Ethiopia: A New El Dorado for Bankers?


A market of more than 100 million inhabitants, where only one-third of those over 25 have a bank or mobile finance account (compared to an average of 58.5% in sub-Saharan Africa and 79.5% in neighbouring Kenya). An economy where one public institution, Commercial Bank of Ethiopia (CBE), alone manages 55% of outstanding credit. A banking industry so inefficient that its costs absorb 56% of its revenues, but where the return on assets is four times higher than that of Moroccan banks…

Long closed to foreign players, the Ethiopian banking sector is undoubtedly one of the most interesting for investors and banking institutions active in Africa.

Return on banking sector assets (%), Ethiopia (blue line), Kenya (red) and Morocco (green). ©Fredgraph

And, not surprisingly, last September’s announcement of the imminent opening of the sector to foreign institutions caused a commotion.

According to the draft law approved by the country’s council of ministers, four modes of entry are envisaged: establishing a subsidiary, opening a branch, investing in existing banks (up to 30% of capital) or opening a representative office.

In addition, foreign nationals will be able to acquire up to 5% of the capital of Ethiopian institutions, just like non-bank investors.

Liberalised industry

About 10 foreign players already have offices in Ethiopia. This trend has increased in recent years. Among them: Kenya Commercial Bank and its rival Equity Group Holdings (Kenya), Deutsche Bank and Commerzbank (Germany), Bank of Africa (Morocco), Ecobank (Togo), Ziraat Bank (Turkey) and Standard Bank (South Africa).

The European Investment Bank, the Export-Import Bank of India and its South Korean counterpart are also present in Addis Ababa.

Even though the liberalisation of the Ethiopian banking industry “is an idea that has been in the works since the 1990s”, according to international arbitration specialist Leyou Tameru, the country’s macroeconomic context certainly has something to do with the decision by Prime Minister Abiy Ahmed and his advisors to launch this project.

Loans and advances to bank customers in Ethiopia. Annual data in millions of birr, as of the end of June each year. Column D = new loans, Column C = deposit collection, Column O/S = Outstanding Credit. ©Loans Banks Ethiopia

A necessary liberalisation

The country’s inflation rate was close to 32% in October, almost ten points higher than in the same period in 2021.

The country’s foreign exchange reserves, at their lowest level since 2014, can cover only two months of imports, as opposed to an average of six months south of the Sahara.

The GDP growth rate is in sharp decline. It is expected to fall to 3.8% this year – its lowest level since 2005.

According to the US Department of Commerce, the shortage of foreign currency, “due to low exports and high demand for infrastructure projects” has forced companies to “wait a year before accessing hard currencies”.

As a result, the private sector is suffering from a lack of financing.

“A limited number of companies have access to most of the loans,” says Hailemariam Temesgen, a lawyer and consultant for several private banks in Addis.

The banking sector in Uganda and Kenya, for example, is more dynamic in terms of providing credit, even though these two countries “have a smaller population and GDP than Ethiopia”, says economist Muluken Kassahun, research director at the Commercial Bank of Ethiopia.

Facilitating foreign investment in the banking sector is essential to attract the capital needed to boost growth.

Consolidation in sight?

Faced with a marked decline in growth since 2017, the Ethiopian authorities had already “pushed local private banks to consolidate their equity in order to expand their capacities (number of branches, capital deployed…)”, says Tameru, who is also the founder of I-Arb Africa, an online platform specialising in international arbitration in Africa.

In April 2021, the National Bank of Ethiopia (NBE) increased the minimum capital requirement for a banking licence from BR500m ($93,000) to BR5bn ($93m).

This decision could force the sector to consolidate before the arrival of foreign players.

The country has 19 operational banks – for about 30 banking licences granted – with a total balance sheet of about BR2.4trn, according to the official agency ENA.

“There is a case for merging lower capital local banks to make them more competitive and able to compete with new entrants,” says Habtamu Tadesse, senior analyst at the Development Bank of Ethiopia (DBE).

“In the long term, there should be a few large banks, which would be the real economic players, and, in parallel, foreign banks,” adds lawyer Tsegaye Laurendeau, a partner at the British firm Signature Litigation.

[pullquote]If local banks lose customers, they may make strategic mistakes to remain attractive.[/pullquote]

Last November, Awash International Bank, the country’s largest private bank (with 6.8% outstanding credit at the end of June 2021), announced its intention to raise $796m in equity: enough to quintuple its paid-up capital, and even surpass that of Commercial Bank of Ethiopia, estimated at $740m.

Uncertain transitional pace

While the liberalisation of the economy, which began in 2018, has offered new prospects, the speed at which the banking sector is opening up and the conditions of this transition remain uncertain.

According to a study by Cepheus Growth Capital, Ethiopian banks have long been subject to “strict regulations” regarding the minimum rate of return on deposits, the conditions for granting loans (with a contribution of at least 27% of the credit in NBE bills), and the rules for access to foreign currency.

As Kassahun points out, “In a context where the state is financing large development projects under complex conditions, additional sources of funding would be welcome”.

For DBE analyst Tadesse, “The arrival of foreign banks, which have more capital and better access to liquidity, could open up new opportunities for [unsecured or consumer] loans that do not yet exist”.

This is good news for SMEs, which, according to Ethiopian business lawyer Tebibu Kebede, “will naturally turn to the institution (local or not) that gives them faster access to loans”.

Weakened sector

However, the financial sector expert warns, “If local banks lose customers, they may make strategic mistakes to remain attractive”.

In other words, granting loans according to “softer” criteria could, paradoxically, weaken the sector.

On the face of it, African banks seem to be well placed in the race, says Kebede.

The latter operates in “similar economic structures, particularly in Kenya”, and has a “better knowledge of the market”.

According to this specialist, African institutions “are aware that the parallel currency market could discourage Western banks”.

Two-thirds of the funds that the diaspora sends to Ethiopia are indeed disbursed outside the official channels.

Will this African affinity be enough? “In telecoms, it was a consortium that won the new licence in Ethiopia. The brand name may be African (Safaricom), but the technical content is not always African.

“When we talk about ‘African preference’, how much of the funding is coming from the continent?” asks arbitration expert Tameru.

It turns out that many operators from the East – China, South Korea, India, Pakistan – are better integrated into the Ethiopian economy than their African counterparts, which could facilitate the establishment and development of banking groups from these countries.

China ($3.36bn), Saudi Arabia ($1.42bn) and Turkey ($915m) hold the largest stocks of foreign direct investment, according to the US State Department.

What kind of freedom?

Another unknown is the amount of freedom that the foreign competition will have.

“The governing role of the Central Bank will probably extend to foreign banks,” suggests economist Kassahun.

Among the conditions that the NBE could impose, according to him:

  • a limit on the number of banking licences granted;
  • a minimum level of capital higher than that of local banks;
  • a minimum number of branches to be opened (including in rural areas, where 70% of the population lives);
  • a ceiling on interest rates and loan amounts;
  • the obligatory presence of Ethiopians in key positions…

All these elements could limit the firepower of new entrants.

They would be forced to confine themselves to representative offices or niche financial services, and would not really play an active role in the financing of the Ethiopian economy, the economist stresses.

Market share

Beyond the brakes that can be imposed by the central bank, what about the other key public player in Addis Ababa: the Commercial Bank of Ethiopia?

“Most of the country’s financial flow passes through it, whether it be for development projects undertaken by the government or those of large companies (industrial parks).

“Even though it will decrease, CBE’s market share will remain important,” business lawyer Tebibu Kebede told us.

There are other challenges to keep in mind.

“Given the shortage of foreign currency, foreign institutions may find it difficult to move their capital out of the country,” says Tameru.

Also, any investment will have to be made with a long-term perspective, which may discourage players such as private equity firms, whose funds have a limited life span.

Finer regulation

According to Tameru, Addis Ababa will have to provide solid guarantees to foreign banks to convince them to take the plunge, for example, by structuring agreements, with the endorsement of jurisdictions and investment regimes, facilitating the use of international arbitration courts and the repatriation of currency.

This expert says the country will have to adopt such facilitation “within a reasonable time frame” if it wants to ensure the success of the banking sector’s liberalisation.

But even this option is not without its problems.

One shouldn’t overlook the technical complexity of a finally open banking system and its inherent risks (notably money laundering), and shouldn’t overestimate the Ethiopian Central Bank’s capacity to regulate these institutions within a complex international financial structure, says consultant Temesgen.

Mobile finance

The central bank will also have to deal with the revolution in the financial market triggered by the 2021 arrival of Safaricom, a recognised specialist in mobile finance.

Last October, the Nairobi-based bank won the right to launch its M-Pesa offering in Ethiopia.

“Telecom services are gradually expanding to become those of a credit provider,” says Laurendeau.

According to this partner at Signature Litigation, we can expect to see innovative and specific regulations, or even the emergence of a differential licensing regime, to be attributed to mobile banking players, according to their original field of activity (banking or telecoms operators).

“The Ethiopian government is late to the party, but it is taking the opportunity to observe what is happening elsewhere and it seems to be keen not to mix genres.

“At a time when all these major sectors (banking, telecoms, capital markets) are being liberalised, this is an opportunity to make sure everyone is doing what they know how to do and doing it well,” says Laurendeau.

Opening up locally, then globally

Like the aforementioned entry of Kenya’s Safaricom into the Ethiopian telecoms market in July 2021, which had implications for the banking sector (digital banking, mobile payment, etc.), the liberalisation of the banking sector and its inclusion of foreign players is part of a wider context: that of Addis Ababa’s application to join the World Trade Organisation (WTO).

It is also part of a wider reform of the domestic financial market.

Ethiopian authorities have also announced the creation, by 2023, of a local capital market (Ethiopian Securities Exchange, ESX).

The government plans to list 50 companies initially.

“Banks are among the most stable institutions in the financial market; their business plans can extend over 25 years,” explains arbitrage specialist Tameru.

The liberalisation of this sector, better understood by international investors, should boost the future local stock market.

The ESX project is being developed in collaboration with FSD Africa, an institution dedicated to the development of financial markets in Africa, supported by British funds.

ESX is still being set up (regulation, market segmentation…), but the Addis Ababa sovereign wealth fund  Ethiopian Investment Holdings ($150bn in assets under management) is expected to be the most important player in this stock market project, due to its holdings in major state-owned companies, including Ethiopian Airlines and Ethio Telecom.

At the same time, the many players involved – investment banks, rating agencies, traders, brokers, and custodians – need to be trained.

Melesse Minale Tashu, the macroeconomic advisor to the governor of the National Bank of Ethiopia (NBE), who is in charge of the central bank’s Capital Market Project Implementation Team, is working on this task.

According to him, more than 600 industry professionals have already been trained.

By Loza Seleshie

The African Report


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