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Month: April 2021

SIGNED IN DELIGHT

Posted on by Web Master

Finance Minister Ahmed Shide (left) and Ousmane Dione (centre), World Bank country director, saunter out of the halls of the former’s headquarters on King George VI St., Sidist Kilo area, following the inking of a 907-million-dollar financing agreement, almost one-fifth of which is earmarked for COVID-19 response initiatives. The virus has killed over 3,400 people in the country, with total reported cases at around a quarter of a million.

This year, the World Bank approved other projects focused on education, climate resilience, and social safety nets, bringing lending commitments to two billion dollars thus far. Ethiopia’s government has been reiterating the need for support from bilateral and multilateral development partners in light of the COVID-19 pandemic and its troubling political situation. These are indeed developmental challenges that the World Bank would like to see the country get past, on top of a severe locust invasion that has threatened food security and livelihoods as well as limitations in competitiveness and an underdeveloped private sector.

Lia Tadesse, minister of Health, is close by as one of the projects to be covered by the agreement is a 207-million-dollar grant to support vaccine acquisition and distribution. Her Ministry has received around 2.5 million doses in recent months, with over 430,000 receiving the jab thus far.

Part of the financing agreement related to the pandemic is a 200-million-dollar loan to support small and medium enterprises (SMEs), aimed at closing credit gaps for such enterprises by providing capital and lease financing.

Most of the loans, though, will go into the Access to Distributed Electricity & Lighting project. The half-billion dollar programme will largely be focused on bringing private sector capital into the energy sector. One hundred million dollars is expected to be channeled to private sector distributors and suppliers to support the delivery of services.

“It’s always a delight to be at these ceremonies signing agreements,” said Ahmed before he inked the deal with the Bank.

With Evolving Financial Sector, Central Bank Needs to Step Up its Game

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There were no surprises when the National Bank of Ethiopia (NBE) decided two weeks ago to raise commercial banks’ minimum paid-up capital requirement. For a few years now, the central bank has been signaling that all private banks in business – 16 of them by the last fiscal year – reach at least two billion Birr in their capitalisation. The latest directive takes this a notch up, raising the threshold to five billion Birr, 10 times the current requirement.

It is a long way coming for an industry that had seen a rebirth in the mid-1990s with a threshold capital requirement of 10 million Br. This allowed the first generation of private banks such as Awash, Abyssinia, United, Dashen and Wegagen to emerge. A paid-up capital increase to 75 million did little to deter the second wave of banks – Bunna, Nib, Zemen, Oromia International and Lion – from joining the industry. Not even half a billion Birr capital threshold was much of a roadblock when more banks were entering the market. Banks such as Debub Global, Enat, Addis, Berhan, CBO, and Abay were the latest in the bloc.

In the face of 17 banks under formation, the latest demand could be an uphill task for several banks. It may merely be a small inconvenience to those who have been in the market for two decades and above. Already, Dashen and Awash are in the clear. Before the directive, the Bank of Abyssinia’s shareholders decided to beef up their capitals up to 10 billion Br. Amhara Bank, which recently held its first general assembly, will be entering the market with a cool six billion Birr in paid-up capital, the first bank to achieve such a monumental feat upon formation.

Rising requirements for paid-up capital, which improves banks’ ability to mobilise deposits for loans and advances, is not the only thing occurring in the financial sector. It is an area of the economy that investors and, more importantly, small-time savers, have their eyes on as inflation bites. A testament to this is their proliferation in number, with around a dozen banks in various stages of formation.

No less interesting is the diversity in the services and products they are offering. Interest-free banking (IFB) has made the biggest splash and is gaining ground in the insurance sector as well. Full-fledged interest-free banks such as ZamZam and Hijra are similarly joining the industry, as are the types specialising in single products such as mortgage and investment consultancy. There is as well a heated competition in electronic banking, with Ethio telecom on the cusp of entering the market.

Combined with establishing a capital market, for which a bill has already reached parliament, these changes are bound to transform the sector nearly beyond recognition.

Similar dynamics take place in monetary policy, where the currency, the Birr, is being moved towards a market-clearing rate. Inflation has stubbornly stayed in the double digits, and the administration is attempting to break free of its habit of having money printed to finance the budget deficit. Instead, it funds it using sales from bonds and treasury bills.

Yinager Dessie (PhD), governor of the central bank, clearly has his job cut out for him. His record over the past three years has been questionable. An International Monetary Fund (IMF) guided programme that sees subsidies cut and the Birr depreciated has meant inflation has been hard to tame from a 20pc year-on-year rise. The consequences to the living standards of households, including in terms of food security, have been worrying.

Added to this will be regulating a banking industry that is evolving rapidly. How hard this is becoming has been evident with the directives it has been compelled to come up with regularly as it attempts to monitor the flow of currencies in and outside of banks. It has recently put restrictive rules to forex retention and has moved to substantially limit the amount of cash individuals and companies can hold outside of banks.

Under such circumstances, an increasingly popular recommendation is separating the responsibilities of the central bank’s role in ensuring macroeconomic stability through monetary policy tools from its insurance and banking regulatory duties. Reducing the latter function of the central bank will help it focus more stringently on monetary policies and perhaps even prohibit a conflict of interest in its duty to bolster commercial banks.

At least on the side of addressing conflicting interests between monetary policy and regulation of banks, there will be some merit to such recommendations. While the wellbeing of the financial system is necessary for the economy to be healthy, the reverse does not necessarily follow. As the rather impressive return on earnings per share (EPS) of several banks this year shows, economic hardship is not necessarily reflected in commercial banks’ account books. An extreme example is stock market gains in the United States throughout the COVID-19 pandemic – despite a severe dip at the outset, and the economy going into recession afterward, the market recouped its losses in a matter of two months.

In Ethiopia’s case, though, the financial system is still not sufficiently complex to make establishing a separate regulatory body that urgent. Not enough decoupling has taken place between the economy and banks and insurance firms for the simple fact that the market remains heavily regulated. Capital controls remain firmly in place. More importantly, there is not nearly the abundance of services and products as well as a regulatory environment that allows any meaningful level of speculation.

A more pragmatic recommendation is to strengthen the monetary policy functions of the central bank. It has been too comfortable policing banks while playing second fiddle to the executive part of the government for far too long. The latter had reduced its monetary policy function to its preferred economic planning instrument, no matter the consequences to macroeconomic stability. It is about time it refocuses its priorities and serves to check on the executive’s spending.

For this to occur, it would need to be sufficiently insulated from politics, which crowds out professional and independent monetary policy regulation. Addressing this starts from the top. The central bank’s governors have been deeply embedded within the highest corridors of politics, including serving as politburo members of ruling coalitions.

The same goes for the current governor, who himself is running for a parliamentary seat in the upcoming elections, representing the ruling Prosperity Party (PP). Experience shows this creates a conflict between the political interests of the ruling party and the central bank’s duty to maintain price stability. At some point in time, it was not possible to distinguish between the fiscal ambition of Sufian Ahmed and the monetary ease of Teklewold Atnafu. They were the longest-serving finance minister and central bank governor, respectively.

Sufian’s appetite for funding projects in parts of the country to buy his party more voters and Teklewold’s eagerness to print money that fed inflationary pressure on the rest of the economy was legendary.

The less that such a redline is not strictly adhered to, the harder that the central bank would find it to regulate an ever-expanding number of banks and products while maintaining a monetary policy that anticipates and can respond to an evolving economy.

Remittance, Losing its Battle Against the Parallel Market

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Opened a few weeks ago, the Birmaji branch of the Cooperative Bank of Oromia (CBO), on Africa Avenue (Bole Road), was quiet and empty around lunchtime on Thursday. Two staff, an accountant and a customer service officer, were set on their back-office duties while a teller at the front desk waited for customers to walk in.

The branch has had a modest attraction to customers since its opening – up to 80 visitors a day – but, shockingly, only two people have showed up to cash out money remitted through international transfer services in that entire period of time.

Nebiyou Debele, the branch’s accountant, was bemused by the low amount of remittance coming into the branch. His experience in the current and other branches he worked at before does not give him much confidence about the country’s remittance operations. Even among the few who drop by, none cash out remittances more than 1,000 dollars. The parallel market offers more than a 30pc margin to a dollar, a factor that drives customers away from the formal channels.

“People ask us if we’re awarding incentives, and leave when they learn we’re not,” Nebiyou told Fortune.

The branch where he is working now may be young, but the decline is evident in many of the Bank’s 464 branches across the country. These branches generated a foreign currency inflow of 363.42 million dollars last year, 22pc of which was from private transfers and remittances.

However, a marked decline in the number of people going through the banks for remittance is a trend many in the industry find deeply worrying.

The size of the Ethiopian diaspora community is estimated to reach three million, mainly concentrated in the United States, the Middle East and Europe. It has made Ethiopia one of the main destinations for remittance globally. It was one of the top 10 remittance-receiving countries in Sub-Saharan Africa along with Nigeria, Ghana, Senegal, Kenya, and South Africa, according to the World Bank’s Migration & Remittances Factbook, released in 2015.

Remittance is a major source of foreign currency to low and middle-income countries. Migrants’ remittance inflows to developing countries have consistently surpassed official development aid over the last two decades and can even exceed the value of foreign direct investments. Two years ago, it had reached an all-time high of over half a trillion dollars.

This is consistent with what Ethiopia has witnessed over the years. For the decade since 2011, revenues from foreign direct investment were short of 15.5 billion dollars, less than half of the 37 billion dollars the country received through remittance, as data from the National Bank of Ethiopia (NBE) shows. Neither were revenues from export earnings any match to it. The figures for two decades show remarkable growth in remittance, from 233 million dollars in 2003 to 5.6 billion dollars in 2019, the year when revenues from exports were below three billion dollars.

The significance of remittance to the balance of payments is not to be understated.

The trend in remittance, commonly understood as money transfers made from migrants to friends and families in their place of origin, ran into a hitch in the past fiscal year, registering a one-billion-dollar drop. Although the severity differs among banks, most, including the state-owned Commercial Bank of Ethiopia (CBE), where the largest share comes through, have reported a decline in their respective foreign currency earnings.

CBE had an inflow of 1.8 billion dollars (only 139m dollars was from exports) in the first half of the last fiscal year, which made up 36pc of the national total during that period. Ordinarily, the Bank’s earnings make up to 70pc of the national amount, which has dropped significantly to 1.4 billion dollars in the current fiscal year, almost a quarter lower.

The Cooperative Bank of Oromia, where Nebiyou works, had a relatively similar experience. The flow of foreign currency through remittance declined by 7.76pc in the last fiscal year, from 55.7 million dollars.

The significant drop in the amount of remittance last year could have been caused by the shift of the parallel market to utilising diaspora accounts, in addition to the economic strain of the COVID-19 pandemic, says Kiflu Degefe (PhD), a researcher at the Policy Studies Institute.

The outbreak of the COVID-19 pandemic, which brought economic recession across the world, may have contributed to the decline. Nonetheless, the rapid rise of the informal transfer has a significant impact, observed Deribe Asfaw, president of the Cooperative Bank of Oromia.

His bank may have seen a two-million-dollar rise in foreign currency mobilisation in the past nine months of the current fiscal year, compared to the same period last year, but the President is unsatisfied; two million dollars is “nothing” for a bank of its size.

“People still think that money sent through Western Union can only be withdrawn from the CBE,” Deribe told Fortune.

Alongside MoneyGram, Ria, Dehabshill, and WorldRemit, Western Union is one of the main money transfer companies active in the Ethiopian market.

The slight increase of inflow in this fiscal year might seem like a glimpse of hope for the banks, but the sustenance of the parallel market through a global pandemic proves otherwise. The global remittance market is characterised by high transaction costs and limited competition among service providers. This encourages widespread use of informal transfers, presenting the toughest challenge for bankers and policymakers. This is especially true in places where the exchange market is closed, such as in Ethiopia, and rates from the formal market are far lower than what the markets on the street offer.

There is little known about the scale of informal remittance in Ethiopia. Data from the central bank shows that it has grown exponentially from 756 million dollars in 2010 to 2.3 billion dollars a decade later, making up 49pc of the total amount of inward remittance registered last year.

However, a study conducted three years ago tells a different story. According to the International Organisation for Migration, around 78pc of remittance flow though some corridors to Ethiopia goes through informal channels.

Experts in the sector raise their concerns on this. The amount of illegal inflow could be underplayed, as the method of computation to determine informal remittance by the central bank is simplistic. It is calculated as the residual from the balance of exports, imports, and direct remittance. Considering inaccuracies in the official reports from the central bank, the flow of remittance through informal channels could be higher.

The widening gap between the official and parallel market rate must have played its part; this has encouraged people to send money home through informal channels, according to Abdulmenan Mohammed, a finance expert based in London.

Those in the banking industry attribute the high disparity to the increasing gap between rates people get from the official and the parallel markets. They are not off the mark in their assessment.

A young mother of two who works in a private company receives support sent from a relative in the United States on every holiday. This relative sends, through Western Union, up to 300 dollars. When the exchange rates at the banks began to lag significantly behind those available on the black market, up to 56 Br to a dollar, she quickly changed sides. An additional 4,200 Br from as small a transaction as 300 dollars was good enough for her to switch over.

Sofia Ibrahim manages the remittance division at Nib International Bank, where forex transfer declined by up to 40pc in recent years. She has seen the inflow stabilise and says that it is moving at a constant rate in this fiscal year, despite occasional surges during holiday seasons. She understands that people have a valid reason for receiving money through informal channels; but says that the issue goes beyond individuals.

In addition, Sofia explained that though the amount that used to come in through diaspora accounts was high, it has been dropping alarmingly since the new directive was issued.

“It’s just been a month,” said Sofia. “We’ll know the real effects in a couple of months.”

The National Bank of Ethiopia (NBE) passed a directive last month ordering diaspora account holders that receive inward remittance to surrender one-third of what they receive to its coffers. Its officials claim that they were determined to fight illicit transactions that have undermined the forex market and allocations that disadvantage domestic manufacturers.

The forex acquired through illicit remittance services is used for dubious activities, research done on illicit financing in Ethiopia indicated. It can be used to make informal payments, acquire properties, and, usually, finance under-invoiced purchasing, a scheme importers use to acquire foreign currency to pay for imports of goods. They request a small amount from banks through letters of credit and pay for the rest through the parallel market.

This has put the banks in a desperate bid to attract those with access to forex, devising marketing schemes to lure customers offering moderate to lavish incentives worth millions of Birr. From a token in mobile credit to generous offerings in loan financing for vehicles and house purchases, the race to the bottom is fierce in the industry.

These are schemes hoped to bring in a huge amount of foreign currency to the banks, according to Sofia.

The authorities have taken a series of measures to pull the plug on the informal money transfer market. Cracking down on the streets in the capital known to have forex transactions has continued. They have also imposed restrictions on the number of transactions in Birr, retention of foreign currency earnings, and utilisation of diaspora accounts.

However, it is too early to weigh the results of the recent directives, although the banks have seen positive outcomes, Frezer Ayalew, banking supervision director at the central bank, told Fortune.

The industry wants to see major policy changes beyond legal sanctions to address the foreign exchange shortages. For Deribe, increasing domestic productivities and availing a win-win mechanism through which the country and foreign investors can benefit should be the focus.

“The government should have a strict control mechanism, not just stringent policies to control illicit trade activities in under-invoicing and over-invoicing,” he said.

Healthy competition should be fostered within banks to provide an innovative solution for the problems, according to Deribe.

“Other competitors are coming in before we have learned how to compete,” the President told Fortune.

Some African countries with a liberalised foreign exchange market are less troubled by illicit trade. A good example is Kenya, where remittance in its entirety comes through formal channels.

“So long as there is a shortage of foreign currency in the formal channels, the parallel market will exist,” said Abdulmenan. “Legalising the parallel market is a better option.”

Kiflu concurs. Opening up the foreign exchange market for a market-based regime is a sustainable remedy in the long run. However, when to do that is highly dependent on the amount of foreign currency reserve available to cushion the inevitable hemorrhage and the performance of the export sector.

International Wheat Procurement Falters, Again

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The federal government’s bid to import desperately needed consumer goods seems to be going from bad to worse as procument processes to buy wheat, sugar, and rice faltered last week.

Only one supplier, Promising International, showed up during the bid opening last week for procurement tenders floated in March this year by the Ministry of Trade & Industry.

With the rising cost of living, driven largely by upward prices for food items, authorities at the federal government are under pressure to stablise the market. Over the past three years alone, Ethiopia has imported an average 1.2 million metric tons of wheat a year, excluding food aid, which accounted for about 30pc of the domestic consumption. Last year, the federal government imported 1.7 million tonnes of wheat.

A procurement process, which would ordinarily have been carried out by the Federal Public Procurement & Property Disposal Service (PPPDS), was instead made to be floated by the Ministry to speed up the procurements on behalf of the Ethiopian Trading Business Corporation (ETBC) and the Ethiopian Sugar Corporation (ESC).

The Office of the Prime Minister made the decision.

Officials at the ministries of Trade & Industry and Finance were not available to comment on the rationale behind the structuring of the tenders.

Partitioned in three lots – 400,000tn for wheat grain, 170,000tn for parboiled rice, and 320,000tn for sugar – the committee in charge of the procurement process for wheat saw an offer only from the Dubai-based company when the bid was opened on April 20, 2021. Promising International was one of the 50 prospective suppliers that have bought the bid documents.

Promising, a frequent wheat supplier to Ethiopia, was blacklisted due to a dispute with PPPDS for failing to deliver on a bid for 200,000tn of wheat awarded in 2018. A recent favorable court ruling, however, has allowed Promising to get back into procurement activities.

Usually, when bids are announced for wheat procurement, many suppliers place their respective bids, despite dozens buying the documents. None of the suppliers in the three lots have provided bid bonds, along with other technical documents, according to Tsewaye Muluneh, director-general of PPPDS and a member of the technical committee, comprising members from the Ministry, PPPDS, and ETBC.

“It’s a basic and primary requirement for bidders,” said Tsewaye.

The technical committee has done its analysis and reported to the approval committee, according to her.

There was a mishap during the submission of the documents where a bid bond worth 500,000 Br was placed in the financial document rather than separately, according to representatives of Promising International.

“These things happen,” said Habtamu Million, a local representative of Promising International.

The reluctance by the suppliers to provide bid bonds shows that there is fear of failure to deliver the goods if they are awarded the contract, says Sintayehu Demissie, lecturer at Addis Abeba University School of Business & Economics.

“The requirements must not have been attractive to the bidders,” he said.

The financial requirements laid out this time around were markedly different from the ordinary requirements set by PPPDS. It demands suppliers to use their own foreign currency and repatriate the respective amount at least two years following the delivery. With options as long as 10 years, a longer repatriation period is given higher value during the bid evaluation process. The suppliers are also required to invest no less than half of the proceeds from the supplies in Ethiopia.

“The requirements are indeed difficult to attain,” Habtamu conceded.

The cost of the procurement of wheat is expected to rise to 140 million dollars, including transportation. The trend will not be different for the other consumer items. According to the Food and Agriculture Organisation and the International Sugar Organisation, the global price of rice in March 2021 ranged from 378 dollars to 558 dollars for a tonne; and, the price of sugar stands at 460 dollars a tonne in April 2021.

Over the past three years, the country imported close to 330,000tn of sugar annually and 300,000tns of rice, costing it close to 200 million dollars in 2018.

Since last year, the federal government has been struggling to procure wheat from international suppliers through competitive bidding. Two contracts for wheat procurement from international grain suppliers were canceled due to defaults or contractual non-performances. The latest attempt in failure was for 600,000tn of wheat after two suppliers were contracted for 117 million dollars. In November last year, Rosentreter Global Food Trading and Martina Mertens were awarded contracts to supply 400,000tn and 200,000tn of wheat, respectively. Both companies failed to show up.

The case is under litigation before the courts, according to Tseway.

The mishaps frequently occurring in wheat procurement have led officials at the PPPDS to begin drafting directives to establish a stringent and speedy procurement process.

The recurrent debacle of procurement, especially of wheat, shows that there is something that is not working, according to Sintayehu.

“The procurement of wheat need not follow certain procedures all the time,” he said.

He urges that it can be procured through bilateral agreements with foreign governments; it could be procured by awarding a certain trustworthy company to supply wheat for a long period of time; and even outsourcing the procurement process could be worth a try.

PPPDS opened another bid last week for the procurement of 30,000tn of wheat to be used for the Ministry of Agriculture’s safety net programme financed by the World Bank. Two bidders, Promising International and Falcon Bridge Resources, both Dubai-based companies, have placed their respective offers. Promising International offered 11.62 million dollars for 30,000tn and Falcon, 10.7 million dollars for the same amount.

UTILITY MONOPOLY TO ENHANCE ELECTRICITY DISTRIBUTION IN ADDIS ABEBA, OUTSKIRTS

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The Ethiopian Electric Utility (EEU) is set to kick off the construction of power lines in two weeks in Holleta, 35Km away from Addis Abeba, at a projected cost of 10 million Br.

The primary enhancement is to be done on the Hidase substation, and three new distribution lines are to be installed. The first one to the Holleta town centre for public use, the second to Menagesha (20Km from the capital), and the last one to the Wolmera area, where several flower farms are located.

This could come as a piece of good news for the horticultural farms in the area, which have voiced their complaints about power shortages and outages through their industry lobby group, the Ethiopian Horticulture Producer Exporters Association (EHPEA).

The area gets its power from the worn-out Addis Alem substation, and developers have long been pleading with the government to relieve them of frequent power outages in horticulture farms, where lots of operations depend on reliable power supply, according to Tewodros Zewdie, president of the Association.

A directive issued two years ago grants the EEU the authority to provide dedicated lines for industries with recurrent problems of power supply. Water bottling and steel milling companies are beneficiaries of this arrangement, according to Gemedo Dera, EEU’s head for distribution for areas surrounding Addis Abeba.

“The horticulture farms can use these avenues,” he told Fortune. “The physical work may not take more than two months; we plan to finalise it before the rainy season comes.”

However, importing materials for EEU’s projects has seen difficulties due to a severe shortage of foreign currency, causing millions in overruns.

Similar projects, which were also aimed at improving services both for households and industries, have been carried out in Bishoftu (Debre Zeit), Dukem and Gelan.

Recently, several enhancement projects have been initiated by the EEU with the support of development partners. The African Development Bank (AfDB) provided 60.64 million dollars in financing, and Japan chipped in 24.46 million dollars.

The EEU has kicked off a project which aims to rehabilitate the electricity supply lines in Addis Abeba and towns within a 50Km radius of the city, in four phases. Earmarked with a total budget of 85.1 million dollars, the project is at its final design stage, Fikreselam Getnet, manager of the project, disclosed to Fortune.

When completed, the project is hoped to address power interruption issues in Legetafo, Gelan, Dukem, and Bishoftu townships.

The project entails the rehabilitation and construction of medium-voltage lines, the replacement and installation of distribution transformers, the renewal of substations, and the establishment of the supervisory control and data acquisition system (SCADA) for the distribution network in Addis Abeba.

China Electric Power Equipment & Technology (CEPET) and China National Heavy Machinery Corporation (CNHMC) have been awarded the project for the design and construction phases, while recruitment is in progress to establish SCADA.

“The project is mainly public-use centered,” said Fikreselam.

Ethiopia has 4,064MW of power production capacity from hydro sources, 324MW from wind, and 25MW from a waste-to-energy plant. However, inefficient distribution systems cause around 21pc of the power to dissipate.

The efficiency of substations and distribution lines is a bigger problem in Ethiopia than power generation capacity, where 44pc of the population has access to electricity, noted Tigabu Atalo, an independent power consultant with over a decade of experience in energy and power infrastructure development.

According to the expert, the country has invested a lot in power generation but not so much in substations and distribution lines.

“Power doesn’t reach users due to infrastructure limitations,” Tigabu said.

In an attempt to achieve universal accessibility by 2025, the government signed a financing agreement with the World Bank last week for 500 million dollars to be dedicated to the expansion of on-grid and off-grid electricity access.

Ethio Life Records Lacklustre Year

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Shareholders at Ethio Life & General Insurance (ELiG) saw their returns drop for the second year in a row after the firm reported a disappointing performance for the year ended June 30, 2020. Its net profit declined by 8.6pc to 23.65 million Br; hence its earnings per share (EPS) were slashed by almost a quarter to 164.31 Br.

A drop in return for shareholders value is consistent with results over the past couple of years when more than 30pc loss in EPS was recorded. The senior management at ELiG concedes to the slump in growth and attributes the stagnation to slowed economic activities, high inflation, political uncertainty, and the shortage of foreign currency.

“It’s widely acknowledged that the overall business environment in the 2019/20 fiscal year had posed more challenges than opportunities for the Ethiopian insurance industry,” said Yoseph Endeshaw, ELiG board chairperson, in the firm’s annual report.

The injection of fresh capital and investments made to acquire a new headquarters in the Mesqel Flower area during the third quarter have also contributed to the decline in EPS and profit. Although not as near in decline as ELiG, the insurance industry’s aggregate net profit has fallen by almost two percent to 2.02 billion Br, during the reporting period.

This must have been bad news to the shareholders, according to Abdulmenan Mohammed, a financial statement analyst based in London.

ELiG has reported mixed results in its profit and loss account.

Underwriting surplus increased by 18.9pc to 80.46 million Br, and total gross written premium (life and general) surged by 29.4pc to 207.36 million Br. It is a figure Abdulmenan referred to as “impressive.”

Over a quarter of the gross written premium was ceded to reinsurers, leading the retention rate to fall slightly to 72.2pc from 73pc. It shows room for improvement as the average retention rate in the industry sits somewhere around 77pc. Despite the decrease in retention rate, claims paid and provided soared by 47.3pc to 65.6 million Br.

“Such a massive increase should call the attention of the firm’s senior management to rectify in the area of risk management,” said Abdulmenan.

Representatives from ELiG were not immediately available for comment.

Commissions paid to agents also soared by 47.1pc to 16.67 million Br, a significant amount paid to attract customers, and an expense that the expert advises should be kept under close watch.

Despite the shortcomings, ELiG did report an impressive performance in investment activities. Interest earned on time deposits increased by 14.6pc to 19.03 million Br, while dividend income almost doubled to 3.77 million Br.

Expenses, however, also spiked. Salaries and benefits shot up significantly by 51.6pc to 45.92 million Br and general administration expenses increased by 22.3pc to 24.44 million Br.

The total assets held by Ethio Life & General increased by 23pc to 587.8 million Br, including in fixed time deposits, in shares and bonds and in acquiring properties. These investments account for about a third of its total assets, much lower than the preceding year’s figure of 41pc.

“This must have been because a significant amount of money was held with customers and reinsurers,” said Abdulmenan, advising that this money be collected and invested to generate additional income.

Liquidity analysis shows that ELiG’s cash-and-bank balances decreased both in value and relative terms. It dropped by 15pc to 62.13 million Br, while the cash-and-bank balances to total assets ratio down to 10.6pc from 15pc.

Despite the reduction, Abdulmenan sees the liquidity level of ELiG, which was established in 2008 by 117 shareholders, as reasonable.

ELiG’s paid-up capital has increased to 147.68 million Br, showing an increase of 21pc. Its capital and non-distributable reserves account for 27pc of its total assets. ELiG is still a well-capitalised insurance firm that should give peace of mind to its shareholders.

At a time of public health risk due to COVID-19, the firm is doing reasonably well, feels a shareholder who requested anonymity. He believes that as ELiG focuses on the life insurance business than most others, it faces its own unique set of challenges.

“There are other insurance firms that have been in the industry for a similar amount of time as ELiG,” he said, “and they haven’t made as much progress. It is reasonable to say that the firm is successful. It had a few rough years after establishment but has since been performing well.”

The firm provided only life insurance products for the first four years of operation, before expanding to general insurance in 2012.

Abay Bank Looks to Dive into Digital Arena

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Abay Bank is entering into a partnership with AirfPay, a fin-tech company that provides digital solutions, to launch a mobile POS (m-POS) service in the coming weeks.

ArifPay is part of an emerging industry spurred by a directive the central bank issued last year allowing non-financial institutions to operate as payment instrument issuers, including the supply of m-POS card reader devices. An m-POS is a smartphone or tablet that can perform a cash register or a traditional POS machine wirelessly. It enables account holders to use an ATM card from any bank.

The Bank will begin distributing the devices to its merchant customers in the coming month, according to Eriste Woldemaryam, director of digital banking at Abay.

“We plan to introduce more alternatives for electronic payment,” Eriste told Fortune.

A bank with a paid-up capital of 1.7 billion Br, Abay is also teaming up with Engida Travel Solutions to launch applications to book cross-country luxury bus tickets and flight tickets and hotels.

Engida Travel Solutions was established in 2020 with 3.5 million Br in initial capital. It has developed the Liyu bus ticketing application, working with eight transport services, including those who make cross-border trips to Khartoum. Engida is also developing applications for flight and hotel booking services.

The bus ticketing solution has already received certification from the Ministry of Innovation & Technology, according to Seyoum Mengesha, head of the Private Sector Industry Technology Support Directorate at the Ministry.

The Ministry issues competency certificates to ICT-related companies operating in manufacturing, computer equipment sales, software engineering, networking, and consultancy services.

The bus ticketing application will be launched this coming week, according to Eriste.

The hotel booking application incorporates domestic and foreign hotels on a pay-on-arrival basis. The application will feature more than 150 hotels in the country and works with Expedia in incorporating hotels abroad.

“We’ll first serve domestically and transition soon to international bookings,” said Eriste.

However, the hotel booking application is still undergoing security checks and testing, Banteab Abiy, co-founder and CEO of Engida Travel Solutions, told Fortune.

Abay Bank, in business since November 2010 with 4,000 shareholders, is also focused on strengthening its digital security, according to Elias Berhanu, information technology director at the Bank.

“Abay is working on its capacity to defend against cyberattacks by creating awareness in employees and customers and updating its firewalls,” he said.

The new services will be an addition to the digital payment options for Uni-Cash, a utility payment platform that the Bank partnered with last year. The platform, developed by Atlas Computer Technology, allows users to pay utility bills, transportation fees, and school fees digitally.

The platform has registered over 47,000 users so far, according to Meried Tilahun, managing director of Atlas. The company has been working for over 10 years with financial institutions in building financial infrastructure and core banking support, leasing servers from Ethio telecom for 40,000 Br a month.

Almost none of these ventures would be possible without the POS and ATM interoperability implemented by EthSwitch, the national switch operator, in recent years.

M-POS systems are user-friendly and convenient, making them preferable for merchants and consumers, says Fikiru Woldetinsae, marketing and innovation director at EthSwitch.

“The device might have a discounted price and a better efficiency than the traditional copper cable POS devices,” he said. “It has the potential to enhance digital marketing and e-payment methods.”

EthSwitch is currently running a pilot project for the integration of digital payment systems in the country.

Co-working Facilities on the Rise in Addis Abeba

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Adore Addis, a co-working space in the Bole Atlas area, is set to be fully launched in two months, developing an area covering 700sqm. It lies inside an eight-story building and aims to provide a shared space where clients can work, study, or complete research.

The idea to open a co-working space was conceived two years ago by Bilen Aynu, and her sister Zebib. Both returnees from abroad, they looked for a working space in the capital but had no luck, leading Bilen’s sister to rent out a whole building. Bilen, who has had experience in the service industry, co-owning Savor Addis Restaurant, an upscale eatery near Atlas Hotel, decided to make it a high-end co-working space.

Although co-working spaces are as common as ordinary offices in much of the world, Ethiopia has been slow to catch up. Globally, there are more than 19,000 co-working spaces, according to coworkingresources.org. In Ethiopia, however, the number remains below 10, although the country’s first co-working space, Ice Addis, was opened in 2011. IceAddis and Xhub come attached with incubation hubs, and their usual customers seem to be startups. Recent entrants like BlueSpace, Sheger Hive, and Pro Office, however, avail working spaces as a standalone service.

Several co-working spaces have come and gone over the past few years.

Two years past its initial schedule, Adore Addis’ plan to open was delayed due to court cases between the building owners and a former lessee. The outbreak of the COVID-19 pandemic did little to speed things up. The space has been open unofficially to customers for at least a year now, though some of the finishing on the building is yet to be completed.

As Adore Addis is not open 24 hours, it has been at times difficult to attend a late or early morning meeting, says Eden Sahle, founder of Yada Technology Plc, [She is also a columnist on this paper] who signed up for Adore Addis’ working space in March this year.

Despite having her own rented office, Eden decided to use the facility at Adore Addis because of interruptions of electric power and internet services at her office. Although she finds internet connections are more stable in hotels, the atmosphere is not designed as a working space and distracts her.

“Here, they give you backup options if the WiFi is down,” she told Fortune.

The appeal for customers to use these facilities is to lease a space for the short-term, especially useful for small companies and startups. What is usually spent on long-term commitments for office spaces can be used to pay for other aspects of the business.

A regular at BlueSpace, Ida Abebe, a fifth-year mechanical engineering student, has been using the service for a little over a month. She finds that spending her day at a workspace is more suitable than at a hotel or home because it provides a quiet atmosphere with little distraction. She does not have to worry about frequent power outages or WiFi interruptions.

“It’s also motivating to see other people working around me, especially now in times where a lot more people are working from home,” said Ida. “Working at home, for me, has too many distractions.”

She pays a monthly fee for her membership at BlueSpace and goes there up to four days a week. Before deciding to settle at BlueSpace, she researched other workspaces in the capital, weighing commute distances and their hours of service.

“BlueSpace was the only one I could find that is open until 11pm, and that was an important factor,” she explained.

Although the services she has encountered there are satisfactory, Ida would have liked it to be open 24 hours, a more suitable schedule for her online classes administered from California, a whole 10 hours behind East Africa Time (EAT).

Nega Asfeha, an expert with over three decades of property management and consulting, sees that the market has been trending globally and in Africa.

Foreign entrants are also eyeing the market, according to Nega. He recalls that an international company based in London was scouting for space five years ago but postponed the project, not having found an ideal spot.

“This new workspace utilisation is a trend,” he said.

But that also presents a challenge for the co-working space business as spaces may remain vacant when renters leave and until new customers can be found. The prospect for price cutting as the number of buildings in Addis rises and many more companies start providing similar services worries those already in the business.

“We expect many spaces to enter the market soon,” Bilen told Fortune. “Competition in price will arise.”

Adore Addis so far has required an investment of 15 million Br, and the founder expects to be faced with a lot more expenses before the workspace officially launches. A construction team is working on remodeling the third floor while the basement and the first floor are yet to be renovated.

The first basement is planned to be a parking space, while the upper level will be a restaurant where customers can drive in and grab their food. The ground floor too will have a coffee area. The first up to the third floors are to be fully dedicated as a working space to accommodate 120 individuals. The workspaces are also equipped with meeting rooms.

From the fourth floor up, Bilen’s vision is to set up a hotel.

Once fully opened, Adore Addis will be a 24-hour service center, which will require the company to double its workforce from the 20 it has now, according to Bilen.

Komari Introduces Hard Seltzer to Ethiopia

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A new line of flavoured alcoholic beverages hit the shelves this past week with the launch of the Arada hard seltzer cocktail drinks line from Komari Beverages Plc. The sugar-free drinks have an alcohol content of five percent and are available in three flavours; pineapple-grapefruit, apple, and lime.

The company has been developing the product for around three years, and it put a lot of effort into market research, according to Amity Weiss, chief executive officer of Komari.

The marketing team collected input from thousands of people on the kinds of drinks they enjoy and what flavours they would be interested in. Komari brought in international experts to develop 12 different flavours for the hard seltzer drinks because it is a flexible drink in terms of flavouring.

“We want to be able to produce flavours with Ethiopians and their own choices,” Amity told Fortune.

The contents of the beverages are made locally, except for the flavouring, which Komari is importing for the time being. However, the company plans to make it locally, according to the CEO.

Komari has the capacity to produce 27,000 bottles an hour at its manufacturing facility in Cheke, Amhara Regional State, 100Km away from Addis Abeba, near Debre Berhan. The company distributes its beverages from the three warehouses it owns in the capital. It incorporated in 2017 with 26 million dollars, with most of equity raised from investors in Germany, becoming the 12th alcoholic beverage producer in the country.

The Arada hard seltzer drinks go for anywhere between 30 Br and 50 Br, depending on where the product is available.

Komari, which employs 132 people, faced some challenges in product development mainly due to the COVID-19 pandemic. There were delays in bringing in technical experts from China, and the company also had to cut back on the scale of product testing.

When new entrants join the market with thorough research and with users’ perspectives, it becomes easy for them to blend in with other existing products, says Ermias Teshome, a marketing and communications consultant with 15 years of experience.

“The brand has been well thought of and in development for a while now,” said Ermias. “This is what all types of industries should aim for when bringing in new items or introducing products to the market.”

The new consumer-driven products will be a breath of fresh air for the domestic alcoholic beverage industry, which has been impacted by the ban on advertising on broadcast platforms.

“As new alcoholic products emerge, there will be competition, leading to quality products at better prices,” said Ermias.

COVID Hampered Rural Finance Initiative to Resume

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A national initiative to provide finance to rural households is to resume following a long delay due to travel restrictions caused by the COVID-19 pandemic.

Signed in January 2020, the third phase of the Rural Financial Intermediation Programme is set for launch with a 305-million-dollar budget, carried out by the Association of Ethiopian Microfinance Institutions (AEMI). Designed to reach out to 13.5 million people, it focuses on capacity-building for rural finance institutions and cooperatives; improving regulation and institutional discipline; and, facilitating the flow of funds in rural areas through credit financing services.

A significant portion of the funding comes from international development partners, with the largest contribution (112 million dollars) provided by the European Investment Bank. The federal government has a 51.9-million-dollar stake, while domestic financial institutions such as the Development Bank of Ethiopia (DBE) and the Commercial Bank of Ethiopia (CBE) have contributed 60 million in dollar value.

The first phase of the programme was implemented over a period of seven years, beginning in 2003, with financing of just under 89 million dollars. It was an initiative deemed “successful” by the International Fund for Agricultural Development (IFAD), one of the financers of the third phase.

The federal government and IFAD agreed to launch the second phase, with the financing of 248 million dollars. It also had lasted seven years, beginning in 2012.

The third phase, set to be completed in 2026, incorporates strategies to modernise the agricultural sector, building up institutional capacity through technology-led support, according to Teshome Kebede, director of the AEMI, which has 35 members.

The agricultural sector supports 80pc of Ethiopia’s population and accounted for two-thirds of the country’s 2.1 billion dollars in export earnings recorded in the first eight months of the current fiscal year.

Kinfemichael Yibkaw, a finance expert with over two decades of experience, expects that the project will have significant positive impacts on agriculture, particularly as only 31pc of the population with access to banking and financial services.

He also believes the programme will have a major contribution in decreasing post-harvest loss, which leads to the waste of 30pc of agricultural products, through the mechanisation and modernisation of traditional farming methods.

 

New Capital Threshold, Small Inconvenience for Some, Existential Risk for Others

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Last week, the National Bank of Ethiopia (NBE) instructed private banks, both in operation and under formation, to increase their paid-up capital to five billion Birr in five and seven years, respectively. This measure seems to have been triggered by the increasing number of banks under establishment. A decade ago, a similar episode alarmed the NBE to increase the paid-up capital of banks from 75 million Birr to half a billion (effective June 2016), causing the dissolution of several banks in the pipeline.

Unlike other industries, the Ethiopian banking industry has certain features that induce newcomers. The industry is defined by rapid growth and confinement to rudimentary services. It has been thriving over the past decade. Despite a significant drop in returns, the earnings per share (EPS) of private banks still hovers around 30pc, which is much higher than the returns of other investments.

The banks are confined to providing basic services partly due to regulatory restrictions. They are limited to taking deposits and providing loans, arranging letters of credit, dealing in foreign exchange, money transfers and issuing letters of guarantee. This has resulted in an industry of homogeneous banks, with less product diversification and specialisation, albeit in different sizes.

These factors, combined with the tight regulation of the industry, have reduced the risk profile of mainly the private banks, resulting in decent returns, unlike in many other countries which have a liberalised financial sector. This situation, complemented by the implicit and explicit guarantee afforded to the Commercial Bank of Ethiopia (CBE) by the government, despite the concentration of considerable systematic risk within it, has enhanced the stability of the industry.

The stability and profitability of the industry combined with little entry barriers due to lack of specialisation and diversification has always attracted newcomers, leading to increased competition which has driven the returns of the shareholders down.

Generally, competition is good for dynamic and allocative efficiency. The competition encourages innovation, reduces prices, and increases access to finance, the result is better consumer welfare and increased financial inclusion. However, letting unbridled banking competition reign is naïve as the industry has specificities. Untamed banking competition could cause financial instability. The failure of a single bank would undermine the stability of other banks through contagion. The effect could often spill over into the real economy. That is why banking competition is dealt with cautiously.

Regulators are in favour of stability as the cost of a lack of it is too high. They often set rules that encourage concentration. But as the benefits of competition cannot be ignored, a certain degree is encouraged while setting the rules to tame its pernicious effects. Through control of branch opening, instituting deposit insurance schemes, setting higher capital requirements, and other measures, banking competition is harnessed.

Requiring a significant amount of capital serves as an entry barrier, enables banks to have a significant buffer against losses and discourages irresponsible lending. The problem with smaller capital is that it encourages ‘gambling for resurrection’ behaviour. This means that when banks have smaller equities, they are encouraged to take undue risks, displaying a gambling behavior. The more considerable equity a bank has, the more prudent a behaviour it tends to display as the shareholders have a significant stake in the bank’s survival.

As the new directive benefits the industry by taming competition, it affects many of the banks. The directive will force either merger or dissolution of several banks which have been under formation. The shareholders of the banks that may be forced to dissolve will incur considerable costs which have been spent thus far. It is dismaying that the central bank has taken too long to develop some deterrents despite several warnings. What is more disappointing is that the NBE did not take a lesson from its abrupt measure taken a decade ago to halt a wave of banking formation, which led to the dissolution of several banks in the pipeline.

With a combined paid-up capital of 41.8 billion Br as of the end of the past fiscal year, the existing banks are required to raise 38.2 billion Br in half a decade. This means the industry will have to increase its paid-up capital by 15pc a year. Considering previous experiences, this does not seem problematic. The trouble is that banks with a capital of far less than two billion Birr may find it difficult to beef up to the minimum threshold within the prescribed period. Banks such as Debub Global (paid-up capital of 986 million Br by last June) needs to increase its capital by as high as 40pc annually. The growth of profit can not match such capital increase if we go by previous trends; the result is reduced returns to shareholders of the smaller banks. This makes achieving the industry average return over the coming years a daydream.

The brunt of the new directive seriously affects the banks under formation as well. Firstly, they will have to raise massive capital or merge unless the NBE comes up with some exceptions. Secondly, even if they tackle the first difficulty, the returns of their shareholders will be much smaller due to high capitalisation levels coupled with lower profitability due a learning curve.

Instead of relying on entry barriers for financial sector stability, Ethiopia can have a stable financial sector and at the same time reap the benefits of competition.

Currently, Ethiopia has a small number of banks and lower-level private sector participation in banking for its population size and gross domestic product (GDP). As a result, the country is not adequately enjoying the benefits of competition. One factor chiefly contributing to this situation is the excessive dominance of the CBE, controlling 64pc of credit and 60pc of deposits. This sets the Ethiopian banking industry apart from several of its African peers in which the state banks play little part. If the market share of CBE is reduced by half, a space for more than 10 banks could be created. This should be considered within the economic reform package.

Regulatory restrictions have played a great part in the lack of specialisation and diversification in the financial sector, the result is lower private sector participation. For instance, dealing in securities and investment in the insurance business is highly restricted. Relaxing the restrictions and developing a regulatory framework increases innovation, attracts new players and increases competition.

Finally, the NBE often uses a surprise and blanket approach to regulation. This instills unpredictability and is costly to the industry. Regulatory proactivity, predictability, and consideration of specific aspects of the industry players will help smooth out the evolution of the industry.

Stuck in Yesteryear, Higher Education Assessment Needs to See Beyond the Basics

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Aplethora of activities and events have been entertained in the area of higher education recently. The Ministry of Science & Higher Education has been engaging in popularising its strategic plan that is intended to change the face of tertiary learning in the country. The Higher Education Relevance & Quality Agency (HERQA), the federal agency in charge of regulating the higher education sector, was also to be restructured and its reporting duties separated from the Ministry.

On top of this, a review of higher education curriculum is also soon to follow. The significance of these endeavours goes beyond higher education – a sector deemed an enabler for the overall socio-economic development of the nation.

The current state of higher education in Ethiopia leaves much to be desired as it is marred by widely acknowledged issues of quality, relevance and equity. Multiple universities being opened up to address issues of outreach has created quality compromises of its own. HERQA is, for instance, reviewing the quality of the 51 public universities across the country, which will include an assessment of their programmes, courses and facilities.

Some institutions of higher learning have programmes copied from preexisting universities, and facilities and resources, such as laboratories and libraries, are lacking.

One critical area that needs emphasis and deserves attention is student assessment. During their stay at colleges and universities, students are subjected to different tests and examinations. They labour hard, cramming night after night in anticipation of a typical exam. Such exams usually involve facts, terms and properties of objects or the use of procedures and formulas. A student answering such exams either knows the answer or does not; that is, the solution does not need to be “figured out” or “solved.” There is little transformation or extended processing of the knowledge.

In essence, these assessment practices mainly focus on measuring limited student ability and give disproportionate weight to recalling and reproduction. However, simply remembering facts or principles and correctly replicating certain procedures do not ensure success in meeting real-world challenges. Indeed, the divorce of content from the application has adversely affected our educational system.

Under the current challenging environment, students need to find, evaluate, synthesise, and use knowledge in new contexts, frame and solve non-routine problems, and produce research findings and solutions. They are also required to acquire well-developed thinking, problem solving, design and communication skills. This is not to argue against basic literacy skills that many learners of all ages still lack. Often the reality of the nation demands high levels of both skill sets.

What is needed is shaping the curriculum and instruction around critical thinking, problem-solving, self-management and collaboration. Teaching should also be offered in context, and students should learn content while solving real-world problems. For all of these, an appropriate higher education assessment will play an instrumental role.

Currently, public universities can be established and become open to students without the blessing of HERQA. Following this, the Agency’s own structural shortcomings – in terms of human resources and funding – prohibits it from accrediting them. The initiative to imbue the Agency with more mandates and resources to oversee the process and output of universities and to conduct market analysis is an important start.

This promising start could be improved by allowing further decentralisation of the education system. This could include incentivising institutions of higher learning to develop their curriculum and entry requirements after careful accreditation and appraisal by the Agency.

But doubling down on the current route will likely mean that the labour market would continue to be starved of the skills needed in the evolving economy.