Friday, May 24, 2024
- Advertisement -
- Advertisement -

Ethiopia’s banking sector: Unearthing inequality and imbalances

Ethiopia’s banking sector has seen impressive growth in recent years, but significant issues threaten its long-term sustainability and equitable development. During a parliamentary session on November 4, 2023, Prime Minister Abiy Ahmed (PhD) delivered a speech emphasizing the state of Ethiopia’s banking and financial industries. He highlighted the presence of over 100 financial service institutions in the country, including 31 commercial banks, 48 small financial institutions, 6 payment service companies, 6 capital goods leasing companies, and 7 wallet service providers.

Remarkably, the commercial banks alone have witnessed an impressive average growth rate of 20 percent over the past five years. With a total loan of around 547 billion birr and benefiting 450,000 borrowers, the sector continues to thrive.

One particular aspect that needs attention is the disproportionate loan allocation distributed among a few individuals and organizations considering Ethiopia’s population is estimated to range between 120 to 130 million.

In this country, the affluent segment of society is able to secure loans worth billions of Birr, while the general public struggles to access even a thousand Birr in credit, provided they meet the necessary requirements.

In his concluding remarks, the Prime Minister acknowledged the existence of a small group of wealthy individuals at the top, while the majority of the population remains at the bottom. The middle and lower classes have not experienced significant growth, resulting in distorted livelihoods and income disparities. The current situation in Ethiopia raises doubts about its sustainability. The prevalent practice of engaging in under-the-table negotiations with banks to amass wealth and become millionaires must be addressed, as it is an unsustainable practice.

Now, focusing on the issues raised above and analyzing the industry’s failures, losses, and hopes as a starting point, have led me to deeply contemplate the critical situation at hand, indicating the urgent need for the National Bank to conduct a thorough examination of its operations and the banks under its jurisdiction.

Although the Ethiopian banking industry predates many banks in Africa, there are overarching weaknesses in service provision, organization, modernization, and capital capacity. Numerous internal and external problems contribute to these challenges. Notably, Ethiopia was one of the last countries in the world to open its doors to foreign investment in the banking industry, placing it in a ranking similar to Eritrea and North Korea.

Banks are entrusted by law to manage money and foreign exchange received from the public. Given their substantial operational scope and influence on the economy, strict control and monitoring are imperative.

While foreign banks are permitted to operate in the country, they benefit from protection against fierce competition. The National Bank of Ethiopia enforces mandatory professional control to ensure adherence to corporate governance. These measures were implemented with the hope that opening the industry to foreign bank competition would equip domestic banks with technology, professional competence, and capital capacity, enabling them to effectively navigate the competitive landscape. By accessing modern services offered by banks, citizens can receive professional assistance in advancing the country’s development activities and successfully completing our national development plan.

Aligned with the aforementioned national plan and vision, the government has granted banks monopoly rights over hard currency, thereby generating foreign exchange commissions. Furthermore, when considering the country’s annual inflation rate of 35 percent, banks pay savers a relatively low interest rate of 7 percent while lending at interest rates three times higher (21 percent).

Are banks utilizing this special opportunity provided by the government to their advantage? How are they leveraging this unique position?

Regrettably, it appears that the responsibility bestowed upon banks is insufficient. Instead of focusing on value creation, improving the standard of living for citizens, and generating appropriate profits, their primary and overriding agenda revolves solely around profit.

Consequently, the pursuit of profit-driven competition engenders a climate of death, destruction, and struggle. In contradiction to their purpose, banks engage in unlawful activities, forsaking the national vision and the perspective of the people in favor of self-enrichment. It is evident that this self-serving approach, lacking professional expertise and a collaborative mindset, is a recipe for failure.

Banks’ credit and foreign exchange supply are largely concentrated among a select few, primarily catering to the high-class economic category. Subsequently, this setup enables a handful of “investors” to exert control over the market, with market prices being the sole determining factor. The majority of society is excluded from accessing these banks due to the creation of closed systems for foreign exchange deployment and loans.

The banking industry, from employee hiring to promotions and credit provision, is predominantly driven by personal relationships, interests, and ethnic considerations. When new banks enter the industry, they are compelled to align themselves along ethnic or religious lines right from the start. While this may appear to be a short-term strategy for gaining an advantage in the banking industry, the long-term implications reveal a harsh reality of significant threats.

To foster an independent society and address this issue, it is imperative to increase the overall savings of the community and focus on generating foreign currency from the grassroots level. The broader community, which plays a significant role, is currently struggling with the credit system and the availability of foreign currency. Consequently, banks contribute to the widening wealth gap, resulting in income and asset inequality. It becomes evident how banks impede the circulation of money among the general public by restricting it to a select few groups.

Furthermore, banks have failed to establish systems that benefit middle and low-income traders or the rest of society by offering reasonable interest rates. The most concerning issue is that individuals who deposit their savings are excluded from accessing loans and foreign currency due to their poverty. This exclusionary practice emphasizes that banks are primarily focused on accumulating wealth. This raises questions about the suitability of bank board members and senior management in fostering public trust.

It is evident that neither the defendants nor the senior managers of the banks can be considered drivers of increased profitability. Moreover, banks demonstrate a lack of social responsibility in fulfilling their societal obligations.

In summary, the primary objective of any company, particularly institutions that receive protection through critical national resources, should extend beyond mere profit-making. It is disconcerting to witness the Ethiopian government and the National Bank of Ethiopia turning a blind eye to the imbalances present in the banking sector. It should be recognized that when the financial sector suffers, the economy as a whole is adversely affected.

The central bank holds the responsibility to curb these imbalances within commercial banks. Its main mandate is to ensure price stability, promote a sound financial system, and support economic development through the promotion of monetary stability and a competitive financial sector. This can be achieved by discouraging reckless lending and foreign exchange deployment.

(AmehaHailemairam holds a Master of Arts in Economics from Indira Ghandi University, with experience in the banking sector and as a financial analyst.)

Contributed by Ameha Hailemairam

- Advertisement -

Fresh Topics

Related Articles