Curbing Entrepreneurial Fraud in the Financial Sector

The crooks of the society often come in three piece suits and ties, and in Ethiopia, as in the much more developed countries, their frequent abode is in the banking and insurance sectors.
Reading the list of problems the central bank lists in the banking, insurance and microfinance sectors, one is easily reminded of the finance executives who made the 2008 financial crisis happen on all the world. In Ethiopia their crimes include stealing depositors money.
The National Bank’s list shows how entrepreneurial professionals and executives in the three sectors could become to enrich themselves at the expense of others. Like hackers, they take pride for finding a way to break every rule that is in place. When no body seemed to mind, things got so bad as they did at Cooperative Bank of Oromia, which the central bank had removed en masse.
What they do starts with as simple as stealing depositors money by accessing their accounts. In credit, foreign exchange, letters of credit, cashier’s payment order and other activities, they find opportunities for profiteering. At microfinance level, it even becomes more ludicrous. A depositor may get his interests paid more than once, if he is a good friend, or lose it altogether. Ghost loans for borrowers that are not there are also made, and more in a list that is even longer than for the bigger banks. At insurance firms, there are frauds related to claims and commissions, as well as down pricing damaged properties, which the firm takes to sell them cheaply.
Both government and the National Bank of Ethiopia (NBE) used to deny the existence of some of these problems. For example it is old news that bank executives charge illegal fee to provide foreign exchange. That fraudulent commission has progressively grown from one Birr per dollar to three. This money, which adds up to a formidable sum, is apportioned to a hierarchy of “rent seekers”, a chain that is believed to extend all the way to the NBE itself. 
It is also easier to borrow if the borrower, who is going to be double digit interest rate, is willing to let go some percentage of the loan granted to the approving official, who will share it with other executives.
The NBE says that most of the problems it mentioned were widely raised during the meeting with sector actors to review the performance of the GTP I around the end of the last fiscal year. There are widespread malpractices in the financial sector and there is not easier and more fun way to prove that than for the government to unleash the dogs of the anticorruption commission to investigate the sources of the wealth some of those people have accumulated.
(Of course, that would be embarrassing since the promise by the government to conduct investigations into the personal wealth of high-ranking government officials was buried.)
The case of the bigger rent seekers, i.e., government officials aside, the decision of the central bank to look into the financial sector and straighten is up is nothing but commendable. 
Many of the problems it has identified are occurring because of the problem of financing both in local and international currencies. The impetus for corruption could originate both from the service seeker, who is worried about the huge competition for limited resources, as well as from the bankers, who, for the same reason, identify those who, with little fuss, will share they get from the bank. Such transactions affect the true cost of the hard currency and the loan. The “real” will be much higher than the “actual” that is recorded. 
It should be bothering that the NBE had for long neglected these serious problems affecting the entire economy. But it will be more interesting to see it actually go to work seriously. One of the ways it is going to make that happen is by making it easier for clients to report malpractices. It will also be interesting to see how that will affect the activities of banks. For example, most banks have a loan to deposit ratio of around 60%, which means that they are lending only 60% of the deposits they keep. Apparently it will be more difficult for those who wish to access loans without collaterals. It is going to be easier for those who may no longer be required to involve in something criminal with the executives. It could mean that the banks will be able to lend more and collect more and have less bad loans. It could be more income at banks and microfinance institutions, as well as insurance firms, who may have less assets sold cheaply, among others.
It will be interesting to see how the draft bill come to finalization and how financial conduct regulation will be operationalized.

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