Experts argued that before public banks are reformed the National Bank of Ethiopia (NBE) should reform itself.
In a panel discussion entitled: ‘the state of financial intermediation and the resilience of the Ethiopian financial sector’ organized by the Ethiopian Economics Association financial experts recommended reform begin at the Central Bank.
With regard to economic reform the government has said it wants to change the Commercial Bank of Ethiopia and the Development Bank of Ethiopia (DBE). DBE is experiencing problems with a high amount of non-performing loan.
Michael Addisu, an expert in the financial industry, said at the panel discussion that the institutional capacity of the Central Bank should be conducted before going to financial enterprises. “Modernization of human capital and the legal framework at the Central Bank is a priority,” he explained.
He said that NBE has limited capacity which must be improved if the financial sector is to modernize.
On different occasions experts criticized the capacity of NBE saying they have just as much knowledge as other banks. They argued that private financial firms and their experts are much higher regarding skills and knowhow than at the regulatory body but that occasionally they abuse the sector.
Geberhiwot Agaba, the financial and economic sector guru, said there are critical limitations in the regulation area. “Ideally regulations should by an efficient system with acceptable cost at the financial firms,” he added.
He recommended nurturing as opposed to controlling the financial firms is the best way to improve the sector. “A more consultative approach is also the other way,” he added.
Eyob Tesfaye, an economist, who chaired the panel, said that the public financial sector should be lead properly since they are the asset of the tax payers.
He hinted that DBE is looking for 16 billion birr capital injection under its reform but he stressed that that is also needs accurate management.
Michael also adds that technology should be mandatory in banking to boost the sector. “The coming of modern technology like crypto currency should be considered,” he underlined why the sector should be timely technological capacity.
Geberhiwot said that the country would not achieve its ambitious development plan with a single development bank.
Geberhiwot said most of financial firms are commercial banks that focus on short term loans since the saving would be repaid in a short period.
He said the major saving sources are deposits that has limitation to provide long term loans. Geberhiwot said that the loans sector is also aligned with collateral, which excludes many from financial sector. “The project idea financing is almost nill in the country. The loan mainly focuses on trade which is either import or export,” he added.
Tewodros Makonnen, economist, said that for 100 birr loan the collaterals is 125 birr. “It shows how accessing loans is highly embedded with strong collateral,” he added.
Geberhiwot said the country does not have syndicate finance that was crucial as sources of financing.
“There is a mismatch compared with product packages at the financial firms and the demand in the society. Even though the country is dominated by a young society, the youth group cannot access finance even if it has good business ideas since collateral is mandatory,” Michael said.
Michael added that even though the financial sector has registered significant growth regarding branching out the concentration is limited in the capital that is 35 percent and in other major cities. “This shows the financial sector would have a long way to expand,” he added.
Youth have not been saving money because interest rates don’t keep up with inflation.
Experts said that the society prefers to invest in long term assets like buildings or vehicles, since they have better accumulation compared with inflation. Panelists stressed that controlling inflation is the best way to improve saving.
Tewodros said that studies indicate that controlling high powered money shall control inflation in the context of Ethiopia but the government is not using it properly. “The question is how much the government is controlling the high powered money to slash the inflation,” he said.
Tewodros also insisted the Central Bank be independent from the government. He claimed it would be crucial for the sector growth.
Eyob said banks are collecting the savings from the poor and provided for elites that are not also invested in real sectors like agriculture and industry, which can build the country. He criticized the elites focus on the cities on the development of service sector.
The Home Grown Economic Reform (HGER) can only be improved if the financial sector reforms, he added.