For long, Ethiopia has not had a well developed financial system. In fact, the financial system was closed to the private sector and hence lacked the advantage of competition. Since opening up its financial sector to the private sector some two decades ago, the country’s financial institutions, particularly, its banks have shown significant growth.
On the other hand, the government still continues to prohibit foreign ownership in this sector and the country’s banking sector is currently comprised of the National Bank of Ethiopia (NBE), which is the central bank, two state-owned banks, and sixteen private banks.
Under the ongoing second Growth and Transformation Plan, NBE increased the minimum capital for banks to operate to two billion Birr (90 million USD) and requires all sixteen currently operating private banks to increase their paid-up capital to that amount by 2020. According to a recent study by Addis Ababa University for academic purposes under the title Comparative Analysis of Financial Performance of Private Commercial Banks in Ethiopia by Sewagegn Chane, Ethiopian private commercial banking sector remained stable; banks are adequately capitalized and profitable and remained in a sound position.
Capitalizing on the conducive environment, both the state-owned Commercial Bank of Ethiopia (CBE) and private banks have been employing various mechanisms to win the stiff competition for better market share. With the exception of very few cases, most of the banks are profitable.
That is why, in recent years, the banks and insurance companies have shown a growing tendency of building their headquarters in a local area commonly known as ‘Senga Tera’ in the way they have been creating Addis Ababa’s financial district. When turning to the state-owned banks, the focus of this piece, based on the most recent data, the Commercial Bank of Ethiopia (CBE) mobilizes more than 60 percent of total bank deposits, bank loans, and foreign exchange. NBE controls the bank’s minimum deposit rate, which now stands at 5 percent, while loan interest rates are allowed to float. Real deposit interest rates have been negative in recent years mainly due to inflation.
CBE dominates the market in terms of assets, deposits, bank branches, and total banking workforce. CBE was legally established in 1963. In 1974, CBE merged with the privately owned Addis Ababa Bank. Recently, the Bank reported that it has earned 9.4 billion Birr (347.7 million USD) profit over the last six months. Bacha Gina, President of CBE told The Ethiopian Herald that CBE has also provided 40.7 billion Birr as loan and collected three billion USD in foreign exchange from remittance, exports, and others, achieving 93 percent of the plan.
Remittance takes the lion’s share of the forex earning. CBE has also mobilized 29.8 billion Birr in deposit, achieving 92 percent of the plan. In terms of debt collection, the Bank has only managed to achieve 70 percent of its plan which is 21.8 billion birr.
As to the President, the failure is mainly due to the fact that loan payments from mega-projects have not been collected /recovered on time. During the first half of the budget year, the Bank has also collected 59 new branches, increasing and expanding its physical outlets to 1,346. The new branches have already seen deposits worth of 188.1 million Birr. “With over 1.5 million new bank accounts opened, the Bank has now 20.3 million customers,” he said.
The other government-owned bank is the Development Bank of Ethiopia (DBE), which provides loans to investors operating in priority sectors. DBE extends short, medium, and long-term loans for viable development projects, including industrial and agricultural projects. DBE also provides other banking services such as checking and savings accounts to its clients. In their recent report, IMF staffs encouraged the authorities to review the strategy and financial model of the government’s development lending agency—DBE—which has seen lower-than-expected returns to its investments in recent years.
Herald February 7/2019
BY MULATU BELACHEW
