Part I
Recently, the Council of Ministers approved a draft banking business proclamation that will allow foreign banks to operate in Ethiopia’s market. The draft proclamation includes provisions to redefine and revise the duties and responsibilities of the National Bank of Ethiopia (NBE) in coordinating and guiding the activities of the financial sector in Ethiopia.
The draft proclamation provides for opening up the banking industry for foreign investment. Foreign banks can invest in banking businesses by opening foreign bank subsidiaries, branches, or investing in shares of existing domestic banks. Representatives of foreign banks will fall under the regulatory umbrella of the National Bank.
The draft also outlines a range of prompt corrective actions to be taken on banks by the National Bank, a regulatory sandbox framework for introducing new and innovative financial services, and authorizes the National Bank of Ethiopia to address problems faced by failed banks to minimize costs to consumers. Additionally, changes to the composition of Commercial Banks’ Board of Directors are included.
For over half a century, Ethiopia has prohibited foreign banks from entering the financial and banking sector of the country. In a highly globalized world and with Ethiopia’s need for access to international financial resources, the continued closure of the national financial system has not provided the country with the necessary financial resources to accelerate and develop the national economy. Before delving into a detailed analysis of the proclamation allowing foreign banks in Ethiopia, it is useful to have an overview of the development of the banking system in Ethiopia.
Modern banking institutions in Ethiopia were first introduced during the reign of Emperor Menelik II in 1905, when the Bank of Abyssinia was formed through a concession between British representatives and the National Bank of Egypt. Since its formal establishment on 16 February 1906, it was under the management of the National Bank of Egypt as per the concession agreement.
In 1963, a new banking law allowed for the split into the National and Commercial Bank of Ethiopia. This law permitted other commercial banks to operate, including foreign banks that were 51% owned by Ethiopians. The largest of these was the Addis Ababa Bank, owned by 40% by the British-owned Grindlays Bank, with 26 branches by 1975. There were also two commercial banks, Banco di Roma and Banco di Napoli, with eight and one branch respectively in 1975.
Under the Derg leadership, the entire economy fell under government control, adopting a socialist policy towards the economy of Ethiopia. Private sector commercial banks were limited in existence, nationalized, and consolidated into the Commercial Bank of Ethiopia (CBE).
Banks with large customers shifted into public enterprises and were forced to lend to the government for developmental plans. The money supply grew in real terms and as a proportion of GDP. Based on central bank planning policy, the CBE willingly lent to public enterprises according to government instruction.
During the Ethiopian Civil War, profitable public enterprises reduced due to worsened foreign exchange shortages and bankruptcy issues but soon recovered as foreign exchange became more readily available. The lending to the private sector, which varied between 30% and 40% of loans and advances between 1981 and 1993, was straightforward without foreign exchange. Potential borrowers were not creditworthy, and foreign exchange allocation was ideally profitable.
In addition to commercial banks, the government established a developmental bank that was 100% owned by the government. The Agricultural and Industrial Development Bank (AIDB) was formed in 1970, taking over two earlier development banks: the Development Bank of Ethiopia and the Ethiopian Investment Corporation, established in 1963 as the Investment Bank of Ethiopia. AIDB was a government-owned bank providing medium- and long-term loans to the agricultural and industrial sectors. The Housing and Savings Bank was created in 1975 from a merger between two earlier housing finance institutions established in 1962 and 1965, one of them granted by the United States government.
Currently, Ethiopia has over 25 private commercial banks, one government-owned bank, and one development bank. The NBE Directive number SBB/78/2021 increased the banks’ minimum paid-up capital requirement from ETB500 million to ETB5 billion. Existing banks have five years to meet the new standard, while new banks have seven years to do so.
According to an NBE (2022) report, there are now 83.3 billion birrs in deposit accounts, up from 40.04 billion. Total deposits have increased from 899 billion in 2019 to 1.7 trillion in 2022. The bank’s overall capital also increased from 98.9 billion birrs in 2019 to 199.1 billion birrs in 2022, at an average annual growth rate of 27%. Additionally, the banks’ overall assets increased by 92%, from 1.3 trillion to 2.4 trillion birr. Net income for banks climbed from 22.4 billion birr in 2019 to 49.9 billion birr in 2022, representing a 122% growth.
The entry of foreign banks into a country’s banking market has been a significant topic of discussion among policymakers and economists. The liberalization of the banking industry can bring numerous benefits, including enhanced competition, improved financial services, and increased foreign direct investment (FDI). However, it also presents challenges such as regulatory complexities, potential destabilization of the local banking sector, and the risk of financial contagion.
Editor’s Note: The views entertained in this article do not necessarily reflect the stance of The Ethiopian Herald
BY SOLOMON DIBBABA
The Ethiopian Herald July 7/2024
