Saturday, July 13, 2024

Bankers caution for a stepwise sector open up


Bankers express concerns over the opening up of the financial sector despite acknowledging its merits. The financial gurus advise government to approach the opening in a stepwise phase outlook and not give shares through opening subsidiaries and branches.
In response, officials from the National Bank of Ethiopia (NBE) underscored that most of the expected risks and challenges will be answered in the detailed directives and other laws related with the opening up of the financial sector.
As policies and strategies [investment of foreign nationals in Ethiopian banking sector] was ratified by the Council of Ministers; a draft proclamation that will amend the current banking law has been tabled to the parliament. As the process follows track,the NBE hosted a discussion about the opening up of the sector for foreign actors with bank CEOs before last week.
During the discussion held at the HQ of NBE, leaders of the banking sector raised critical issues on the case questioning the timing; highlighting that the country is facing several economic challenges, to which opening the sector to experienced actors is not ideal.
“We are facing macroeconomic challenges, inflation, fiscal problems, trade balance deficit, internal challenges and weakness and many more economic problems. Therefore it will not be a proper time to open up the sector to foreign players for the country’s benefit,” bank presidents expressed their concern.
According to the policy, a direct and indirect shareholding of investment of nonbank foreign nationals as well as investment by Ethiopian organizations fully or partially owned by foreign nationals in a new or existing bank shall be limited to 5 percent, “Whereas, a single foreign bank, as a strategic investor, may own share up to 30 percent in an existing or new domestic bank. However, aggregate foreign ownership in an existing or new domestic bank shall not exceed 40 percent in a bank.”
The document further added that a single foreign bank, as a strategic investor, may be allowed to invest in a new, wholly or partially that is up to 100 percent owned subsidiary bank incorporated under the law of Ethiopia; or by establishing branches with full banking authority.
At the discussion, bank leaders underlined that the share of a single foreign bank taking on existing or new Ethiopian banks will be huge and will attract influence on other shareholders, “Most bank shareholders are scattered, so 30 percent in single share at this scattered condition will easily dominate the system. Allowing a 30 percent share may not pan out as what the government ideally expects.”
Bank presidents stressed that the current five percent maximum shareholding of Ethiopian investors needs to be revised; if foreign investors are to be allowed to take huge positions.
One of the president said that as per the commercial code a quorum is about 25 percent for general assembly so therefore by default the 30 percent share ownership shall fulfill the quorum.
Bankers also advised the government to rethink about the opening of the financial sector as a subsidiary and branch. They expressed that government should give priority to foreign actors to acquire existing or new coming banks first.
“If foreign players are to operate through the subsidiary and branch business, foreign direct investment shall primarily move to them, which will significantly affect Ethiopian banks activity and their IBD business,” the sector gurus said.
“When foreign banks start operation, their first duty would be approaching the foreign community to move their accounts to the foreign banks thus dominating the correspondent banking. It will not only reduce the correspondent banking business but foreign financial partners will not have interest to provide correspondent banking service for local banks,” Abie Sano, President of Commercial Bank of Ethiopia and Ethiopian Bankers Association (EBA), said.
They suggested that the subsidiary and branch opening up should be carried out gradually with another step, “after we get experience on the first stage of the opening up of the sector, allowing the other phase will make it beneficial to the country and the sector.”
One of the objectives as the policy document states, “The main rationale for the policy shift is to ensure sustainability of economic growth thereby achieving increased credit and foreign currency supply in the economy.”
However bankers argued that the foreign currency flow in connection with opening up of the financial sector will not be feasible since foreign investors are repatriating their earnings.
Regarding portfolio, Abie stressed that the government should have strong controlling instruments in which foreign banks operating in to give way for diversified businesses as opposed to focusing on their favorite area.
He added that the policy has appreciably identified possible risks regarding the opening up of the sector but mitigation strategies have to be considered.
According to the policy document, opening the banking sector for foreign investment would enhance supervisory capacity of the National Bank as cooperation and collaboration with foreign regulators are expected to be increased, upon foreign bank entry, and would positively contribute to regulatory and supervisory capacity of the Bank.
“In addition, the challenges coming from the sector upon entry of foreign banks with more sophisticated products and services may force the National Bank to upgrade its regulatory framework and supervisory capacity. To this end, it is found imperative to make policy shifts to allow foreign investment in Ethiopia’s banking sector,” it added.
Asfaw Alemu, President of Dashen Bank and vice president for EBA, stressed that the regulatory body, NBE, must be proactive to make sure it is fully prepared prior to the opening up of the sector, “I don’t accept that the capacity of NBE will be built in connection with the coming of foreign banks.”
The three Vice Governors of NBE in response expressed that most of the concerned issues will be clearly mentioned on the upcoming directives and regulation that will follow the amendment of the proclamation that has already reached parliament.

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