Just this month, a first-generation titan in Ethiopia’s private commercial banking industry found itself in the midst of a compulsory restructuring, extending to the ousting of its CEO/President.
While I will refrain from naming the bank to avoid singling it out, it is worth noting this crisis highlights some of the core systemic issues facing the Ethiopian banking industry – issues that need to be addressed.
The bank in question was the subject of a series of media reports detailing a liquidity crisis in the lead up to this month’s restructuring, with some reports suggesting it was unable to satisfy withdrawal requests of as little as 10,000 birr. This crisis understandably shook confidence in the bank and raised serious concerns about its management.
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Eventually, regulators the National Bank of Ethiopia (NBE) were forced to step in, suspending the bank’s entire board of directors and later barring them from the banking industry for five years for the negligence that triggered the liquidity issues.
Unfortunately, this lapse in ethics and subsequent liquidity crisis is not a unique occurrence in the Ethiopian banking industry.
I have seen firsthand some of the systemic problems plaguing the industry through close connections with mid-level and senior executives across the country’s commercial banks.
Chief among these problems is the prevalence of an “affiliation” culture within the industry, rather than a culture that promotes professionalism and good governance.
A large part of this affiliation culture is down to the ownership structure of many private banks, which are often formed along ethnic, religious, or familial lines. The shareholders that make up the equity base of many Ethiopian private banks are often mutual family members, friends, or business associates.
Although these close connections helped seed the establishment of new banks initially, their continued prevalence have fostered an environment where sound banking practices take a back seat to personal relationships and favoritism. Decision making becomes less about principles of risk management and more about helping affiliates. As a result, minority shareholders often end up shouldering disproportionate losses when liquidity issues emerge from negligent lending.
The impacts of such mismanagement trickle down to other stakeholders as well. Employees, especially those working in branch offices, feel the pressure intensely during liquidity crises. At a time when deposit mobilization is getting more difficult due to low deposit interest rates and consumers’ growing preference to invest savings in more solid assets such as real estate, bankers are under immense pressure to meet often unrealistic deposit collection targets set by executives.
Failure to meet targets can threaten employment. I have personally seen clerks, tellers, and branch managers fall into personal crises from the stress of their predicament. It also means morale takes a big hit across the organization and, by extension, the industry.
However, the roots of these issues lie higher up. Had boards of directors refrained from direct interference in day-to-day lending operations and dictating who should receive loans – in some cases without proper collateral – and had senior executives run banks based on professional governance and risk management principles, liquidity crises would have been a far less common sight in Ethiopian banking.
But, unfortunately, many boards are composed of the same circle of interconnected individuals and companies as the major shareholders. Conflicts of interest abound and there are inadequate checks and balances.
This is where the NBE needs to play a stronger oversight and regulatory role. While the five-year industry ban on the board of the bank in crisis was warranted, periodic on-site inspections and enforcing stringent fit and proper regulations for bank executives and board members need to become the norm.
The NBE should proactively monitor for potential signs of affiliation-driven mismanagement and neglect of risk before crises emerge, not just react after the fact. More also needs to be done to encourage professionalization of the banking workforce through training programs and certifications.
Banks themselves would do well to professionalize their operations. This involves ensuring truly independent risk, audit and compliance functions. It means subjecting lending decisions, related-party exposures and overall governance to periodic scrutiny by qualified third-party experts. Robust succession planning could gradually broaden ownership beyond a select core group over time.
Collaboration across sectors will also be important. The banks association must play a lead role in developing robust governance codes and transparency standards. Minority shareholders too must exert more vigilance in understanding who they elect to boards and demanding transparency into lending policies and risk management practices. They ultimately carry part of the responsibility for the sustainability of their investments.
Finally, investing in human capital deserves emphasis. Targeted training programs can help cultivate a new generation of bankers grounded in ethics, diligence and prudent decision making. Protecting employee welfare through open reporting channels and support systems would lift the profession’s esteem.
Unless these deeper structural and cultural issues are addressed, liquidity crises will remain a cyclical occurrence in Ethiopia’s banking sector, further eroding confidence in an industry that is otherwise poised for tremendous growth potential.
