Can Ethiopia’s banking sector pull off this feat?
The National Bank of Ethiopia (NBE) issued a directive in April 2021 that required the country’s commercial banks to increase their minimum paid-up capital. This was to ensure ongoing financial resilience within the banking sector. The new minimum capital requirement is ETB 5 billion (about $95 million), a ten-fold increase from the previous minimum requirement. The deadline for the banks to comply is 30 June 2026, with certain concessions for those currently under formation.?
Could the banks pull off such a feat?
The Ethiopian banking sector comprises more than 20 banks, which collectively boast ETB 199 billion in capital, according to the latest available figure from the NBE. This may suggest that the sector as a whole is capitalised in line with the new directive. The devil is in the details, however. Two public banks dominate the market, while half of the country’s banks have yet to meet the requirement.?
The good news is that banks in Ethiopia have more and more routes to raising capital. Banks can boost their retained earnings (and capital) by reducing dividend payouts. A second option is to issue new equity. Foreign investors could be a source of capital in this regard. They may be attracted to Ethiopia’s financial sector given its imminent opening, and that the country is home to 115 million people and is Africa’s eighth largest economy (GDP $111 billion). Plans to launch the country's first securities exchange will also provide a route for banks to raise additional equity.?
There is yet a third way – an increase in merger/acquisition (M&A) activity. There is precedent for this in Africa. Nigeria has had several waves of banking consolidation driven by changes in the minimum capital requirements. More recently, in 2017, the two smallest banks in Malawi merged to meet updated capital requirements. Similarly, two state-owned banks in Ghana merged in 2018 for the same reason. More dramatically, in Ghana, five banks lost their banking licences in 2018 for struggling to meet the updated capital requirements, among other problems. The Bank of Ghana subsequently merged these five banks into a single entity, with the government injecting additional capital.
While M&A activity may be a matter of survival for Ethiopia’s smaller banks, pulling it off is not a walk in the park. Pitfalls often include inadequate due diligence, failing to optimally integrate the two entities and overestimating the benefits from merging.?
Genesis has been advising banks across the continent on mergers and acquisitions for over 20 years:
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Best wishes
Richard Ketley, Adriaan Slabbert & Christian?Gebremariam
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