Will foreign banks be beneficial for Ethiopia?
By Rafiq Raji
In June 2018, Ethiopia’s new prime minister Abiy Ahmed survived an apparent assassination attempt. The attack was not entirely surprising. Ahmed has been ruffling quite a lot of feathers. He purged the military hierarchy, instituted reforms at businesses owned by the military, and signalled the liberalisation of crucial sectors like banking and telecoms; if not for anything else, to ameliorate a perennial foreign exchange shortage.
Fears have been raised about whether allowing foreign banks to participate in the Ethiopian banking sector would be beneficial to the country. Not that there was not already some representation by foreign firms. Some already operate representative offices, for instance. But the goal has always been to be able to operate fully-fledged banks. The Ahmed administration is a potential ray of light in this regard; albeit the government insists opening up the financial sector is not being considered at this time. Years ago, this might be taken with all seriousness. But the Ethiopian government rarely signals its policy drift. The recent positive policy moves were a huge surprise, for instance.
Opening the gates
In early June 2018, the Ethiopian government announced it would allow domestic and foreign investors to take stakes in Ethio Telecom, the state-owned telecoms firm and Ethiopian Airlines, the state-owned carrier. Other state-owned enterprises (SOEs) up for grabs are Ethiopian Power and Maritime Transport and Logistics Corporation. The state would still retain majority stakes in them, however. Regardless, it is a huge change in policy. In a speech to parliament in June, Ahmed suggested any sale would be gradual, however, over 10 to 30 years. He was probably being mindful of political sensibilities.
More importantly, as much as 40% of Ethio Telecom, which has some 60 million active subscribers already, could be sold to foreign operators like MTN, Vodacom and others who have long expressed interests in operating in the country. The government added a caveat, however, asserting it would need to do a study over a year or two before any policy move.
No such profound pronouncement has been made for the financial services sector talk, however. For the banking sector, there have been some participation by foreign niche players. In February 2015, Ethiopian banks launched mobile money services with the help of foreign fintech firms: “helloCash” by BelCash, a fintech firm based in The Netherlands and “M-Birr” by MOSS ICT, a fintech firm in Ireland. Another example of a foreign financial services company long operating in the country, albeit in partnership with Ethiopian banks, is Visa, a credit and debit card company. Since 2004, it has been providing card services to customers of Ethiopian banks. Despite its vintage in the country, it has long asked for room to do more.
As early as 2015, the government had also indicated it wanted to develop a secondary fixed income market.
There have been some changes in the financial sector, nonetheless. In June, a new governor was appointed for the National Bank of Ethiopia (NBE), the central bank. There is not much to suggest governor Yinager Dessie, who used to be head of the national planning commission, would be making significant policy changes. Much store is to be put in what Ahmed says and does. And for the banking sector, there is not much as yet. It is certainly inevitable that full banking licences would be granted to interested foreign banks at some point in the future, especially as the telecoms sector was much more coveted by the government.
Besides, the government already allows some foreign participation in the banking sector. In April 2016, for example, the Ethiopian legislature made amendments to its banking laws as it joined the African Trade Insurance initiative.
Some foreign banks seized the opportunity when the rules were first relaxed. The European Investment Bank opened an office in July 2015, for instance, lending to mostly state-run infrastructure projects. So did South Africa’s Standard Bank months later in October 2015. Other foreign banks in Ethiopia are Commerzbank, a German bank, the Export-Import Bank of India, Bank of Africa, and so on. The trailblazer was Turkish state-owned Ziraat Bank, opening an office in April 2015.
That said, there was similar enthusiasm about these sectors being opened up in early 2015. At a summit in Addis Ababa, organised by The Economist, it was for the telecoms sector that seemed like the government had no plans to consider foreign investment at all. Instead, it indicated that it would be more receptive to liberalising the banking sector. That the case is now the reverse, points to the spontaneity and unpredictability of the Ethiopian government, irrespective of who is in power. Besides, any liberalisation of the banking sector would have to be clear on whether banks would still be required to deploy almost a third of their funds to government bonds. There is also the fear that any privatisation programme could be marred by corruption, as has been the case in other African countries and elsewhere.
Regardless, something drastic has to be done to stem the country’s economic troubles. China, hitherto a reliable foreign partner for the erstwhile socialist-styled Ethiopian government, has lately been less enthusiastic. Perennial difficulties in securing foreign exchange and tapped out indebtedness by the Ethiopian government to its Chinese counterpart, are reported to be making the Asian nation slow down the pace of its investment in what has perhaps been an exemplary African country, especially in terms of its industrialisation and infrastructural development efforts. In the most recent decade, the Chinese have provided loans to Ethiopia in excess of US$13bn, which were used to develop various infrastructure projects: roads, railways, dams, industrial parks and so on.
There might be other reasons that China is cooling off on Ethiopia. Its ambitions in Africa are expanding and it is likely finding investments elsewhere to be yielding higher returns. Its first army base in Africa is in neighbouring Djibouti, for instance, a nation which Ethiopia incidentally depends on for a way to the sea. Thus strategically, Djibouti is a more strategic partner than Ethiopia.
Kenya, a bigger economy nearby, is also proving to be more exemplary of how China would like to be seen on the continent. Thing is, if the Chinese, perhaps the most ardent supporters of the regime hitherto, now worry about the FX and debt crisis, the problem must be really bad. It certainly points to the urgency for the government to liberalise some sectors of the economy for foreign participation. And if the Ethiopian government is indeed serious about tackling the FX shortage problem, and there are indications it is, the Ahmed administration at least, then the two sectors that it must liberalise at the earliest time possible are the telecommunications and banking sectors.
The Ethiopian government has been sending mixed messages. On the one hand, the prime minister has been signalling a change in the way things are done. And yet, another part of the government says something else. In April, the month Ahmed assumed his new position and adopted a refreshingly reformist drift, President Mulatu Teshome Wirtu suggested it was investments in manufacturing that the government was interested in and not the telecoms and banking sectors. It is important to point out at this point that it is not that the government has not been receptive to foreign investment. Because even before the Ahmed administration, the longevity of which is still uncertain, the government had already been relaxing investment restrictions. Hennes & Mauritz (H&M), the Swedish fashion retailer, already has a factory in Ethiopia, for example. So does the American fashion giant PVH. In December 2017, the state also sold the National Tobacco Enterprise to Japanese investors for $434m. Unilever, the global consumer goods company, has been operating in Ethiopia since 2016. Besides, foreign hotel chains like Hilton, Marriot, Sheraton and so on have been operating in the country for quite a while. In other words, the president was simply reiterating what has been official policy all along.
Aid is not free
The upheaval in the majority Oromo areas that birthed Ahmed’s premiership remains; albeit subdued. Long suppressed by the hitherto ruling Tigray minority, Oromos took to the streets in spite of almost sure death, imprisonment or torture, indicating they had had enough. Ahmed, an Oromo and so a beneficiary of their struggle, has thus far not disappointed them. He has perhaps been moving too fast, though. But in light of the recent attack at a rally of his supporters, which is widely believed to be a failed assassination attempt and one of many planned attacks to cripple the economy, he may have rightly judged speed to be of essence. Thankfully, there is no sign that he has been cowed by the unfortunate incident. Instead, he seems even more energised.
The Ahmed government does not seem to be in a hurry to liberalise the banking sector, however. That is probably a mistake. Unless Ethiopians begin to see meaningful change in their standard of living, it might be only a matter of time before his popularity begins to wane. Without a doubt, an immediate solution to the foreign exchange shortage and myriad economic problems crisis, would be to liberalise key sectors of the economy. Allowing foreign participants into the banking sector would allow for new FX flows and expertise needed to develop the country’s virtually non-existent capital markets.
The consequent change could be potentially overwhelming for a bureaucracy and political class long nurtured on a cautious approach. Thus, the necessary quick changes the Ahmed administration has to put in place are fraught with huge risks; for him, the stability of his government and indeed a somewhat pampered socialist-oriented populace. All indications suggest Ahmed is up to the task, however. But he is only one man. For the needed changes to materialise, he would have to carry an old-school bureaucracy along.
Even so, the aforementioned troubles would not entirely prevent the economy from growing at what are still remarkable growth rates. But unless something drastic is done, ertswhile double-digit growth rates would be increasingly elusive. Still, the International Monetary Fund (IMF) reckons the Ethiopian economy should grow by about 9% in the current year. That would be a slowdown from the remarkable heights of the past decade. Foreign exchange reserves are just enough to cover about two months of imports or less; about $3bn. In fact, imports have been four times as much as exports in recent years. Without at least as much exports, the differential has to be filled from external loans and aid.
The new administration currently enjoys some goodwill, however. In mid-June 2018, the United Arab Emirates (UAE) deposited $1bn with the central bank and pledged another $2bn in investments to the country. The government says the investments would be in tourism, agriculture and renewable energy. All these came about during a visit by Crown Prince Mohamed Bin Zayed of Abu Dhabi in the month. It is believed the generosity of the prince may not be unconnected to Ahmed proving to be an excellent host.
But the goodwill is not going to last forever. And the aid, like almost every other, is not likely to be entirely free: The UAE might be desirous of certain considerations. Just nearby, in Djibouti, where Ethiopia is influential, the Arab country was kicked out of a lucrative sea port concession. Thus, it is doubtful it is giving the new money totally out of the goodness of its heart.
Expertise, capital and jobs
KCB Group, Kenya’s largest bank, which opened a representative office in Addis Ababa in 2015, and has branches across East Africa, is one of many African and indeed foreign banks likely to make a foray into the Ethiopian banking sector. Clearly banking on the new reformist prime minister, it announced in late June the country could open its banking sector in about two years’ time. There would certainly be a lot of opportunities for newcomers.
According to the central bank’s website, there are currently 19 local banks in Ethiopia.That is about six banks for every one million Ethiopians. This is clearly inadequate; albeit this is not necessarily an intelligent measure, especially when you consider that the Commercial Bank of Ethiopia has about $18bn in assets and a customer base of about 16 million. A couple of foreign banks have representative offices in the country, but are not licensed to conduct plain vanilla banking services, that is, collect deposits and issue loans. The reformist Ahmed government has raised hopes that this might change, however.
It begs the question, though, about whether such a move would be beneficial. The government, old and new, is particular about financial inclusion. Incidentally, even in African countries where there are more liberal policies, financial inclusion remains a challenge. According to the World Bank, financial inclusion “means that individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way”.
The key question then is whether allowing foreign banks to participate in a country’s financial services sector engenders financial inclusion. The evidence is mixed. In fact, there is probably not much that they do in this regard. There are a few good stories, of course. For instance, some foreign financial firms specialise in microfinancing. But they are usually a drop in the ocean and not necessarily cheaper or more sophisticated than local ones. The Ethiopian government is right to prioritise financial inclusion. According to the World Bank, it is “an enabler for seven of the 17 Sustainable Development Goals (SDGs)” and reckons it to be crucial to poverty alleviation and shared prosperity. To this end, it has set a global goal of universal financial access (UFA) by 2020, just two years away. Would this goal be reached by then? Probably not. But much progress is being made. More relevant here is whether foreign commercial banks help with this goal.
Quite frankly, financial inclusion cannot be the main reason for allowing foreign banks in to a country. Their advantages relate to the new capital they bring for the use of local and foreign firms doing business in the country. They also allow for more seamless trade. It is much easier to do business with a bank in-country as well as abroad for international trade, for instance. But pushed rightly, foreign banks can help with such idealised goals as financial inclusion. They certainly are able to deplore the latest technologies in this regard. That is as far as most would go, though. Brick-and-mortar branches add on unnecessary weight. And increasingly, when foreign banks make a foray into another country, they rely on local deposits to fund local loans.
Their real advantage for a country is big-ticket transactions. It is easier to get financing for mega projects by firms if foreign banks operate in the country. True, while foreign multilateral development financial institutions do provide some funding, commercial ones not backed by their country’s government rarely do. Besides, there is a need to differentiate between foreign banks that are from other African countries and those outside the continent. Although, it is the latter than tend to get all the attention, the former have their advantages too. For instance, if a Kenyan bank is able to do business in Ethiopia, the gesture is expectedly reciprocated for an Ethiopian one in Kenya. But since a Kenyan bank might have no more heft than an Ethiopian one, it is not surprising that the more capable foreign banks from the West and East are the ones much sought after.
In any case, South African banks remain dominant on the continent. The largest, Standard Bank, is excited about the Ethiopian opportunity, certainly. With a Chinese bank in its shareholding, it is increasingly the go-to-bank for transactions with the Asian nation. At least, it likes to portray itself as such. That is probably where the opportunity is, that is, pan-African banks looking to expand to Ethiopia.
Otherwise, Western banks have been cutting back on their African exposure. Barclays, a British bank, is a recent example. Curiously, even these Western types might be interested in an Ethiopian venture. Investment banks are certainly keen. A capital market is virtually non-existent. Technology and expertise would probably be the key benefits.
For these to be realised, the Ethiopian government would need to liberalise the sector as quickly and as widely as possible. For if there is any whiff of uncertainty or hesitation in whatever liberalisation policy is announced, there might not be many foreign banks willing to take the risk. Potential investors would also be looking to see a more institutionally-directed and sustainable shift towards reform.
Currently, it could be rightly said that there is a one-man risk. Were Prime Minister Abiy Ahmed to leave the scene, what then? And judging by the relative slow pace planned for banking sector reforms, Ahmed may not be in office long enough to make a meaningful impact. Thankfully, there is an almost existential need to attract foreign capital. The perennial foreign exchange shortages would in due course spur even more protests as jobs become increasingly scarce and commodities more expensive. Nothing short of comprehensive reforms of the banking sector would do to resolve the problem.
Do foreign banks help?
What has been the actual experiences of countries that allow foreign banks to participate in their financial services sector, African ones especially? International banks have been pulling out of Africa lately. Some of the reasons include a realisation that local banks have a greater edge. Another is how shallow most African markets still are. Trade finance was the main draw for the increased interest of foreign banks up until the global financial crisis in 2007-08. When commodity prices slumped, however, it became writ large how susceptible most African economies remain to the volatile commodity markets. With problems of their own, international banks began to roll back their African operations to what they deemed to be more realistic levels. And quite frankly, foreign banks were a little surprised by how hard it was to beat local ones.
That said, some remain firmly in place; more agile operations are the norm, though. The few global banks, which seemed determined, are treading carefully nonetheless. In November 2011, JP Morgan, an American bank, started offering some services in South Africa and announced it planned to open representative offices in Nigeria and Kenya. That chief executive Jamie Dimon was still talking about JP Morgan’s plans for Kenya in January 2018, seven years later, speaks to the mixed case for international banks in Africa. Credit Suisse preceded JP Morgan in South Africa, setting up an office in January 2011. Barclays also moved its Africa headquarters to the continent from the United Arab Emirates in 2012, buying a controlling stake in ABSA, a South African bank; albeit its optimism was short-lived: it recently sold the African business. Another was China’s ICBC, opening an office in South Africa in November 2011.
What was the major attraction? Developed economies were either in recession or growing very slowly and yields were extremely low or negative. But here was a continent with more than one billion people, with millions unbanked and much more underbanked. Adding to that, it seemed Africans were beginning to prosper: a supposedly growing middle class was much vaunted. But the main driver for most global banks’ resilience about their African vision was a desire to hold on to all of their clients’ businesses in every part of the world. Why should a client be allowed to go to another bank for its African business and risk losing it in the process, it was reasoned. It proved to be dearer than planned: the clients did not necessarily do frequent transactions for and with their African subsidiaries. Or better put, the volume of transactions was not so much that they could not be undertaken from the banks’ hub branches, a central African location or both.
Research suggest foreign banks do not always help the financial development of poor countries. According to an IMF working paper in 2006, in countries with more foreign banks, credit to the private sector and access to credit in general tend to be lower. Consequently, there is also usually slower credit growth. The paper argued foreign banks tend to be more beneficial to advanced countries. Thus, the Ethiopian government’s caution is not entirely out of place.
However, there are documented benefits for poor countries as well. Arguments in favour range from better economies of scale and supervision, more advanced technology, greater perception of safety by depositors, and lower corruption. Of course, with regards to corruption, there have been cases lately about the susceptibility of foreign banks too. But in general, these are the exceptions and not the norm.
“Several studies find that foreign banks in lower-income countries (LICs) lend predominantly to the safer and more transparent customers, such as multinational corporations, large domestic firms, or the government.” This remains largely the case. And when the specific case of African countries is explored, other studies still find that to be the case. Still, it is argued that local banks become more efficient from copying the practices of their foreign competitors, by the adoption of better technology and banking practices, for instance. So, the Ethiopian case, when opened up, is not likely to be any different.
About the author
The author, Dr Rafiq Raji, is an adjunct researcher of the NTU-SBF Centre for African Studies, a trilateral platform for government, business and academia to promote knowledge and expertise on Africa, established by Nanyang Technological University and the Singapore Business Federation. This article was specifically written for the NTU-SBF Centre for African Studies.
This commentary was published in How we made it in Africa on 19 July 2018.