Tuesday, January 17, 2023
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BusinessForeign banks granted same entry capital as local banks

Foreign banks granted same entry capital as local banks

Foreign banks willing to join the Ethiopian banking sector independently will have to fulfill the same minimum threshold of paid up capital as local banks, officials at the National Bank of Ethiopia (NBE) said. The current threshold of five billion birr (USD 95 million) will apply to foreign banks expected to join the Ethiopian market once the open-up takes flight, which is expected within a year’s time.

All other regulations and standards enacted by the central bank to maintain the soundness of the banks, ensure financial inclusion, and keep the balance of profit-seeking with the development plans of the government will be in place both for local and foreign banks. The rule that require banks to surrender 70 percent of the hard currency they generate to the central bank will be also applicable on foreign banks.

“All the laws applicable to local banks will be similarly applicable to foreign banks,” said Fikadu Digafe, vice governor and chief economist of the NBE.

Following the Council of Ministers’ decision in August to liberalize the Ethiopian banking industry, the central bank is finalizing preparations of legal frameworks to embark on the open-up process. The preparations include amending the 2008 Banking Business Proclamation and introducing at least three new directives.

The policy and strategy document ratified by the council, dubbed “Investment of Foreign Nationals in the Ethiopian Banking Sector,” and the draft Banking Business Proclamation amendment prepared by the NBE, propose four entry modalities for foreign banks. These include: subsidiary, branch, commercial representative office, and acquiring equity in local banks (or a joint venture). All four modalities are allowed.

In particular, subsidiaries of foreign banks will be on equal footing with local banks. The subsidiary is an arm of a foreign bank that will be fully incorporated in Ethiopia. They will have to meet the minimum paid capital threshold, among other requirements.

Since a subsidiary is a separate legal entity, according to the policy, the parent bank may not support it above and beyond the initial minimum capital requirement. However, some foreign banks may be willing to guarantee the solvency of their subsidiaries in order to maintain their international reputation.

A subsidiary modality may limit intra-group transactions, but a subsidiary can still borrow from its parent bank easily. Ethiopia would have a relatively heavier fiscal burden if it had to bail out a subsidiary than a branch. If shocks originate from the home country, the subsidiary model is much better than a branch in terms of fiscal cost, according to the policy.

The five billion entry capital for foreign subsidiaries, which is around USD 95 million at the current exchange rate, can be less worrying for foreign investors; given the 25 to 40 percent annual return in Ethiopia’s banking business.

The other modality, branch banking, is smaller than a subsidiary by size. But it will have to meet the minimum capital requirement to be determined by the central bank, according to Solomon Desta, vice governor for financial institutions supervision at the NBE.

Foreign banks can have branches in Ethiopia and sub-branches. “It would be easy to close a branch and run away during a crisis or economic downturn, but it can be ring-fenced through a capital equivalency requirement,” the strategy states.

The parent bank of both foreign bank branches and subsidiaries must be listed on the stock exchange in their country of origin, or it must be wholly or mostly owned by the government of their country of origin. Ethiopians will be represented in the management and leadership of both the foreign banks’ subsidiaries and branches in Ethiopia.

Fikadu says a subsidiary is better to generate more foreign currency for Ethiopia. The policy and strategy documents also state that subsidiary and equity acquisitions are the best ways to generate foreign currency for Ethiopia.

The policy states that the representative office will “conduct market research and advice, as well as facilitate trade financing and investment.”

“There are many representative offices in Ethiopia already. But they are not regulated by the NBE because they are not authorized by the NBE. We do not know what they are doing in Ethiopia. Therefore, we have to re-register them in a bid to inspect them under the NBE,” Solomon said.

However, bankers and experts believe the capital requirements for foreign banks should be higher than local banks’ requirements to avoid any risk of cut-and-run. Stringent control over capital fly-out is also recommended.

“Subsidiaries and branches will be difficult to control for the NBE,” Abe Sano, president of Commercial Bank of Ethiopia, said.

He says that equity can bring better forex, skills, technology, and knowledge for Ethiopia but will force local banks to keep putting aside provision because of the parent company’s situation reflecting on the partners. “It is also not clear how the foreign banks will have representation in the local banks’ management, in the case of equity acquisition. Therefore, a joint venture is a better modality but is not included in the new law. So, it must be included.”

Nonetheless, there has been no assessment conducted on whether any of the four modalities Ethiopia allows are suitable for foreign banks.

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