BY ABEBE WOLDEGIORGIS
The Ethiopian financial sector is facing various challenges but three of them are the major ones. As it is known, since the down fall of the imperial regime, the sector was closed to the local and foreign private investors. There was no competition among banks and unable to draw experience from foreign financial sectors. As a result, the sector remained at its infancy level Yared Hilemeskel, a financial consultant with rich experience in the field said.
As to him, the sector was illiberal and until recently, even Ethiopian Diaspora was not allowed to operate in the sector. But since few years ago, when they were given green light from the government to operate here, they began to purchase shares in local banks with hard currency.
Secondly, foreign banks were not allowed here to operate but months ago the Council of Ministers allowed foreign banks to come here and to purchase share from local banks. In addition, they can open branches of their own banks.
The third challenge is that the lagging behind of digitalization. As to Yared, however, in the future there is a possibility even mandatory that countries might abandon utilizing paper money due to the expansion of crypto currency.
This currency has been introduced in many countries since 2008 and currently, the circulated amount of crypto currency rose to 3 trillion Dollar all over the world. Governments did not think that cryptocurrency is expanding in such unprecedented manner and did not assume that it might compete with the central banks which have the authority to control paper money.
Nowadays, in the foreign world, the company known as “trust bit coin”, similar to the central bank has the mandate on formulating the monetary policy and engaged in exchanging goods and services through bit coin. Because of these, countries such as China are forced to establish ‹‹Central Bank Digital Currencies›› (CBDC) to safeguard the role of paper money in the market from crypto-currency.
If one utilizes crypto currency, he uses the currency not through banking but through his lap top and if he has 500 million US Dollar in crypto-currency, the money will be deposited in the computer. But in the past the money would be deposited in the bank. Normally, banks lend money to customers with interests and gain profit and in turn they provide interest fee to the depositors.
Alike this, when the money is put in the computer, depositing the money in the bank will be irrelevant. Therefore, when the government allows foreign banks, such money transaction might be introduced. Therefore, to cop up with such challenges, local banks must prepare themselves to the inevitable competition.
Currently, Safari-com joined the Ethiopian telecom market with other company known as EMPESA engaged in money transaction business and it is better to think that the introduction of crypto-currency will be apparent that does not use the National Bank channel. Virtualization also enables customers to conduct payment from everywhere and in such a situation, the government can’t collect tax and banks also will never obtain profit.
As to Yared, a local bank which has 10 billion Birr of paid capital is equal to 200 million Dollar in the current exchange rate. As compared to big banks which possessed hundreds of billions of dollars, the amount is very small.
Such big gap between local banks and foreign banks in terms of deposited money paves the way to easily swallow the local banks. Therefore, in order to compete with them, local banks must recapitalize their asset. In addition, beginning the capital market as soon as possible is essential. The absence of stock market inhibited banks not to enhance their capital amount. It is also chained by the trade law.
If stock market begins, the bank with 200 million Birr deposit can increase the amount. Buildings built by banks can be supplied as capital in the market. Virtualization and digitalization integrate the local banks with the foreign market in banking business and can compete with foreign banks. Utilizing mobile banking also enable them to cop up fintech. When the Kenyan based Safari come began to operate here, for instance, the Ethio-telecom immediately introduced Tele-birr. Since it is common in other parts of the world, banks also must adopt the Tele –birr system.
The National Bank of Ethiopia must consider that the practice of crypto currency is inevitable and prepare itself to that practice. Likewise, it has to imagine that how digital currencies are deposited in banks. Even though it is complicated to some extent, professionals can make it easy. The Kenyan based financial transaction company, EMPESA is established in 2007 and the Ethiopian M- Birr also introduced 2 years later in 2009.
The Kenyan law encourages creativity in the financial innovation. Business beginners may pose tolerable social crises and though there is no specific law to them, the agency helps them to stimulate their business. In other countries when new business model is introduced, it will not be waited until it involves in its full operation.
They are protected until they develop their own capital and get organized. Later on, following their full involvement in business, the law that is related with their operation will be introduced. In Ethiopia when M- birr was introduced in 2009, it was not recognized because of the absence of law in that regard but later after many appeals, the law was introduced in 2015.
There was seven years gap between the introduction law of EPPESA and M- birr. Even the objective of the introduction of the law was only to support banks’ activities not to function by their own. The new technology brings benefit to the late comer. The earlier innovator invests its energy and resource to change the previous law and to create awareness regarding its services. But the late comer involves in to the business without spending its energy and resource because the earlier made the level playing field conducive.
The digital finance system is different from the traditional banking system. When traditional bank grows, it opens its branches in other parts of the country. But the technology based crypto currency can grow from small up to big and becomes complicated in short time. It depends on its approach and new ideas.
As to Yared, political reform has been undergoing in Ethiopia for the last four years. Political prisoners were freed and exiled politicians were allowed to come and compete in election here. These are big achievements. But in the economic front, the reform brought very little change. Basic challenges witnessed in the economic sector are still continued.The property rights and the land owning systems is not touched.
During the consecutive three years of power assumption of EPRDF in 1991, various measures had been taken and new laws were introduced to liberalize the economy from command to market led. In this regard, the privatization law, the permission of Ethiopians to establish banks can be mentioned. Had it not been for the new law introduced, the commercial bank of Ethiopia would have possessed a monopoly power till now. But there is no law introduced which can bring a paradigm shift in the economic sphere.
In fact, the stock market law is introduced but not implemented yet. In Ethiopia, the property law is an important issue. As a result of lack of clear definition regarding land ownership system in relation to investment, 68 million hectares of land is not cultivated in Ethiopia. Only 16 million hectares of land is plowed. If the cultivated land is grown up from 16 million hectares to 20 million, there would be a dramatic shift in the economic front.
The 13 million hectares of land which was cultivated during the imperial era is only increased by 3 million hectare today. But the number of population has grown to 115 million. Thus, Laws that can bring remarkable change must be introduced. In fact, the government tried to improve various laws but unable to solve the basic economic questions.
As to Yared, the land owning system introduced by the Derg regime is still working and it is the most constraint factor for the rapid economic growth of the country. The land proclamation introduced by the Derg gave the government a monopoly power on land ownership.
The government should capitalize on providing land to the youth and encourage them cultivate for mutual benefit of the youth and the country. Doing so, ensuring food security can be realized and importing food will be halted.
The Ethiopian Herald November 15/2022
