Ethiopia: Upgrading Credit, Saving Associations in a Way to Outpace the Economy

Widely acceptable that Ethiopia, as one of the world's fastest growing economies, is seeing carefully laid plans to boost its economy. And in order to strengthen the national economic growth better than ever, the government of Ethiopia is making different reform activities in the financial sector.

The current government of Ethiopia has embarked on a number of reforms to improve the efficiency and competitiveness of the banking sector in order to accelerate the process of economic growth. Of late, taking the reform as an advantage, different new Banks have been emerging.

Including the recently established 'Sinqe Bank' which was formerly known as Oromia Credit and Saving Share Company (OCSSCo), more than 20 new private Banks are under formation in addition to the existing 18 banks in Ethiopia with their strongest economic significance, documents from National Bank of Ethiopia indicated.

With a subscribed capital of 15 billion Birr and a paid up capital of 7 billion Birr, Oromia Credit and Saving Share Company (OCSSCo) has relicensed to provide banking service in consort with its long existing microfinance wing based on the Micro-Financing Business proclamation No. 626/2009 and national bank of Ethiopia directive No. SBB/74/2020. The company is also renamed as "Sinqe Bank" borrowing the name of Oromo women cultural institution.

According to the Bank's President Zewdie Tefera, the establishment of Sinqe Bank with a high capital makes it different from other firms. Equipped with over 15 billion Birr in total capital, the bank is expected to be competitive in the country's thriving financial industry.

"Purpose of the establishment is inaccessibility of contemporary financial service to the rural people in the region that contributes for their impoverishment," he added. It was stated that the new bank will use the existing 400 OCSSCO branches. The president stated that in its 23 year existence, the organization has provided credit and saving services to a significant number of people in Oromia State.

According to him, it is serving over one million clients including farmers, women, unemployed youths, traders, Medium and Small-Scale Enterprise operators, women entrepreneurs and others adding that the vision of this bank is to be the first (the leading bank) in the next five years and be one of Africa's largest banks.

Following the directive of the National Bank of Ethiopia (NBE) issued last year, allowing microfinance institutions to evolve into commercial banks with a two-year transition period executives of the microfinance made the transformation from microfinance to banking service with not discounting the microfinance operation.

"The primary goal of the relicensing is to realize inclusive services to all withstanding the microfinance service targeting job creation and financing to the poor and incorporate larger financial seekers as well," Zewdie said.

Following the issuance of proclamation No.40/1996 that determines the licensing and supervision of microfinance institutions, Oromia credit and saving Share Company was established in August 1997 to give micro finance service obtaining operational license from the National Bank of Ethiopia and trading license from the Federal Ministry of Trade and Industry.

The company started its operation with 5.2 million Birr which in the last 23 years has grown to 7 billion while its asset has reached 15.4 billion Birr in this fiscal year. The paid-up capital of Oromia Credit stood at 679 million Birr as of October 2020. "The new bank is expected to enter in the financial market soon after ratification of its establishment by the National Bank. The bank will also continue to strength its microfinance services targeting low income people, farmers and unemployed youths combined with its full banking service," Zewdie added.

The bank will certainly contribute to economic growth by mobilizing potential financial resources in the region as well as in the country by providing financial services equipped with contemporary financial technologies, he noted. As to the president, the transition of the company to bank is an extra step in the scheme of poverty reduction and developments of the people in all forms and social parts. Other than this, the bank will do its duty to solve the issue of foreign development in the area.

Mekonen Abera, an Economist, for his part told to The Ethiopian Herald that the transformation of the microfinance institutions to banks is vital as they significantly contribute to the development of the economy through facilitating the business. The banking business thrives on the financial intermediation abilities of financial institutions that allow them to lend out money and receiving money on deposit.

Banks or microfinance institutions accept deposits, make loans, and derive a profit from the difference in the interest rates paid and charged, respectively. Through the process of financial intermediation, certain assets or liabilities are transformed into different assets or liabilities. As such, financial intermediaries channel funds from people who have extra money or surplus savings to those who do not have enough money, the borrowers, to carry out a desired activity. One of the financial intermediary is micro finance institutes those play a vital role in the economy.

As banks are the financial intermediaries, they can connect surplus and deficit agents, upgrading of microfinance institution to banking level which enable the banking sector to address basic national economic issues. Since these unions, the financial institutions, are serving parts of the societies who live in the area where the bank service is not available and working with the majority of the society. Their growth to the bank level will help the national economy as well as the surrounding community they are working with. Owing to the fact that many of the institutions' brunches have been found at rural areas, are of paramount importance to integrate the rural society with banking system, he illustrated.

He further stated that it will also help the society to be aware about where they would go to borrow money; what they would do with their savings; how they would borrow or save; and what risks they might face as a depositor and borrower. Thus, this institution will help the economy to manage payments for goods and services should be processed swiftly, safely and at low cost since all the community is working with the bank sector. However, if banks fail to perform these tasks, the consequences for the entire economy could quickly become so wide reaching that even the banking system would be exposed to large shocks. It is therefore, important that banks are able to absorb losses and meet their current payment obligations.

Mentioning that about 20 new banks are emerging, Mekonen further explained that the financial reform made by the government during the last there years has opened the door to raise the computation in the banking industry. Accordingly, banks can also facilitate the development of saving plans and are instruments of the government's monetary strategy.

Moreover, the role of the private sector is crucial in accelerating the pace of economic growth. The banks increase the participation of the private sector in economic development by making available the loans easily on reasonable rate of interest. The expansion of financial sector encourages entrepreneurs to make investments by promoting entrepreneurship. The growth of the financial institution into bank will facilitate the growth of the national economy. Henceforth, the bank sector should work to bring rapid economic development. By the same token, it is also an opportunity to minimize joblessness, promote entrepreneurship, encourage saving culture, increase availability and accessibility of bank service, the economist underscored.

Apart from this, banks allow businesses and households to pool their risks from exposures to financial market and commodity price risks. Much of this is provided by banks through derivative transactions. All in all, despite micro finance institutions have their own significance in outpacing the country's economy, as a result of the above mentioned reasons, upgrading such institutions is also of paramount importance to booming the national economic growth, Mekonen emphasized.

BY HIZKEL HAILU

More From: Ethiopian Herald

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