Tuesday, January 17, 2023
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BusinessTo survive foreign competition, central bank governor suggests mandatory mergers, acquisitions

To survive foreign competition, central bank governor suggests mandatory mergers, acquisitions

The bankers’ association is upset about the tax on recapitalized dividend

The National Bank of Ethiopia (NBE) plans to enforce mergers and acquisitions on local banks to survive competition as the regulator gears up to open up the banking industry in the near future. The central bank is already designing policy instruments to vanguard local banks from perishing amidst foreign competition, Yinager Dessie (PhD), governor of NBE, stated during a discussion with all local banks on August 8, 2022.

“We appreciate the increasing number of local banks. However, we prefer fewer but strong local banks, instead of many weak ones, “said Yinager.

The number of local banks increased from 18 to 30, just in the last year, adding one bank every month, on average. The influx came following NBE’s new banking proclamation that allowed the establishment of interest-free banks and the evolution of MFIs into banks.

An additional 13 banks in the pipeline failed, as they could not meet even the 500 million birr minimum paid-up capital, which is raised to five billion birr a few months back. Some of the 13 failed banks managed to mobilize less than 30 million birr in capital, according to the governor.

“We will still give licenses to banks that can come up with the five billion birr paid-up capital. 30 banks is not sufficient for the size of Ethiopia’s population. Our concern is not their number, but their capital. We do not want local banks to oust each other amidst the competition, but to strengthen each other,” said Yinager. 

He stated that fulfilling the five billion birr capital would not be sufficient to survive the expected stiff competition from foreign banks.

However, Abie Sano, president of the state giant Commercial Bank of Ethiopia (CBE) and president of the Bankers’ Association, argued that allowing the formation of new banks is already creating havoc.

“The increase in the number of local banks is already creating a shortage of manpower in the industry. In particular, CBE is a victim of new banks snatching manpower trained by CBE. Increasing the number of banks by 12 just in one year is abnormal. Allowing a new influx is draining the capacity of existing banks due to the high rate of turnover,” Abe said.

“Every new bank is snatching manpower from existing banks, which is creating a huge gap. “This cannot help to create strong local banks. The scramble to snatch bank employees is done by raising salaries at high rates,” added Abe.

Existing banks are also significantly increasing salaries to retain their manpower. This in turn is skyrocketing banks’ operating costs. The leading banks, including CBE, have up-scaled their salary scales in the past couple of months.

Abe also criticized the recent decision by the Ministry of Revenue to tax recapitalized dividends.

“Banks have been dying hard to increase their capital by channeling dividends to capital. But the Ministry of Revenue lately decided to tax all the recapitalized dividends to-date. This will substantially erode banks’ capital, and erode shareholders’ confidence,” said Abe.

Only the first year is exempted from such a tax. The Ministry of Revenue did not specify whether it is the bank or the shareholder who is going to pay the tax. The Association also formally lodged a complaint with the central bank.

Yinager said the NBE is discussing with officials of the Ministry of Revenue and Ministry of Finance to reach a decision on whether the accrued tax on recapitalized dividends should be paid or exempted.

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