By Andualem Sisay Gessesse – Banking sector in Ethiopia has been closed for foreign banks due to the government policy that aims to protect local private banks, which started mushrooming since 1995.
As a result of these protection, the total number of private banks owned by Ethiopian shareholders has today reached 24. Each of these banks are owned by a few thousand Ethiopians while most of them have tens of thousands of shareholders.
With the latest Amhara Bank, which joined the market after being established by over 169,000 shareholders, the total number of bank shareholders in may not exceed over one million people at the moment.
As a result of these investments and the protection of the banking industry from foreign banks, over the past few decades has enabled the shareholders of these private banks to earn a return on equity of between 20 to 50 percent per annum, far more than from the less than 10 percent global average.
Following the continuous pressure from global financial institutions like the International Monetary Fund (IMF), World Bank (WB), and many countries such as, the United States and other development partners, the Government of Ethiopia has been signaling to the local banks to prepare themselves in terms of technology and the like for the inevitable competition with the foreign banks.
After several years of giving the signals, finally the Government of Ethiopia last weekend announced its decision to open the banking sector for foreign investors, which ended the isolation of the country’s financial system from the rest of the world.
What it means to local banks, the people
Though the news was not a surprise for the already established local banks in Ethiopia, it was a shock for some of the bank leaders especially those just entering the market and are preparing to go operational.
Most of the bank directors have been expressing their fear that the opening of the sector to foreign banks will result in the declining of revenue and profit of the local banks. This is mainly because the foreign banks have huge capacity and technology, which makes the small local banks unable to compete.
It is true an importer of goods or an industrialist who needs hard currency to import spare part for a broken machine, cannot wait for months or even a year as usual to open a letter of credit (LC) to have access to hard currency in these local banks if he finds a foreign bank in Ethiopia that can handle his request in a few days.
Likewise, a civil servant or an employee who has been told by the local banks only to save but not being able to borrow without collateral, is also likely to move to a foreign bank if the bank has the technology that analyzes credit worthiness of an individual and lend money without a collateral.
Analysts of the sector have been suggesting that the entering of big foreign banks may lead these small banks to merge and become stronger.
Indeed, the entry of foreign banks poses imagined or real threat to local banks owned by less than one million shareholders and engaged in lending to the rich collecting from the poor.
But the decision helps foreign companies operating in Ethiopia to have access to hard currency whenever they want to repatriate their profit. We don’t expect rapid investment be it by the Ethiopians in the diaspora or by foreigners unless Ethiopia gives guarantee to the investors that they can repatriate their profit when ever they needed. Even though Ethiopia’s trade imbalance widening, we can’t force investors to reinvent their profit or tell them to way for a few years until the country gets hard currency.
In general it is a very good news for the majority of people in Ethiopia with 110 million plus population, and the economy in general if properly regulated.
This is because when the foreign banks come any Ethiopian can be able to open a dollar or Euro or other foreign currency account and be able to use it whenever she/he wants – be it to buy an ebook, or be it to purchase goods online and sell in her or his shop in Afar, Gambella, Addis Ababa, or Hawassa.
Believe me it properly implemented without the business-as-usual practice of protecting and helping the few rich to dominate businesses mainly import and export trading, the coming of foreign banks disrupt many things creating more jobs for entrepreneurs.
We don’t only need foreign banks to have access to hard currencies, but also generate hundreds of millions of hard currencies with online goods trading and services – be it for those engaged in small manufacturing, farming, mining, digital content creators, and freelancers.
I heard some people expressing their fear that the coming of foreign banks to Ethiopia will increase the flow of hard currency out of the country by those already engaged in stashing their money outside Ethiopia using both legal and illegal techniques.
Meanwhile denying 21st century global banking service to Ethiopians cannot be a solution to combat organized criminals and those already engaged in illicit financial transactions. I think the solution should be having proper regulatory mechanisms in place with committed professionals.
My question is, does the central bank of the country, the National Bank of Ethiopia, has the technology and professionals equipped with knowledge of detecting and tracking complex international financial frauds, investment and trade scams, and the like in the face of global recession anticipated in 2023?