A I S I S I A A A D D A A B B A U N N D D D D D D I I I S S S A A A A B B A A A A U N N I I I V V E E E E R R R R S S S I I I T T Y Y A S H L I S S S SC H G R A S ST U C H HO O O O L L L O O F F F F G R R R A A A D D D D U U A A A AT T E E E E S T U D D D D I I I E E E E S S S S
THE IMPACT OF FINANCIAL LIBERALIZATION ON THE OWNERSHIP, MARKET STRUCTURE AND PERFORMANCE OF THE ETHIOPIAN BANKING INDUSTRY
By Tesf aye Boru Lelissa I.D.NO GSR/1406/98
[email protected] Advisor: Prof essor Dr. Chakradhar Dash
A T A T he he s i s mi t d he S e S h l o f G e s s i s S S S u ub mi tt t e e d t d t o t he S c c ho ool o G r a ad d u u a at t e S e S S t tu u d d i i e e s o o f A Ad A d d di i s A A A ba ba U ni v u f l o r t he D ve e r s i it t y i n P P a a r t ti i a al l f f l i l ll l m e nt o f t t h e r r e eq q u ui i r e e m e nt s f f D e e g r e ee e o f M a a s t te e r o f A A r A t t i n B Bu s i i n e s s A A d d m i ni s t t r a at t i i o n
August 2007
AD D DI IS S AB AB A U N NI IV V E E R R S S I I T T Y Y S C CH H O O O O L L O F F G R RA D U UA T E E S T TU U D D I I E ES S
“ T m pa c T h e I I ct t o f F Fi F i n a nc i ia a l l L L i ib e r a al l i i z a at t i i o n o n t he O w w n e r s hi p , M M a a r k e et t S S t t r u uc c t t u u r e e a nd P P e e r f o r ma nc e e o f t t h e E t nd u t h i o pi a a n B Ba n k i i n g I I u s t t r y ” ”
B y T e f e s a y e e B Bo r u u L L e el l i i s s a a I . D D N N o. G S R / 1 4 0 06 6 / 9 98 8 Approved by the Board of Examiners:
______________________ Advisor
___________________ Signature
__________________ Date
______________________ Examiner
___________________ Signature
__________________ Date
______________________ Examiner
___________________ Signature
__________________ Date
D e ec c l la a r a at t i i o n I her e b y decla r b re t ha t t t his t hesis is m y or igina l w w or k k ha s not be been pr esent ed f or a degr ee in a n y ot her un v i v er sit y a nd t ha t t a ll sour ces of ma t r t he t hesis ha v e be b y l y a ck no w ledged. te r ia l used f or t been du y a
Declared by
Ato Tesf aye Boru Lelissa Student
____________________ Signature
July 19,2007 Date
ID No GSR / 1406 / 98
Conf irmation by Advisor
Prof essor Dr Chak radhar Dash Advisor
___________________ Signature
July 19, 2007 Date
L i i s t t o f A Ac A c r o n y m s
AIB -Awash International Bank S.C AIDB- Agricultural and Industrial Development Bank BOA- Bank of Abyssinia S.C CBB - Construction and Business Bank CBE - Commercial Bank of E f Ethiopia CBO - Cooperative Bank of O f Oromia S.C CRk- k-f irms Concentration Ratio CR1 – the Single Largest Bank Concentration Ratio CR2 – the Two Largest Banks Concentration Ratio DB - Dashen Bank S.C DBE- Development Bank of E f Ethiopia DK- Do not Know Freq. - Frequency HHI- Herf indhal-Hirschman Index HSB-Housing and Saving Bank IT- Inf ormation Technology LIB - Lion International Bank S.C NIB - Nib International Bank S.C Per. - Percent ROA- Return on Asset ROC- Return on Capital ROE- Return on Equity UB - United Bank S.C WB - Wegagen Bank S.C
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Lis t tt t of f C h ha ar t tt ts
p g pa a g g g e e n no
Chart 1: The Trend in CR1 and CR2 ratios during the Pre-Ref orm Period…………...33 Chart 2: The Trend in HHI during the Pre ref orm Period……………………………...34 Chart 3: The Trend in CR1 and CR2 ratios during the Post Ref orm Period…………..35 Chart 4: The Trend in HHI during the Post-ref orm Period……………………………..37 Chart 5: Trend in the Prof itability Perf ormance of Ethiopian Banks………………….38
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Lis t tt t of f A A A An ne x x x xe s
p g pa a g g g e e n no
Annex 1: List of B f Banks Operating In Ethiopia …………………………………………...vi Annex 2: Geographical Branch Network of t f the Banking Industry……………………..vii Annex 3: The Current Market Share Prof ile of E f Ethiopian Banks……………………...viii Annex 4: Selected Balance sheet Items of the Banking Sector…………………………...ix Annex 5: The Two Banks (Cr2) and the Single Bank (Cr1) Concentration Ratio of Ethiopian Banks From 1976-2006……………………………………………….xi Annex 6: The HHI f or Ethiopian banks f rom 1976-2006……………………………......xii Annex 7: Prof itability of the Ethiopian Banks f rom 1976-2006………………………...xiii Annex 8: Questionnaire…………………………………………………………………xiv
iv
CBE continued to be a single industrial giant accounting f or 66.3% of assets, 39.3% of net loans, 66.8% of d f deposits and 41.7% of c f capital in the bank ing system. Public bank s (CBE and CBB) accounted f or 69.6% of assets, 44.6% of net loans, 69.1% of deposits and 46.1% of capital in the sector.
In terms of advancement in inf ormation technology, the Ethiopian bank s are exceedingly slow to cope up with advancement in Inf ormation Technology around the globe. For instance out of the ten bank s in the country only two private bank s have network ed all their city branches and partly their outlying branches. The other two bank s (one government and one private bank ) have attempted to link only some of their city branches. The bank ing industry has also served to create an employment opportunity f or more than 23,334 people as at June 30, 2006.
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f urther signif ying the great concentration of the bank ing industry at that time. The trend in the concentration ratios are displayed hereunder: C h a r t 1: T he T re n d i n R1 a n d C R 2 rr a ti o o r m P n C o s d d u ri n n g t h t he P P re- Re f Pe ri o o d
120.00
The single largest bank (CR1) and the two largest banks (CR2) concentration ratios during the pre reform period CR1 Loan
100.00
CR2 Loan
e g 80.00 % n 60.00 i o i t 40.00 a R
CR1 Deposit CR2Deposit CR1 Capital CR2 Capital CR1 Asset
20.00
CR2 Asset
0.00 1 976
19 77
1 97 8
19 79
19 80
1 98 1
19 82
198 3
1 98 4
1 9 85
1 98 6
19 87
19 88
1 98 9
19 90
199 1
Year
B. The Herf indhal-Hirschman Index (HHI)
The HHI bef ore the ref orm period also has f urther strengthened the argument f or the excessive mark et concentration prevailed at the time preceding the ref orm measure. As shown in the Table below, the sum of s f square of t f the participating bank ’s share in the industry on average had stood at 5550.90, 7557.22, 7570.76, and 8072.88 f or loan, deposit, and capital and asset mark et shares respectively. Table 5: The HHI bef ore the Ref orm Period
Average Maximum Minimum Sour ce: A Aut hor com put at ion
Loan Deposit Capital Asset 6649.10 8206.00 8962.22 8434.16 7374.98 8758.27 9583.68 8837.41 5550.90 7557.22 7570.76 8072.88
Thus, the ratio has greatly surpassed the non-concentrated (below 1000) and moderately 24
concentrated (less than 1800) standards24. As the CBE was the main contributor to the HHI,
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According to the horizontal merger guideline of the US Department of Justice, a market whose HHI after merger is below 1000 is defined as a non-concentrated market, 1000-1800, moderately concentrated market; and over 1800 as highly concentrated market, Sangkyu and Jong-kun (2005)
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by any standard the bank ing industry at that time can be identif ied as a mono bank ing system with no competition among the existing f ew government bank s in f act the government stance was to minimize the extent of competition between the commercial bank s and the existing specialized bank s. The trend in the HHI during the pre-ref orm period is as shown in the Chart below: C h a r t 2 he T re n d i n H I d o r m P 2 .: T n H H d u ri n n g t h t he P P re rre f Pe ri o o d The HHI during the Pre-reform period 12000.00 10000.00 Loan
8000.00
% n i o 6000.00 i t a R 4000.00
Deposit Capital Asset
2000.00 0.00 1 9 76 19 77 1 9 78 197 9 1 9 80 198 1 1 9 82 198 3 198 4 1 985 19 8 6 19 87 19 88 19 89 19 90 19 91
Year
4.1.2.2. The Post Ref orm Period A. The k-f irms Concentration Ratio (CRk)
During the post ref orm period, the average concentration ratio f or the two largest bank s (CR2) in the concentration measure of the loans, deposits, assets and capital mark et in the industry stood at 83.83%, 90.18%, 89.10%, and 81.49%, respectively. In the same manner the single largest bank (CR1) on average holds 71.85%, 84.55%, 72.08% and 83.20% of the industry’s loans, deposits, capital and assets, respectively. Thus, the concentration ratios in all the measures revealed that the bank ing system in Ethiopia is highly concentrated (see Table6).
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C h a r t 4 he T re n d i n H I d o r m P 4: T n H H d u ri n n g t h t he P P o s t- re f Pe ri o o d The HHI during the post refrom period 10000.00 9000.00 8000.00
e g % n i o i t a R
7000.00
Loan
6000.00
Deposit
5000.00
Capital
4000.00
Asset
3000.00 2000.00 1000.00 0.00 1 99 99 2
1 99 99 3
1 99 99 4
1 99 99 5
1 99 99 6
1 99 99 7
1 99 99 8
1 99 99 9
2 00 00 0
2 00 00 1
2 00 002
20 03 03
2 00 00 4
2 00 005
2 00 00 6
Year
The HHI f or the asset size of the industry also exhibited the same perf ormance pattern as the deposit mark et and the HHI f or capital revealed equivalent perf ormance with the loan mark et. 4.1.2.3. The Current Market Share Prof ile of Ethiopian Banks
The country’s giant bank , CBE continued to lead the industry in terms of m f mark et share in the loans (39.62%),deposits (66.99%),capital(43.21%) and assets (66.55%) and government owned bank s (CBE and CBB) accounted f or 45.04% of l f loans,69.31% of d f deposits,47.71% of capital and 69.89% of assets of t f the bank ing sector. In general, as shown in the Table below the mark et share of private bank s in the loan and capital mark et is shown a progressive improvement where as in terms of deposit mobilization and total asset the CBE has still dominated the industry (the mark et share of individual bank s is attached in Annex 3) Table 8: Market Share of C f Commercial Banks by Ownership In terms of %ge
B a n k s
Loan
Deposit Capital
asset
State banks
45.04
69.31
47.71
69.89
Private banks
54.96
30.69
52.29
30.11
CBE
39.62
66.99
43.21
66.55
Sour ce: A Aut hor com put at ion
37
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stages 11: representative of f fi ces, branches in special economic zones, allowing f oreign bank s to operate in selected cities and allowing opening of b f branches all over China. As these stages reveal, till now, China doesn’t allow f oreign bank s to open subsidiaries in the country. This clearly indicates such gradual approach is very important f or Ethiopia to f ollow although the time f ramework and mode of entry might not be necessarily as in the case of China. Concerning the reason f or the f ull liberalization of t f the f oreign mark et some respondents said that bank s should hold their money by any dependable currency they wish as well as f reely hold any amount of f oreign currency as per their need and requirement rather than placing a statutory requirement f or the amount and type of c f currency to be held by bank s “as it is one of the areas where they demonstrate that they are the bank s “as per the words of one respondent.
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Stage I, form late 1970s to early 1980s, China allowed foreign banks to open representative offices. Stage II, from 1980s to early 1990s, it permitted foreign banks to open operational branches in special economic zones. Stage III, during mid 1990s, improved regulations on opening up to and supervising foreign banks were formally promulgated, promulgated, allowing foreign banks to operate in 23 cities. The last stage started since since 1996. In this stage foreign banks have been allowed to open branches all across China ( Tinghuan, Liu (2001)
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