Posted on Wednesday, 16 September 2015 14:12

Ethopia's splendid Isolation

By Jacey Fortin

Photos© Illustration by Séverin Millet for TARIt may be small, constrained by regulations and slow to develop, but by some measures Ethiopia's network of privately run banks is one of the healthiest to be found in Africa


The Ethiopian state has carved out a major role for itself in the financial sector, but privately owned banks are still managing to do well.

Private banks can compete by offering better customer service or focusing on a certain sector

With well-capitalised portfolios and profit margins exceeding continental averages, Ethiopia's public and private banks are enjoying a period of strong growth.

Deposits are on the rise, and an International Monetary Fund report last year found that "return on assets and return on equity showed comfortable performance, at 3.1% and 44.6%,respectively."

This is good news for Ethiopia, which boasts one of Africa's fastest-growing economies.

Still, Ethiopia's private banks are lucky the sector is closed to foreign competition because they are not yet ready to compete with their continental and global peers.

The government in Addis Ababa only allowed private banking in 1994, so the country's 16 institutions are young. They are also constrained by a regulatory framework that leaves them unable to offer credit cards or investment banking services.

Compared to more mature institutions in countries like neighbouring Kenya, Ethiopia's private banks have a long way to go.

The private banks' health is partly a result of protective government policies and the small size of the sector as a whole.

But that leaves this country of 95 million people vastly under-banked, and business owners are paying the price.

Among the many challenges that private enterprises face in Ethiopia, "access to finance ranks top," says Getachew Regassa, secretary general of the Addis Ababa Chamber of Commerce, which counts about 15,000 companies as members.

"To start with, the credit system is based on collateral, so collateral itself is an issue, and the other issue is the availability of credit to different segments of the private sector."

Getachew adds that while private banks do not seem to discriminate according to sector, size matters.

Large companies have easy access to credit, while tiny businesses benefit from the government's investments in micro-finance.

This leaves medium-sized companies out in the cold. The World Bank made a similar assessment this year, noting that banks "tend to see small and medium enterprise lending as having higher risks and lower profitability than lending to large enterprises."

No need for risk

Addisu Haba, who chairs the Ethiopian Bankers Association, says it makes sense for private banks to avoid risky investments, especially since there is no shortage of clients seeking loans.

"The problem is not that we are discriminating because they are small or medium enterprises," he explains. "If you don't have people with collateral, then you go to someone who has it."

As the president of Debub Global Bank, which is less than three years old, Addisu knows the challenges faced by small private banks, which are dwarfed by the state-owned Commercial Bank of Ethiopia (CBE, #23).

In recent years, all three public banks, which include the Construction and Business Bank and the Development Bank of Ethiopia, have accounted for at least 60% of loan disbursals.

The CBE alone has more than 800 branches, while not one private bank has reached the 200-branch benchmark.

Private banks can compete by offering better customer service, focusing on certain sectors or simply having a branch in the right place. But competition is dampened in part by a low interest rate for savings, which is set below the rate of inflation by the National Bank of Ethiopia (NBE), the country's central bank.

"Public or private is not the main issue," argues Alemayehu Geda, an economics professor at Addis Ababa University. "If you are a private entre- preneur, what matters is access to the money and the cost of borrowing, which is about the same [from either a public or a private bank]."

Still, many private bankers remain optimistic about their prospects. Helaway Tadesse is a senior vice-president at Zemen Bank, which caters mostly to corporate clients.

He says banks are increasingly competitive when it comes to interest rates paid on deposits, and that these are now positive in real terms for long-term savings deposits.

He adds that continuing economic growth bodes well for the sector as a whole, noting that returns on equity have fallen somewhat from their peak of a few years ago but are still at comfortable levels. "Operationally, banks are not exposed to serious risks as lending is funded fully by customer deposits, as opposed to, say, short-term lines of credit," Helaway says.

"And there aren't what you would consider very risky products or instruments in the system other than conventional loans."

But the sector has not been without controversy. One issue is the lack of foreign exchange, which is steered toward government-prioritised projects.

Although trade finance constitutes one of the private banks' key sources of revenue, the dearth of foreign currency can force importers to wait months to open letters of credit.

Some analysts also recommend that the NBE adopt a more flexible exchange rate, which could boost exports by allowing the Ethiopian birr to drop in value.

Regulatory squeeze

A new issue that pits the state against private banks arose in 2011, when the government mandated that private banks spend 27% of their loan portfolio on low-interest bonds from the central bank, thus constraining their liquidity and lending capacity.

And a 2011 increase in minimum paid-up capital, from 75m ($3.6m) to 500m birr, sent smaller banks scrambling for more shareholders and funds, and made it difficult for newcomers to enter the sector.

The regulation met with resistance, and bankers are still pushing for measures that would either increase yields or place time limits on the bond obligation.

The Addis Ababa Chamber of Commerce, too, has become an advocate for private banks.

In recent years it has helped convince the NBE to ease liquidity requirements and played a key role in challenging the 27% rule on bond purchases.

But Addisu, who chairs the Ethiopian Bankers Association and was president of Bank of Abyssinia when the measure was introduced in 2011, says the sector has learned to live with the regulation – and may even have been strengthened by it.

"We thought that it would choke the growth of the banking system as a whole," he says. "So we worked hard to mobilise more deposits. This country is under-banked, so there was always room for us to mobilise more resources."

While the government argues that regulations are in place to lessen risks for banks and to steer finance toward favoured projects, private enterprises still struggle to access the credit they need.

Proponents of the system argue that things are moving in the right direction. "Regulatory changes are slowly working to make the financial environment more conducive for risk taking," says Zemen Bank's Helaway.

He points to a credit bureau that is capturing a growing share of businesses, as well as a trend toward better record-keeping for tax-compliance purposes.

"Over time, these developments, plus the intensifying competition among banks, will propel private banks to move beyond just picking the safest and most traditional credit requests."

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