Financial sectors in Ethiopia have been playing a pivotal role in backing the economic growth and fueling the fight against poverty and underdevelopment. In today’s time indeed, the banking sector has become most relevant for everyone as citizens can do their respective transactions from anywhere and at any time through online banking. The Internet has made sending money and transferring funds from one account to another at no cost currently thanks to the proliferation of science and technology.
Taking this fact into account, The Ethiopian Herald conducted an exclusive interview with Alemayehu Lemma, an agro-economist graduated from Haramaya University in agro-economics, to receive a professional comment on the role of banks in promoting economic progress.
He said, “The banking sector is crucial to the modern economy. As the primary supplier of credit, it provides money for people to buy homes and whatever they like as well as for businesses to buy equipment, expand their operations, and meet their payrolls. Besides, banks help finance large-scale projects such as roads, dams, airports, which can provide jobs, increase productivity, and drive economic growth. By providing financing for these projects, banks help stimulate economic development and create opportunities for communities.”
He further stated that needless to state, no country can ever, especially in the era of innovation and technology, have a healthy economy without a sound and effective banking system. In the system of modern economy, banks play a very sound role in economic development of emerging nations like Ethiopia.
He said, “Banks in Ethiopia, both public and/or private, collect the surplus savings of the large group of population and make them available for those economic agents who have best investment opportunity. They create new demand deposits in the process of granting loans and purchasing investment securities. They also stimulate country’s economy through facilitating economic activities. Especially public sector banks are the backbone of the nation’s economy via playing a crucial role towards buttressing the economic progress of the country.”
As to Alemayehu, it is also good news for banks, if conditions are made conducive for them to improve their services and compete more aggressively to retain customers. The banking sector in Ethiopia has been undergoing transformation, driven by public sector banks.
Alemayehu further elucidated that banking is the process of storing money for future use, either in cash or by investing it. Banks are where people get money from, when they need it to make payments or buy goods and services. Businesses can also borrow money to grow or expand.
To make all these activities much more reliable, banks must have a wide network of branches across the country and overseas to perform these functions effectively. They must also be able to keep their records safe in computerized databases that cannot be easily hacked. It is well recognized that banks give credit using rules such as easy repayment conditions, minimum interest rates, and the like. Regular credit users take advantage of these rules and can repay their debts regularly.
“To make long story short, banking is an important aspect of any country’s economy. And like any other industry, it has its standards, sets of documents, and procedures. Such streamlined actions help the industry ensure that banks carry out transactions with ease and efficiency.”
Ethiopian banking sector has been experiencing a wave of change over the past decade, of course. The growth in mobile banking has, to some extent, affected the traditional business models of banks. However, most banks have shown tremendous resilience to these changes through adaptability and innovation, he opined.
He said, “When we talk about banking system especially in the current epoch; mobile banking has to come to the forefront. Yes, it is all about bringing into the digital age. The use of spare and personal mobile phones and other handheld devices has popularized mobile banking. Several banks have developed mobile sites for their customers, making it easier for customers to conduct banking transactions independently.”
True, banking plays a big role in the development of the economy of the nation as it is the backbone of any country’s economy, and its well functioning is essential for nation-building and move towards coming up with economic sovereignty. Ethiopian banking sector plays an important role in providing funds to different priority sectors like agriculture, small scale industries, trading enterprises, real estates, etc, he added.
The system helps a lot in business development by developing strong ties with foreign countries through establishing branches even. Banks in Ethiopia, be they are state owned, commercial or private ones, are also of paramount importance in facilitating trade and commerce by providing payment facilities to various local and international business houses, he opined.
As to Alemayehu, banking system in Ethiopia provides financial security to the people by providing loans at competitive rates, paying reliable remittance services, etc. It also helps citizens save their money and invest it in different financial instruments like government securities, long-term bonds, etc.
Thanks to the advent of science and technology, the Ethiopian banking sector has been providing, peculiarly since recently, safe and secure financial services through money orders, cash deposits, and cash card services.
“Small businesses are often the engines of regional and national economies. Banks support these businesses by providing access to capital and credit, as well as other financial services such as cash management and payroll processing. By supporting small businesses, banks help create jobs, stimulate economic growth, and promote entrepreneurship,” Alemayehu said.
He further elucidated that banks play an important role in encouraging savings and investment, which are essential for economic growth and development. By offering saving accounts and investment products, banks help individuals and businesses build wealth and plan for their future. This in turn helps to stimulate economic growth and development at national level.
In Ethiopia, he said the common suppliers of funds for supporting domestic economic activities are commercial banks, development banks and micro-finance institutions. However, other financial institutions such as pension funds, unit trusts, and insurance companies also play a role in providing funds for domestic investment purposes, in that they also create a platform for raising domestic savings.
Furthermore, he stated with the introduction of new technology such as cell-phone banking and internet banking, existing banks and new entrants in the market have been able to improve their efficiency in terms of service delivery over the years and increase access to their product to clients without bank accounts and those with limited access to branches of banks.
This is clearly indicating as the causality run from economic growth to financial development. The homegrown economic model which entails that economic growth is determined by endogenous factors rather than by external forces has two folds, one that considers economic growth to be significantly determined by investments in innovation, knowledge and human capital at home and the second one focuses on externalities and positive spillover effects that can lead to economic growth.
Yes, the rate of increase in skills and capacities of a workforce ultimately increases the economic growth of Ethiopia. Infrastructure development, economic progress and increased investment in physical capital such as roadways, machinery, and factories will increase the efficiency of economic output following cost-effective approach.
The good thing is Ethiopian banks play an important role in the country’s economic development by providing sufficient money supply to support growth, guiding funds to proper investment lines, and promoting the development of financial institutions and markets despite shortcomings that need to be bridged well.
In a nutshell, the role of banking in economic development is multifaceted and essential. Banks have the ability to promote economic growth and development by financing infrastructure projects, supporting small businesses, promoting financial inclusion, help to create jobs, encouraging savings and investment, supporting international trade and more. As the financial sector evolves, it is imperative for banks to maintain their dedication to supporting economic development and creating opportunities for everyone.
BY MENGESHA AMARE
THE ETHIOPIAN HERALD TUESDAY 8 OCTOBER 2024
