By Nohaila Ibn El Farouk
Addis Abeba – In early April, when KCB Group announced they are undergoing talks to acquire stakes in Ethiopian lenders, it was easy to sense a feeling of déjà-vu. The second largest bank in Kenya already made plans to expand to Ethiopia back in 2018 but was forced to put them on hold in 2020 due to the situation in the country. Now, KCB is coming back to the plan with renewed vigor and finds itself in a completely different environment than before. What a difference three years make!
Most of the people living today in Ethiopia never had the chance to bank with foreign financial institutions due to the rigid regulations in the country that were put in place since 1974. It was almost 50 years ago when the East African country last allowed foreign financial institutions to operate within its borders. That is about to change as the government’s recent efforts to liberalize the banking market in the country are coming into effect.
After years of delays, Ethiopia’s road to banking liberalization began in earnest in 2020 and has been fraught with obstacles, with the Covid pandemic and the Tigray civil war upending the country’s financial scene. But with Covid receding and a peace agreement being signed late last year, Ethiopia can contemplate returning to normal operations within the country and banking reform should be a priority. With good execution, increased banking competition could help energize the Ethiopian financial sector and help with the country’s much-needed recovery. Indeed, the re-opening of some banks in the war-hit Tigray region back in December was hailed as an important indicator of the peace agreement holding up.
Banking liberalization was put off for a long time by Ethiopian authorities out of concern for the effects it might have on domestic financial institutions. The apprehension was rooted in the idea that Ethiopian banks will find it difficult to compete with large international banks who are more accustomed to operating in competitive environments. But as it happened in so many other places, market liberalization and increased competition tend to create an effervescent business environment in which both local and foreign companies can flourish. Indeed, some transformations are already taking place among local financial institutions that are hoping to improve their position in the new banking landscape.
Last year microfinance company Amhara Credit and Savings Institution (ACSI) became Tsedey Bank. With more than 500 branches across the Amhara region, it is now among the largest private banks in Ethiopia, and heralds even more activity on the market. Some small companies will undoubtedly be absorbed by larger players during an inevitable wave of consolidation, but others will take their place. Banking liberalization creates an environment which rewards small, agile players perhaps even more than large, established ones and attracts a constant stream of new investors.
Financial liberalization is also likely to accelerate the spread of fintech solutions, whether it’s digital banking or mobile money solutions. Foreign competition will force local banks to adapt to the increased consumer demands shaped by the ability to choose from several financial services. The effects can already be seen, and the Ethiopian customer has reasons to be happy.
In anticipation of foreign companies moving fast to offer digital services in the country, state-owned Ethio Telecom launched TeleBirr, the nation’s first telecom mobile money service. Now that Kenyan telecom Safaricom announced plans to expand to Ethiopia, including its popular M-Pesa mobile payments platform, Ethiopians will soon be able to pick from two services of this type, where two years ago there were none.
Competing over a field with low penetration and immense room for growth is likely to shape the approach of both TeleBirr and Ethiopian M-Pesa into customer-centric models. This productive competition will go a long way towards bringing Ethiopia closer in line with other African nations like Kenya and Nigeria when it comes to modern approaches to banking. Across Africa’s largest nations, tech transformations and the relatively low levels of penetration for traditional banking services have created huge momentum for digital finance. From Egypt to South Africa and many places in between, the concept of engagement banking, which uses digital solutions to create a people-first, bespoke experience for customers of digital finance, is burgeoning demand.
Digital banking solutions can also serve as a catalyst for turning the tide of what has long been the elephant in the room when it comes to African banking: the large percentage of the population is unbanked. Like in many other countries in Africa, only a minority of Ethiopian adults have registered for any sort of bank account, but digital banking has proven that it can quickly redress the imbalance. Tech solutions are likely to attract not only the expected crowd of young, tech-savvy customers, but also those living in remote or rural areas, where an internet connection is easier to get hold of than a brick-and-mortar bank. With 75% of its population unbanked, the potential for growth in Ethiopian banking is immense.
Ethiopia finds itself in a unique position to transform its aging financial system within this decade if the banking market liberalization is properly implemented. Engagement banking and digital solutions must be at the core of this transformation, as the pull of technology can no longer be ignored even by the most conservative industries. Amidst Ethiopia’s infrastructure boom, digital infrastructure should not be ignored, but rather prioritized if the long-awaited reform of the country’s banking is to be fully successful.
Change is coming to Ethiopian banking, bringing with it both risk and opportunity. It is up to the country’s authorities, financial sector, and general population to seize the reins of this transformation and use it to shape the future of Ethiopia. How long until we hear the lion of Ethiopian finance roar again? AS
Editor’s Note: Nohaila Ibn El Farouk, is an Associate Account Executive EMEA, at Backbase, a Dutch banking and financial technology company. Views expressed in the article are that of the writer and do not necessarily reflect AS’ editorial stands.