What does the law allowing foreign banks to enter the Ethiopian market contain?
What does the law allowing foreign banks to enter the Ethiopian market contain?
The House of Representatives has approved a banking bill that would allow foreign banks to enter the Ethiopian market by a three-vote majority.
The law was approved two years after the cabinet decided to implement a policy to open the banking sector to foreign investors.
The Cabinet passed the resolution at its A L I meeting in August
Following this decision, a bill was submitted to the House of People’s Representatives in March last year to implement the policy. The bill was passed by parliament on December 8, 2017, five months later.
The law, passed yesterday, is believed to “open the banking sector to foreign investment on a carefully prepared legal and regulatory basis to improve its competitiveness and efficiency and contribute to sustainable economic growth.
According to the law, “any foreign bank with partial or whole ownership ” is allowed to open a foreign bank branch or agency office.
In addition, foreign banks can become shareholders in Ethiopian banks.
The law states that the stake that foreign investors can hold in a local bank “shall not exceed 40 percent of the total subscribed capital of the bank.
In addition, it may allow foreign banks to buy part or all of domestic banks “exceptionally” to attract strategic benefits to National Bank investments or to find solutions to troubled banks, as well as to stabilize the financial system.
The law sets out the requirements for banks to open their continuity, branches and representative offices. In addition, it has regulations on how control activities are conducted.
According to the law, “no bank may open or close a branch or office in Ethiopia without first obtaining written permission from the National Bank.”
The law stipulates that the “minimum conditions and requirements” for opening and closing branches will be determined by the national bank’s guidelines.
The bill, which was passed by parliament, includes provisions for Ethiopian citizens who are foreign nationals to participate in banking activities.
Under the law, a person who has been confirmed as an Ethiopian national and wishes to be counted as an entrepreneur in the country “cannot withdraw any payment or income from investment in foreign exchange outside Ethiopia.”
The law states that both Ethiopian and foreign citizens, “the manner in which they purchase bank shares in birr or the manner in which they establish banks shall be determined by the issuance of guidelines by the National Bank”.
Members of parliament also raised concerns about foreign banks entering the country.
Responding to the concerns, National Bank Governor Mammo Miratu said the bill “does not aim to attract foreign investors.
“The outcome and solution is not to bring foreign investors into Ethiopia’s financial sector system, but to work to improve the competitiveness of the banking sector and its contribution to sustainable economic growth,” he added.
“The law gives the National Bank the role of providing solutions when a bank faces financial difficulties, clearly sets out these powers and responsibilities, clarifies solutions and decisions and includes legal provisions that enable the National Bank to fulfill its responsibilities as a regulatory office,” he said.
Finance and financial management expert Dr Abdulmannan Mahamad told the BBC that the approval of the law “does not mean that foreign banks will line up and enter the country”
“Not only the economy, but also the political situation, only a few banks may be interested,” he said. “I don’t think the situation in Ethiopia is very encouraging for foreign banks.
Dr Abdulmannan said foreign banks should conduct extensive research before entering the market.
“I don’t see any reason for these banks to enter the country and take away existing banks or put them at a loss,” he said.
“Furthermore, if the monitoring of the national banking supervisory system is implemented, ”I see no reason why it would put local banks or the sector at serious risk,” he said.
Are there advantages or disadvantages to foreign banks entering Ethiopia?
The Ethiopian banking sector is not new to foreign banks. Banco di Roma and Bank of Abyssinia.
However, for many years, Ethiopian markets in sectors such as banking and telecommunications have been closed to foreign and private investors.
Former Prime Minister Mallas Zenawi said at the World Economic Forum in 2012 that Ethiopia does not have the capacity to open up the banking and telecommunications sectors.
“Stop tracking, they use tools we can’t even understand. How can we control them? We have no power now,” he said.
While there are those who support Mallas’ position, there are those who say that we cannot live apart from the world market.
When Prime Minister Abiy Ahmed came to power in 2018, he indicated that state-owned enterprises would be put up for sale in whole or in part.
The government decided this; foreign investment in the country, he says, to modernize the agriculture-dependent economy.
It also says that bringing in foreign exchange supply, strengthening job innovation and international competitiveness, will help bring about economic growth.
Following the opening of the telecom sector to foreign investors, it has now been decided to open the banking industry to foreign companies.
Months ago, Prime Minister Abiy addressed the country’s parliament: “Banks should be technology-enabled, keep pace with global development and prepare to compete with banks in other countries.”
Is the entry of foreign banks a concern for domestic banks or a good thing?
What do they bring with them?
National Bank of Ethiopia Governor Yinager Dassee (PhD) said months ago that many African banks are showing interest in entering the Ethiopian market.
According to FurtherAfrica’s 2020 data, as of 2015, nine foreign banks have offices in Ethiopia.
Zamadeenah Nigatu, chair of the Fairfax African Fund, said “this announcement is a big step forward.”
“For example, I have worked a lot in so-called developing countries. We can look at Argentina, Brazil, Asian countries like China and India.
The economist said the opening of the sector in Ethiopia, which is second only to Nigeria and South Africa in terms of gross domestic product (GDP) in sub-Saharan Africa, “shows that Ethiopia is open for business”.
When foreign banks come, they bring international experience – administrative and technological experience as well as foreign exchange…”
Father Zamadeenah also cites customer service as one of the benefits.
“For example, in the United States where I live, banks take very good care of their customers.
Consultancy and audit expert Xilaahun Girma said one of the benefits of foreign banks’ entry is that they attract foreign investors to the country.
“The opening of this sector to foreign banks will allow the spread of new technologies,… invite investors who do not believe that local banks will provide enough money to the country.
For example, if Citibank or Standard Chartered enter Ethiopia, foreign investors will see it as an advantage when they conduct research,” he said.
However, Mr. Xilaahun said the country opened the banking industry under pressure from international institutions.
How about: “One of the World Trade Organization – WTO criteria is that countries should not be barriers to trade and services.
“Although local banks are at a better level of capital and technology than before, they still have a long way to go,” he said.
So how can banks in Ethiopia compete?
W aling together
The government says local banks must merge or leave if they want to remain competitive following the new policy.
Abba Zamadeenah says the idea is good.
“Awash Bank, the largest private bank in Ethiopia, ranked 83rd in Africa,” he said.
“Power is valuable in the banking industry. We have 18 banks, and three or four may be added soon. 10 are awaiting permits.
This is not a requirement at all. I guess, in a year and a half, there will be five banks with great potential.”
When banks merge, their lending capacity increases, and technology advances. In addition, they say, they can cope with the arrival of foreign banks.
Economist Xilaahun cites Nigeria as an example, saying, “First, the will can be made to separate, otherwise the strong can take over the weak.
Asked if the local banks could disappear when foreign banks enter, he said: “I don’t expect Ethiopian banks to disappear. But their corporate clients are taken away,” he says.
“What should not be mistaken is that these foreign banks are not expected to enter rural areas and do retail banking.”
Mr. Zamadeenah believes that foreign banks should have a better chance of growing if they buy shares from banks in Ethiopia and work with them.
Arguing that local banks will not disappear, Xilaahuun said local banks can serve other communities as foreign banks focus on the capital and other major cities.
“Unless we force them by policy, they will do their work from one headquarters and connect the other with technology. They are not supposed to open branches in villages like local banks.’’
The consultant frequently mentions the concept of the ‘corporate client’. What is a ‘Corporate Customer’?
“There is something called 20/80 in the banking industry.
20 percent are the biggest foreign exchange earners for the bank. There is no doubt that foreign banks are coming to kidnap these customers. Their goal, ‘‘is a corporate customer but it’s a mistake to think they’re going down and lending.’’
“That is why I say they should merge to be competitive and the National Bank is not expected to control thirty or forty banks,” Xilaahuun said.
The expert said the capital of the banks is five billion birr but he predicts that the severity of this capital will increase soon.
“There are no banks that meet these criteria, and if there are no banks, their option is to merge,” he said.
For headache, remedy for heartburn’
Ayyala Galan (PhD), a well-known economic critic and researcher at the Kuwait Institute for Scientific Research (KISR), is among those who strongly oppose the bill.
‘‘For a headache, it is a nausea pill,’’ the economist said, adding that opening the sector to foreign companies is not based on the actual problems in the country.
The banking and financial sector in Ethiopia has two major problems, he said.
The first is called structural imbalance, he said, adding that public banks are too large to compete with ‘small’ private banks.
‘‘The very big ones have competed with the small ones, and it is the state banks that benefit from everything.’’
To resolve this huge inequality, they say, it should remain under the government and be divided into different banks, or it should be privatized and taken into private hands.
‘‘In coffee, you don’t put people who don’t have the same weight on stage and cooperate.’’
According to the economist, the second problem facing the Ethiopian banking sector is regulation.
They cite the worst interest rates on bank loans as an example.
“In the world, there can be no country that grows by borrowing at 15% or 18% interest rate and doing business with it,” he said.
‘‘Like in other countries, they should lower interest rates to 7% and 6%, respectively.’’
This will give millions of citizens who have not been able to borrow before the opportunity to borrow, he said, although banks may lose their profits.
Therefore, the government’s decision to open the sector to foreign banks is not based on solving the problem, he said.
One of the reasons why foreign banks benefit the country is that they provide foreign exchange to the country.
Economist Ayyala Galaan (PhD) strongly opposes this. In explaining this, he says the statement – the phrase “I see it as a long-term problem, a current solution”.
“An imported company can bring in a single, million or a billion when it first comes in. But, since it came in and started operating, it has been sending dollars abroad every month.”
“The dollars that come into the country come back from selling goods abroad, and these banks have nothing to do with bringing in dollars from abroad and pouring them in.”
Another benefit that banks are said to bring is the introduction of new technology, but the economist argues that this is “false economics”.
“The technology brought by the banks is not ‘rocket science.’ The technology is not in the hands of the banks, it is in the human mind.
If they say they will import this technology through auto repair shops, fertilizer shops, and others, I will accept it.”
T’o’ano
What controls should be imposed on foreign banks when they enter the country? The question is another point of contention.
“No bank has ‘failed’ in Ethiopia in the past 27 years,” Zamadeeneh said, adding that the National Bank has done a good job in this regard so far.
“However, the National Bank should increase its regulatory power as foreign banks are now coming. Because it is very different to control local banks and to monitor complex global banks.”
Xilahun predicts that a new regulatory process for banks operating with a focus on the ‘corporate customer’ is likely to be issued in the near future.
“Many people are saying where are you in debt to buy a house and a car,” he said, adding that government and non-government employees in Finfinnee can pay their monthly rent to the bank.
The National Bank believes that when foreign banks enter the country, “the amount of debt that is healthy will correct the existing laws”.
However, he says, “Now that they are allowed to enter, they have to think about how to leave.”
“We have to follow the guidelines issued by the National Bank. It needs to be known how much money they can spend each year. There should be a way for Ethiopians to buy shares,” he said.
