New Players, Old Challenges, Exciting Innovations

Jan 29 , 2022
By Yigermal Meshesha

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New banking entrants are infusing fresh energy into the banking industry. But the next two years will be a make or break moment for commercial banks as they try to bridge the gap between the dilemma of current realities and upcoming challenges, writes Yigermal Meshesha (yigermalet@gmail.com), a banker with over a decade of experience in the industry.

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The entry of a new competitor into a market has repeatedly been identified as a critical determinant of a market's structure and profitability. Entrants may affect existing businesses by taking market share away from them, thus shrinking their share of the profit pie and reducing prices to penetrate the market, intensifying competition among players.

Over the last decade, Ethiopia's economy has benefited from a favourable economic environment, growing at a rate of around 10pc, albeit with significant inflation rising, above 30pc recently, and with the purchasing power of the Birr against a basket of major currencies falling by three-fold.

Growth in the "real" economy has fuelled the growth of Ethiopia's banking industry, which has seen a more than 10-fold increase in deposits and outstanding credit on all commercial banks and the state policy bank. Simultaneously, per capita GDP has almost doubled, yet more than half the population is unbanked.

This and other factors have motivated business peoples in Ethiopia to look for a new venture. Ultimately, they found the banking industry lucrative. The central bank's openness has brought exponential motivation, including the long-awaited full-fledged interest-free banking business. Regardless of political reasons, a logical argument can be made beyond the unbanked population's inclusion that more competition will improve service quality and ultimately benefit the consumers.

These all sound great theoretically, but the reality on the ground is different and the challenges the management and shareholders of new banks will face cannot be discounted as the banking industry is already experiencing stiff competition. Therefore, unless these new banks get their act together early, shareholders could suffer a significant setback, and some of them could go extinct.

Let us refresh our memory about how banks make a profit. Banks make money primarily in three ways: the spread between deposit and lending rates; the fees they charge for various products and services; and investments on the surplus funds.

This is overly simplified; however, all these modes of earnings potential have been possible to some extent in the past, provided that the demand is growing, banks are well-capitalised and have the proper human resources.

But currently, due to the liquidity strain and stagnant economy, deposit growth from cheap resource bases is diminishing, which forces banks to look for expansion of fixed time deposits with higher interest payments while lending rates remain the same. On the other hand, due to the enduring changes of the National Bank of Ethiopia's directives, the income from fees and commissions on international banking business is expected to diminish as the ratio of surrender requirements has reversed in the central bank's favour. Neither will income from surplus profits, mainly by providing fixed time deposits to contenders at a premium, be an ideal business as liquid funds cannot satisfy even individual bank clients' needs for credit.

Thus, CEOs should focus on innovation to create new revenue streams through market segmentation, new product development, product tailoring and matrix pricing strategy; going digital will also be critical.

Very recently, incumbent banks have focused on customer value propositions and pricing as their primary growth drivers. However, new entrants such as Goh Betoch Bank, Selam Bank, and the interest-free banks are set up to challenge the status quo with innovative services, market segmentation, and lower-priced banking.

Unlike conventional businesses, banking post-2022 will face a new wave of challenges from platform plays, integrating multiple financial and non-financial products and services into one easily accessible ecosystem. The emerging micro and nano credit platforms, which will operate without collateral and offer instant overdraft account facilities to individual clients, will undoubtedly infuse new energy into the playing field. Multiple e-commerce enabling fintech firms, payment instrument issuers, and payment gateway operators will also have a disruptive effect on our country's banking ecosystem, with which both existing and upcoming banks may share a pie. Hence, the following 12 to 24 months will be critical for market players to position themselves at the epicentre of these new platforms. It remains to be seen whether banks, payment instrument issuers, telecommunications companies, or big tech companies will take the lead in platform development.

Financial institutions with a clear vision that can embrace change will outperform others. The winners will be those that assess their current digital challenger playbook and establish a proactive response.

No less thrilling with the new entrants should be human capital. Banking in Ethiopia could not continue as it has up to now. Senior executives and board directors should clearly understand that the industry is on the way to adapting and resiliently addressing customer expectations about convenience, accessibility, relevance, speed, and price. Moreover, Ethiopia is also on the verge of commencing a capital market. Specialised services like interest-free banking have been commenced on a full-fledged basis and are expected to bring about more businesses. At the same time, shareholders' expectations remain the same.

The digital disruption is expected to significantly lower transaction fees and processing time, as interoperability is becoming the fashion now, requiring highly adaptable human capital. In light of this, the priority for a CEO of a new bank should be to recruit a team composed of competent and agile personalities or investing in human capital development and continuing strategy. This is for the reason that the banking industry is highly characterised by recruiting based on relationships and recommendations instead of objective requirements, past performance, and current capability.

I guess every executive requires subordinates to be diligent, result-oriented, team players, and value-adding, as the collective result will define the fate of the organization and the individuals in charge at any time. Quest for professional development, agility, technology utilisation, customer service are the most daring priorities as the dilemma between current realities and upcoming challenges should be high on the to-do list of every CEO.

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PUBLISHED ON Jan 29,2022 [ VOL 22 , NO 1135]

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