Addis Fortune Finance (AF): Could you elaborate on the apparent disconnect between Ethiopia’s robust financial sector and its slowing real economy? With the economy slowing down, yet banks are recovering impressively high, how is this dichotomy explained?

Aklilu Wubet (PhD): This is indeed intriguing. The financial sector, particularly banking, starkly contrasts the broader economic landscape. Despite the overall economic slowdown, it has shown resilience and growth, especially in deposits, loans, and employment generation. This divergence is rooted in several key factors.

Private banks have shown remarkable resilience in loan recovery, boasting a 57.3pc share in loan collection. This success can be attributed to strict regulatory measures by the central bank to keep non-performing loans (NPL) low. Central bank policies have played a significant role by stimulating growth in the financial sector through favourable lending conditions and low-interest rates, effectively boosting the sector. In contrast, the real economy, encompassing sectors like agriculture and transport, has been battered by external shocks such as the COVID-19 pandemic, inflation, and ongoing conflicts. The private financial sector’s recent surge, surpassing public sector banks in deposits and loans, indicates a shift towards efficiency and modern banking practices. It, however, has not been mirrored in the real economy, which still struggles with legacy issues and slower adaptation to contemporary economic dynamics.

While the financial sector appears to be thriving, it is not immune to the broader economic challenges. Issues like liquidity and loan losses persist, albeit at a lower intensity compared to the struggles faced by the real economy sectors. This imbalance suggests that while the financial sector has mechanisms to cushion economic shocks, the real economy lacks similar resilience, hence the observed disconnect.

AF: Despite a general economic slowdown, the banking sector’s recovery has been notable. How has this been achieved?

The financial sector’s resilience during an economic slowdown is attributable to several strategic factors. The sector’s robustness is partly due to the stringent regulatory framework enforced by the central bank, especially regarding loan recovery and maintaining low non-performing loans (NPLs). This regulatory environment has compelled banks to adopt prudent lending practices and rigorous loan recovery mechanisms, contributing to their overall stability and growth.

Another factor is the sector’s loan composition. The focus on relatively resilient sectors such as import-export has insulated banks from some economic downturns. These sectors have continued to perform relatively well, ensuring a steady flow of loan repayments and sustaining the banks’ financial health. The banking industry has benefited from the diversified nature of its loan portfolio. This diversification, including consumer loans and import-export financing, has provided a buffer against sector-specific economic challenges. Consumer loans, often backed by salaries, offer a stable repayment stream, while the dynamism of the import-export sector helps maintain loan performance.

AF: What defines the Ethiopian financial sector, and how does it contribute to its growth?

A mix of traditional and modern elements characterises the financial sector, which plays an indispensable role in the country’s economic fabric yet faces unique challenges and opportunities. The sector is heavily regulated, reflecting a cautious approach by the authorities towards financial management. The regulations have ensured stability but also limit the sector’s agility in responding to market dynamics. Despite increasing competition, the sector remains somewhat conservative, primarily focusing on traditional banking methods over innovative financial solutions.

Adopting technologies lags behind global standards. While there is an evident appetite for leveraging new technologies, actual implementation is slow. The sluggishness in embracing digital banking and fintech solutions restricts the sector’s potential to catalyse broader economic growth. Another defining aspect is the sector’s dichotomy of public and private ownership. The public sector, historically dominant, is gradually ceding ground to more dynamic and efficient private entities. The shift signifies a maturing market where private financial institutions drive innovation and customer-centric approaches, contributing to the sector’s overall growth and, by extension, the economy.

AF: What limitations does the banking sector face in enhancing deposit mobilisation?

Despite significant progress, banking confronts substantial challenges in deposit mobilisation, especially concerning its contribution to GDP. The primary issue is the banking industry’s limited reach, particularly in rural areas. While the number of branches has increased, the vast majority of the population in rural regions remains underserved. This geographic limitation hinders the sector’s ability to attract deposits from a significant portion of the population, thus affecting its contribution to GDP.

Cultural factors also play a crucial role. The culture of banking and saving is not as entrenched as in other regions. This lack of a strong savings culture, coupled with limited financial literacy, means that many potential depositors remain outside the banking system. Efforts to educate and encourage the public about the benefits of banking are essential but have yet to achieve the desired impact. The banking industry must innovate and adapt to become more appealing to potential customers. This involves not just expanding physical access but also embracing digital banking solutions to make banking more accessible and convenient. However, the industry’s slow pace in adopting such innovations further exacerbates the challenge of deposit mobilisation.

AF: How do cultural aspects influence banking in your market?

Cultural factors significantly impact banking practices, influencing how people interact with financial institutions. There is a noticeable lack of a widespread savings culture, especially when compared to regions like Asia. This cultural gap implies that many Ethiopians do not view banking as an essential institution for their financial well-being. Changing this perception is a complex task that involves not only educating the public about the benefits of banking but also ensuring that banking services are relevant and accessible to their daily lives.

The banking industry has not been as proactive as it could be in reaching out to potential customers. This includes geographical reach and how banking products are presented to the public. Banks need to step up efforts in financial inclusion, using traditional methods and modern technology to reach a wider audience. The banking sector must work to build trust with the public. In many parts of Ethiopia, there is still a significant degree of scepticism towards banks, partly due to past experiences and partly due to a lack of understanding of how modern banking can benefit individuals and communities. Building this trust requires consistent, transparent, and customer-focused banking practices.

AF: What trends have you observed in the banking industry over the years?

Several key trends have emerged in the Ethiopian banking industry, reflecting domestic and global economic changes. One significant trend is the industry’s urban-centric focus. Most banking activities, including loan disbursement and resource mobilisation, are concentrated in urban areas. This urban focus leaves rural areas relatively underserved, creating a disparity in financial services availability across the country.

Another trend is the concentration of loans among a few large borrowers. This concentration poses a risk, as it creates a dependency on a small group of clients. Lately, however, there has been a shift with private banks increasingly outperforming state-owned banks in terms of loan shares. This trend signifies the private banking sector’s growing efficiency and market responsiveness. There is a growing emphasis on digital banking and fintech solutions. Although adoption has been slower than in some other countries, there is a clear trend towards integrating more technology into banking operations. This trend is driven by customer demand for convenience and efficiency, as well as the need for banks to remain competitive in a rapidly evolving digital landscape.

AF: How do you plan to sustain growth and maintain momentum in your operations?

Sustaining growth and maintaining momentum in the private banking sector require various approaches. There is an increasing need to align banking services with the evolving needs of society. This involves not only offering traditional banking products but also innovating to provide services that meet the changing demands of customers, especially in a digital age. Emphasising financial education and digital literacy among customers is crucial for cultivating a deeper understanding and reliance on banking services.

Technological advancement is vital. The sector must invest in and adopt cutting-edge digital solutions to improve service delivery and operational efficiency. This includes mobile banking, online services, and fintech collaborations, which can expand the reach and appeal of banking services, especially to younger, tech-savvy demographics. The industry must build and maintain customer trust by having transparent operations, competitive product offerings, and excellent customer service. Building a loyal customer base is essential for long-term growth and stability in the banking sector.

AF: The banking industry’s mobilisation of resources is notably low compared to the GDP. Why is the sector struggling to reach higher levels of deposit mobilisation?

The industry indeed faces significant challenges in mobilising resources. The core issue lies in reaching a broader customer base. For instance, the banking sector once had a ratio of one branch for 200,000 people, which has dramatically reduced to one branch for 9,000. However, even with this expansion, our mobilisation in relation to GDP remains low, revealing a failure in attracting deposits and stimulating depositor interest. We lag in financial inclusion, technology adoption, and outreach, particularly in rural areas where a significant portion of the population resides.

AF: How do you address the mismatch between the amount of loans approved and the slower level of disbursements?

Addressing the gap between loan approvals and disbursements is a complex issue that requires a nuanced approach. The demand for loans is high, but several factors limit the capacity of banks to disburse these loans. One key factor is the high loan-to-deposit ratio, particularly in private banks, which limits their lending capacity. This ratio reflects the banks’ ability to lend money based on their deposits, and when it is high, it indicates that banks are nearing their lending limits.

AF: How significant are accessibility factors in shaping the banking industry?

Accessibility is crucial, but there is also a cultural aspect at play. Compared to Asian countries, where saving culture is more ingrained, Ethiopia has a long way to go. The concept of banking is still alien to many potential depositors. Our focus must shift towards changing this cultural perspective on savings. Observing trends over the years, it is evident that banking remains predominantly urban-centric and dominated by a limited number of borrowers.

AF: Private banks are now outperforming state-owned banks in loan shares. What factors contribute to this shift?

The private sector’s ascendancy in the banking landscape is a multifaceted phenomenon. The number of private banks and their branches, including those in rural areas, has surpassed state-owned banks. This expansion has bolstered public confidence in private banks. There is a visible shift in the economic landscape, too, with the private sector’s share increasing as government involvement diminishes. These factors collectively enhance the private banks’ ability to outperform their state-owned counterparts.

AF: Given the critical role of risk management in banking, especially in Ethiopia’s unique challenges, what strategies are being employed?

Risk management is paramount, particularly in a volatile environment like Ethiopia. Our approach involves diversifying resource mobilisation to avoid concentration risks geographically or sectorally. We are also focusing on leveraging technology for better service delivery. Moreover, managing foreign exchange exposure is a crucial area of focus. Ensuring liquidity and meeting foreign and domestic commitments are among our top priorities.

AF: In addressing the challenges of deposit mobilisation and overcoming public perception issues, what unique strategies have been implemented at Wegagen Bank?

Tackling the stigma associated with our bank has been a significant challenge. We have embarked on an engagement strategy to rebuild trust among staff, customers, and shareholders. Celebrating our 25th anniversary was part of this effort to rebrand and reposition ourselves in the market. We have also restructured our management organisation to be more responsive and customer-centric. These efforts are gradually bearing fruit, as evidenced by a growing customer base and improved public perception.

AF: Wegagen Bank has confronted an array of challenges in recent years but demonstrated remarkable resilience despite conflicts and negative media coverage. What strategies have the Bank’s leadership implemented to overcome these adverse impacts?

Wegagen Bank has overcome significant challenges, notably due to conflicts in the northern region where a third of its branches were closed for over two years. This period also saw the Bank wrestling with widespread and unfounded negative media coverage, which adversely affected its operations. In response, the Bank implemented a comprehensive recovery strategy, emphasising collaboration among its Board, management, employees, and other key stakeholders. This approach included numerous engagements with relevant parties and targeted promotional efforts aimed at countering the negative media narratives and restoring its reputation. These initiatives proved successful, leading to renewed confidence from the public and marking a significant turnaround in the Bank’s operational performance. The resilience and collective action of the Bank’s leadership and staff played a crucial role in steering the institution back onto a path of growth, demonstrating their capacity to navigate through and emerge stronger from periods of adversity.

AF: With the National Bank of Ethiopia shifting its focus to price stability and inflation control, how do you perceive these changes impacting the banking industry?

The National Bank’s focus on price stability and inflation control is a necessary strategic shift. This approach aligns with the broader goals of macroeconomic stability. However, banks must have the flexibility to challenge and contribute to policy-making processes. We appreciate short-term measures like caps on lending, but I would like to emphasise the need to balance regulatory oversight and operational freedom for banks.

There should also be a policy in the foreign exchange regime that encourages exporters and tam on the import of luxury goods — an exchange market regime that fits the macroeconomic environment.

AF: With the advent of competition from international banks, do you foresee consolidation in the industry through mergers as inevitable?

The challenges posed by foreign banks equipped with advanced technology and substantial resources demand a robust response from domestic banks. Their entry should be managed with a dual focus: encouraging cooperation and competition. This balance is essential. Cooperation should span various domains, including infrastructure, knowledge sharing, and crisis management, while competition should focus on improving service quality. Despite existing mechanisms, there is a need for a deeper level of collaboration and shared understanding.

It is not merely a question of capital; it is about leadership, management, and a deep understanding of the global economy—the ability to compete hinges on dynamic leadership, which can be hard to find. We must strive to actively seek external knowledge to learn from international banking systems such as those in Europe, Western Africa, and Kenya. However, this kind of global understanding and adaptation is rare, putting enormous pressure on leadership.

The NBE, too, should zoom in its focus on this, going beyond demanding us to allocate a mere two percent of our budget for training. There needs to be a strategic alignment between budgeting and training, emphasising exposure to global banking trends. For example, mobile banking was a novelty 15 years ago. It is a necessity now. The rapid evolution in telecom-based banking technology, as seen in Kenya’s adoption of mobile banking for farmers, proves the urgency for adaptation. 

Leadership is indispensable. At Wegagen Bank, we recognise a significant gap in this area. We are trying to learn from each other; but, it is not enough.

AF: Is the current environment conducive to both cooperation and competition?

The existing environment is not wholly conducive to the ideal blend of cooperation and competition. For instance, the proliferation of ATMs is not a sign of resourcefulness but rather a lack of collaboration. We could achieve more with shared infrastructure. While initiatives like the Ethio-Switch company for interoperability exist, we need to think beyond that. This adaptation requires a shift in culture and mindset, aligning with global banking norms. In essence, the balance between competition and cooperation is not only desirable but fundamental. It should be reflected in regulatory directives.

AF: Do you view the entry of telecom companies into the financial sector as a threat, and is adaptation essential?

In the short term, telecom companies entering the financial space pose a threat. However, in the long term, banks must adapt, collaborate, and innovate alongside these new players. The banking landscape is evolving rapidly, akin to the analogy of a frog in boiling water, not realising the danger until it is too late. We need to be proactive, not reactive.

AF: Looking ahead, what are the main concerns and strategies for the banking industry in the face of potential competition from international banks and the advent of financial technology?

The anticipated entry of international banks presents both challenges and opportunities. It shows the need for robust leadership and management skills within local banks. We need to enhance our capabilities in understanding global banking trends and technological advancements. The rise of fintech is a game-changer, demanding significant investment in digitalisation and innovation. The potential synergy between traditional banking and emerging technologies like mobile banking cannot be overlooked.

AF: How is your bank addressing corporate social responsibility and sustainability, especially in regions affected by conflict and economic challenges?

Our approach to corporate social responsibility and sustainability is considerable and numerous. We are focusing on the economic rehabilitation of conflict-affected areas by aiding in cultural and business development. Our loan assessment includes considerations for environmental sustainability. We are actively participating in various regional initiatives, aligning our social responsibility efforts with business objectives and a genuine commitment to societal well-being.