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Banks line up to do business in Africa's fastest-growing economy

Mar 08 2017 09:59
Renee Bonorchis, Bloomberg News
Ethiopia


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STANDARD BANK GROUP LIMITED [JSE:SBK]

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Johannesburg - Lenders are lining up to set up businesses in Ethiopia, one of Africa’s fastest-growing and most under-banked economies. Now they need the government to let them open their doors.

Over the past two years, Standard Bank [JSE:SBK], Africa’s biggest lender by assets, and KCB, Kenya’s largest lender, have joined the likes of Commerzbankand Ecobank Transnational in setting up representative offices in sub-Saharan Africa. The lenders are hoping the government will eventually start granting licenses for fully fledged branches.

They’re wagering that the country’s ambitions to join the World Trade Organisation, coupled with increasing demand for capital to support the economy, will lead the government to open up an industry closed to investors since a Marxist junta nationalised banks four decades ago.

Still, they’ll be investing in a country that’s cracked down on political opponents, with the benefits of faster growth yet to trickle down to the majority of the population.

“It has the potential to become one of the most exciting banking markets in the region,” said Robert Besseling, Johannesburg-based director at Exx Africa, which advises companies on business risks on the continent. “Government has hinted at liberalisation and even privatisation of state-protected sectors.”

Exciting market

The prize is a $62bn economy of 105 million people that’s grown quicker than any other in sub-Saharan Africa over the past decade and may expand 7.5% this year, according to International Monetary Fund data.

Only 22% of adults in Ethiopia have access to a bank account, compared with 70% in South Africa, the continent’s most industrialised economy, and a sub-Saharan African average of 34%, according to World Bank statistics.

The country’s two state-owned banks, Commercial Bank of Ethiopia and Development Bank of Ethiopia, account for more than half of the industry’s assets, with the rest split between 16 other lenders, while about 11 foreign companies have been allowed to open representative offices.

These so-called rep offices allow the lenders to meet with clients operating in Ethiopia and advise them on issues like cross-border trade while learning more about the economy. With just a rep office, the foreign lenders can’t take deposits, open branches or offer full-service banking.

Total capital in the banking system increased by 26% to $2.04bn in the three months through September, compared with the same period a year earlier, according to the central bank. The value of new loans granted during the quarter increased 20%.

In comparison, South African banks, the continent’s largest, control assets of at least R4.8trn.

“We’re optimistic that the financial regulations in Ethiopia will continue to evolve to deepen financial inclusion,” said Lawrence Kimathi, chief financial officer of Nairobi-based KCB Group, which opened a representative office in the capital, Addis Ababa, last year.

The government’s growth and transformation plan for the five years through 2020 doesn’t allow for the sale of stakes in local banks to foreign lenders, or for those wanting to enter the market to start their own operations. Yohannes Ayalew, a governor of the National Bank of Ethiopia, referred only to that document when asked by Bloomberg on February 10 if rules might be relaxed this year.

Pan-African lender Ecobank wants to expand its presence in Ethiopia from a representative office to a full banking licence. The lender, with operations in more than 30 African countries, wants to pursue a licence “as soon as the country allows,” chief executive officer Ade Ayeyemi said in an interview in Lome, Togo in June.

Retain control

“I doubt they’ll do it,” said  Maurice Oduor, a money manager at Nairobi-based Cytonn Investments Management, when asked if Ethiopia will give full banking licenses to foreigners this year. “But if they do, it won’t be 100%, they will likely want to control employment terms and things like profit repatriation.”

Ethiopia isn’t without risk. The government declared a state of emergency in October to deal with protests by ethnic communities who said they were being pushed off their land. As a result, foreign direct investment dropped by a fifth in the first half of Ethiopia’s fiscal year that began in July. Much of the country’s continued growth has been due to the dominance of the state.

The state has previously said that the opening of vital industries won’t occur until the government is able to regulate them effectively and domestic businesses can compete with foreign companies. The currency has weakened 5.3% over the past 12 months.

“We have seen increasing interest from investors in Ethiopia’s economic growth,” said Kate Johns, a spokesperson for Johannesburg-based Standard Bank. “We have key clients who are currently operating, or seeking to establish themselves, in Ethiopia.”

Nigerian lenders will also be keen to expand in Ethiopia as economic growth slows at home, according to Doyinsola Afolabi, a banking analyst at Afrinvest West Africa in Lagos, citing Guaranty Trust Bank, Access Bank, United Bank for Africa, Zenith Bank and FBN as likely investors.

“The closed banking sector could be eventually be opened up for foreign investment,” said Exx Africa’s Besseling. “Although it might not be in 2017.”

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