Investment Limitations in and by Banks in Ethiopia
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Date
2010-01
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Addis Ababa University
Abstract
This research was conducted as an investigation into the complexities of the
attempts of the Government of Ethiopia to control banking business by applying
strict regulatory intervention and its impact on the participation of foreigners in
the banking business in the country.
To start with, the researcher accepts the universal argument that banks are
unique from other business organizations. They are unique because they provide
the most important contribution to any economy; they uphold the public trust and
confidence; they are key players in the payment and settlement system for the
government, business sector and households; they are deposit takers, liable for
financial assets that are the property of the entire social system which are to be
repaid, in full, on demand or on the date they are due; they play a major role in
the allocation of financial resources, acting as an intermediary between depositors
of surplus funds and borrowers in need of funds; they are highly leveraged: in
comparison to commercial or industrial companies i.e. cash flow sensitive to meet
repayments.
This unique feature makes banking a risky business whose failure may result in
systemic risk and necessitated special and strict regulatory intervention by
governments.
Among the various regulatory intervention mechanisms, investment limitation in
banks and by banks themselves are found to be essential factors that affect them
for good or bad.
The nature and scope of investment in banks and by banks is regulated in
different countries differently. At the same time, the performance and stability of
banks have got a lot to do with the flexibility or strictness of the regulatory regime
concerning investment in and by banks.
The concerns related to protection of infant banking industry against FDI & the
regulator’s competency issues may not be neglected. But Ethiopian law is too
strict in this regard. Hence, at least equity participation of foreigners is advisable.
The other limitation on investment in banks is on national investors. As
comparative study shows, limiting investment by 5% of the subscribed capital of a
bank is too strict. This affects the capital mobilization capacity of banks in
particular when viewed in relation to total exclusion of FDI and prohibition of an
influential shareholder not to invest in another bank. This intern directly affects
the efficiency and competitive advantage of banks. Beyond that, this stringent
restriction on national investors seems to be against the constitutional right of
citizens to acquire property based on the theory of vested rights. Hence, if the
intention is to control the power of influential shareholders, the researcher
recommends that recognizing nonvoting shares is advisable.
Indeed, the 5% restriction itself seems to be too strict because it affects the capital
mobilization, competition capacity and efficiency of banks which needs some
relaxation. Moreover, Ethiopian law has neglected all related factors other than
ownership as it does not regulate issues of pledgee and usufructory.
With respect to the concern related to investment by banks, this research suggests
that scope of economy of efficiency vs undue affiliation with commercial entities,
stability vs systemic risk, the degree of investment risk vs loan provision should
be analyzed. On the other hand, it is argued that investment as a source of
revenue needs due attention.
As part of a concluding remark, the findings of the research confirm that it is
difficult to qualify the advantages and risks associated with investment of banks
in equity of commercial entities. Hence, without appriori assessment and
qualification, it is not easy to suggest the optimal level of mixing. But, generally,
comparative study shows that Ethiopian law takes a moderate position. Based on
the result of the study, the researcher recommends that this issue demands
further economic analysis/research.
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Keywords
attempts of the Government, of Ethiopia to control,banking business