Monday, May 20, 2024
Interview“If banking was opened up before, the economy could collapse”

“If banking was opened up before, the economy could collapse”

Sewagegn Chane is director of the Public Financial Institutions supervisory department at the Public Enterprise Holding and Administration (PEHA), which regulates state-owned enterprises. Sewagegn is currently responsible for directly supervising the Development Bank of Ethiopia (DBE) and the Liability and Asset Management Corporation (LAMC). The Commercial Bank of Ethiopia (CBE), Ethiopian Insurance Corporation (EIC), and the National Lottery were also under his supervision, until they are transferred to Ethiopian Investment Holding (EIH) past May.

Working in public financial institutions for 30 years, Sewagegn initiated the establishment of the stock market in Ethiopia, which is bearing fruit eleven years after the first feasibility study. He was also vocal and key in rescuing the DBE, initiating Ethiopia’s first reinsurance company, Takaful (Islamic insurance), among others.

Sewagegn is also researcher at i-Capital Institute and organizer of the East African Finance Summit. Currently, he is leading two teams formed at the institute, studying the establishment of an investment and agricultural development banks in Ethiopia. Although he has been advocating ending state protection over the financial sector for years, he has currently changed his mind, just as Prime Minister Abiy Ahmed (PhD) authorized a policy that envisages opening up Ethiopia’s financial sector to foreign competition. Sewagegn believes the banking sector should remain closed at least for the next few years. The Reporter’s Ashenafi Endale sat down with the public finance guru. The excerpts, does not necessarily reflect PEHA’s position.

The Reporter: What is the progress in reforming public financial institutions, which commenced after Abiy came to power?

Sewagegn Chane: The biggest reform we undertook is in the DBE. In 2018/19, the House of Peoples’ Representatives (HPR) decided DBE cannot continue as a financial institution and debated on how to dismantle it. That year, the bank reported 765 million birr loss so the HPR decided that the bank is not supporting itself, let alone the economy.

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Myself, Haileyesus Bekele, the president at the time, and Yohannes Ayalew (PhD) DBE board president at the time, were called by the HPR to explain the issue. At that time, Public Finance Institutions Agency was a separate entity outside PEHA. The agency was led by Sintayehu Hailemichael (PhD) and I was the deputy director for operations. When some 36 SOEs were put under PEHA in 2018/19, the agency was included under PEHA, as a directorate.

The Budget and Finance Standing Committee at the Parliament insisted the DBE must be dismantled, because it was reporting a loss consecutively. The three of us were called to give our final comments on the committee’s decision. The committee was told that the fundamental problem of the bank was the lack of institutional independence.

Everybody was intervening in the bank, and it was unable to operate as a bank. The PM, other ministers, sectorial institutions, and even individuals have been meddling in DBE’s operation. Secondly, the bank gives loans but does not collect. Those who took DBE loans view it as the government’s budget, not as a client. Most of them had the “developmental investors” plate.

They take a loan and divert it to other businesses. Commercial farming in Gambella and Benishangul are good examples. I was in Gambllea for a year and half, to study why DBE’s loans failed there. There are so many rain-fed projects there. Particularly, six of those that took loans completely diverted the money to other businesses, instead of the commercial farming.

I stood before the standing committee, and pledged to give the DBE additional time. I told them if institutional freedom is restored, relationships with clients will be straightforward, and the bank’s loan collection capacity rebuilt, bringing DBE on track. So I asked the standing committee to give us just one year, and if we fail to rescue the bank in that year, then the committee can dismantle it.

Yohannes on his behalf explained how the IMF and the World Bank are happy to see the DBE dismantled because they do not want development banks in developing economies. He also elaborated how important a development bank is for Ethiopia. After a brief tea brake discussions, the standing committee announced it granted the one year time.

Immediately, we embarked on the reform agenda, introducing seven reform pillars. One of the biggest reform pillars was reducing DBE’s Non Performing Loans, which was over 40 percent at the time. If the bank cannot collect the loans, it cannot disburse loans the next time.

DBE’s NPL at the time was weighed in rain-fed agriculture and textile. So, we stopped any further loans for rain-fed agriculture. In textile, many foreign investors took loans in billions but did not pay, so we decided to take over all the projects that are not paying back their loans, and transferred them to other investors.

We also took the contract management of non-performing projects. For instance, the DBE took over the management of Elsi Addis, Etur and other textile factories, for the time being. Except Etur, most of these projects have been transferred to new investors, without reaching the foreclosure stage. 

The major project left on our hands to date is Ayka Addis.

The other serious measurements we took were barring any officials from intervening in any loan appraisals and disbursement processes. Before the reform, orders for some loan approvals were given from the Office of the PM. Officials from the Industry, trade, agriculture, and many other ministries used to give such informal orders to the bank. Now, even the DBE board cannot involve in loan disbursement cases, except on strategic issues.

We managed to reduce DBE’s NPL to 30 percent this year, including Tigray loans. It is actually 17 percent, if loans in Tigray are excluded, which are affected by the war in northern Ethiopia. Profit comes from loan interest. If the loan is not collected, there can be no profit.

We managed to generate 1.2 million in 2019/20; just a year after the reform was launched. This year, the bank generated 3.9 billion birr in profit. If we did not put aside 4.1 billion birr provision for the Tigray loans, DBE’s profit this year could have been 7.8 billion birr. The DBE is rescued now and everybody is acting as a client now.

DBE’s source of finance is the guarantees from the Ministry of Finance and the National Bank of Ethiopia (NBE). The capital has increased from five million to one billion. The macroeconomic committee approved a study to allow new DBE bond, effective since January. This is apart from the GERD bond, which is the DBEs source of finance.

Before the reform, all the financial indicators of the bank were negative, and unhealthy. We completely reversed all of that, except for the NPL. Before the reform, there were only expenses and disbursement, but now there is income.

Out of the 31 strategic measurements we stipulated under the seven reform pillars, 21 are aggressively implemented and ten are in the process. Only one measurement has not started, which is the digital technology and modernization initiative.

The PEHA and DBE’s board has contributed for the success of DBEs management. One of the positive factors is the steel-serious discipline of Tegegnework Getu (PhD), the board chair of DBE. As a board chair, he is opaque to any external influence or favor. He never took stipends and incentives allocated for board chairs annually. Even he uses his own car for DBE activities.

Yohannes was the chief economist at the NBE for a long time. How did you believe in him, that he could rescue the bank?

Under past presidents, the bank had many deviations and exceptions. Instead of going through loan approval and disbursement procedures, loan seekers directly contact the president and get the loans, informally.

For instance, after we banned DBE loans for rain-fed agriculture in 2018/19, the bank gave 120 million for rain-fed agriculture project. The president at the time said he was forced because certain officials at the Ministry of Agriculture managed to give the order via the Office of the PM.

Surprisingly, the board chair does not know about the loan. The bank was bleeding. We had to be brutal to stop the bleeding. Most of the bad loans were given during Isayas Bahre’s time. Both Haileyesus and Getahun Nana were unable to save the bank. Our biggest worry was that Yohannes might decline the role to lead the DBE.

Over 200 large scale agricultural projects, and a number of foreign textile investors took loans from the bank and failed to pay. Are you pursuing them legally?

We are trying to acquire the lands currently. Our biggest problem now is with the regional governments of Benishangul and Gambella. The land is the key asset the investors provide as collateral to take the loan from the bank. 

After the investors fled without paying the loans they took, the DBE has to acquire the lands, since it is the collateral. Once we finalize acquiring the lands, we will transfer it to other investors. Then we will recover the previous loans.

I heard the Benishangul and Gambella regional governments are demanding it pays taxes on the lands?

We reached agreements on some of the lands in Benishangul. There are ongoing debates on the amount. The bank agreed to pay the tax, if it agreed on the amount. The regional governments usually give one plot for multiple investors, so one certificate is given to multiple investors. The regional agriculture bureau has been reporting to us that the lands were being cultivated by the investors, which was false.

In general, rain-fed agriculture and textile investments have bled DBE.

For instance, Ayka Addis’s investor used informal channels to get the loans, instead of going directly through the bank. It either goes through the PMO or other officials. Solving all this was not simple.

Most of DBE’s clients were unruly. They had the right to take the loan, and the right not to pay. So we disciplined the clients first, and reversed the bank’s practice of negligence. All this was done in three years.

How much is the land leased for the rain-fed projects?

The rate depends on the regions. Basically, tax, lease and anything related to the land is handled by the investors. But since the investors went bankrupt, and the DBE took the lands, now the bank has to pay them. This is the reason why the regional states are asking DBE for the taxes, because it is under the bank now.

The investors who took the land in regional states for commercial farming, left, and the tax holiday period is over. So regional states are now claiming the taxes and the DBE agreed to pay. This is the game.

Did the Gambella commercial farms failed by design?

The loan was supported by policy. The policy of initiating commercial farming and modernizing the agriculture was not wrong. So the DBE prepared policy and procedures.

The major factor for the failure at that point, was the decision to give loans for rain-fed agriculture. This was a mistake because the investors knew the loopholes and abused the loans and failed to return it.

The DBE is on the right track now but business continuity is more critical.

What are DBE’s sources of funds, after the NBE’s 27 percent T-bill is replenished?

The NBE introduced another bond this year, in which banks channel one percent of their loan portfolio to the DBE. In the past six months, a bit more than 10 billion birr has been channeled to the bank from this new scheme. Once we start from insurances, these two schemes will become our biggest source of funds.

The GERD bond and loans from international banks also generate finance. It also accesses external funds like SME loans, through the MoF. DBE’s T-bill is almost zero currently.

How much is the loan interest the DBE is paying currently, when will the rest mature?

The DBE pays interests by adding two percent on the saving interest, which means nine percent. On the other hand, DBE’s interest rate is between 11 percent and 12 percent, the least being for import substituting projects. The margin covers its administrative cost. So the bank is able to pay all its interests duly. 

DBE requested to put Tigray NPL’s off its balance sheet. But NBE officials told The Reporter that it is not going to take it off its balance sheet.

If Tigray’s NPL is put-off DBE’s balance sheet, DBE’s NPL could be 12.5 percent. But including the Tigray NPL, which is 10 billion birr, the NPL stands at 30.4 percent. What we are saying is this 10 billion birr in NPL happened by factors out of DBE’s control. We are not asking the NBE to cancel the Tigray loan.

We undertook a detailed study on how the NPLs could be taken off the balance sheet, and presented to the NBE. We do not know why NBE is silent on the issue. The CBE also requested the NBE to take off two billion birr off CBE’s balance sheet. This was also studied and presented to the NBE.

The NBE first said the request should be processed by the Bankers Association but the issue is still in the process. It is illogical to keep inactive numbers on banks’ balance sheet. When unrest occurred in Oromia over the past few years, the NBE allowed loans of affected investors in the region to stay off banks’ balance sheet. The same can be done for Tigray. It is not a big deal. It is NBE’s decision but I do not know why it is reluctant when it comes to Tigray NPLs. Tigray NPL does not represent DBE’s actual performance, which is outstanding.

DBE’s outstanding loan is 63.4 billion birr. Total NPLs stood at 19 billion, of which 10.1 billion birr is created in Tigray since the war. The president of DBE requested to exclude the Tigray NPL but PEHA does not agree, unless the NBE approves it.

Another investor is negotiating to buy Ayka Addis. Will this be the last negotiation?

A number of potential buyers have been trying to buy Ayka Addis in the past but failed. Especially a Chinese investor was very eager to acquire Ayka Addis. Any potential buyer is expected to contribute 50 percent of Ayka Addis’s portfolio. For instance, the initial investment loan was USD 1.7 billion so the buyer is expected to contribute half of it. But the Chinese lacked capital so it requested to contribute only 10 percent of it, which means around USD 200 million, so we refused because we cannot breach the 50 percent law.

If Ayka Addis is sold, DBE’s NPL will drop to around 15 percent, from the current 30.4 percent. Ayka Addis is holding a huge loan. The principal loan is 1.7 billion, a decade ago. Including the interest, probably it is around USD three billion by now. The value of the machines, factory building, raw materials when the DBE received Ayka Addis, is valued at USD 1.79 billion.

By the way, we are still paying the salary of 4,500 employees of Ayka Addis, though it has not operated for years now. It is between 13 million birr and 14 million birr every month. We cannot abandon the employees, after the Turkish investor left. We are carrying all this cost.

There were also other alternatives for Ayka Addis, other than selling it.

There were three major options tabled. The first is selling to a capable investor or buyer. The second is operating Ayka Addis under a management contract, just like Elsi Addis and the third was repurposing Ayka Addis into an Industrial Park. Some three potential investors have been negotiating. The Chinese came last.

Currently, another negotiation is underway. We hope this will be the last one. It is a consortium of local and foreign investors. We will disclose it when it materializes. Ayka Addis’s operation ranges from cultivating cotton to sewing the clothes. It pins the cotton, dyes it, and makes the clothes. It is an end-to-end project. So the potential buyer is expected to specialize in all these value chains.

Will the new buyer pay Ayka Addis’s accumulated tax?

Under Ethiopia’s law, a company does not pay taxes if it declares bankruptcy. After the DBE took over Ayka Addis, the tax authorities are saying Ayka Addis must pay tax, since it did not undergo liquidation. Ayka Addis was not operating for the past eleven years. So, the tax authority is asking for back-taxes for all these years, stating the project did not declare liquidation. So we are arguing with the tax authority.

But the DBE declared foreclosure?

When the Turkish investors left and the DBE started managing Ayka Addis, the tax authority started asking for tax.

Amazingly, Bmet cables, one of the Turkish investments abandoned after taking huge loan from the bank is a good example of how much Turkish investor’s exploited us. Under the Turkish investor, Bmet cables utilized 40 percent of operational capacity but they were not paying their loan.

Now, the local buyer, Tadesse Admasu of Red Star Trading, is operating at 12 percent of its capacity due to different reasons. The buyer acquired Bmet paying 890 million birr. Now, it has paid all the loans owed to Bmet.

How much has Ethiopia lost because Turkish investors left the country without paying DBE loans?

Before, their equity contribution was 30 percent. This means the DBE contributes 70 percent of the investment. Under the previous ratio, a Foreign Direct Investment comes with USD 30 million, and takes 70 million. The foreign investors left without paying the 70 percent loan they took from the DBE. But now, we adjusted the equity contribution to fifty percent, for foreign investors. Local investors pay 20 percent.

FDI is needed to bring technology, capital, forex, and create jobs. It did not meet any of these targets.

One of the other loopholes FDIs has been exploiting is that they highly under invoice export price. They usually have subsidiaries or a mother company operating abroad. So they export the clothes to them, with fake price documents. These investors also import raw materials only from those mother companies or subsidiaries abroad. The FDIs operating in Ethiopia do not want to use local inputs. They export t-shirts with USD 60 cents from Ethiopia. But the buyer abroad, which is affiliated to the FDI, resells it at a much higher price. So the FDIs generate meager forex for Ethiopia. Their bank statements also indicate loss, always. Especially the expats brought by FDI are highly abusive. Bmet’s former CEO has been paid 500,000 birr in salary monthly. This is excluding housing, vehicle and other accommodations. Now we decided to reduce expats inflow.

That is why, just when we started being strict on Ayka Addis that the Turkish investor’s fled Ethiopia immediately, without handing over the project’s properly. I think they left for Burkina Faso.

Are there new public financial institutions planned to be established, particularly to finance long term development projects?

Four years ago when the bank was in deep trouble, we conducted a study to determine its fate. One of our alternative recommendations in the study was to breakdown DBE into three different policy banks; into an industry bank, agricultural bank and an SME bank. Finally, a decision to reorganize and reform DBE as it is was made. In the meantime, we conducted a study to renovate the bank; the ATA was also making moves to initiate the establishment of an agricultural bank.

The initiative to establish a stock market was also conducted by us. We have been trying to convince the government to establish a stock market for the past eight years. It is only realized under Abiy.

Now, the importance of an independent agricultural bank and investment banks is imperative for Ethiopia. In line with the agricultural bank, agricultural insurance and micro-insurance firms are necessitated equally. These firms protect the loans provided by the agricultural bank to farmers.

We conducted the “Proposal of restructuring public banks” in 2014. The proposal included the recommendation to determine the fate of the former Construction and Business bank (CBB). We did not just demolish CBB without a proper study.

The same studies have later been modified for the DBE. The modified study also recommended the vitality of Agricultural Development Bank, and mortgage bank (construction bank). The plan is for the CBE to stop mortgage financing, and transfer the role to the new Construction Bank (CB). In fact, the proposed CB partly takes on the role of the now defunct CBB.

Currently, we have established two working groups at i-Capital Institute, studying on investment bank and the agricultural development bank each. PEHA has the mandate to give birth to new public enterprises, apart from managing the existing ones. It can also decide on mergers, and dismantling of SOEs. 

As long as Ethiopia is progressing from an agrarian economy to manufacturing, a stock market is very essential. If we need more robust manufacturing companies, we must build a robust stock market, where the companies are listed, float shares, and mobilize capital. A manufacturing industry cannot grow without a stock market.

The banking sector fears to give loans to manufacturing industries because the banks fear losing their saving capital. Once the stock market is active, the interest in banks will drop. But the stock market will grow faster, hand in hand with manufacturing.

I hope the establishment of an agricultural bank is realized soon. Ethiopia has an agrarian economy. But the economy is currently distorted, as the service sector constitutes the largest portion of the GDP. In a bid to transform Ethiopia’s economy from an agricultural to a manufacturing industry, agricultural development bank cannot be an alternative. Agriculture is not developing due to lack of finance, fundamentally.

The agricultural bank also needs an insurance firm, to cover the risks of the loans. The bank finances tractors for the farmer, and then the insurance firm insures the machines as well as the harvest.  It is highly imperative that agricultural development bank and investment banks are essential for this country.

A secondary market cannot operate without an investment bank. Since we are nearing the establishment of a stock market, we also need to establish an investment bank.

For instance, banks are planned to be listed on the stock market. The investment banks will study the banks, as well as other IPOs, inside out. So, the investment banks determine the exact value of shares, and securities. This means IPOs, including commercial banks, cannot determine the price of their shares by themselves, unlike now.

The underwriter preserves the interest of every stakeholder, investor, IPOs, and others. It sets standard but the investment bank cannot be listed on the stock market itself.

Once the two working groups wrap up their studies, the documents will be reviewed by stakeholders. Then, we will present the final documents to the government to decide on whether to drop or implement the study’s recommendations.

A few years back, we travelled to Nigeria to visit their central bank and development bank and took three months of training. I was amazed by their Islamic insurance. We extracted lessons and brought it to Ethiopia.

The government is saying the banking industry will be opened for foreign competition very soon. What is your take on this?

Before, we have been asking the government to open the banking industry. But recently, we have changed our perspective. We prefer the government to delay the opening up for now. I precisely know the exact capacity of each local banking institution.

Before, our assumption was that local banks will merge, at the face of an open up. So we have been advocating for it to open, at each meeting and financial summits.

Basically, banking and insurance businesses in Ethiopia is a captive business. The banks are formed either under religious, ethnic, political sentiments or other bands. So, Ethiopian banks and insurance companies lack the business mentality. If they had a business mentality, they will work with anyone who has a viable business idea. So I believe the government must delay the sectors opening up.

The NBE recently said mandatory merger and acquisitions will be forced on local banks, when the sector is opened up.

That is inevitable once the industry is opened up. Of course mergers can happen even before the opening up. For instance, the NBE raised the paid up capital to five billion. Those who failed to meet will have no option but merge. The NBE can also raise the reserve let’s say to 25 percent, from the 10 percent currently. Many banks could have merged. This way, competitive banks could be created.

Western banks, especially Europeans, strongly pushed Malaysia, Korea, South Korea, and Thailand to open up their financial sector. Once these Asian countries opened their financial industries, the western banks withdrew after joining the sector. The Asian economies were hit by financial crisis as a result.

But eventually the Asian tigers avenged the western banks. The 2007 financial crisis hit western banks, because the Asian tigers suddenly raised their banking capital. They intentionally gave more loans to American banks. Then the American and European banks disbursed those loans to mortgage, and small businesses. The western banks failed to pay their loans to the Asian tigers, taking revenge twenty years after the western banks played foul.

We do not need such turf wars.

The only reason Ethiopia’s economy is doing well after the war in the past two years, is because our financial industry is closed off. Our economy survived because the banking sector is not open.

If banking was opened to foreign competition, the economy could collapse, under this war. And had it been opened before the war, the economy would have collapsed by now. Foreign banks simply close and leave, when there is a war.

Many people say the banking industry should be opened. That is wrong. They do not know the exact capacity of local banks in surviving foreign competition. I have no confidence even in the CBE.

The CBE has a huge NPL owed by the government. The government owes over half a trillion birr. Unless it is fully paid, CBE will face many challenges.

So, I insist the banking industry should not be opened at least in the next three to four years. Local banks need up to four years to prepare. Mandatory merger is simple.

When the Home Grown Economic Reform was launched in 2019, the government promised to reduce the states hand in the economy, and reduce the pressure on CBE and domestic credit. Is there any progress?

The CBE is not giving loans to the government now. State pressure is reduced. The CBE has studied new organizational structure, and is implementing new business strategies. Before, especially during the previous regime, state banks give loans as if it is a budget. They do not collect the loan.

Do you follow up on CBE’s branches abroad?

We evaluate them during reporting. The bank has branches in Juba and Djibouti. The Juba branch is performing very well but the Khartoum branch was suspended while in the pipeline.

Did the CBE move from PEHA’s supervision, after it is placed under the EIH?

Currently, the CBE is in transition process, from PEHA to the EIH.

I heard SOEs will be categorized under three supervisory institutions according to their performance. These are the EIH, PEHA, and the LAMC. Is that true?

What I know is that there are SOEs going to the EIH, and the rest will remain under PEHA. The LAMC by itself is an SOE and is under PEHA’s supervisory. LAMC is under my supervision. The CBE, DBE, EIH, LAMC and national lottery, are under my directorate.

The EIH has recently on-boarded 27 SOEs, out of the 36 SOEs under PEHA. Does that mean they are completely out of PEHA?

The investment part of SOEs goes to the EIH, while the enterprise management aspect remains under PEHA. But so far, there is no definite decision on whether the selected SOEs completely move to the EIH, or partially. This is decided by the macroeconomic team of the PM.

Will all SOEs be listed on the stock market?

The plan was for the SOEs to list a certain percent of their value on the stock market. If SOEs like ET, ethio telecom and others trade 10 percent of their portion on the stock market, it builds the public’s confidence. But SOEs must meet stringent financial reporting systems.

I also hear that five percent of ethio telecom’s share will be sold on the stock market. SOEs that meet the right financial reporting system will be able to float shares on the stock market.

People are facing difficulties acquiring houses because real estate companies collect money from house seekers and disappear. The stock market will also solve this. Everything will take shape under the secondary market.

The government is allowing the establishment of new banks in the last two years. But lately it confirmed the opening up of the banking sector for foreigners. Isn’t this sending mixed signal?

Mergers can be done at any time. Then local banks can consolidate and ready for competition. PEHA is exemplary in merging CBB with the CBE six years ago. Private Banks must follow suit.

Local banks are in a comfort zone, registering lump profit, not because they are providing a class service. They are profiting because they are protected. Under state protection, they do not have to improve service. They survive at the expense of the client. Millions are saving in bank but only a few thousand get loans. All of this will change, once foreign banks come.

To allow foreign banks, the banking proclamation, banking service code and the investment regulations must be revised. Especially, the code must allow banking for foreigners. The existing commercial code allows banking and insurance only for Ethiopians. Non Ethiopians cannot be investors, or operators.

Do you think the financial sector will be opened before five years?

I think so but I prefer it being delayed. All banks are giving loans to the service sector. Manufacturing and agriculture cannot grow unless we have banks that can give loans for long term projects. There are no consumer loans too.

Insurance companies complained over NBE’s order to direct 15 percent of their profit to DBE bond.

The rate has been reduced lately and the insurance companies agreed.

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