Fortune News | Jul 27,2019
April 6 , 2019
By Zinabu Samaro (PhD) ( Zinabu Samaro (PhD) (firstname.lastname@example.org), a development economist with particular interest in late development, industrialisation and regional economic integration. )
The announcement by the National Bank of Ethiopia to open the financial sector to foreign competition will mean a loss to the nation’s aspiration of structural economic transformation, argues Zinabu Samaro (PhD) (email@example.com), a development economist with particular interest in late development, industrialisation and regional economic integration.
Ever since the Ethiopian Peoples’ Revolutionary Democratic Party (EPRDF) came to power in 1991, it has been under pressure from international financial institutions and governments of donor countries to liberalise the financial sector.
Until the ascension to office of the party coalition’s third chairperson, Prime Minister Abiy Ahmed (PhD), the government had resisted the pressure. This was because the government believed the domestic banking sector was still in its infancy to effectively compete with multinational banks and the lack of capacity of the government to effectively regulate and supervise foreign banks.
However, late last month Yinager Dessie (PhD), governor of the National Bank of Ethiopia (NBE), told parliament that there are plans underway to open the financial sector to the global market. It is doubtful that the recent change of heart to open up the financial sector has anything to do with the maturity of local banks and improvements in the capacity of the National Bank.
But even if the two purported challenges have been adequately addressed, it is not in the interest of long-term economic development and transformation of the country’s economy to liberalise the banking sector at this point in time.
Economic activities vary a great deal in terms of their potential to generate long-term prosperity and wealth. Therefore, where money and credit go matters a great deal for prospects of economic development, as well as the stability of the macroeconomy.
For instance, from a macroeconomic and development perspective, a financial sector that extends credit for investment activities that help change the productive structure and capacity of an economy is much better than one that extends credit and finance towards speculative, non-value-creating activities.
Consequently, if appropriately managed, the financial sector has the potential to facilitate and fuel capital development of the economy, thereby extricating the population from poverty and ushering in higher living standards. It is the sector that largely determines who does what with real resources by way of dictating how economic surplus and savings are generated, managed and allocated to different economic activities. Thus, the most important aspect of the financial sector in a capitalist economy is the fact that finance serves as the scaffolding and the resource circulation system of the economy.
In general, the value and significance of the financial sector in general and the banking sector, in particular, emanates not only from whatever value-added activity it produces for the financial institutions themselves. In fact, until the 1970s, the financial sector was not considered a value-adding, productive economic sector.
Historically, due to its role as the scaffolding and resource circulation system in an economy, the financial sector has been highly regulated across the world. As the result of its strategic importance, governments around the globe are also always reluctant to liberalise it, particularly with respect to foreign competition.
Therefore, the focus of debate about liberalisation of the banking sector in Ethiopia to foreign competition should be reframed around the strategic role of the sector in the rest of the economy, its stability and its role in prospects for structural transformation rather than on the survival and performance of the domestic banks as individual for-profit enterprises.
The main argument put forward to advocate for banking sector liberalisation in developing counties is improved efficiency. The logic is that the presence of foreign banks may stimulate domestic banks to reduce costs and increase the efficiency of existing financial services through competition.
In the presence of foreign banks, domestic banks will also be pressured to improve the quality of their services to retain their market shares. Foreign banks claim to bring capital, better technical skills and products into the financial sector of developing economies.
Meanwhile, economic development has always meant a long-term process of changing the productive structure of an economy away from specialisation in "nature-intensive," low-skill, low-knowledge, low-technology economic activities toward more productive ones. This is traditionally known as industrialisation.
Therefore, from the perspective of long-term economic development, the focus of financial sector policies in developing countries cannot be on maximising the efficiency of the financial sector per se. The main attention should be facilitation and fueling of industrialisation and structural transformation under stable macroeconomic conditions.
A common feature of all successful cases of industrialisation is that they made sure that finance served structural transformation.This has often necessitated a considerable amount of intervention and control over financial activities. In fact, no country that trusted lightly regulated financial markets to make its saving and investment decisions has ever had a successful development experience.
In all cases, the finance sector was protected from foreign competition to achieve the goals of industrialisation. Moreover, there is not a single case where a country has successfully achieved structural transformation, while foreign banks and financial institutions dominated its banking sector.
Even liberalisation of the financial sector to foreign competition after achieving middle-income status has had disastrous consequences on economies such as South Korea, Argentina and Mexico.
For instance, opening up the banking sector in South Korea in the early 1990s led to a shift from corporate to consumer lending, constrained capital accumulation and helped create an excessively indebted household sector, while making it harder for the government to adopt progressive economic policies - finally leading to the economic crisis in 1997.
Some of the reasons for this development include foreign banks’ operating strategies in developing economies. These banks are likely to concentrate on three major market segments. First, they tend to focus on serving wealthy elites - a strategy called “upscale retail” banking. Second, they tend to focus on the residential mortgage and household loan markets. Third, they are likely to specialize in fee-generating services for large corporations, especially those that are foreign-owned, and trading on their own account.
"After the outbreak of the Asian financial crisis, foreign banks refused to renew short-term loans, demanding payment," reports research by James Crotty and Kang-Kook Lee. "Illiquid Korean banks and highly leveraged firms were unable to comply. With key banks and non-financial corporations on the verge of default, the Korean government accepted an IMF loan to help repay their foreign debt. In return, the IMF took effective control of the Korean economy."
There is also an added dimension to foreign banks’ tendency to create and amplify economic crises in developing economies.
“No country should let its banking system be taken over by foreign banks - even though in developing countries Western banks are likely to be more ‘efficient’ than domestic ones - for at times of crisis banks rely heavily on their home state and are likely to sacrifice operations in developing countries in order to protect their home base,” said Jomo K. Sundaram, former assistant secretary-general for economic development at the United Nations.
Moreover, the loans they provide tend to be primarily short-term, and therefore, foreign banks can - and do - pull money out of developing countries at any sign of a downturn.
In addition to their negative role in transmitting and amplifying economic instability and crisis, foreign firms’ takeover of a developing country’s banking market is followed by poor investment funding, with small and medium businesses hit hardest. A good example here is Mexico, where liberalisation of the banking sector to foreign competition resulted in a situation where foreign banks starved Mexican companies of needed credit.
The banks were making gigantic profits but not through the provision of credit to companies. They were charging expensive commissions for services such as credit card use and by filling loan portfolios with government bonds.
Foreign banks tend to redirect loans and credit away from producers to consumers, which limits the prospects for structural transformation and expansion of the productive capacity of an economy. They are also more insulated from the influence and pressure of national governments in the sense of aligning their policies and lending with the development goals, objectives and industrial policies of developing country's governments.
Dominance of a country’s banking sector by foreign financial institutions substantially reduces a country’s ability to use finance for industrial development and structural transformation. This is on top of the pressure they would put on the hard currency reserves of the host countries when they repatriate their substantial profits - which are generally earned in local currency but are repatriated in hard currencies.
The promise of increased efficiency and improved service quality in the banking sector cannot be sufficient incentives to open up the banking sector to foreign competition. Liberalisation of the financial sector would effectively mean the government giving up one of the most important policy tools for long-term economic development. It would no longer be able to manage and use the financial sector to create, shape, cajole, direct and govern market forces toward structural transformation and industrialisation of the economy.
PUBLISHED ON Apr 06,2019 [ VOL 19 , NO 988]
Fortune News | Jul 27,2019
Editorial | May 25,2019
Commentaries | Dec 14,2019
Viewpoints | Mar 20,2021
Fortune News | Nov 30,2019
Commentaries | Aug 28,2021
Agenda | Mar 02,2019
Radar | Oct 23,2021
Fortune News | Feb 16,2019
Fortune News | 43403 Views | Jul 18,2020
Fortune News | 36826 Views | Sep 01,2021
Photo Gallery | 32764 Views | May 06,2019
Photo Gallery | 29637 Views | Mar 17,2019
Commentaries | Jan 22,2022
Life Matters | Jan 22,2022
My Opinion | Jan 22,2022
Sunday with Eden | Jan 07,2022
Agenda | Jan 22,2022
Editorial | Jan 22,2022
November 27 , 2021
Against my will, I have witnessed the most terrible defeat of reason and the most sa...
November 13 , 2021
Plans and reality do not always gel. They rarely do in a fast-moving world. Every act...
October 16 , 2021 . By HAWI DADHI
Residing in a country with no capital market, an organised marketplace for trading se...
August 28 , 2021 . By HAWI DADHI
The streets of Addis Abeba are as varied as they are many, although too many of them have yet to be named. From the narrow alleyways of the...
Queuing for in-demand basic goods and services is not an unfamiliar occurrence in Eth...
Leaders of the National Election Board are in a charm offensive mood, of a sort. Last week, they organised a rare tour for members of the me...
When the country’s most senior diplomats and envoys return back to their posts after two-week debriefings, they leave behind a point or tw...
January 22 , 2022
The relationship between fuel price shocks and politics needs no introduction. As a f...
January 15 , 2022
Foes and friends of Prime Minister Abiy Ahmed (PhD) agree that his administration is...
January 7 , 2022
There has not been much research to put a number on high costs wars inflict on Africa...
January 1 , 2022
It is a norm to emphasise grand structural changes to address the myriad political pr...
PM Abiy Ahmed (PhD) at a Gala Dinner Called for the Awarding of the Félix Houphouët-Boigny Peace Prize
May 6 , 2019
I lived in Tanzania some time ago, working on a project. I met new people who came f...
There is a popular saying in Ethiopia. It goes, “esuma aquam yelewim,” referring to a person without a firm stance on a given issue. The...
January 22 , 2022
The faithful lean from a Sidist Kilo sidewalk in bright white threads to catch a whiff of frankincense. The occasion was Timqet, a religious...
January 22 , 2022 . By HAWI DADHI
The federal government will likely toss fuel subsidies entirely by the middle of next year. The Council o...
January 22 , 2022 . By TSION HAILEMICHAEL
Abay Bank has availed 50 million Br in short-term loans to two cooperative unions, pioneering lending ser...
January 22 , 2022 . By HAWI DADHI
Ethiopia wants to know the whereabouts of a businessman abducted in Nairobi two months ago. Ethiopian aut...
Or see contact page