Kenyan neighbours spy opportunity in a liberalised Ethiopia

Ethiopia’s prime minister, Abiy Ahmed Ali, has announced drastic economic changes since taking office in April, including a push to privatise state-owned assets such as hotel chains, sugar farms and cement producers, as well as the partial privatisation of entities in the aviation, logistics, telecoms and energy sectors.

The outlook for state-controlled financial services’ institutions, however, remains less clear. “The financial services sector in Ethiopia is very opaque and hasn’t had any international exposure or presence,” says Ahmed Salim, senior vice-president at Teneo Strategy, an advisory firm and investment banking platform based in South Africa.

Nevertheless, a number of regional banks remain hopeful that the government will move to liberalise the financial sector over time. Indeed, prior reforms have encouraged lenders from Kenya, eastern Africa’s biggest economy, to set their sights on Ethiopia, which remains underbanked relative to regional norms.

Only about 22% of adults in the country have access to a bank account, compared with the sub-Saharan African average of 34%, according to figures from the World Bank. Moreover, Ethiopia’s $62bn economy has grown quicker than any other in sub-Saharan Africa over the past decade, and could grow by as much as 8.5% in 2018, according to International Monetary Fund estimates.

Good neighbours

Ethiopia has 18 commercial banks, according to the National Bank of Ethiopia’s annual report. Commercial Bank of Ethiopia, one of two state-owned lenders, holds assets worth 485.7bn birr ($17.6bn), or about half of the system total, and serves 15.9 million customers, according to corporate data.

By comparison, Kenya’s largest bank, Kenya Commercial Bank (KCB), has assets of Ks555.6bn ($5.5bn). KCB chief executive Joshua Oigara says the lender has intentions of setting up shop in Ethiopia and will either partner with a local player or opt for a greenfield venture, once the government’s reform programme begins to kick in.

“Ethiopia is one of the fastest growing economies in Africa and this makes it a desirable economy to invest in,” says Mr Oigara. “Ideally, we want to be in a position where our international business is contributing up to 20% of our books. Apart from Ethiopia, growing our international business is one of our strategic aspirations under our 2016-2021 Transformation Strategy.”

Beyond Kenya, KCB currently has a regional presence in neighbouring Burundi, Rwanda, South Sudan, Tanzania and Uganda.

Kenyan banks first showed interest in securing a foothold in Ethiopia in 2013, but were rebuffed by the authorities because a Special Status Agreement signed between the two east African neighbours allowed only a limited range of Kenyan companies to operate in the country. They were also restricted to the trade, investment, infrastructure and food security sectors.

However, in October 2015 Kenyan banks gained entry into the market after the Standard Bank Group (which trades under the CFC Stanbic brand in Kenya), the largest banks in South Africa and Kenya by assets, respectively, received licences to open offices in Ethiopia.

Unpopular caps

Meanwhile, Equity Bank and the Co-operative Bank of Kenya, the country’s second and third largest lenders by total assets, respectively, who in the past have stated their intentions to establish a foothold in Ethiopia, are now keeping quiet regarding their regional ambitions.

Patrick Mumu, a research analyst at Kenya’s Genghis Capital Investment Bank, says the two banks may have temporarily shelved their ambitions because of the hostile banking environment.  

Interest rate caps were controversially introduced in 2016 by Kenyan MPs, limiting borrowing rates to four percentage points above the Central Bank of Kenya rate, ostensibly to inject new capital into the economy through affordable loans. Since then, Kenyan banks, particularly the larger ones, have seen their profits fall sharply.

“Equity Bank has the capacity to enter the Ethiopian market and is keen to expand its regional network, but over the past year it has embraced a strategy contingent on the removal of the interest caps,” says Mr Mumu. “This strategy, coupled with the stringent requirements on International Financial Reporting Standard 9 and challenges experienced in the region in the past, are very probably the reasons why the bank has chosen to temporarily shelve further regional exploits.

“The bank has been building liquidity levels through investment in government securities, with the liquidity ratio now at 57.1%, which is significantly above the 20% statutory minimum, in anticipation of a repeal of the interest rate caps.”

Equity Bank has a regional footprint in Rwanda, South Sudan, Tanzania, Uganda and the Democratic Republic of Congo (DRC). Last year it closed seven branches in South Sudan due to political instability there, and problems have been compounded by the uncertainty surrounding the scheduled elections in the DRC.

Entry requirements

In August, Finserve Africa, a wholly owned financial technology subsidiary of Equity Bank, revealed that it was in discussions with six Ethiopian banks to collaborate on cross-border mobile payments and e-commerce. Finserve Africa chief executive Jack Ngare publicly stated the subsidiary was targeting remittances from 3 million Ethiopians living outside the country.

Equity Bank CEO James Mwangi has said that some countries are difficult to enter from scratch because they are too big, “so we will enter by acquiring a medium-tier bank and upscale it. For acquisition we will give shares in Equity Bank instead of cash.”   

Co-operative Bank faces similar issues, and intensive capital investment would be required if it were to pursue regional expansion, which Mr Mumu says would put strain on the bank.

Habil Olaka, CEO of the Kenya Bankers Association, says local lenders will leverage on three key qualities as they seek entry into the Ethiopian market.

“They have adequate scale to enter the market once they have a full appreciation of the domestic dynamics,” he says. “They also have the requisite experience of operating in other markets besides Kenya, therefore they have demonstrable ability to adapt to local market conditions. [In addition], the banks seeking to expand into the Ethiopian market have the expertise and capacity to operate in a highly competitive market such as Kenya’s, attributes that will be critical for success in the Ethiopian market.”

Mobile opportunity

It is not just banks who are seeking to access to Ethiopia. Safaricom, Kenya’s biggest mobile phone operator and the most capitalised company listed on the Nairobi Securities Exchange, is in “advanced talks” with the Ethiopian government to introduce its popular M-Pesa mobile money service in the country, a major step towards establishing a toehold. Ethiopia’s state telecommunications monopoly, Ethio Telecom, is expected to carry the service. Founded in 2007, M-Pesa has nearly 30 million users in Kenya, a country of 41 million people.

Nevertheless, all eyes will be on Kenyan lenders as Ethiopia’s reform programme unfolds in the coming years. “Kenyan banks are likely to adopt a variety of mechanisms to get into the Ethiopian market, depending on the conditions set for getting into restricted segments of the market,” says, Eric Musau, head of research at Kenya’s Standard Investment Bank. “Opportunities may arise for acquisitions or strategic partnership with indigenous commercial banks and telecommunication companies.”