Ethiopian Business Review

The Foreign Exchange System Should Be Changed

Peter M. Sullivan has been the managing Director and head of the Public Sector Group for Africa at Citi Bank since 2007. The Public Sector Group is committed to facilitating global best practices and success transfers among its client base including central banks, multilateral development banks and sovereigns.  

Peter, who is responsible for developing business and structuring and delivering product solutions for sovereigns, state-owned enterprises and multilateral institutions in Sub-Sahara and North Africa, has 27 years’ experience in the banking industry with Citi including the coverage of Global Financial Institutions, Industrials and Sovereigns.  Peter has headed many innovative transactions, such as the first fuel import hedging by a Sub Saharan African Sovereign, the first local currency sovereign Sukuk, the first local debt exchange and a number of receivable-backed financings for Central Governments across Africa. He has also worked with the officials of central banks and executives of several commercial banks in Ethiopia, while he was also a member of the teams that arranged debut bond issuing for Ghana, Gabon, Senegal, Nigeria, Rwanda and Cote d’Ivoire as well as the respective follow-on issues

He was a member of the delegation from the President’s Advisory Council on Doing Business in Africa (PAC-DBIA), which visited Ethiopia for three days from June 24, 2018 with the purpose of exploring opportunities to increase trade and economic cooperation. EBR’s Samson Berhane sat down with Peter on the sidelines of the event held between the delegates and the Ethiopian government, to discuss the engagement of Citi Bank in the Sub-Saharan African market and his viewpoint about the Ethiopian financial industry.

You were part of a business delegation that visited Addis with the US Secretary of Commerce in late June. Many of the businesses don’t have a presence in Ethiopia. What was the purpose of your visit? 

Citibank is one of the major correspondent banks working with Ethiopian banks. We have a lot of experience as well as interest in the country and we want to continue looking for ways to expand that. We also want to show that we are supporting US based and other companies that promote greater capital and trade flows. So my visit was related with strengthening our role as capital facilitator and promoter of international trade.

Do you have plans to open an office in Ethiopia?

Citibank constantly explores and assesses market opportunities. With an impressive economic growth rate and massive market size, Ethiopia has a lot of positive attributes to attract foreign banks. We would certainly assess the opportunity and determine the right time to come to Ethiopia.

In Ethiopia, the financial sector is closed to foreign banks.  Even the Diaspora community is not allowed to invest in the sector. This is because the Ethiopian government believes that opening the sector will drain local capital. Do you think this is justifiable?

Let me answer this by citing the operation of Citibank. The bank operates in over 100 countries around the world and sees its role not only as a foreign bank but also as a local partner. For instance, we have business relationships with Ethiopian banks through correspondent banking. So we support banks operating in the country although we don’t have any presence in Ethiopia. When Citibank enters the Ethiopian financial sector the bank will facilitate the flow of capital into Ethiopia. So we really think servicing is mitigation of some of the risk in the financial sector. Our position is to promote localization of the service sector, to deliver service to foreign, local and domestic clients and to mobilize more capital resources that drive business and public sector.  

Does this mean the complete liberalization of the financial sector will help Ethiopia to get rid of one of its persisting problem, which is shortage of foreign currency? 

I think one of the advantages of liberalizing will be boosting the risk taking capacity of the financial sector, which in turn increases the amount of credit that goes, for instance, to exporters. But this is a drop in the ocean considering the amount of capital needed. So in order to make the best out of the liberalization, there must be reforms such as changing the existing foreign exchange system. Regardless of whether it is deemed to be an Ethiopian or a foreign bank, both will be regulated by the same rules. So there are some constraints to the amount of liquidity that can be brought in.

Setting aside the level of liquidity liberalization could bring, do you agree with the assertion that if foreign banks are allowed to invest in Ethiopia they will bring efficiency to the sector?

Without a doubt, competition promotes greater efficiency and leads to customer satisfaction. But Citibank is not engaged in retail banking. Rather its support is on a wholesale basis by helping banks that serve retail clients. Citibank can help by bringing new technologies and better ways of managing risk in order to enhance the capacities of the local banks, which in turn, translates to efficiency.

Do you think private banks operating in Ethiopia can compete with foreign banks that have huge capital backing, considering the fact that even the largest private bank in Ethiopia has less than USD100 million paid up capital?

When it comes to the financial sector, it is the regulatory framework that really sets the playing field. When foreign banks come into the market I think they will elevate the expectations of clients from the banking industry. So boosting the level of capacity of the regulatory body, which is the National Bank of Ethiopia (NBE), increasing the minimum level of capitalization and improving the risk management frameworks set up for individual banks, will be essential. This will allow the local banks to compete with each other as well as foreign ones. We have seen this in other African countries.

The government-owned Commercial Bank of Ethiopia (CBE) controls 40Pct of the market share while the rest is shared by 16 private banks. Even if the private banks are allowed to invest and raise their capital, it will be difficult for them to catch up.  

Raising capital increases the lending capacities of the banks, which in turn, will help to expand market share. But when increasing capital, it is best to source it from individual investors and institutional partners. In this way they can expand their client base. When their client base gets bigger it will demand various banking products and services. While trying to satisfy these demands, banks will be exposed to different technologies and platforms in order to be more efficient in delivering a broader and better range of products and services. So bringing CBE, which is regulated by the NBE just like other banks, in line with such practices will have a positive impact on leveling the playing field and improving the competitiveness the banking sector in general and individual banks in particular. 

Are you saying CBE should be privatized to achieve fair competition and efficiency into the sector?

The owner of a given bank dictates its business strategy. Since the government is the owner of CBE the bank has its own objectives, which follows the government’s vision. There are many government owned banks around the world that are very efficient and contribute a lot to the economy. On the other hand, private banks also have their own objectives that serve the population. Whether government or private ownership is good for the public at large is an open question. 

How do you perceive the recent decision of the Ethiopian government to partially or fully privatize key state owned enterprise?

I think the decision sends a very strong signal that the public sector cannot do it all by itself. The move will have tremendous benefits in terms of providing capital to public owned companies like the Ethiopian Airlines and bring accountability to these enterprises. Privatization does not bring capital only: it also draw access to other markets, managerial expertise and technology transfer. The key to benefiting from privatization is having a clear goal and objectives as well as knowing the right mix of investors. I think the government is working towards these. 

Do you think liberalization is more beneficial to Ethiopia than privatizing some public enterprises? 

Privatization and liberalization can go hand in hand. One does not exclude the other. 

Some advanced countries like the United States went as far as allowing private banks to have a say in the regulatory process. In fact, some private bank executives are members of the Federal Reserve Board of Governors.

As a market participant I think having a say in the matters that concern you is very important. Of course, the Federal Reserve Bank sets the rules and decides the interest rate. But getting feedback from the market participants is necessary to ensure the government’s decision is practical and can bring efficiency into the market.

Do you think it is possible to replicate such practices in Ethiopia where board members of the NBE including the governor are selected based on their affiliation to the ruling party?

Globally, central banks have regulatory, liquidity and risk management functions. Cyber security is now becoming a big concern for financial regulatory bodies. I think those who work at the regulatory bodies are stewards of the national interest. The question is whether they serve this interest. 

Technology is major driver for the success of most foreign banks.  While the same technology is available to all why do you think banks operating in Sub-Saharan Africa are stuck with traditional banking?

I am not sure they are. For instance, in Kenya, banks have been pioneers of mobile payment. I would say actually African banks were earlier adapters of technology. 

But in Ethiopia the banking sector still follows traditional way of doing business.

 

The banking business goes hand in hand with the telecom sector. Banks operating in Ethiopia are not exposed to the technological advancement enjoyed by other African countries.


6th Year . July 16 - Aug 15 2018 . No.64


 

 

Samson Berhane

Editor-in-Chief

samson.b@ethiopianbusinessreview.net

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