Tsehay Shiferaw has worked in the banking industry for nearly a quarter-century, almost as long as Ethiopia’s private banking industry has existed. He led Awash International Bank (AIB) for the past decade after becoming president in 2011. Awash as launched a ten-year strategic plan under his leadership with the goal of making the bank one of the top ten financial institutions in East Africa by 2025.
Tsehay is currently preparing for new competition from foreign banks, preparing to take his bank overseas. The Reporter’s Selamawit Mengesha and Ashenafi Endale spoke with Tsehay about the banks’ future plans and the opening up of the industry.
The Reporter: Dozens of new banks have joined the industry in the past couple of years, but none are specialized in areas like agriculture, SME lending, or others. Why are there no specialized banks in Ethiopia, and why are all of them focused on traditional commercial banking services? How can banks’ profit-seeking policies and the government’s financial inclusion policy match?
Tsehay Shiferaw: There are changes coming, bit by bit. For instance, a mortgage bank is being established. In the future, agricultural banks, international trade banks, and other specialized banks will be formed. It is not right to blame all banks for becoming commercial and not specialized banks. There is no infrastructure or incentive in place to encourage the formation of specialized banks. Basically, all banks are formed for the sole purpose of profit. The shareholders expect profits at the end of every year. So the banks are forced to operate in business areas where the return is higher.
Thus, the government has to introduce policies and incentives that can encourage banks to go out and serve rural areas and neglected sectors like agriculture. For instance, the government has already ordered commercial banks to allocate a certain portion of their credit to agriculture and SME. So the banks have to channel the portion to MFIs or directly give it to SMEs.
Other countries, especially India, have succeeded by deploying such policies. Pushing banks into rural areas is not right. Instead, developing new mechanisms to bring the rural population into the financial system is critical.
Opening branches in rural areas is no longer viable for banks. It takes several millions of birr every year to operate a single branch. It is very critical to expand mobile, online, and agency banking to rural areas.
Kenya, Nigeria, and many other developing countries are ensuring the financial inclusion of their rural populations through agent banking. Agent banks are selected everywhere; they receive money and give money.
If there are agency banks, rural people can deposit money and take loans. The young generation also has a good appetite for mobile banking and online banking. Branching is not a must nowadays. Gradually, opening a branch will be unnecessary.
Currently, the government is preparing to open up the banking sector for foreign players, and local banks have been told to craft a strategy to cope with it. What kind of competition can we anticipate?
It is not appropriate to discuss only the negative aspects of the liberalization. The joining of foreign banks will also have numerous benefits for local banks. An industry can improve and become more efficient only when there is competition. The public gets ample alternatives and better services only when there is competition. I expect foreign banks entry to energize local banks and create an affluent financial industry, which is essential for a better economy in Ethiopia.
AIB has already implemented a number of strategies in order to maintain its position as the leading bank in the competition, and we have hired Mckinsey and Company, an international firm that specializes in corporate strategy advice. We are formulating what we have to do when the foreign banks come. It also determines how we can cooperate with foreign banks and work with them.
We are also planning to expand our business outside Ethiopia. So Mckinsey’s study will determine how best the bank can operate outside Ethiopia, just like how foreign banks will invest in Ethiopia.
The first thing foreign banks coming to Ethiopia will have over us is skilled manpower. So we have to work hard on human resource development.
The second thing is technology. We are also working on that. To be frank, the technology that exists in Ethiopia currently is not inferior to that of other African countries. The question is, how much of that technology is available to the population and being used on the ground?
In this regard, we are very backward. But for sure, once the telecom sector is efficient and the national ID is introduced, better technology interaction will occur. Awash Bank is not afraid of foreign banks’ entry. We are preparing to tap into the opportunities they present. So we are preparing strategically to make Awash a better bank.
How do you plan to protect the interests of your existing shareholders, because acquiring up to 30 percent of existing banks is also allowed for foreign banks? Do local banks have the appetite to sell shares to foreign banks? Which one of the four entry modalities allowed by the government do you think is best suited?
The Ethiopian government allowed the entry modality in all available modalities. From all these modalities, investing in existing local banks is the best one. The government should also promote joint ventures. Foreign banks have good capital, manpower, skills, and technologies.
In Ethiopia, there are many banks, and all are small. Even if they pooled all of their capital, we couldn’t compare them to a single bank in Nigeria or South Africa. So if those foreign banks come and invest in these existing local banks, the local banks will become very strong.
Regarding existing shareholders’ interests, the coming of foreign banks will create a huge benefit. The main point is that we should not focus only on the existing cake. We can make a bigger cake.
When foreign banks come and invest in existing local banks, the share value of local shareholders will significantly grow. The bank also becomes profitable. Local banks will be able to generate more profit with less investment. So I see the opportunity as a good advantage.
Usually, it is said that Ethiopian banks are highly profitable. Is that really the point, because it is very small in hard currency?
I do not accept the media narrative that Ethiopian banks are profitable. As I mentioned, all these 30 banks cannot make one strong bank. Capital is an important indicator of a bank’s health. Capital is also a major parameter to measure risk. A deposit is a liability. It is owed to depositors. It is the capital that indicates how much the bank owes to shareholders.
In this year’s top 100 African banks, only two Ethiopian banks are included: Awash and the CBE. The measurement is capital. Both of these banks have declined from their positions from last year. This is because of the drop in the value of Ethiopian currency. The second reason is because our capital is still very small, especially in hard currency.
For instance, AIB is usually considered a profitable bank. The shareholder is always reinvesting its dividends and profits to capitalize the bank. They are always reinvesting profits to make AIB a strong bank. The management also proposes reinvestment for the shareholders. So, in essence, we cannot say it is for profit.
Bank profits in other countries are much higher than in Ethiopia. But of course the earnings per share in other countries are lower compared to Ethiopia. But in terms of profitability, we are much lower.
Our economy is very small, and it seems big when a bank posts one billion birr in profit. In other countries, bank profits are huge. If this country has to grow, our banks must grow more and get stronger. A strong economy cannot be created without a strong banking industry.
There is a stiff competition to retain staffs in the industry. By offering excessive pay and benefits to employees, certain banks have come under fire for disrupting the job market. What is your reflection?
Regarding employees, yes, we give them loans to buy houses or other basic necessities. Compared to other countries, our proportion of employees is very small. Employees’ loans are even calculated based on their salaries. An employee earning 50,000 birr cannot obtain a loan of two million birr.
So, I don’t think the conclusion about banking employees’ salaries is exaggerated. It is only in Ethiopia that taking credit is considered a privilege. Taking credit is your right, not a special benefit. Everybody must be able to access loans. For instance, currently, AIB is considering micro-lending. Once the national ID is operationalized, everybody can take out loans online using their social security number. You do not need an AIB account to take the loan.
This technology also reduces the bureaucracy at banks. They take loans using their phones. Then they withdraw the credit using an ATM. Then the loan is paid from their salary. Banks must start micro-lending, which can activate the economy. Microlending has a crucial role in economic activities. So we need to create technology-based microlending systems. Currently, less than 200,000 people in Ethiopia have access to bank credits. Millions of people, however, save money in banks.
Is the AIB planning to raise its paid-up capital currently?
Sure. When foreign banks visit Ethiopia, one of the most important parameters they consider is capital. AIB’s authorized capital is currently 12 billion birr, and we are planning to raise its capital fivefold.
We will present this decision to the shareholders during the annual general assembly meeting. This decision will make Awash the biggest bank in capital in Ethiopia. Its capital will grow to around 55 billion birr. The shareholders decide on the matter.
Are local banks proposing a joint body that can protect local banks’ interests as well as the smooth opening-up process in coordination with the NBE?
Yes. We are working with the central bank closely. We are also conducting various discussions through the Ethiopian Bankers Association (EBA). We have forwarded our suggestions and recommendations.
The number one target of NBE is maintaining national interest and creating an environment in which all of us can benefit. It is finalizing the legislation and directives required to implement the national banking open-up policy and strategy.
Though banks’ lending interest rate has been climbing faster, it is still much lower than the inflation rate. Do you think interest rates on deposit should be raised soon to cope up with inflation?
Technically, it is advantageous to accept a loan than to collect a deposit and disburse a loan given the circumstances in Ethiopia. The inflation rate is very high. Fixed asset property values are increasing faster. Banks’ lending rate currently is small compared to the inflation rate.
I hope the government’s measures to tackle inflation will be successful. For instance, the efforts toward food self-sufficiency are commendable. Inflation can be controlled if monetary and fiscal policies are well aligned and strictly implemented.
Currency outside banks has greatly increased despite the central bank’s measures like demonetization and limiting cash holding amounts. Is this causing a liquidity crunch for banks?
Currency outside banks exists at any moment in any country. The most important thing is the volume. The measures taken by the central bank have helped reduce it. Once it enters the banking system, currency circulates in the formal economy.
The performance of EthSwitch is very good. Operationally, its profit has been increasing, and this is very promising for all banks that have invested in EthSwitch. It also has more projects in the pipeline regarding the interoperability of banks. Once these projects are realized, banks will reap more benefits. EthSwitch is a national switch that connects all financial institutions.
It is connecting ATMs, POS, mobile money, and all digital financial platforms of financial institutions. It is currently doing extremely well, but it has to do much more than this.
For instance, the number of POS machines is still limited, and more distribution is required. The banking industry is concentrated in certain urban areas, and the only option to reach the rural part of the country is through digital financing. Plus, if POS and ATMs are connected, there is no need to deploy ten POS machines inside a hotel where a number of ATM machines are also installed.
There are limited machines in the country, and saturating them in certain spots is not right. So, EthSwitch must consult with the NBE, introduce new laws, and equally distribute the technologies across the country.
Digital financial operators are currently decoupling from banks and reestablishing themselves as independent operators, following the central bank’s new law. What is the impact on banks?
This move has no negative impact on banks. Rather, it has benefits. Every new step in Ethiopia is in line with the evolution of global banking services. First, branches expanded; then ATMs, POS, and mobile banking were introduced; and now the online payment stage has arrived.
The banking revolution in Ethiopia is moving toward digital banking. So the presence of more independent digital payment companies and fintechs will facilitate bank transactions. So there is much to be done to elevate Ethiopia’s financing industry to the global stage. Technologies such as EthSwich also reduce banks’ investment costs.
The NBE forces commercial banks to expand branches by 25 percent annually. How does this mandatory rule align with banks’ interest in deviating from bricks and mortar towards technologies?
Basically, the NBE has no legislation that mandates banks expand branches by 25 percent annually. It is just a recommendation.
However, the banking situation in Ethiopia demands opening more branches. The more we open branches, the more we mobilize deposits. There is no option for now since the internet connection is poor when you are just a few hundred kilometers from Addis Ababa.
So, the best strategy for Ethiopia is to amalgamate both branch expansion and digital financial services. In the future, once the telecom sector is fully opened and becomes efficient, digital finance will gradually prevail.
Safaricom has come, and a second private operator is expected soon. As a result, the banking industry will gradually become highly efficient by the time the telecom sector does, but the national ID system and social security are critical to this end.