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Summary: Although Ethiopia's banking sector is very tightly regulated, leaving little space for foreign banks, the private banks have been making large profits. There is mounting pressure on the government to loosen entry to foreign banks, especially as a liquidity crisis appears to be looming. Which way will the state swing? James Jeffrey in Addis Ababa has been finding out.

Whether Ethiopia's burgeoning banking industry represents a good news story or quite the opposite rather depends on where you are coming from - literally. Domestic private banking has taken off in a big way and the performance of Ethiopian private banks over the past few years - paying annual dividends of between 30% and 40% - indicates the sector is healthy and has much reason for cheer.

A less rosy picture emerges from the perspective of foreign interests, as the financial sector remains - along with about another 25 sectors including telecoms, media and retail - closed to outside investment.

As a result, the likes of the IMF are clamouring for the Ethiopian government to embrace a more neoliberal economic approach, while the government appears resolutely determined to stay the course with a more tightly controlled banking model.

Despite this apparent impasse,there exists some room for manoeuvre for foreign financial businesses, and may be more yet. "The question isn't if the financial sector will open up but when, and under what circumstances," says Tamrat Giorgis, managing editor of Fortune, an Addis Ababa-based week ly business newspaper. "It 's inevitable."

Established in 1963, the National Bank of Ethiopia (NBE) is the central bank of Ethiopia, regulating and setting policy, and one of three stateowned banks. The Development Bank of Ethiopia (DBE) can trace its history back to 1909 and was the first attempt of its kind to promote trade and agriculture during the reign of Emperor Menelik II. Nowadays it focuses on the country's economic development by providing medium and long-term investment credits as wll as short-term loans along with technical assistance to viable projects.

The third state-owned bank, the Commercial Bank of Ethiopia (CBE), is the largest commercial bank in the country, controlling the majority of the industry's assets. Like NBE it was established in 1963, and CBE now has nearly 7m customers with accounts in 746 branches spread across the country.

Ethiopia's banking industry is highly regulated by NBE making related investments particularly secure, Giorgis says. No Ethiopian bank has gone bust due to financial difficulties.

Such confidence is misplaced, however, says an Addis Ababa-based macroeconomist, who formerly worked within the state banking sector before moving to a multinational organisation. State banks face a number of significant problems, he says, such as being highly exposed to long-term loans. Regulation may be sound but it is implementation that is more of a problem, he cautions.

Within the private sector, there are 18 commercial banks of varying sizes, though most have partaken in the trend of impressive returns garnered during the past few years of growth. "Profit making has been as easy as cherry picking," says the macroeconomist.

Addis International Bank (AIB), a relative late comer to Ethiopia's banking industry, this year increased profit after tax by 270% compared to last year's figure. Such gains have spurred expansion across the board, with banks increasing staffing levels by up to 41% in the past year.

Pivotal moment

Ethiopia is at a crossroads, according to Jan Mikkelsen, the IMF's resident representative in Ethiopia. Its leaders can either continue with the existing developmental model that has reached a point of stasis or change course and breathe a degree of dynamism into the country's macroeconomic activities.

Previously, Ethiopia's former long-term leader, Meles Zenawi, who died last year after 21 years in power, rebuffed criticisms of his government's tight fiscal policy by pointing out that it allowed Ethiopia to weather the 2008-2009 global economic crisis. His successor, Hailemariam Desalegn, has made it clear that he intends to continue Zenawi's policies and not loosen state control of key businesses such as the financial sector.

But foreign influence is not entirely absent. The Ethiopian Bankers Association has a sol id working relationship w it h foreign banks including Germany's Commerzbank. CBE has a long tradition of cooperating with US-based Citibank and recently developed a new human resource strategy by working closely with consultants from the Frankfurt School of Finance & Management in Germany.

At the same time, multinational banks such as Commerzbank and UK-based HSBC have liaison offices in Addis Ababa, primarily for international trade and foreign exchange transactions. Pan-African banking conglomerate Ecobank Transnational recently opened its first representative office in Ethiopia to promote its services to overseas businesses and other banks in the region. UK-based Standard Chartered Bank is reportedly looking to open a representative office.

There is certainly more play available when it comes to foreign companies offering value-add services. At the beginning of 2013, NBE issued a long-awaited directive permitting transaction-based mobile banking. Among those looking to provide m-banking operations is M-Birr ICT Services PLC, the Ethiopian subsidiary of M-Birr Limited, an Irish company which created the M-Birr system, named after Ethiopia's currency the birr.

Bank of Abyssinia (BoA) signed a contract at the beginning of December w i t h L eba non-based Computer Business Machines for the purchase of 50 ATMs. It has also agreed to purchase 200 point-of-sale (POS) machines and a switching system - technology that drives ATM and POS devices - from the Moroccan company S2M.

Previously, United Bank, Awash International Bank (AIB) and Nib International Bank (NIB) formed a company called Premiere Switch Solutions (PSS) to provide ATM and POS services, purchasing a switching system from S2M for about $10.5m.

Now the rub

After a good run, however, Ethiopia's private banks are now starting to feel the pinch. This is due in part to stiff competition induced by the boom,

Foreign influence is not entirely absent. The Ethiopian Bankers Association has a solid working relationship with foreign banks including Germany's Commerzbank. CBE has a long tradition of cooperating with US-based Citibank with banks now scrabbling to hire and retain staff - as well as poach them from other banks - amid a dearth of skilled workers. Banks are increasing salary and benefits packages, putting a strain on resources.

Also, recent state restrictions on private credit are putting pressure on banks' capital reserves. A NBE directive mandated a 27% levy on news loans for the purchase of government bonds from the DBE. Banks lose on these due to bonds being outpaced by inflation.

State banks are not off the hook, either. Despite Ethiopia averaging growth of more than 10% in the seven years to 2011, according to the World Bank there are signs that Ethiopia's public investment-led boom may run out of steam.

Heavy government spending on imports and infrastructure for its five-year public works programme (two more five-year programmes are planned) is eating up liquidity, with foreign exchange reserves falling to less than two months' worth of imports. A funding gap looms due to a $3bn trade deficit and the IMF forecasting Ethiopia's economy growing at about 7.5% in 2013 and in 2014, short of the government's ambitions of maintaining 11.2%.

Whether such pressures might spur the government to become more amiable toward the foreign private sector remains thoroughly steeped in conjecture.

However, the 2015 election should offer a significant indication of what the future may hold, Giorgis says. For even if the ruling party wins, if the opposition is able to offer a good enough policy package that highlights flaws in governmental policies then fiscal change may well follow.

Furthermore, Ethiopia is applying for World Trade Organisation (WTO) membership, with accession negotiations focused on opening up market access to restricted sectors such as finance. Though 'don't hold your breath' appears to be the consensus. Countries such as the Republic of Sudan, Algeria and Bhutan started the accession process long before Ethiopia but remain observers. China's application took 15 years.

If the financial sector does open up, what then for foreign banks keen to invest? Banks should come prepared for initial returns likely to prove lacklustre, says a banking expert who has worked for an international bank in Ethiopia for more than a decade. Despite Ethiopia's massive unbanked population, opening branches across the country won't be a feasible or profitable option for a long time, he notes. Better to open a branch in Addis Ababa and build a solid platform by purchasing a majority stake in a local bank. Also, evaluate thoroughly rather than rush in, he says.

The macroeconomist offers some advice, too, and which could apply to various interested parties when it comes to the future of Ethiopia's banking industry and what courses of action to take. "Change is always a risk," he says, "but not to change is even riskier." ua

'The question isn't if the financial sector will open up but when, and under what circumstances, it's inevitable,' says Tamrat Giorgis, managing editor of Fortune, an Addis Ababa-based weekly business newspaper

Foreign influence is not entirely absent. The Ethiopian Bankers Association has a solid working relationship with foreign banks including Germany's Commerzbank. CBE has a long tradition of cooperating with US-based Citibank

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Publication:African Banker
Geographic Code:6ETHI
Date:Feb 17, 2014

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