April 04, 2006

Exposed finance sector?

Sometimes, I get worried about the banking sector here. (Who actually worries about the banking sector - okay, my worry is on a personal level i.e. I want the money I deposit to be available when I withdraw and also on a social level i.e. what would happen if the banking sector found itself overly involved in one activity that suddenly had no buyers.) Only 10-15 years old, the modern banking sector in Ethiopia with its semi-private banks seems to be on a steamroller of growth, but may be taking too much risk in real estate and construction to go on like this forever.

When you drive around Addis, and other parts of Ethiopia, you are left with conflicting ideas. Addis Ababa is probably the fastest growing city in Africa in terms of construction, at least that I've seen. Kampala, Cotonou (Benin), Johanessburg, Dakar (Senegal), and Accra (Ghana) don't hold a candle to it. Those cities are also growing, but Addis is BOOMING. Everywhere you walk or drive, there is a construction site, with somebody is putting up an office building or apartment complex or a G+3. At the same time, you hear stories about shortages of foreign currency. All too much for my rudimentary economic skills.

But still, where is all this finance for construction coming from? There are a couple of theories. One is that construction is the one investment in Ethiopia where families, friends, and collectives, can pool there money for a long-term investment. There are no stock markets and although you can sometimes buy shares in banks, and big companies, this is rare, very expensive, and probably not as well understood as pooling money to put up a building.

Another theory is that the practice of using banks by the common man is growing rapidly, with lots of people putting lots of money into banks for the first time ever. This has left banks with significant amounts of money to invest. Where do they put it? As with families and small groups, the easiest thing to understand is construction and property. Understanding a businesses' potential or creating a mortgage system requires a lot my knowledge, but a building is simple and, as people like to say here, the value of property never goes down (maybe not over the long-run, but what about 10-15 years?).

That leads to my fear that the banking sector is exposed and makes me wonder about putting money in my checking account. Unlike many countries that have experienced the shock of banking-sector corrections, Ethiopia's banking system is too new to have gotten burned (yet). Hopefully, safeguards are in place, but I get the sense that there's a little bit too much faith in banks, as evidenced by this line in Sunday's (April 2, 2006) Capital newspaper, which states that, "in an otherwise gloomy business atmosphere, the past year has been a golden year so far, for Ethiopian banks, giving the feeling that the banking industry is an ideal niche market for potential investors". Yikes!

How coffee and flower exports and oil imports play into all this is a question better left for Dr. Constatine or Yosef B. of Fortune newspaper or my colleague from Wisconsin with the burly beard (and possibly my colleague from Washington with no beard, though I generally leave to him guidance on political affairs). This is as far as I can take it.


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