The Spirit of Innovation Fuels Financial Sector Reforms

Jul 13 , 2020
By Asseged G. Medhin

The financial reforms pushed through the economy over the past two years are astounding, considering the resistance to change that had existed for well over three decades. The reforms have been part and parcel of the larger liberalisation of the economy, from one that was state-led to one where the private sector has a greater role to play. These plans are as radical as liberalising strategic sectors such as telecom to long-term and broadly significant as establishing capital markets.

One of the sectors in desperate need of change has been the financial sector, which has remained traditional and unable to play the influential role it could have in the economy as a result of tough regulations it has to work under. It was a sector that should  have been led without the box, instead of inside or even outside it.

Frequently, the sector has been criticised for lagging, even by the standards of sub-Saharan Africa. The lack of strategic alignment, shallow formation of capital, under-utilisation of knowledge-based management, unimpressive rate of innovation, high concentration in cities and poor financial access and a general inability to think outside of the box.

Reforms being unveiled by the administration of Prime Minister Abiy Ahmed (PhD) have attempted to change this, and it seems for the better. One of the most inspiring and encouraging developments over the past two years has been the development of interest-free financial services. Individuals and organisations around the country can now access banking and insurance services free of interest.

What makes interest-free services distinctive is that interest is not collected, risks are shared and, in the religious sense, it prohibits socially-undesirable and unethical investment activities.

For this, the government deserves its fair share of credit for the law that allows insurers to provide interest-free financial services. This was a unique development and can help bring millions into the insurance sector. It will bring a fundamental breakthrough in the growth and diversity of the industry and increase the penetration of insurance.

This should surely improve the flow of income into the financial industry and improve innovation and dynamic interaction of knowledge, philosophy and capital with the greater inclusivity of the insurance sector for communities. What we are seeing in the financial sector, in the formal and informal sphere, with the traditional systems of Ikub and Idir, is the development of a highly sophisticated process for pooling together resources.

The new product will bring a shift in how finance is utilised and insurance services are provided to bring about an improvement in the manner people conduct business and secure their assets. It is an important alternative product with a new spirit of development, adding real value to the Ethiopian insurance industry.

It should be noted that it is not merely the opening of industries that will lead to substantial change. The playing ground and how it is refereed are just as critical. The real deliberation of the regulatory body in the developmental and innovative spirit follows that transformation in the financial sector requires determination and flexibility.

If the current spirit and energy of reform is improved upon, there is no reason this cannot happen. The importance of a strong and sophisticated financial sector that can bring to bear new services and products is of fundamental importance to any economy, especially one that is liberalising.

It is one thing for a closed economy to have a highly regulated and traditional banking and insurance industry. It will be quite another if a dynamic economic environment is not met with a financial industry that can keep up. The current reforms taking place within the industry, including the development of interest-free financial services, are thus not only critical but well overdue.

PUBLISHED ON Jul 13,2020 [ VOL 21 , NO 1055]

Asseged G.Medhin, deputy CEO of Global Insurance Company.

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