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Ethiopia: Financial sector resists opening doors to foreign banks
Ethiopia’s financial sector was the center of discussion last week at a summit organized in the country’s capital, Addis Ababa, under the auspices of The Economist magazine.
Though the country’s officials realize the negative impact caused by the absence of foreign banks, they told the participants that it is not yet the right time to open up the sector for foreigners though the government says it plans to do so after some time.
Some panelists mentioned the major challenges the country is facing to realize its ambitious growth targets due to shortage of finance. One of those who advised Ethiopia to open up its financial sector for foreign banks was Sergei Stankovski, managing director of one of the biggest US Wall Street banks, Goldman Sachs.
“The banks are supposed to channel savings into investments to allocate capital. Therefore, question number is, are Ethiopian banks doing it efficiently? The second question is whether domestic savings in Ethiopia are sufficient to finance ambitious investment programs? In my view the answer for these questions is probably no,” he said.
“Therefore, to me the opening of the banking system to foreign banks is only two things. One, the ability to bring in foreign banks who can bring in their own capital and who can bring their own expertise and distribute this capital and expertise domestically here in Ethiopia. And second allow the Ethiopian banks to borrow internationally,” the US banker elaborated.
Helaway Tadesse, vice-president of Zemen Bank, one of the 16 private local banks operating in Ethiopia, responded: “A lot has been done and a lot more can be done. The key issues can be how three different groups can find what they need. One is the private sector, the other is the government and another is state enterprises.”
Stating that private banks’ profits are affected due to the lending limitation cap introduced by Ethiopia’s central bank and that forces each bank to buy government bonds, Helaway however pointed to positive developments in the banking sector in Ethiopia.
He noted that deposits had reached 360 billion birr (US$17 billion – 30 percent of the country’s US$54 billion GDP) with 2,500 bank branches across the country, while there are 20 million accounts and 2 million debit card holders with several thousand ATMs and points of sale (POS) devices nationwide.
Ambitious targets
Ethiopia – which has set an ambitious target of becoming a middle income country in a decade, has been investing heavily on infrastructure development in recent years. Even though huge government projects have been delayed due to a crunch in financing, the government has been resisting the pressure from foreign banks to operate in the country.
To finance its infrastructure projects the country this year accessed 1.5 billion euros through a Eurobond offer.
In addition, Ethiopia has also been allocating huge budgets from its coffers through increased tax revenues, on average amounting to 20 percent annually.
Ethiopia exports mainly primary agricultural products worth around US$3 billion per annum, leaving it with an approximately US$10 billion trade deficit. The continued widening gap between the country’s imports and export earnings along with the absence of foreign banks in the country, has been causing shortages of hard currency in Ethiopia.
One of the panelists, whose foreign private company has invested in several sectors in Ethiopia, expressed concern about the problem of remitting shareholder profits caused by shortage of foreign currency.
Amidst all these challenges, government officials insist that it is not yet time to open the financial sector to foreign banks even though the country has very ambitious development targets aimed at making Ethiopia a middle income one by 2025.
Next door, adjoining where The Economist was hosting it discussion, officials of South Africa’s Standard Bank were gathered for the opening of their first office in Ethiopia. They were following in the footsteps of another African bank, Eco Bank, which opened its office in Addis Ababa last year.
Both banks are hoping that Ethiopia, which is working to join the World Trade Organization, will open up its financial sector for foreign banks sooner or later.
Remittances
According to new date from the World Bank, remittances to Ethiopia from its diaspora community has increased in the past couple of years and expected to grow by over 50 percent in the next 3 years.
The National Bank of Ethiopia says the official receipt of remittances hit US$1.5 billion an approximately 88 percent jump over its value in the previous year. Global remittances sent home from some 250 million migrants are projected to grow by about one percent to US$588 billion.
Source: Africa Review