- The egg-and-chicken dilemma

By Asrat Seyoum

For many centuries humankind have been puzzled by the mystery of the egg-and-chicken dilemma. As it is obvious that the chicken is the result of a hatched egg, it is also true that the chicken itself lays the egg. So, which precedes which is a veritable dilemma. The relationship between the banking sector and its main customer, the private businesses, in Ethiopia as well exhibits somewhat similar picture. The two sectors have been expanding simultaneously in the past ten to fifteen years. The partnership between these sectors is also on the rise, and not only in terms of individual growth.

For instance, out of the total investment licensed in the country between 1993 and 2008 about 85 percent, 34796 projects, was accounted for by the private domestic businesses. Sector-wise (agriculture, manufacturing, services and so on), the lion’s share of the investment ventures licensed also falls under the private category.

On the other hand, the banking sector as well has a saga of its own. Without counting a couple of new banks on their way to the industry thus far, there are about 15 banks in the country controlling 92 percent of the total assets in the financial sector. The assets of these banks total about 34 percent of the country’s gross domestic product (GDP).

Prior to 2003, the banking sector's main trading partner was the public sector. In terms of loan disbursement the public sector had the upper hand while the then infant private businesses were barely in the books. However, from 2003 onwards, loans to the private businesses had picked up and at present out of the total loan available in the banks, 61 percent is channeled to the private sector. Here trends show that both individually and in terms of partnership the two sectors are emerging. But has the growth in the private sector stimulated the banks? Or is it the other way around?

Tsegaye Tetemke, an ex-vice president of the Commercial Bank of Ethiopia (CBE) and currently a bank and financial consultant, in his paper "The Role of Local Banks in the Growth of the Private Sector", maintained that if the private sector is the a moving vehicle, the banking sector is its engine. However, given their role, the local banks are yet to bring out the best in them. According to his presentation, the banking system in Ethiopia is poorly competitive and inefficiently governed.

He said that the issue of corporate governance in the banking sector stands out as one of the problematic areas where the sector fails to play the engine-of-growth role effectively. “Specifically the risk management problems manifest themselves in the number of foreclosures in resent times”, he said. He said that, before a loan is declared to be a default, the bank takes various steps to save it. In fact, foreclosure is always the last resort and if the number of cases foreclosing is high, it means there is a serious risk management problem.

With regard to the competitiveness of the banking sector, Tsegaye underscored that there is a lot to be desired yet. Generally, the local banking operators are still working in a poorly competitive setting. In terms of price competition, he pointed out that the National Bank of Ethiopia (NBE) has set only the floor of the interest rate and it is up to the banks to calculate and offer higher interest and compete to attract customers. However, thus far, the private banks are following CBE in terms of price (interest on deposit) and price competition is not distinctive in the financial market with exception of some banks that are offering banking service for exporters free of charge. He said that it is visible that the CBE is a price giver in the industry so far. Furthermore, he said that, at the moment, the customers are going to the banks while the reverse would have been the case if the market was a competitive one.

However, he did not completely rule out the possibility of competition in the sector. For instance, he underlined quality service and technological assimilation as the two important areas through which bank sector operators can compete at this time. Yet Tsegaye also noted that untapped demand for financial services by itself could also render difficult situations for the competitiveness of the sector.

Abraham Aboye, a member of the private business community, told The Reporter that in the real sense of competition there is not much choice to the private operators and, in fact, the banks have more customers to choose from. In his line of work, Abraham said that it is difficult to obtain bank guarantees for performances and advances. He said that collateral still plays a very high role instead of the credit history and valid contract documents. “Without a collateral, we get nothing,” he said.

Tsegaye said that NBE should be responsible to draw up a code whereby the sector could compete in a fair and balanced environment.
Given the lending cap and increase in reserve requirements, the local banks obviously have an excess liquidity in their hand that they did not lend out. Having their own virtue, the cap and the reserve increase both point out to the availability of excess liquidity in the country, hence a potential to facilitate credit effectively. However, as to the question of the role the banking sector still provides a large amount of capital but the bottlenecks forced it (the sector) to shy away from full-fledged successes. In conclusion, Tsegaye said that given the above problems, it would be an overstatement to say that the banking sector had accomplished its role of an engine of change more effectively.