Radar | Jul 25,2020
Nov 26 , 2022.
In the wake of the liberalization of the telecom sector, Ethiopian authorities have made a milestone move opening the door for foreign capital to enter the financial sector. In effect, people talk more about the prospect of foreign banks joining the domestic financial market, although the sector comprises commercial banks, insurance firms and microfinance institutions. Ironically, a policy whitepaper central bank regulators produced articulating their vision for the entry of foreign capital makes no mention of the latter two.
They seek to open the banking industry with a limited number of foreign-owned banks. Long sealed off for foreign capital, the industry will see a day of reckoning through cautious opening up, spurring the environment for further foreign direct investments. Whether banks follow capital or the other way may be a matter of curiosity. But in the Ethiopian market, overseas capital has come first through investments made by Heineken, Diego and most recently, Safaricom.
The opening of the telecom and financial sectors to foreign capital has been an ideological battleground issue for the Ethiopian state under the thumbs of the leftist political class against mounting pressure from the international liberal order. The intensity of interest was evident in many of the inquiries from countries in response to Ethiopia's bid to join the World Trade Organization (WTO); they were about the prospect of liberalising the two sectors.
So were Prosperitarians enthusiastic about and moving fast in ravaging the walls of fear and irrational apprehension for foreign capital in finance.
Many rightfully identified the closedness of the financial sector in which there has been no foreign capital for close to six-decade, and a non-competitive market structure and strong capital controls in place. The other is the dominant place of state-owned banks such as the Commercial and Development banks. Limited accessibility, traditional products and services, meagre credit supply, and a lack of tailored products and services for households and firms have characterized the financial sector. Inadequate financial market infrastructure and limited capacity in skills have been menacing the sector.
Nonetheless, the left hegemonizing state power for five-decade dreaded private capital. More so over the three decades since the early 1990s, the left harboured profound suspicions of foreign capital in several sectors of the economy but willed to relent its grips gradually. However, whether in finance or the main economy, Ethiopia was not new to foreign capital.
The first bank that entered Ethiopia's economic history pages was managed by the National Bank of Egypt, owned by the British. The Bank of Abyssinia - no relations with the existing bank - was formed 110 years ago with half a million pounds of authorised capital to process transactions and mint coins. Raising part of its equity in the London and Paris stock exchanges, this Bank stayed in business for a quarter of a century.
Although the Imperial government bought Egyptians out in the early 1930s, the financial sector remained open and thriving, with locals owning most of the shares in joint ventures with foreign banks. Foreign institutions owned 40pc of the Addis Ababa Bank. The subsequent decades following the nationalisation and expropriation of private wealth in the mid-1970s were dreadful for the financial sector. Although the post-1991 order revitalised finance through domestic private capital, protectionism continued.
The left feared foreign-owned banks would threaten the nourishment of viable domestic banking for they are experienced and have a reputation. The domestic financial industry is too young and inexperienced to stand up to the might of overseas banks. The entry by foreign banks would skew credit allocation towards large-scale - and primarily foreign-owned - companies in the industry, real estate and service or trade and agriculture.
Representations of foreign banks through offices helping in correspondence banking were permitted. But the recent opening for foreign nationals of Ethiopian origin and foreign investment in the capital goods leasing business could be viewed as a warming-up phase. And many continue to confuse liberalisation with deregulation, the latter about the authorities putting their regulatory hands off the sector.
The economy would benefit from financial sector liberalization, especially from the entry of foreign-owned banks and the prospect of the privatization of the state-owned Commercial Bank of Ethiopia (CBE). Opening the banking industry to foreign capital would help to enhance competition, foster a vibrant banking industry that can supply adequate finance and facilitate foreign currency generation, which would, in turn, help to upgrade international competitiveness by enterprises. It is wise to remember that it is not countries that compete but the companies and enterprises they nurture.
Foreign-owned banks will bring their expertise, network, technologies and organisational culture. They can introduce specialized banking products and marketing tools, generating positive spillover to the domestic market. They may not bring large enough foreign exchange as many would hope to boost the balance of payments. But they will generate jobs.
Liberalizing the banking industry has its way of building up the efficiency of the financial sector pushing domestic banks to compete with more efficient foreign banks. They will help improve the skills and technology levels of the industry.
Just as foreign banks come with good fortune, their arrival is not risk-free. There will be inherent risks until the regulatory and operation experiences in the sector are developed. It is here where the capacity and competence of the regulatory agency count.
Rightfully, central bank authorities worry that exposure to external shocks, foreign ownership concentration, cut-and-run during financial troubles and supervisory challenges are possible risks to face when foreign banks enter the domestic market.
They should work diligently to enhance their regulatory and supervisory capacity, implementing fair policy safeguards.
The challenges coming from the industry upon entry of foreign-owned banks with more sophisticated products and services may force the National Bank of Ethiopia (NBE) to upgrade its regulatory framework and supervisory capacity. Given the role and responsibilities its regulators have, it should not be surprising to observe a broader consensus on the importance of a strong and autonomous central bank.
The sense of autonomy does not mean that a central bank should not be accountable. It includes to beholden to lawmakers and the general public. While it is essential not to be partisan in power politics, regulators should be sensitive and aware of the broad social, political, and economic context within which monetary policies are conducted. Accountability is a test of public support that sends a clear signal through the financial markets when the public is unhappy with monetary policy objectives and implementations.
The need for a competent central bank can be characterized by high-quality professional staff and governors who are bold and courageous in making decisions unpopular in the eyes of the political establishment. Recruiting and retaining the best people, building a career-based organization, providing a competitive salary structure and a conducive environment should be their priorities. It would become vital to design a substantial policy shift allowing and regulating a financial sector with foreign capital involved in transforming the industries.
PUBLISHED ON Nov 26,2022 [ VOL 23 , NO 1178]
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