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    BusinessBehind Ethiopia’s decision to end banking protectionism

    Behind Ethiopia’s decision to end banking protectionism

    Commercial banks are mystified by the government’s move to end the long-standing state protectionism and liberalize the banking industry.

    Last week, the Council of Ministers approved a new policy, with some guidance on how it will be carried out.

    Improving forex revenue and access to finance, better efficiency in the banking service, technological and knowledge transfer, boosting global competitiveness, and integrating Ethiopia’s economy into the global financial system are mentioned by the Council as the driving forces behind the policy move.

    In the past few decades, the Ethiopian government has been opposing the private sector’s calls for the opening-up of the financial industry before they switched sides now. Bankers and academics now believe that the government should not open up the sector to competition at this time, fearing that local banks are not prepared for competition and will be lost if foreign banks arrive.

    The modality of how foreign banks will join the Ethiopian financial market is only partially clear so far.

    The policy allows foreign banks to enter using four commercial modalities, according to Frezer Ayalew, banking supervision director at the National Bank of Ethiopia (NBE).  Foreign banks can open subsidiary arms in Ethiopia, open branches in Ethiopia and will also be allowed to acquire shares in existing local banks. Commercial representative offices can also be used.

    “All of the four operations will be allowed for the foreign banks,” Frezer told The Reporter.

    The policy document has not been distributed to bank officials so far. Once the document is published, the preparation of other legal frameworks like proclamations, regulations, and directives will follow before its actual implementation.

    The NBE is already revising the existing banking business proclamation, which allows banking business only for Ethiopians. A steering committee led by the Ministry of Justice is also amending the Banking Service Code, which has been in place for over 60 years.

    Revising the banking service code alone is not sufficient to allow foreign banks to operate in Ethiopia, according to officials at the steering committee. Ethiopia’s investment proclamation and regulations also need a brush up, according to the officials. Insiders say revising all the necessary legal frameworks that enable foreign banks will take up to one year from now.

    Eshetu Fantaye, former president of Buna Bank and current president of Ahadu Bank, stresses that the government must be cautious about ushering in foreign bankers. “We must know what we want first. Is it foreign currency or efficiency the government wants from foreign banks? Modalities like subsidiary, branch, offshoring, and commercial representative offices negatively affect local banks and will have no use for Ethiopia.”

    “A foreign bank can open a branch in Ethiopia with a small capital. It does not improve savings. Instead, it erodes the savings of local banks. The government should allow foreign banks only to acquire shares in local banks. This is complementary both for boosting forex revenue and also efficiency,” Eshetu said.

    The bank president also insists bankers, the chamber and all stakeholders must stringently deliberate on the policy before rushing to action.

    Sewagegn Chane, CEO of Public Financial Enterprises supervisory who oversees public financial institutions at the Public Enterprises Holding and Administration (PEHA), believes the government must allow at least a four-year grace period until local banks make final preparations.

    “We have been asking the government to open the banking industry. But since then, we have changed our perspective. We prefer the government to delay the sector opening up for now,” said Sewagegn. “I have no confidence even in the Commercial Bank of Ethiopia (CBE), which has a huge NPL owed to the government.”

    Sewagegn emphasized that inviting foreign banks in the midst of conflict and investment uncertainty will jeopardize Ethiopia’s overall economic performance.

    “The only reason Ethiopia’s economy is doing well after all the war in the last two years is because our financial sector is closed,” Sewagegn said. He predicts mergers among local banks will be highly considered in the face of foreign competition.

    “That is inevitable once the industry is opened up. Of course, if the NBE keeps raising the bar, mergers may occur before the opening,” he added. 

    However, Abdulmenan Mohammed, a London-based financial expert, stated that most of the modalities formulated by the NBE cannot bear much fruit.

    “First, shareholders of good performing banks, like Awash, do not sell shares to external investors. Even if the bank issues new shares, it sells it to existing shareholders. Infant banks might be eager to sell shares to foreign banks. However, foreign banks are cautious about acquiring equity in small banks that did not build their reputation. I cannot imagine Barclay’s bank acquiring shares of one of the small banks,” Abdulmenan said.

    Abdulmenan stated that the contribution of foreign banks to Ethiopia’s forex revenue, as well as improving access to finance, will be insignificant.

    “Ethiopia’s forex problem will not be solved by forex generated by foreign banks, which will serve only big corporate clients. Most probably, they will only serve FDI originating from their own countries and will not engage in retail businesses in Ethiopia. In terms of technology, even local banks are already improving,” Abdulmena said.

    According to the expert, foreign banks’ presence will be strong and fruitful only when the FDI inflow to Ethiopia improves.

    Abdulmenan also says a merger cannot succeed given the nature of local banks.

    “How can a bank profiting 30 percent merge with another bank profiting 20 percent? With which bank can Awash bank merge? Who will be the president if two banks merge? Obviously, there will be a lot of layoffs if there is going to be a merger. If two banks merge, they cannot keep two staffs in the same position,” he said.

    A merger happens if two banks have common business interests, one has exceptional resources, to avoid duplication of effort, or if the first bank moves to rescue a failing bank, according to Abdulmenan.

    “Local banks do not meet the prerequisites for a merger. Of course, new banks in the pipeline can pool their capital and form one giant bank instead of many small ones,” he said.

    Some scholars echo that the Ethiopian government decided to open-up the banking sector because of external pressures, instead of internal needs. Some insiders even claim Prime Minister Abiy Ahmed’s administration decided to deliberate on the opening-up in a bid to lessen the western pressure on Ethiopia in relation to the war in northern Ethiopia.

    Others argue that the IMF is pressuring Ethiopia to open up as a condition for receiving the much-anticipated loans and debt restructuring.

    “IMF pressure, WTO accession or other external pressures might be behind Ethiopia’s decision,” Abdulmenen says. 

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