Experts in the financial sector argue that the sector needs reform taking into account the country’s economic realities, and the level other countries, including East African countries, are currently at. They agree that further developed and modernized financial sector that has wide variety of investment choices better tailored to average Ethiopians is important.
Speaking to The Ethiopian Herald, Tesfaye Hailemichael, Accountant and Managing Director of Cornerstone Advisory Services, says much works remain ahead in view of the existing low penetration rate of banks as 15 to 20 percent. First, the technological infrastructure should be upgraded, as nowadays countries are pushing mobile banking, and using local shops as agents to deliver financial services.
Also, the financial regulations should be in sync with the current global realities and should be revised accordingly, he notes, while the services financial firms deliver should be increased. Of course the government is reforming the sector. One is the plan to setup a stock market by 2020. ‘Establishing stock market; a good start’ Stock markets are perceived as a tool for promoting the financial sector, and Tesfaye believes that establishing capital market would complement the financial sector development.
Establishing stock market would enable local companies to raise investment capital by giving investors a slice of their share, which they can use to make huge investment to expand and grow their businesses. “Now most of the banks are share companies, except for the state-owned ones. However, they cannot capitalize by selling shares to the investing public as the market does not exist today. So, in this regard, setting up the stock market can stimulate the economy.”
Tesfaye also went on to say that allowing more competition in the financial sector through various means will enable them to increase the provision of financial services they provide, like mortgage service, (investment) advisory, and asset management. “Also, when capital market is established, investment banking will have an arm, as it will be the banks that will be involved when a company decides to go public.
This means the banks will be diversified through this process as well, which enables them to increase the number of Ethiopians that will have banking access.” Further adding to the list of benefits, Mushe Semu, an economist, says that it mobilizes resource better than banks, as it can allow the banks to bring in capital from the informal sector as well.
Usually people who even have small disposable income could have invested in feasible ventures by allocating small sum of money from their income, says Mushe, but are unable for lack of readily available markets from which they could go and buy. And if a stock market is established, there is a possibility for many people to better assess and invest in feasible ventures. Further, stock market helps ensure fair pricing practices and transparency in transactions and starting share companies, he notes.
‘Structural reforms’ But, argues Mushe, there needs to be structural reforms to be made to further develop and modernize the financial sector. As to him, the resource in the country should be allowed to move freely in both public and private banks. This means government offices, public development organizations like Ethiopian Airlines should not deposit in public banks only. “What I think we should be doing is make the banks open, and the resource open for all, and compete on the basis of the reliability and accessibility of services provided, modernity and the way process credit; and then, let the money go wherever it wants.”
Going further, Mushe believes that it would be better for the Commercial Bank itself to be separated into five or six different institutions, and find a way for the resource to be used more competitively. “I can understand the government may need bank, but it is not exposed to competition; and I think this is the way to solve the main issue in the sector.” Dr. Teshome Adugna, an Economist, for his part opines that the banking and financial sector have not been modernized at the expected level.
This is despite the fact that positive changes seen in core banking, and in the exchange market due to the government’s effort to modernize the sector. He also suggests regulation and legal enforcement revision on concerning the government side. With regards to the private sector, the issue is that the sector is more focused on profit and dividend share rather than retaining profits as a source for further innovation and expansion.
And according to him, this has given an edge to the state-owned Commercial Bank of Ethiopia, which is dominating in credit market share, bank branches, saving mobilization, and they should move in an innovative manner to compete with it. “They have showed some failing in this regard as they are not moving at the expected level when it comes to making the sector more modern and competitive, although I am not saying they are not doing anything in these aspects.”
Moreover, Dr. Teshome suggests that rather than being 18 different banks, it would be better for them to merge into four or five bigger banks, like England and other countries, to be more competitive. The Malaysia Experience Citing his experience in Malaysia’s financial sector reform, Dr. Teshome states two things that Ethiopia can learn from to develop and modernize its financial sector.
One is how through and careful they were in opening up the sector to foreign banks, and how integrated it was to their national interest. “Ethiopia is still an agrarian country and has weak saving culture. Until those variables change, the country’s financial sector should be conservative. It should be incremental reform done in the context of tangible national interest, and not just economic principle.”
The second thing Dr. Teshome mentions is how during the Asian financial crisis Malaysia looked into local capital resources like their employment fund (same to our social security fund) to get the country out of the financial crisis. There is surplus money like social security fund in Ethiopia that the government can inject into the economy through policy instruments. “We can mobilize the fund through various ways and inject it to create real asset.”
While they all agree that the regulation should be revised, including the 27 percent loan Bill, strengthening the training and education of bankers, involving the Diaspora community into the financial sector, and finally maybe looking into ways on how to involve foreign banks were mentioned.
The Ethiopian Herald, March 27/2019
BY ROBEL YOHANNES
