
Radar | Oct 28,2023
Dec 15 , 2024
By Yoseph Aemero
Prime Minister Abiy Ahmed's (PhD) administration's economic policy reforms and liberalisation measures have set the stage for changes in the banking industry, with mergers and acquisitions (M&A) emerging as strategies in store. Although the recent decision to open the financial sector to foreign capital presents an opportunity for domestic banks, it also exposes their vulnerabilities.
With a relatively low capital base and outdated operational frameworks, domestic banks face the pressing need to reorganise and strengthen their structures to remain competitive in a market poised for transformation.
The revised commercial code introduces a framework for mergers, providing two distinct pathways: merger by forming a new organisation or acquisition. In the first case, incorporated companies combine their assets and liabilities to create an entirely new entity, a process governed by Article 565(1). The second method involves a business absorbing another, transferring assets and liabilities without liquidation, and issuing shares to the absorbed entity’s shareholders.
The legal infrastructure sets the foundation for consolidation in an industry historically marked by fragmentation and limited capital.
Alongside the Commercial Code, a law on trade competition and consumer protection passed in 2013 also plays a regulatory role, emphasising the importance of safeguarding competition. Article nine of this law outlines conditions under which mergers occur and guides notification, approval, and compliance. These legal frameworks are supplemented by directives from the Ministry of Trade, such as those issued in 2013, which elaborate on procedural requirements for M&A activities—a recent directive issued in 2022 covers commercial registration and licensing.
The National Bank of Ethiopia (NBE) also oversees mergers in the financial sector, requiring prior approval for any consolidation efforts. However, the absence of detailed regulations from the NBE calls for policy clarity to guide M&A in the industry.
The banking industry has shown steady growth over two decades. The state-owned Commercial Bank of Ethiopia (CBE) holds the lion’s share in the market with its massive assets and broader customer base. Over 30 private banks operate in a competitive yet fragmented environment, characterised by regulatory protectionism and without foreign direct investment. These banks have an aggregate capital of approximately 290.6 billion Br, with private banks claiming a share of 67.4pc.
This pales in comparison to the financial heft of regional players such as Kenya’s KCB Bank Group, whose capital surpasses the aggregate of all commercial banks in Ethiopia. Some private banks struggle to meet the minimum capital requirements set by the NBE. They illustrate banks' competitive disadvantage as the industry opens to foreign players with larger capital bases and more advanced technologies.
However, the trouble confronting domestic banks extends beyond capital constraints. Many operate with technological lags, limiting their ability to compete in a digital economy. Fragmentation constrains the industry, as the prevalence of small banks with overlapping operations limits efficiency and profitability. As Ethiopia prepares to welcome foreign competition, the domestic banks risk being overshadowed by global players better equipped with financial and technological resources.
Mergers and acquisitions offer a strategic pathway to address these risks. Consolidation allows banks to pool resources, strengthen their capital bases, and achieve economies of scale. Larger, merged entities are better positioned to fund large-scale projects, absorb risks, and compete with international players. Operational redundancies, a common feature among small and mid-sized banks, can be contained through mergers, leading to enhanced efficiency and improved cost management. Consolidated banks are better equipped to invest in advanced technologies, such as digital banking platforms and data analytics, which are becoming essential in a rapidly evolving financial landscape.
Larger banks with expanded branch networks and consolidated resources can reach underserved rural areas, offering innovative financial products to a broader population. This aligns with the federal government's goals of enhancing economic inclusion and promoting inclusive growth. However, achieving these benefits requires careful planning and execution.
Global experiences provide valuable lessons for the domestic banking industry.
Nigeria’s banking reforms in the early 2000s, which mandated consolidation, resulted in fewer but stronger institutions capable of competing on a global stage. Similarly, Kenya’s banks have seen increased financial stability and operational efficiency through mergers. South Africa offers another model, with its consolidated banking industry serving as a regional powerhouse. Ethiopia's banks can draw insights from these examples to overcome the complexities of mergers and acquisitions and optimise long-term benefits.
Despite their promise, mergers and acquisitions are not without risks. The regulatory burden remains a barrier, as mergers and acquisition policies lack transparency to encourage consolidation. Clear policies and directives are needed to guide the process and support the industry's growth and stability.
At the same time, the responsibility for successful mergers largely rests with the management of private banks. They should conduct thorough economic analyses to understand the implications of mergers, identify potential partners, and evaluate assets and liabilities with the assistance of independent experts. Legal compliance is equally essential, requiring cooperation with economists, management specialists, accountants, auditors, engineers, and corporate lawyers.
Cultural integration is another issue, particularly in a market where identity-based banks may have differing organisational cultures and priorities. Successful mergers require effective leadership and change management to align disparate entities. Resistance from stakeholders, including shareholders and employees, adds another layer of difficulty. Concerns about perceived risks, loss of control, and job security can impede the merger process.
PUBLISHED ON
Dec 15,2024 [ VOL
25 , NO
1285]
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