Commentaries | Dec 10,2022
Aug 20 , 2022
By Christian Tesfaye
It seemed like it was yesterday that the National Bank of Ethiopia (NBE), in one of its most colourful regulatory actions, banned all types of securitised lending for about a quarter. It basically dried out credit growth, a significant move for the financial sector, or so it seemed.
As the new fiscal year set in, banks have been publishing performance reports. It seems like they had a great year. Profits, deposits and revenue are all up. They do not seem to have been affected, in the slightest, by what seemed like a tough year for almost every other industry.
The number of banks expanded to 30, from 18. The industry's total profits grew more than double to nearly 50 billion Br. Total assets are now 2.4 trillion Br while deposits stand at 1.7 trillion Br, and capital almost cracked 200 billion Br. The growth in mobile banking users to 43.3 million is no less impressive.
Individual performance indicators, for the few that have released them, suggest that the rewards did not merely go to a few. It is diversified. The Commercial Bank of Ethiopia (CBE) now has half as high paid-up capital, 21pc more in deposits, 1.2 trillion Br in assets and 23.6pc more in outstanding loans to the economy. At nearly a trillion Birr, CBE’s outstanding loans are equivalent to 20pc of Ethiopia’s GDP. Talk about too big to fail! Wegagen Bank, one of the major underperformers in the past year, is back in shape.
What is happening here? How is the finance sector growing in leaps and bounds even as the economy is on its knees? Is it currency depreciation?
Partly, yes. At the beginning of the year, the official exchange rate was 49 Br on the dollar. Now, it is almost 53 Birr. A depreciating currency artificially inflates assets and the prices of goods and services. It makes profits and capital growth seem impressive when they are not in reality.
But exchange rate issues alone do not explain the difference. For one thing, the Birr is not depreciating at the rate it used to; the sharpness has slowed. The rate of the fall in the currency’s value is also not steep enough to account for the type of growth the industry has seen. There is something else afoot.
The answer is financial repression. The financial sector is the biggest beneficiary of the negative real interest rates the country is experiencing as a result of high inflation but relatively low savings rates.
Ethiopia’s banks are not diversified. They are dependent on lending growth to make a profit. Normally, this does not come without costs. To lend more, they have to mobilise deposits, and those deposits incur interest rates. Typically, these interest rates should give a significant shave to revenues. But the cost of expanding deposit mobilisation is negligible when lending rates are over twice as high and inflation is far higher than savings rates. Costless savings rates are giving banks the edge.
Here, we need to give credit where it is due. Financial repression is not the only thing that matters. The banks have put in the work to improve services and customer satisfaction, and introduce new products. Look no further than interest-free banking, an untapped market within the financial sector that has come into its own over the past few years, and serves as a source of revenue and deposit mobilisation. Also interesting are digital services, which were basically non-existent. It is not possible to find a firm without digital banking as one of the most important pillars of its strategy.
Still, it is financial repression the banks have to thank. It is not natural for an industry so integrated with macroeconomic conditions to outperform in this way when the country is not doing well. In the long run, neither is it good for the banks.
PUBLISHED ON
Aug 20,2022 [ VOL
23 , NO
1164]
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