The banking sector in Ethiopia is apparently in a state of boom judging from the high rises some private banks are building in the heart of the capital. The proliferation of buildings where their headquarters are located in the downtown of the thriving capital give the impression that mini versions of the City, the British financial district or Wall Street in the US are in the making, which is good news or good prospects in itself. The Commercial Bank of Ethiopia (CBE) has commissioned the construction of its new headquarters, which is also the highest rising building in the capital and a modern landmark in its own right.
Private banks that came into being less than three decades ago are now registering impressive profits, if one goes by their annual reports. They are expanding rapidly into the rural areas and employing increasing numbers of young people to staff their newly built branches. The CBE is of course the leading bank in the country with the biggest market share of more than 80 per cent, has the highest number of branches and is providing employment to tens of thousands of young bankers. Advocates of full financial liberalization often maintain that the banks could have scored even more impressive results had the government decided to withdraw from the sector.
Some of them even go as far as saying that the National Bank of the Ethiopia (NBE) which is in fact the closest thing to the Federal Reserve in the United States, should loosen its tight control on financial policies, leaving the scene to market forces by doing away with tight state control altogether. Yet, simplistic formulas such as this one are easier said than done when we come to dealing with the formidable challenges facing the sector.
The economic reforms recently initiated by the government seem to be going in that direction although the pace of progress might look a bit slower than anticipated. It is not at all clear what the private banks have benefited from recent hard currency infusions that resulted from foreign loans and assistance. There are a number of government initiatives to boost the private sector through greater availability of foreign currency but no tangible evidence of this promise is yet available.
Some activists in the financial sector are said to be working on the fundamentals of creating a stock or capital market that would better promote the circulation of capital and the availability of money for investment, among other things. The government has also repealed some tax requirements that impeded the operations of private banks in the past. It has also endorsed the idea of a capital market although it has no clear idea as to what its role would be in the process.
On the surface, it may appear that the financial sector is in good shape, yet the truth may be different in some other respects. There are alleged management failures in some of the banks that often lead to wastage of resources and reduce shareholders’ profits or sometimes lead to the erosion of trust between the boards of governors and the shareholders.
Many banks may be in good shape and even thriving but others may face problems. What is the real measure of a bank’s good health? There are of course objective criteria for gauging success such as its loans and savings profile, its tax contribution to the national treasury and job creation, technological innovation and the like.
If we look at these things from the point of view of businesspeople, the picture that emerges might be still worrying. Most businesspeople still complain about the difficulties of getting the loans they require. Some banks are said to be running short of hard currency they are expected to sell to their customers who are often businesses suffering from hard currency crunches or tittering on the verge of disaster.
On the other hand, the Ethiopian government is said to be enjoying generous support from foreign financial institutions that are making great contribution to the domestic financial sector that is seriously constrained by hard currency crunches with effects on the country’s trade and import sector in general.
Many domestic enterprises are producing below capacity and their productivity greatly harmed by hard currency shortages that make it more difficult to import industrial inputs and improved technologies that are getting increasingly expensive. This is mainly due to the relatively poor purchasing power of the local currency that is also suffering from the recent devaluations and poor export performance.
While private banks are relatively stable, government banks on the other hand often go through management upheavals and boardroom controversies according to some industry insiders. The regular changes at the top leadership of the CBE or NBE are often alleged to be the factors that lead to management shakeups and appointments although they may not impact general policy.
The lack of transparency in their operations in the past in particular has allegedly lead to the opacity of dealings and relationships horizontally as well as vertically. This was largely the case during the pre-reform time when all bank operations and policies were led from one centre and alleged corruption was a ubiquitous presence.
The current situation in the financial sector might be favorable or unfavorable to the banks but there is an apparent exception with the Development Bank of Ethiopia DBE), a government-owned bank established for providing investment capital to private businesses. The bank has at least seen the coming and going of three governments, and has done quite a good job in living up to its objectives, particularly in the past.
There are many profitable businesses set up with initial loan capital from the DBE that are still going strong. According to some industry insiders, and a recent revelation by the media, the DBE is currently facing a huge problem of non-performing loans and billions that have gone down the drain and whose borrowers are nowhere to be located.
According to a recent statement by the president of the DBE, the bank had outstanding loans to the tune of more than 60 billion birr and out of it 16 billion birr is non-performing loan. According to a recent press statement by the president of the bank, many borrowers have simply disappeared from the financial radar.
During the 2007 banking crisis, the American media were reporting about the huge amounts of money paid to the banks’ board members in the form of benefits as documented by Joseph Stieglitz in his study entitled “Free Fall”. Stieglitz showed that hundreds of millions of dollars were earned by the bank managers while the banking system was failing and the US government was making huge bailouts to save it from terminal illness or total bankruptcy.
Here in Ethiopia, a government-owned bank is telling you that it has lost 17 billion birr, a huge money by Ethiopian standards, as non-performing loans without telling you who the borrowers were and how all that money went out of the bank and just disappeared, without telling the public who the borrowers were or what the deals were.
While the corruption in the American banking system was caused by greed, the non-performing loans in Ethiopia were likely due to poor management or alleged complicity between lenders and borrowers and backdoor deals between powerful people in government and in the banking sector. We can also assume in this connection that the DBE has never been audited by an independent and certified auditor that could have revealed the losses before the disappearance of the main actors in the tragic financial drama.
It is to be recalled that the DBE was often the target of management shakeups and change of leadership and that was done without proper accounting of its finances. It was most probably managed (or mismanaged) by top government officials who were the then untouchables against whom no daring journalist or investigator could go and ask where the lost money went or why the performing loans piled up.
The government’s Ethics and Anti-corruption Commission was not probably entitled to investigate such cases involving the untouchables. How many government banks have been investigated for similar alleged misdeeds or corrupt practices in a country where bank loans were often allocated on political considerations or favoritism that was built within the fabric of the financial institutions.
It is not at all clear why the ongoing reform process in the financial sector has so far failed to addressed this issue in order to restore sanity and efficiency in the sector. The silence that has covered the inner workings of the DBE might be conspiratorial and might have shielded it from public inquiry if not accountability. In politics, it may be good to let bygones be bygones. But keeping silent in the face of such a huge financial scandal that involves one of the big state banks cannot be an act of mercy.
State property is obviously people’s property and it should be the duty of the government to let order, ethics and accountability be the he norms that guide banking operations in the country. The public needs to know the full story of the non-performing loans and disappearing borrowers before they vanish into eternal silence. Failing to do so might even undermine the credibility reform process in the eyes of the public. This is something that can be avoided and should be avoided at any cost and right now.
The Ethiopian Herald Sunday Edition 8 March 2020
BY MULUGETA GUDETA
