Ethiopia: Banking regulation to transform economy from top down

21 Oct 2014

There is a common misconception about banking regulations in Ethiopia, finance minister Sufian Ahmed tells The Africa Report.

In a country with impressive economic growth but very little private-sector dynamism, a 2011 regulation mandated that private banks devote 27% of their loan portfolios to low-interest treasury bills.

The measure constrained access to credit, and many assume those funds are channelled into the Grand Ethiopian renaissance dam, a flagship state project that will cost more than $4bn and generate up to 6,000MW of power.

Sufian corrects this assumption, saying the 27% rule “tells the private sector banks to allocate a portion of their loans, not to the government but to private sector [entities] that are engaged in investment in manufacturing.

The channelling mechanism is that the central bank issues a bond, the money goes to the development bank of Ethiopia and ends in the private sector. it doesn’t end here in the treasury.

It finances long-term investment in manufacturing.” The regulation, then, is part of the plan to transform Ethiopia’s economy from the top down – not by funnelling money to the state but by fuelling capital-intensive sectors that are beneficial in the long run.

And in any case, adds Sufian, the banking sector is not struggling – far from it. the banks “are well-capitalised and they are very, very profitable,” he adds.

“The profitability rates for Ethiopian private banks are much higher than the average for Africa. And they finance 99% of trade. Whether it is import or export service, they finance it, which is good for the economy.”

Other regulations, including the prohibition on foreign competition, tough restrictions on investment services and increased paid-up capital requirements, are still necessary to protect and foster the growth of the financial sector, argues Sufian.

This does not mean they will be in place forever. “[For] securities, insuring and reducing the risks, banks should be properly regulated. So we are creating this capacity, and we think we are in the right direction. When the time comes, I think the central bank will amend its regulations step by step.”