Companies

Ethiopia opens window for local banks

px

President Kibaki with Ethiopian Premier Hailemariam Desalegn during the signing of the special status agreement at State House in Nairobi on November 21, 2012. The deal allows local banks to open representative office in the country. Photo/STEPHEN MUDIARI

Addis Ababa has opened a window for Kenyan lenders to establish marketing offices in a deal that still locks out local banks from starting operations in Ethiopia for direct lending and deposit taking.

In a special status agreement signed by President Kibaki and Ethiopia’s Prime Minister Hailemariam Desalegn last week, Ethiopia allowed Kenyan banks to open representative offices.

This means that the local lenders cannot generate deposits or lend directly to Ethiopian companies and households, but they can conduct research and credit assessments to allow lending from their headquarters in Kenya.

The declaration is set to upset the expansion agenda of Kenyan banks which have opened subsidiaries in South Sudan, Uganda, Tanzania, Rwanda, and Burundi to cut their reliance on the local market.

“Support locally owned banks to open resident representative offices in each other’s territory for liaison purposes and information sharing for trade facilitation,” reads part of special status agreement inked by the head of states of the two neighbouring countries.

Ethiopia restricts foreign investors from venturing into the telecommunications, banking, media, retailing, insurance, and electricity sectors, but allows foreign participation on a selective basis.

The special status agreement signed last Wednesday exempts Kenyan companies, excluding banks, from the restrictions.

READ: Ethiopia locks out Kenyan banks as it opens up market

Lenders like Equity Bank had harboured ambitions of setting up shop in Addis Ababa in the hope that Ethiopia would open its financial services sector to foreign investors.

While the representative offices opens opportunities for trade or export finance for local banks, the deal is seen as less lucrative compared to normal banking operations that a subsidiary would perform.

This is due to the fact that trade between the two countries is still small, with Kenya’s exports to the northern neighbour standing at about Sh5 billion annually compared to Uganda’s Sh76 billion and Tanzania’s Sh41.7 billion.

Local banks are likely to benefit largely from trade finance under the deal since they are not strong in other businesses offered in the representative office model such as project finance, syndicated loans, and mergers or acquisitions advisory services.

Bank representative offices require little capital to operate and usually follow their clients in foreign markets, with few local companies having operations in Ethiopia.

For instance, Kenya has licensed five bank representatives including FirstRand Bank Ltd and Bank of China that are chasing opportunities from increased trade from South Africa and China respectively.

Banks led by KCB, Equity, and Diamond Trust Bank have preferred to open subsidiaries in the regional market where they have introduced full banking services on capital investments running into billions of shillings.

A subsidiary is authorised to accept deposits from local individuals and businesses and advance loans to the same clientele. A direct local presence, therefore, allows banks to acquire more customers and expand its loan book in the foreign market.

Productive sectors

Other businesses a subsidiary can engage in are cash transfers and investment in government securities that earn fees and interest.

The limited business opportunities facing Kenyan banks under the representative model are also expected to impact lenders from the northern neighbour that are eyeing the local market.

Mr Desalegn said Ethiopia would continue with the policy of locking out all foreign banks from setting up subsidiaries in that market, arguing that such institutions will not lend more to productive sectors such as agriculture and manufacturing.

[email protected]