Foreign banks entry to cut with a double edge

Foreign banks’ representatives in Ethiopia are closely inspecting the newly proposed financial code which is expected to allow foreigners to get into the banking sector through; joint venture basis, minority share in local banks and by opening branches and subsidiaries.
The bill to open up the sector was tabled for final discussions and approval by the Council of Ministers last month. The Council of Ministers approved the policy after an extensive discussion after adding their inputs to the draft document. The council has also passed the decision for the new policy to be implemented.
“This is not what the international financial sector players expected. This will lead to a loss of interest to get into the market for many potential aspirants,” said one of the foreign bank representatives who requested to remain anonymous.
“Limiting the role of foreign financial institutions in the market, for instance having minority share could limit the position of foreigners in the management and decision making process, which is not attractive,” said the representative.
The opening of the banking industry for foreign investors is expected to improve the forex shortage in Ethiopia, and access to finance. Moreover, it is stated that the opening of the banking sector to foreign investors will strengthen linkage of Ethiopia’s economy with the rest of the world, as well as bring new technologies and know-how to the industry.
However as Getachew Beshawerd, Managing Director of Chartered Accountants and Management Consultants- a UK based consultancy opines, this option protects local banks to having power in the market.
“Government should not fully open the sector. If that were to happen it would destroy competitiveness of local banks, and the economy could fully be monitored by foreigners,” said Getachew, adding, “Even with the limited options; in principle this could be profitable and a good option in improving forex revenue and access to finance. Furthermore, it would be better for the efficiency in the banking service, since it will result in technological and knowledge transfer, in addition to boosting global competitiveness, and integrating Ethiopia’s economy into the global financial system.”
“However, all these need diligent work,” Getachew explains.
“Government should see long term advantages and consequences properly as it has the opportunity to treat the matter before anything ensues. For example, if the government aims to increase foreign currency by opening the market, it must also be aware that this new shareholders will take dividends in foreign currency. So the regulatory body should see each and every corner properly before opening and ratifying,” he elaborated showing how government ought to be vigilant, whilst opening the financial sector.
Few months ago, Yinager Dessie (PhD), governor of the National Bank of Ethiopia whilst speaking with the media indicated that foreign banks’ entrance to Ethiopia will be through buying shares from local banks and on joint venture basis, at first. As the governor highlighted, many African banks are already showing interest to come and invest in Ethiopia.
Also as Getachew stated, if foreign banks were going to buy shares from the local banks, it has to be officially known how the valuation of the banks are undertaken.
“How is the share transfer going to be? Are banks going to sell their existing share or new share are going to be floated? Because if it is their existing share, the incoming foreign banks are going to buy the share from shareholders and will only benefit the shareholders. Whereas if it is new shares, they will buy it from the company and benefits the company. So this has to be indicated in the regulating document,” he underlined.
“Besides the main proclamation there will also be a side regulation. NBE has to be sure that this regulations goes in parallel with the main proclamation. Such kind of regulations once they are published and has something wrong in it, it’s difficult to correct and will have a long term impact on the economy more than one can imagine,” Getachew stressed.
The fact that Ethiopia has closed its doors to foreign banks has benefited the sector until now.