Mon. Jun 17th, 2024

What to expect from foreign banks coming to Ethiopia

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.

The protection has resulted that 24 private banks are now owned by Ethiopian shareholders. These banks are owned by just a few thousand Ethiopians, while the majority of them have tens or thousands of shareholders.

The latest Amhara Bank joined the market after it was established by over 169,000 shareholders. This means that there may be less than one million bank shareholders at the moment.

These investments and the protection of foreign banks have enabled private bank shareholders to enjoy a return of equity of between 20 and 50 percent per year over the past decades. This is significantly higher than the less than ten percent global average.

The Government of Ethiopia has been urging local banks to be ready for competition with foreign banks, in response to the constant pressure from global financial institutions such as the International Monetary Fund (IMF), World Bank(WB) and many other countries like the United States and other partners.

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 for local banks, the people
The news was not surprising for Ethiopia’s already established banks, but it was surprising for some bank leaders, especially those that are just entering the market and preparing to go into operation.

Many bank directors fear that opening the sector to foreign banks could lead to a decline in revenue and profit for local banks. The reason is that foreign banks have a lot of technology and capacity, making it difficult for small local banks to compete.

It is true that an importer or industrialist who requires hard currency to import spare parts for a damaged machine cannot wait months, or even a whole year, to open a Letter of Credit (LC) to gain access to hard currency in local banks. If he can find a foreign bank in Ethiopia that will handle his request within a few days, it is true.

Similar to the above, an employee or civil servant who was told by local banks to save but not be able to borrow money without collateral is likely to move to another bank if it has the technology to analyze creditworthiness of an individual and lend money to him/her without any collateral.
Analysts in the sector suggest that small banks could merge with larger banks abroad to become stronger.

Indeed, The entry of foreign banksposes a real or imagined threat to local banks owned less than 1 million shareholders and engaged to lend to the wealthy collecting from the poor.

The decision allows foreign companies operating in Ethiopia to access hard currency when they need it to repatriate their profits. 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.

It is generally good news for Ethiopia’s 110 million plus population. It also means that the economy will be stable if it is properly managed.

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.

It was done without the business as usual practice of protecting and helping the few riches to dominate businesses mainly import/export trading. The coming of foreign banks disrupts many things creating more employment opportunities 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 people express their concern that the arrival of foreign banks in Ethiopia will increase the flow hard currency out of the country. They are concerned about those who are already involved in hiding their money abroad using both legal as illegal methods.

To combat organized crime and other organized crimes, it is not possible to deny the 21st-century global banking service to Ethiopians. Already engaged in illicit financial transactions. I believe the solution should be to have dedicated professionals and proper regulatory mechanisms.

My question is: Does the central bank of the country? the National Bank of Ethiopia, has the technology and professionals to detect and track complex international financial scams, investment and trade frauds, and similar in the face of global recession anticipated in 2023?

Source: newbusinessethiopia

By Chala Dandessa

I am Lecturer, Researcher and Freelancer. I am the founder and Editor at ETHIOPIANS TODAY website. If you have any comment use caalaadd2@gmail.com as email contact. Additionally you can contact us through the contact page of www.ethiopianstoday.com.

Leave a Reply