After completing the auditing of their books of accounts for the last operational year, most private banks are announcing lofty profits and awarding their shareholders with high Earnings per Share (EPS). Yet, a debate has emerged over the pros and cons of the profit disclosure. Whereas some see it as a right, since the major corporate objective of a bank is to award its shareholders with high returns over investment, others claim that saving for a rainy season has to also be among the objectives. A prominent advocate of the latter is Berhanu Getaneh, president of United Bank and that of the Ethiopian Bankers Association (EBA). A veteran banker with about 20 years of experience in the banking sector, Berhanu argues that it is better for private banks to capitalise in the good days for there might be bad days ahead. The president, who has a Bachelor’s Degree in Management and a Master’s in Business Administration, has also discussed a range of issues related to the Ethiopian banking industry, in this exclusive interview with YETNEBERK TADELE, EDITOR-IN-CHIFE of FORTUNE. Excerpts:
Fortune: How do you perceive the playing field of the private banking industry? Is it even compared to the government banks? And what is the impact of government intervention for players in the industry?
Berhanu Getaneh: We have to answer the purpose of the government intervention first. Why are these rules and regulations important?
We should focus on their objectives. Banks have to participate in priority-sector financing. There are projects that have a long-term nature, such as hydropower dam building, railway construction, and other investments that have a long-term impact on the country’s future economy.
Why are private banks paying the 27pc loan disbursement?
Of course, this can affect the banks liquidation position. The interest income is also much less. However, the objective is to finance these projects.
I support the objective in principle. The Ethiopian Bankers Association (EBA) also discussed the issue because, as citizens, we have to support such objectives. For instance, if we were to consider the Great Ethiopian Renaissance Dam (GERD), as citizens, we want to see the project being completed. Banks are corporate citizens, though they have legal personalities.
The issue is not opposing the idea but it is about choosing the best method; whether from the disbursement, from outstanding loans or from the deposit. That is our issue, even in the Association; this is the debate we have with the National Bank of Ethiopia (NBE).
If it is from loan disbursements, especially from revolving loans, it affects the banks’ liquidity position. So the question is to evaluate the basis so that the banks can get their benefit without any problem and the government can also have its share. It is about looking for the equilibrium. We already tabled about two proposals to the NBE and there is discussion on it.
If you are asking me why the Commercial Bank of Ethiopia (CBE) is not obliged to this directive, I think, it is because it finances the government biggest projects and handling the priority-sector financing. I think that is why this regulation is not applied to it.
I do not see any privilege given to the CBE. To be frank, our economy is an unbanked economy. If you takeKenya, one bank is for 25,000 people. But when you see our country, two years ago, one bank is for 134,000 people.
In these two years, nearly 500 branches were opened by both private and state-owned banks. This is almost doubling the number of branches. In 2009/10, there were only 650 branches, of both the private and the government-owned ones. In 2011/12, after two years, there are 1,200 branches in the country.
But, still, if you calculate it according to the total population, it is 75,000 people to a single branch. This shows that there is still very wide field to play in and we do not have any problem with that.
Q: Currently, the private Banks are announcing lofty profits for their shareholders. On the other side, they complain that the NBE bill is affecting their liquidity position. What is your judgment here?
Yes, it is clear that banks are registering high profits. This might be due to different reasons. If your question is whether the NBE bill affected our profit or not, before the bill purchase was introduced two years ago, the banks’ accumulated earning was very high. Despite the profit the banks are gaining currently, there is a need for further study of each bank’s income stream and profit sources to know whether this is sustainable. So the NBE bill should not be evaluated over the profits of the banks. We do not have any question on the Bill. The question is on the form of the calculation.
Q: Some banks focus on cheering their shareholders by awarding more earnings per share, while others focus on the capitalisation, and some make a blend of the two. What do you think is their justification?
It depends on the strategy of the banks’ shareholders and the board of directors. Some banks and shareholders have a strategy to put their bank on a strong foundation. These are visionaries who see the future. There are rainy seasons. It is very important to hold a reserve and increase the capital during the good days. It is not advisable to take all the profit out. I belong to this group. I advise those banks who forget the future and cheer their shareholders today to do otherwise. This is depending on the shareholders strong attitude on the future success.
Q: Why do private banks, even the biggest ones, still focus on the capital city instead of extending their branches in the regions? Why do you think the case is as such, though there is a large unbanked society in the regions?
This is not unique toEthiopia. This is the trend of world banking service. Banks are engines of the country’s economic growth. Though their objective is providing services and earning profit, their main role is to play a role in the growth of the economy and they should focus where the profit is.
If you take any other country’s experience, they started their service in the cities. They then move to other areas where there is business and more unbanked society following their capital bases.
Based on their feasibility studies, then, the banks open their branches in the regions. Most of the time new branches incur losses for at least the first two years. Yet, banks might open branches to enhance their networking or in line with their future interests.
Q: The gross expense of private banks is increasing. Some analysts attribute this to inefficient branch expansion and human resource utilisation. Do you agree with that and if so what do you think they should do to decrease their expenses?
You are right. Ethiopian banks are more traditional. It is only recently that they started utilising modern technologies. In my opinion, the banking industry is in the midst of an IT revolution because of two reasons. One is the push from the supervisory authority that requires Banks to be modernised. The other one is the competition between the banks.
What does this brings to the banks?
It brings the financial deepening. It makes the service efficient, reliable and secure. This means that the banks are becoming cost-effective. Indeed, branch expansion is very expensive. Banks pay from 300 Br up to 400 Br for a square meter of rental office space. Can they continue by expending such a large amount of money?
It is very difficult. So, banks should not be dependent on expanding their branches. They should use other alternatives, such as multi-channel banking, paperless service, mobile banking and other IT services, so that they can stop relying on branch expansions.
Q: The banking sector in Ethiopia has no creative loan provisions. It still sticks to the old and traditional loan instruments, largely collateralised. Why do you think is this happening?
In any country’s banking system, there is no way to give loans based on ideas and proposals. Anybody who has an idea, should find an equity contribution. There is no 100pc risk-taking.
But we give loans for those customers who have proven track records and good portfolios. If you take United Bank, in our policy, we lay aside a certain amount of money from the total loan portfolio for this purpose.
Q: The growth rate of the financial sector of the country, which stands at about in 40pc, is more than the economic growth rate. The figures show that the contribution of the financial sector to the gross domestic product (GDP) is not that significant. Its contribution was a marginal 1.8pc in 2011/12. Its average annual contribution for the last 10 years is only o.4pc. Why do you think is this happening?
I agree that the growth rate of the financial sector is very high. However, I do not agree that its contribution to the GDP is insignificant because the service sector is contributing more than the agricultural industry and industrial sector.
If you see the 2010/11 data, agriculture has contributed nine per cent, industrial sector 15pc, and service sector 12.5pc. The GDP is growing at 11pc, this shows that the service sector, which includes the financial sector, is contributing significantly. It is because the growth rate of the banks is from the lower level and that is why its growth is seen significantly.
Q: It is known that there is a policy restriction for foreign banks to function in Ethiopia. But why are Ethiopian banks not expanding to other countries?
The policy restriction is the major opportunity the private banks are given. It is to protect the market for nationals. Until we build enough expertise and capital base, it is a sector allowed only for citizens.
That is why we do not see the intervention of the government negatively. If the Ethiopian banking sector is opened for the foreign investment, it has both advantages and disadvantages.
On one hand, they can bring their expertise, their capital and technology. And they can provide efficient services for the customers. On the other, it has a negative impact. Our banks are concerned on the development of the country because they are corporate citizens. We do not focus only on international trade and collect profit. We care for agriculture, tourism and industry. That is why we agreed when we are asked to participate in the priority-sector financing.
You cannot do this with foreign banks. The foreign banks do not care about poverty reduction and development. They only focus on cities and do not want to expand to regions. Through their international network and expertise, they might evade the power of the Ethiopian banks. Opening up this sector to foreign banks amounts to liberalizing the capital account which means giving freedom for foreign currencies to freely circulate in and out of the country.
But this does not mean that the country should be closed to international banks forever. Especially, when the country is a member of the World Trade Organisation (WTO), we cannot stay closed. It is only for some time, until the local private banks are well-skilled and the regulatory body has enough management skills.
To do this, the government should prepare procedures on how to accept foreign banks in order to minimize the risks. It can be through allowing their equity contribution with the existing private banks or by allowing them to hold shares so that they will be controlled so as not to monopolise the sector. It can also be through allowing them to open their own branches or to have their own incorporated bank.
If you are asking why domestic banks do not open their branches in other countries and whether it is possible to take foreign currency to other countries?
That is not possible. If you take United Bank as an example, we planned to open a branch inJuba,Sudan. According to our study, it is profitable. We are going to present it to the government.
But, we still have to consider the governing laws of that country. And also our banks are in the infantile stage; since we were under the command economy for many years in the past, we have many deficiencies. We have limitations on capital, know-how and risk management. We have to build ourselves in all these areas. And when the laws of a country bind us, we will go forward and open branches in other countries; but not at this time.
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