macroafricaintel | [#StopTheKillings] Would foreign banks be beneficial for Ethiopia? (3)

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

Expertise, capital and jobs
KCB Group, Kenya’s largest bank, which opened a representative office in Addis Ababa in 2015, and has branches across East Africa, is one of many African and indeed foreign banks likely to make a foray into the Ethiopian banking sector. Clearly banking on the new reformist prime minister, it announced in late June the country could open its banking sector in about two years’ time. There would certainly be a lot of opportunities for newcomers.

According to the central bank’s website, there are currently 19 local banks in Ethiopia. That is about 6 banks for every 1 million Ethiopians. This is clearly inadequate; albeit this is not necessarily an intelligent measure, especially when you consider that the Commercial Bank of Ethiopia has about $18 billion in assets and a customer base of about 16 million. A couple of foreign banks have representative offices in the country but are not licensed to conduct plain vanilla banking services; that is, collect deposits and issue loans. The reformist Ahmed government has raised hopes that this might change, however.

It begs the question, though, about whether such a move would be beneficial. The government, old and new, is particular about financial inclusion. Incidentally, even in African countries where there are more liberal policies, financial inclusion remains a challenge. According to the World Bank, financial inclusion “means that individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way.

The key question then is whether allowing foreign banks to participate in a country’s financial services sector engenders financial inclusion. The evidence is mixed. In fact, there is probably not much that they do in this regard. There are a few good stories, of course. For instance, some foreign financial firms specialise in microfinancing. But they are usually a drop in the ocean and not necessarily cheaper or sophisticated than local ones. The Ethiopian government is right to prioritise financial inclusion. According to the World Bank, it is “an enabler for 7 of the 17 Sustainable Development Goals (SDGs)” and reckons it to be crucial to poverty alleviation and shared prosperity. To this end, it has set a global goal of Universal Financial Access (UFA) by 2020, just two years away. Would this goal be reached by then? Probably not. But much progress is being made. More relevant here is whether foreign commercial banks help with this goal.

Quite frankly, financial inclusion cannot be the main reason for allowing foreign banks in to a country. Their advantages relate to the new capital they bring for the use of local and foreign firms doing business in the country. They also allow for more seamless trade. It is much easier to do business with a bank in-country as well as abroad for international trade, for instance. But pushed rightly, foreign banks can help with such idealized goals as financial inclusion. They certainly are able to deplore the latest technologies in this regard. That is as far as most would go, though. Brick and mortar branches add on unnecessary weight. And increasingly, when foreign banks make a foray to another country, they rely on local deposits to fund local loans.

Their real advantage for a country are big ticket transactions. It is easier to get financing for mega projects by firms if foreign banks operate in the country. True, while foreign multilateral development financial institutions do provide some funding, commercial ones not backed by their country’s government rarely do. Besides, there is a need to differentiate between foreign banks that are from other African countries and those outside the continent. Although, it is the latter than tend to get all the attention, the former have their advantages too. For instance, if a Kenyan bank is able to do business in Ethiopia, the gesture is expectedly reciprocated for an Ethiopian one in Kenya. But since a Kenyan bank might have no more heft than an Ethiopian one, it is not surprising that the more capable western and eastern foreign banks are the ones much sought after.

In any case, South African banks remain dominant on the continent. The largest, Standard Bank, is excited about the Ethiopian opportunity, certainly. With a Chinese bank in its shareholding, it is increasingly the go-to-bank for transactions with the Asian nation. At least, it likes to portray itself as such. That is probably where the opportunity is. That is, pan-African banks looking to expand to Ethiopia.

Otherwise, Western banks have been cutting back on their African exposure. Barclays, a British bank, is a recent example. Curiously, even these Western types might be interested in an Ethiopian venture. Investment banks are certainly keen. A capital market is virtually non-existent. Technology and expertise would probably be the key benefits.

For these to be realised, the Ethiopian government would need to liberalise the sector as quickly and as widely as possible. For if there is any whiff of uncertainty or hesitation in whatever liberalisation policy is announced, there might not be many foreign banks willing to take the risk. Potential investors would also be looking to see a more institutionally-directed and sustainable shift towards reform.

Currently, it could be rightly said that there is a one-man risk. Were Prime Minister Abiy Ahmed to leave the scene, what then? And judging by the relative slow pace planned for banking sector reforms, Mr Ahmed may not be in office long enough to make a meaningful impact. Thankfully, there is an almost existential need to attract foreign capital. The perennial foreign exchange shortages would in due course spur even more protests as jobs become increasingly scarce and commodities more expensive. Nothing short of comprehensive reforms of the banking sector would do to resolve the problem.

The author, Dr Rafiq Raji, is an adjunct researcher of the NTU-SBF Centre for African Studies, a trilateral platform for government, business and academia to promote knowledge and expertise on Africa, established by Nanyang Technological University and the Singapore Business Federation. This article was specifically written for the NTU-SBF Centre for African Studies

Also published in my BusinessDay Nigeria newspaper column (Tuesdays). See link viz.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.