Liberalise Financial Sector. The Sky Won't Fall

April 22 , 2022
By Christian Tesfaye ( Christian Tesfaye (christian.tesfaye@addisfortune.net) is a researcher and Fortune's Deputy Editor-in-Chief whose interests run amok in the directions of political thought, markets, society and pop culture. )

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Once again, we hear murmurs of opening up the financial sector to foreign players. The discussion gained traction in the aftermath of Prime Minister Abiy Ahmed’s (PhD) statement during the inauguration of the Commercial Bank of Ethiopia’s (CBE) headquarters a couple of months ago.

Historically, two main arguments have been forwarded against opening the financial sector to the global economy. The first, often touted, is that the country does not have the regulatory capacity to provide proper oversight of foreign banks and the financial instruments they may provide.

There are problems with this view. It confuses liberalisation with deregulation. Both indeed refer to the removal of state restrictions on business but of a very different kind. The former is a relaxation of state controls over capital and trade. In the case of the financial sector, it is the type of reduction in state control that would allow for the entry of non-domestic financial institutions.

But none of this entails that, once allowed entry, the institutions would be able to introduce any financial instrument of their choosing. When they operate in Ethiopia, they have to play under the country's regulatory environment. Under the current laws, they mostly only can engage in savings and loan services. If they wish to introduce more complex financial instruments that do not yet exist in the country, they have to get the green light from the central bank.

People should rest assured that opening the financial sector will not amount to the introduction of complex products such as derivatives, which were responsible for the 2008 global financial crisis. Significant levels of deregulation need to be taken for Ethiopia’s laughably traditional financial sector to be transformed so radically. If nothing else, this is merely self-flattery because the financial and economic ecosystem is not even nearly developed enough to support a market for such products. If we are talking merely about liberalisation, foreign banks only get to operate services that the central bank already regulates.

Of course, the regulatory environment has to change to accommodate, incentivise and encourage the entry of foreign banks. But this only brings us to the second reason why the conclusion that the Ethiopian authorities lack regulatory capacity is misleading. Frankly speaking, it is not that big a leap compared to the updating of the regulatory regime in the telecom sector. It is underselling the sophistication of Ethiopia's business and finance community to a ludicrous degree.

I do not say this merely by looking at the situation at home. Here is a good example. Standard Bank, the South African giant, which is also the largest bank in Africa, has expanded its services into Malawi, Mozambique, Tanzania, Uganda and Zimbabwe.

If these countries are confident enough in their regulatory capacity to open up, should we not? We may believe that the likes of Kenya, Nigeria, South Africa and Egypt are ahead of us when it comes to finance, but we cannot even do as well as Zimbabwe and Uganda, which are supposed to be at a similar level of economic development? Let us not sell ourselves so short.

The other arguments against liberalisation are profit expatriation and hot money. Let us deal with the latter first. Hot money is a phenomenon of lack of capital controls, where money enters and exists a country very fluidly. It is not the same as liberalising the financial sector. A simple way to conceptualise this would be to keep in mind is that the entry of foreign banks is largely just FDI, most likely brownfield investments. The only money they can take out is profits, or what counts in the books as owner’s equity if they decide to sell, as long as capital controls remain in place. Here too, rest assured.

But would they not expatriate large amounts of profits in foreign currency?

Sure. But is that not what we want, for investors to get a good return on their investment in Ethiopia so they can keep coming? Again, I will raise the issue of the telecom sector with the recent entry of Safaricom Ethiopia. The hundreds of millions of dollars they paid in license fees and the billions of dollars they have promised to invest over the years are not charity. Or take the brewery industry, where multinational corporations are the major players. It is a two-way relationship. They want to make money over the long-term, just as any bank that would like to enter Ethiopia’s market will be looking to do. It is up to our policymakers and authorities to ensure that jobs are created, the financial sector modernised and that gains to the economy are realised in a mutually beneficial manner.

By all means, let the sector loose.

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PUBLISHED ON Apr 22,2022 [ VOL 23 , NO 1147]

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