The Banking Boom

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Year shows Growth and Apprehension for Private Banks in Ethiopia

By BROOK ABDU
FORTUNE STAFF WRITER

The last fiscal year had been one of growth and expansion for Ethiopia’s banking sector, though still dominated by the state owned Commercial Bank of Ethiopia (CBE) and although most of the private banks still face the challenge of meeting a paid-up capital minimum of 500 million Br by 2016, according to a decree by the central bank.

In the fiscal year that ended on June 30, 2014, the total number of bank branches in the country reached 2,208; of these 1,205 are private bank branches. Of the new 480 branches opened during the year, 346 were also opened by private banks. The growth has led to improving the branch-to-population ratio of one to 49,826 people to one branch to 39,402. The CBE alone has opened 124 branches during the year, still playing a dominant role, but

the share of state-owned branches has fallen from 50.3pc to 45.4pc.

The sector has seen its profits and expenses as well as its assets and capital growing during the year and over the years. The 16 private banks had a cumulative pretax profit of 4.7 billion Br, which grew by 24pc, and profit after tax of 3.6 billion Br. These banks have paid an income tax of 1.2 billion Br. The growth in the profit before tax surged from the prior year’s 11pc of growth. Among the banks, Oromia International Bank saw an increase in profit of 99.1pc, while Wegagen Bank saw a decrease in profit of six percent.

The highest profit after tax went to Dashen Bank, which had registered a profit after tax of 712.5 million Br while the smallest slice went to Debub Global Bank with 18.5 million Br.

The performance of the sector in the fields of financial intermediation has significantly increased. The interest income in the sector has grown by 30pc reaching 7.1 billion Br. The highest share of this went to Dashen, which has reported an interest income of 1.3 billion Br, followed by Awash International Bank with 1.2 billion Br. Debub, being one of the new participants in the market earned the least, which is 37.2 million Br.

This growth has fed into increasing paid up capital, although most are yet to meet the 500 million Br requirement by the central bank. The total paid-up capital of the banks increased by 35pc to 10.8 billion Br. The 16 banks had 15.1 billion Br as capital and reserves, enabling them to have a capital adequacy ratio (CAR) of 28.6pc, which is far better than the legal requirement of eight percent. CAR shows the capacity that the banks have to absorb risks if considerable portion of loans, advances and other assets go sour as banks are prone to such risks.

The private banking sector has also seen its assets increasing by 21pc to 121 billion Br. Dashen stands at the top of the list having a total asset of 22 billion Br.

Dashen is also the leading spender with its expenses reaching 1.2 billion Br and the smallest being Zemen with an increase in expenses being only three percent. The promising growth in the profit of the private banks is shadowed by a growing expense, especially in the staff and general and administrative realm. Salary and benefit expenses have expanded by 40pc reaching two billion Birr and the general administrative expenses in the banking sector have shown a growth of 46pc reaching 1.9 billion Br, which resulted from the competition in the sector to maintain their employees with salary increase and benefits.

With this comes the challenge of meeting the central bank’s decree of a minimum paid up capital of 500 million Br by 2016. Debub Global Bank, for example, has recapitalized its first profit gained in the last fiscal year, which was 18.5 million Br, forgoing dividends that had to be paid to shareholders.

“The amount set by the central bank is very important to make the banks cover risks,” says AlemayehuGeda (Prof.), a macroeconomist who teaches at the Addis Abeba University, Department of Economics. “The inflation has devalued the money at least five times within the past five years that makes the amount on the directive logical.”

Despite the increase that is seen in the profit of the banks, the earnings per share (EPS) of the banks have shown a decline. The average EPS of the industry has fallen down to 36pc from 39pc in the previous fiscal year. This is a result of the capitalization of the banks to comply with the NBE directive, according to Abdulmenan Mohammed Hamza, accounts manager at Portobello Ltd, a London firm.

In the fiscal year of 2013/14, banks have been focusing on the expansion of their technological bases by expanding core banking and increasing the number of their Automated Teller Machines (ATM). Banks that did not have the machines had invested in new ones. And some like Dashen and United Bank have taken licenses from NBE to start issuing agent and mobile banking in the fiscal year.

But the growth in the adoption of new technologies in the country is slow for Alemayehu, as he compares the growth with other countries, especially with Kenya, which is a worldwide model for its M-Pessa mobile banking.

“Technology does not mean ATM and core banking,” argues Alemayehu. “We need to exploit the potential of new banking systems through which we can access our accounts at home like the Kenyan M-Pessa and internet banking.”

The banks were also seen acquiring their own ATMs except for Zemen and Dashen that use the same machines and the six members of the PSS, Awash International Bank, Nib International Bank, Addis International Bank, United Bank, Berhan International Bank and Cooperative Bank of Oromia.

“They are wasting their resources on what they can possess in groups,” comments Alemayehu.

Even though the banks have experienced growth in these dimensions, the macro economist Alemayehu says that the banking sector is shallow as they do not give world-class services by supplying investment banking, startup capital, and they do not have the experience in issuing bonds.

Since April 2008, no interbank money marketing has been conducted and since its introduction in the country in September 1998 only 23 transactions have taken place, which are worth 259.2 million Br with interest rates ranging from seven percent and 11pc a year and the maturity period spanning from one day to five years, according to the year’s report from NBE.

“Interbank money market remained dormant because of excess reserves in the banking sector,” states the report.

Alemayehu Geda urges for a cautious opening of the Ethiopian financial sector which the government has reserved for domestic investors only. The absence of international investors in the sector has caused the local banks to walk in smaller strides towards change, according to Alemayehu. The banking sector, he believes, has been protected for the past 15 years and this should be reversed; but with a risk he says.

“The banking sector has to be made open to foreign investors slowly by letting the management go first then in the form of shareholders in the sector,” he suggests.

If foreign investors are let in at a time, local banks, which are shallow, could disappear, he says, giving the example of Kenya, where there were 120 banks before liberalizing the sector – only six survived after the liberalization.

The private banks should also organize themselves and challenge the government on some of its biases, like housing saving that is only allowed to be deposited at the CBE, and policy making such as monetary policy and decision of exchange rates.

“If they could not do that, they should lobby the government,” he says.

Despite the increasing expenses and the slow growth of the technology in the industry, the Ethiopian banking system is growing as a recent report of the International Monetary Fund (IMF) shows.

“Ethiopia significantly lags behind the other Sub-Saharan African countries in all measures of financial access, including number of branches, ATMs, depositors, and creditors” states a report from the IMF released in October 2014. “[But] the banking system is expanding and the structure of its liabilities and assets is evolving and the financial soundness indicators [which include CAR, return on assets and return on equity and asset quality] do not indicate immediate risks to the health of the banking sector.”

The number of banks per 100,000 adults stands at around three while that of the Sub-Saharan Africa is about four, the depositors per 1,000 persons is 100 in Ethiopia while this number is 150 in Sub-Saharan Africa. The number of ATMs in Ethiopia per 100,000 adults is well below two while the number in Sub-Saharan Africa is about five according to a data from IMF report.

The fiscal year that showed growth in all banks with many in the industry left to fulfill the NBE directive over minimum capital requirement has stayed being the concern of the banks in the fiscal year. The deadline set for the fulfillment of the directive is June 30, 2016 after which the fate of these banks will be being prohibited from accepting new deposit, underwriting new loans, conducting international banking business and being compelled to merge or be closed.

The year 2013/14 was also a year in the banking sector that had shown an unfamiliar presidential reshuffle, resulting in rise of vice presidents to the post of presidency. Four banks in the sector saw their presidents leave of their own volition. These are Bank of Abyssinia, Berhan International Bank, Debub Global Bank and Lion International Bank. In all banks where the presidents have left, others have taken their place in top positions in the sector. This is in direct contrast to the long-standing comment on the sector that it has no opportunity for the growth of new leadership.



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