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 playa major role in the allocation of finan cial 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 POI & 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 r ela tion 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 n eglected 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 furth er economic analysis /research.
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Keywords
Banks in Ethiopia