Ethiopia: Opening up: How far and how fast?
(By Tom Gardner, The Africa Report) Analysts are almost unanimous in their views of Ethiopia’s financial sector, which remains small, fragmented and uncompetitive, even compared to its underperforming regional peers. In the 27 years since the Ethiopian People’s Revolutionary Democratic Front (EPRDF) came to power, there has not been a single private bank merger.
Understanding the financial sector’s history helps to explain where it is today. ‘Somewhat smaller than that of Bethesda, Maryland’ is how Nobel Prize-winning economist Joseph Stiglitz’s described Ethiopia’s banking system in 2003. The ruling EPRDF set about tentatively introducing market reforms to the country’s then entirely state-run banking sector from 1994 to 2003. Those years were characterised by, at best, sluggish growth.
Photo: The CBE adds a few new storeys to its future headquarters, set to be the tallest building in east Africa
The years since tell a different story. In little more than a decade, the sector has grown fivefold. Eleven private commercial banks were established between 2003 and 2013, all of which are profitable. There are now 17 private banks in Ethiopia. There has been a ninefold growth in the number of bank branches, from 350 in 2003 to more than 3,000 today, while bank capital doubled from $1bn to $2bn between 2010 and 2016. Between 2014 and 2016, the annual growth in bank assets was 18.5%.
But once Ethiopia’s vast population of around 100 million is taken into consideration, total banking sector assets per capita in 2016 stood at about $225, less than a third of neighbouring Kenya’s $782, according to the International Monetary Fund. “We are way behind – even in the regional context,” says Gemechu Waktola, founder of The i-Capital Institute, a consultancy in Addis Ababa. “It’s simply not the kind of bank capital you expect from a country that is the second most populous in Africa.”
The services that banks offer are basic, mostly short- and medium-term lending to relatively safe sectors such as import and export trading, commercial real estate and hotels. And, despite recent government efforts to boost deposits, Ethiopia’s savings rate is among the world’s lowest, making it especially difficult to mobilise funds for risky projects with long horizons.
Loans hard to get
As a result, manufacturing and agriculture – linchpins of the EPRDF’s development strategy – comprise only around 10% of banks’ loan books, according to Abdul Mohammed, a London-based financial analyst. “They’re not interested. It’s too risky for private banks,” he says.
Scarce, too, are seed capital for start-ups, household mortgages and even simple loans for education – due in large part to strict collateral requirements and tough credit checks entailing careful scrutiny of each applicant’s credit history and sometimes even their personal life.
“Right now, the financial sector is not serving the needs of the economy,” says Andualem Telaye Mengistu, a macroeconomist at a government-run think tank. He argues that the current model of financial repression – in which interest rates are kept artificially low in order to fund state spending on infrastructure – fuels inequality.
Real rates of return are negative for savers using banks. The average savings interest rate is 7%, but the country regularly records double-digit inflation. In contrast, those who can afford to invest in land, housing or even cars can enjoy sky-high returns.
The Commercial Bank of Ethiopia (CBE, #19) controls about 70% of the sector’s total assets and acts much like a policy bank geared towards national priorities, particularly housing and energy. The CBE is hugely profitable – in 2016/17 it netted more than half a billion dollars in gross profits – and relatively dynamic, but its muscle has come at the expense of private banks, which have yet to make inroads because of its quasi-monopoly. Indeed, since 2009 their share in loan disbursement has declined due to tight anti-inflationary restrictions placed on their lending activities. The government introduced new restrictions following a sharp devaluation of the birr in October.
Since Ethiopia’s new prime minister, Abiy Ahmed, announced a radical programme of privatisations in June, many have been wondering whether the government might also loosen the screws on the financial sector, opening it up to foreign competition. With new central bank governor Yinager Dessie replacing the conservative Teklewold Atnafu, policy changes could soon come.
Private banks have been lobbying the new administration to soften regulations, which are among the most restrictive in the world. They complain about the obligation, introduced in 2011, that they pay 27% of new loans that they issue to the National Bank of Ethiopia in order to fund development projects, by purchasing central bank bonds at punitive rates. The privately owned banks also object to having to surrender 30% of their hard currency earnings each month. Such regulations are “squeezing our operations”, says the president of a large private bank who asked to remain anonymous.
Mild deregulation is possible but anything much more radical remains unlikely. Most experts reckon that a lifting of the ban on foreign banks is particularly far off, though a commitment to liberalisation will be necessary if the government decides to revive Ethiopia’s long-dormant accession to the World Trade Organisation.
There remains a broad consensus in Ethiopian policy-making circles against rapid liberalization, with many experts citing the risks of banking crises when regulation is weak and local banks are uncompetitive. For all its faults, the Ethiopian banking sector has never experienced a major crisis.
In the meantime, those like Gemechu and Abdul advocate for what the former calls a “controlled opening” with careful parameters – for example by allowing foreign banks to enter into joint ventures or management contracts. “The options are not just fully closed or fully open,” Gemechu says. Perhaps the most likely move would be lifting the ban on diaspora Ethiopians owning shares in local banks.
But Henok Assefa, chief executive of the consultancy Precise Consult, adds that the EPRDF remains fundamentally wary of a liberal financial sector, not just because of its capacity to regulate it but because financial repression is central to its model of state-led development. “This is predominantly about their development strategy,” he says. “They would be very wary of inviting foreign banks into a sector which they control in order to guide capital in a specific direction.”