Ethiopia embarked on a demonization process in September, during which new banknotes were issued to curb cash hoarding and combat illegal activities such as tax evasion.
The move caused 1.3 million Ethiopians with no bank account to transfer their old cash to a bank account from which they could withdraw the new banknotes. This gave a boost to the 19 banks operating in one of the most tightly state-controlled banking systems in Africa.
“This is a success when it comes to getting a lot of people to bank,” said Prime Minister Abiy Ahmed, who came to power in 2018 and promised a major economic overhaul.
The move was the most radical step in a reform plan that the government hopes will spur much-needed foreign investment in the banking sector and other parts of the economy. However, critics say reform should go much further to challenge the entrenched attitudes of policy makers who have so far resisted change.
A driving force behind the reforms is Yinager Dessie, the Austrian-trained governor of the National Bank of Ethiopia. He feels that people are rushing to the banks because “the trust between the banks and the people is huge. There is no bankrupt bank in our history. So we have very aggressive and strict supervision. “
There is no bankrupt bank in our history. So we have very aggressive, strict supervision
Ethiopia has taken small steps to liberalize its tightly controlled financial sector by granting licenses to foreign banks such as Kenyan Equity Bank and KCB that allow them to set up representative offices in the country of 110 million people.
The licenses, however, offer little more than a hold in a country where the central bank set a minimum deposit rate of 7 percent, but lenders set their own unmarked loan prices when inflation was around 20 percent.
“We do not have [got fully operating] international banks here; They are not allowed here because we want to make our local banks strong, ”says Yinager.
In fact, the state-run Commercial Bank of Ethiopia (CBE) covers nearly 60 percent of Ethiopia’s banking activities. A September research report by rating agency Moody’s warned that the lack of commercial commercial banks had led to “dominance of state-owned banks,” which account for around three-quarters of Ethiopia’s total banking assets.
State banks like the Commercial Bank of Ethiopia account for three-quarters of total bank assets © Alamy
In an interview with the Financial Times, Yinager said that “it will take time” for foreign banks to operate fully in Ethiopia, the country’s banking sector “will not always be closed”.
He adds that more than a dozen commercial banks are applying for approval to set up a business in Ethiopia, where, according to the World Bank, 35 percent of adult Ethiopians had bank accounts in 2017, which is below the 43 percent average in sub-Saharan Africa.
“We encourage the private sector to do so [buy into] digital fintech operator. We recently introduced a policy that allows non-financial institutions to take action. Anyone who meets the criteria can be hired and is not expected to be a financial institution. Now we’re trying to expand this mobile banking, Internet banking, ”adds Yinager.
Ethiopia recorded average annual GDP growth of around 10 percent from fiscal year 2008/09 to 2018/19 as the government had a firm grip on key sectors such as services, agriculture and manufacturing. Economic growth in Ethiopia slowed to 6.1 percent in fiscal 2019-20 by July, from 10.8 percent originally forecast by the central bank before the coronavirus pandemic broke out.
However, Western donors and some investors complain that a lack of foreign investment is preventing faster growth, underscoring the lack of foreign capital the country has seen recently.
An adviser to African banks who follows Ethiopia questions the country’s reformist plans. “The mentality that has been around since the 1950s and 1960s has been to make sure the government’s favored business plans work. The mentality to this day has never been that we should have a thriving, competitive banking system that supports a modern capitalist economy, ”says the advisor.
Arkebe Oqubay, senior advisor to the country’s prime minister, says the Ethiopian government is implementing economic reforms despite the Covid-19 pandemic. The central bank’s plans are part of an effort to open previously state-controlled sectors to foreign investors to encourage the inflow of foreign capital.
In Ethiopia, foreign currency shortages are common due to low export revenues and strict government control of the exchange rate. This has made it expensive for Ethiopian companies to finance imports in a country where currency reserves stood at $ 3.1 billion at the end of fiscal year through July – enough to cover about two months of imports.
Other expected reforms include the sale of a stake in Ethio Telecom, the country’s telecommunications monolith, and the issuance of new cell phone licenses, which Yinager says has attracted the interest of South African Vodacom and MTN and French Orange. “With the privatizations we expect a certain amount in the coming years,” he says.
With banks and insurance companies still the territory of local investors, Ethiopia plans to launch a domestic stock exchange. “We have now drawn up a proclamation to establish a capital market in this country. So this is a big reform that we currently have to implement in the coming months, ”says Yinager.
“It will be open to everyone – first-class banks, insurance companies and large state-owned companies. We believe and believe that these big companies will be the main players for the capital market. “