Sunday, May 19, 2024

The entry of foreign banks might crumble the local Banks and Domestic Economy


By Abreham Ketema

The opening of foreign banks in developing countries is considered as a major step toward into the financial liberalization. The promoter of foreign Banks will point out several benefits to invalidate the closed policy.
It is true that they will play a crucial role introducing ,the technologies , new products and services by promoting greater economic leverage and banking sector reforms in the country. Above all , It would likely to solve the forex shortage which directly impacts the government spending But the implications of the presence of foreign Banks on the local Banks would be scarier and put them in much different position , especially, If the government fails to provide consistent funding for the local Banks before enforcing the policy that will likely subvert the previous EPDRF’.
For the past decades, the government of Ethiopia has closed the banking sector and this has putted its administration with quarrel relationship with the western government, International Monetary Fund (IMF ) and World Bank for maintaining on this standing.
Foreign banks are more likely to be profitable and economical than domestic banks in developing market economies, Ethiopia is no different case. It means the foreign Banks will easily monopolize the nation’s top assets and crumble the local Banks. Here is How?
To begin with, The presence of foreign Banks expected to bring a higher interest rate than the local Banks provides. Foreign Banks will introduce new financial Services. This will push out the local Banks to add the range of financial services in order to retain their market Share. This could open door for the local Banks to lower interest margins and profits .In other words, the local Banks would prefer increasing their efficiency by diminishing their interest rate which consequently affects their margins profits. This ultimately might become one of the case in driving out the customers from local banks.
International capital flows, overstretched loans will all be made possible by foreign banks. Consequently, this could put the capabilities of domestic regulators into difficult positions. And foreign banks would harm domestic economic stability and long-term economic growth in this way.
Second, the competition over unreached market is also one of the major player of the game. There are many places where Local Bank Market’s unable to reach currently. In terms of registering New Customer, The Foreign Banks will be able to expand itself beyond the horizon within the limited Time. At the same time, This will decrease an opportunity for the local Banks to attract new Customer by the time , they have accumulated a financial capability to reach over those places .
When there is the Economic Crises and Political Uncertainty at their home, foreign Banks tend to manifest in the way local Banks couldn’t .The hit-and-run tactics of foreign banks, or their desire to abandon foreign markets as soon as an economic crisis arises, could be the immediate character of the Presence foreign bank .Foreign banks will likely be a potential a source of headache , particularly in the wake of the economic crisis and political unrest . Foreign banks may stop engaging in cross-border banking activities in order to redirect their asset at home when faced with capital or financial shocks at their home.
At the same time, the foreign Banks could redirect their lending services when the country’s faced political uncertainty. Especially when the country’s needed their support the most.
Financial Capital, The initial investment provided by foreign Bank to establish its presence in Ethiopia would be a huge Capital. Since they are backed by their home country banks, In this scenario, People will perceive the International Banks safer than the local banks.
Generally, I believe that the Ethiopian government needs to see its decision in a pessimistic approach to narrow the risks that associated with presence of foreign Banks .To the Minimum, the Government needs have plan B in case it is not working to find a way to sustain the domestic economy and Local Banks .

Abreham Ketema is interested in economy, politics and Culture

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