Banking expansion in Ethiopia, inherent shortcomings

NBE Blog

BY ABEBE WOLDE GIORGIS – Currently, the banking industry in Ethiopia is growing rapidly in terms of accessibility, asset development, capital accumulation, profitability, provision of loan and saving.

Yet in light of the nation’s population size, the achievement can pale into insignificance. Mr. Mukemil Bedru is instructor at the Addis Ababa University Business and Economics Faculty. As to him, the banking industry is booming.

But regarding enhancing their capital, banks have limitations. The total amount of the capital of banks all over the country is 85 billion Birr and the industry totally transacts an amount worth one trillion Birr (current exchange rate 1 USD = 32 Ethiopian Birr ).

The amount of profit in each banking sector is rapidly growing from time to time and the deposited money from customers has grown to 400 million Birr.

The expansion of banking service in the country plays a crucial role in the economy by creating opportunity for competitiveness. Hence, managers should regard this as their means of survival.

Rapid transaction enhances the money’s speed of circulation in the market. It also helps to control illegal transaction of money and whip it back into the formal one. In addition, it stimulates the economy through job creation via loan provision.

About 8 new banks have reached at their final phase since their respective establishment and this indicates how the economy is going on the right track, according to Mukemil.
The current political development has also created enabling environment for the burgeoning of the sector.

This budget year, 16 banks have made 16 billion Birr profit testifying the healthiness of the business.

Attracted by this unfolding, people showing interest to involve in the sector have been investing. The recent proclamations which allows the Ethiopian Diaspora to participate in the financial business further creates an enabling situation.

Studies indicate that, currently only 30 percent of the population get access to financial services. This shows that the coverage is insignificant as compared to other African countries which provide financial service up to 70 percent of their population.

Kenya could be exemplary in this regard. Therefore, banks should look for other new market opportunities.

Because of the availability of infrastructural facilities helpful to run financial business, banks focus more on opening new branches in the towns than in the rural parts. Reaching the rural population seems a goal put on the backburner.

In fact, to reach the public opening new branches is not the only option; banks can run their business through utilizing effective technology.

The internet service provider and electric power supplier institutions such as, Ethio Telecom and Ethiopian electric can play crucial roles in this respect.

Service provision is evaluated both in terms of quality and quantity. Both are still below expectation.

The other thing that should be mentioned here is that modernizing the service to the higher level must go in line with the changing of ways of life of the public.

As to Mukemil, though the National Bank of Ethiopia did give instruction to commercial banks to devote their 2 percent annual budget for capacity building, banks still pay little attention in letting their human resources with better skills.

The financial institutions should know that gaining profit easily with no red hot competition is not long lasting. Hence, they should upgrade their service provision and competency through timely evaluation. Therefore, based on the need assessment of the industry, considering the matter is vital.

As mentioned above, currently, banks are mushrooming and each bank also has its own branch in the capital and states. No doubt banks have different level of experience, capital, human resource and managerial skills.

Some have a wealth of experience, while others are late comers. Hence, it is better to look forward to merger. This helps them to gain comparative advantage to respond to the market demand and to avert an unnecessary competition.

Nowadays, it is common to look two banks sharing one building or working next door to each other. This clearly indicates how they are fragmented and run their business wastefully in terms of time.

Therefore, merger can be a remedy which helps to reduce office rent and other expenses.

However, merging together should not be done arbitrarily. Their business’ philosophy, model and strategy must mirror that of each other. Irrespective of such approach, amalgamation could spell their demise.

Asked whether the expansion of banks has its own demerit, Mukemil noted that when the number of banks increases so does the competition. This may bring better opportunities to customers.

But unless it is cautiously managed, it might also create unwanted competition which could push the industry into a pitfall.

For example, providing excessive loan to customers might bring liquidity and inflation as well.

Whenever, banks reach at the highest level of competition the asset that is meant for collateral and projects that need loan should be assessed and a prognosis of their feasibility must be made.

It should be understood that the loan money belongs to the public (i.e. customers). Hence, this must be considered when it is provided in a form of loan. Also risk reduction study must be undertaken.

As it is true of other sectors, the bank industry is governed by free market and the high turnover of human resource from top managers up to the middle level is pervasive.

This might bring unwanted results, which in turn, negatively affect the business. Therefore to avert repercussions, the regulator – National Bank of Ethiopia – should formulate new directives.