while by the time Saturday has come, most bank branches and ATMs were awash with long lines of people waiting to draw out money.
This happened in a country where close to 78pc of the population does not even have a bank account and in a city that possesses 33pc of all the commercial bank branches found in Ethiopia. The number of branches might have grown by close to 29pc the past year, and there may be increased usage of mobile and agent banking. But much of this growth is merely quantitative as reach and efficiency remain substandard.
Competition between banks is still an effort to draw in more foreign currency from individuals that receive remittance. If not that, then it is cutting prices down from what few products there are, as is evidenced in the insurance sector when it comes to motor insurance.
Innovation is likewise scarce, with banks mostly found to be copying each other, instead of the efficient provision of services or the introduction of new ones. They can even be found hiring the same companies to design their management strategies. The Prime Minister is justified in pointing out that the sector is indeed unhealthy in its very apparent inefficiency.
This exists because there is no incentive for players inside the financial sector to go out of their way to take risks or bring new products. There is competition, but it is between small firms that an entire economy depends on. No one company is still able to threaten the customer base of its competitors seriously, and it will be long before firms become concerned about the scarcity of demand, especially when it comes to new account holders. The size of the unbanked population is much larger than those with the proximity of a bank branch or an ATM.
Such seeming apathy is a function of the long-held protectionist policy of the ruling party now led by Prime Minister Abiy in most parts of the economy, but prominently in finance. The Administration is more than just a regulator when it comes to the commanding heights of the economy, from logistics to aviation or telecom. Those are industries with large state enterprises at their centre. It is a classic case of a captured economy that slows down growth and increases inequality while enriching the few powerful and connected.
Ironically, the financial sector is the most liberalised of these heights of the national economy; but, it is sheltered from any meaningful competition bar the state allows foreign banks to come in. The authorities have not remained stubborn to opening up the sector though. There is a willingness, but merely detectable as all that is taking place are recommendations by the central bank to local players and overseas training of its staff.
Full opening up has remained only in the minds of policymakers for matters that can be overcome, had a gradual, step-by-step approach been taken.
The main excuse has been that the central bank does not yet have the regulatory capacity to deal with foreign banks that can bring with them sophisticated products and global prowess. It is despite the fact that the delivery of financial services, which is highly susceptible to technological advancements, is getting more complicated with every passing year. Another is that local banks cannot yet be condemned to competition with foreign ones.
As a result, the central bank has recommended for private banks to take such measures as expanding their branch networks and expanding their capital base. It also ensures that two percent of their annual budget is dedicated to training their staff.
While it is legitimate for the government to want to look after its domestic firms as such competition could severely affect them, not to mention their shareholders, it is crucial to note how long the status quo should be tolerated. Protection is coming at the expense of customer satisfaction but, most worryingly, financial deepening. A robust economy requires an efficient financial sector to carry it. The financial sector is the best institutional intermediary to ensure efficient allocation of resources in the economy for optimum returns. This is more so in an economy where there is no capital market.
The spillover effects of having to depend on weak banks can then be slow growth.
A legitimate case by critics of a move to open up the financial sector is that it could exasperate the adverse macroeconomic situation the country is facing. Ethiopia has had a massive trade deficit for at least a decade now, and consequentially foreign currency has been scarce. It is even rare now and haunting both the private and public sectors. In such an economy, lifting restrictions for private financial institutions can mean the repatriation of badly needed foreign currency to empty the national coffer.
However, this ought not to be enough to dissuade the authorities from taking the first steps towards opening up the sector though. Foreign firms can be eased into the market through joint ventures, as positive spillover effects of the banking system are realized. In the name of an ill macroeconomic component that has existed for long, and can only see its fix with the sort of healthy economy that robust financial firms can help bring, the financial sector should not be held hostage.
The authorities should have at least started drawing up a strategic roadmap and setting a time frame to abide by strictly. They ought to also have begun consulting with industry leaders, reviewing existing regulatory frameworks, and identifying the areas for further liberalisation.
Without the pressure to compete, there is nothing to hold back banks from sticking to the status quo. They are already complacent with high return on shares that make their counterparts, elsewhere, envious. There should be no reason for a policy to protect such banks, and their shareholders, at the expense of customers, or the spillover effects to the economy a robust financial sector could allow. The authorities’ primary concern should be the sovereignty of consumers which at the moment is compromised as managers of financial firms are fully aware they are what all that Ethiopians have.
This is not to claim that operating within Ethiopia`s market has been without its roadblocks. The regulators have not only protected the sector from outside involvement but have also instituted various rigid and unreasonable rules that hold the domestic industry back.
Lifting the current 16.5pc credit cap, phasing out 27pc of the gross disbursements of loans that private banks are required to funnel into the Development Bank of Ethiopia (DBE), and ceasing forcing banks to open letters of credit for specific companies could help the banks become better competitors.
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