Two years ago, at a breakfast in Nairobi hosted by Equity Bank, Ethiopia’s Prime Minister Hailemariam Desalegn said his country was not ready to open up its market to foreign banks.
“It’s going to be a challenge liberalising our banking market and allowing foreign banks in. This is because they will raise the cost of credit and slow our growth. We have our own banks, like the Development Bank of Ethiopia, which create a balance in the sector,” Mr Hailemariam said.
The Ethiopian leader was responding to Equity Bank chief executive James Mwangi’s request for access to the more than 80 million unbanked people in the country.
At the Economist Ethiopia Summit held in Addis Ababa on October 28 and 29, the country’s financial sector was at the centre of the discussions. Government officials told the participants that it was not yet time to open up the sector to foreigners, although the government has plans to do so later.
However, in the past week, Kenya’s and South Africa’s largest banks by asset base have announced that they will be entering the Ethiopian market.
Kenya Commercial Bank said its licence to open a representative office in Ethiopia would open up opportunities in Africa’s second-largest market by population.
“We hope that the Addis Ababa’s sales office will enable us scout for deals and opportunities in the country,” KCB said.
The banks are hoping to prospect for business using representative offices, grow their loan books through financing deals in Ethiopia’s open agricultural and manufacturing sectors, and angle for financial consultancy services for multimillion-dollar projects.
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Ecobank established a representative office in the country last year, and Equity, Kenya’s second largest bank, is in the process of getting approvals to open.
Standard Bank’s chief executive Ben Kruger said they hope to use the bank’s presence in Addis to facilitate trade between Ethiopia and other East African countries. The bank’s trade finance portfolio is one of its key business segments.
“We are able to leverage our strong position on the continent, our strategic partnership with the Industrial and Commercial Bank of China (ICBC), and our sector expertise in natural resources, to facilitate capital investment in support of growth and to connect African markets to each other,” Mr Kruger said.
“We will be well-positioned to take aantage of the cross-sectoral investment opportunities in Ethiopia and the region,” Mr Kruger added.
In February, ICBC, a Chinese government-owned banking group, bought 60 per cent of South Africa’s Standard Bank London subsidiary for $690 million. China has funded several infrastructure projects in Ethiopia.
Last month, the China Development Bank (CDB) said that Addis was now one of its biggest trading partners on the continent.
During Mr Haile Mariam’s visit to Beijing in August, the two countries signed co-operation deals relating to technology, electric power, finance, energy and aviation.
Last year, the Chinese direct investment in Ethiopia was $910 million, and trade between the two countries increased by 55 per cent to $3.4 billion.
Standard Bank’s head of coverage in Ethiopia, Taitu Wondwosen, said that they hope to use the wide client base to attract investments into Ethiopia.
Daniel Kuyoh, a senior investment analyst at Alpha Africa asset managers, said that through the representative office these banks will scout the Ethiopian market for business, with targeted clients in mind who will be offered trade financing once the deals are confirmed.
“It’s a way of going around the market. Since Ethiopia will not allow them to do front office banking, they will be able to do financing from their home countries and benefit themselves, their clients and the Ethiopian economy,” he said.
In 2013, Ecobank set up a representative office in Addis. The bank is one of the biggest trade finance institutions on the continent, with a portfolio of more than $1 billion this year.
“Ethiopia has emerged as one of Africa’s most exciting new markets. This office will provide us an opportunity to establish our networks ahead of the planned deregulation of the banking sector,” Ecobank’s former chief executive Thierry Tanoh said.
In the past, Ethiopia has restricted foreign investors from venturing into the telecommunications, banking, media, retail, insurance, and electricity sectors. But its desire to become one of the region’s top manufacturing hubs offering investors transport and affordable power has seen it launch multibillion-dollar transport and energy infrastructure projects. All these are under the transformation plan started by the late prime minister Meles Zenawi.
READ: Ethiopia is open for investment but not everyone is welcome
In September, the Addis government opened the $475 million metro rail project in Addis Ababa, and announced the joint construction of a pipeline from Djibouti at a cost of $1.5 billion. The submission for financial aisory service is set to be tendered in 2016. In 2014, it awarded road contracts worth $320 million.
Peter Biwott, the trade and development manager at the Kenya National Chamber of Commerce, said that Ethiopia’s public investment and a growing consumer base is attracting foreign investors.
“The country has boasted an average GDP growth of 10 per cent since 2010. Its heavy public investments in agriculture, energy and transport are set to boom, and these financiers are angling for a slice of this pie,” he said.
Sterling Capital analyst Eric Munywoki said that Kenyan banks are looking for opportunities to grow outside their traditional markets.
“Some of these banks are big on trade financing, and they could be looking at this market for that specific purpose. There is room for growth there,” he said.
The entry of these banks into the market could also offer some relief to local lenders that have struggled under the heavy state restrictions on private credit.
Banks in Ethiopia charge an additional 27 per cent when they lend money to the private sector. This has been draining their capital.
Foreign banks eyeing Ethiopia’s markets, however, have enough capital to fund investors for these projects.
Private equity firms are also now looking at the opportunity to enter this market.
SOURCE: THE EAST AFRICAN