Banking On the Manufacturing Sector

ADDIS ABABA (HAN) June 28.2016. Public Diplomacy & Regional Security News. OPINION. BY:Matewos Berhanu. Dynamics in economics is abundantly visible at the early stages of any developing economy. This is catalysed by individuals with complex and diversified economic behaviour. Policymakers in such countries, including Ethiopia, inevitably face the challenge of updating their economic development roadmaps to cater for circumstantial calls to meet required targets in an effective and timely manner.

Their economic institutions should not only focus on regulatory roles so that the game is played by the book, but also ensure that the book is written according to the ever changing needs.

Converging our attention to Ethiopia’s economic status quo – where the economy is in dire need of industrialisation, particularly in the manufacturing sector – a different policy approach is required to expedite the process towards attaining the longed-for economic status. Thus, financial institutions (especially banks) have a presumed role on industrialisation.

With the aim of boosting the country’s expansion of the manufacturing sector, which is often seen as a measure of the strength of any economy, we need to consider enabling, or even requiring, financial institutions to have manufacturing wings owned and managed by themselves.

Financing, which is posed as one of the major concerns in this regard, will be much easier and closer to the sector if this was put into action. One analogy here is having a baby breastfeeding from its own mother, rather than the ‘mother-in-law’. The possibility of having idle cash in their large pockets can be reduced, and at least be used as working capital for the sector.

Top level management in banks usually have an in-depth knowledge of the country’s economic path and can potentially be very fruitful, if given the opportunity to spearhead, or directly take part in, the manufacturing sector.

One of the ‘unattractive’ faces of the manufacturing sector is the length of time it takes before reaping the rewards, as well as the need for financial stability throughout. Banks, primarily engaged in financial services with their ongoing returns, can afford to wait long enough and are in a better financial position to take the associated risks.

Taking a closer look at what it takes to get involved in manufacturing firms, there needs to be a long-term asset commitment backed by full confidence in the smooth running of the economy. Banks are better positioned to make sound investment decisions based on the detailed economic information they have.

Profits from manufacturing firms are usually very attractive, although time consuming. These gains, I this approach, would be shared among many citizens, as banks are owned by numerous shareholders. Furthermore, building this sector with potentially large locally-financed firms would help a considerable amount of earnings to be retained within the territory – unlike the case with foreign investors.

Expediting the country’s industrialisation journey is at the centre of the discussion here, and this is fundamentally about finding alternative ways to take advantage of an already available resource and expertise – both financial and human. As such, this idea of considering the direct engagement of banks in the manufacturing sector is more than simply utilising the idle money they hold.

Prospective investors remain reluctant to engage in the manufacturing sector, despite a wide range of government incentives and well-equipped industry parks.

Of course, this approach might require putting limits in to place on how long banks can be directly engaged in the sector. Once the sector begins to walk tall on its own feet, they would have to revert to focusing on their original economic role as financial intermediaries. This would, by then, demand even greater capacity than now.

In considering this idea, care would need to be taken to ensure zero impact on existing or potential investment prospects.

This could be achieved by limiting it to specific manufacturing areas as necessary and putting a ceiling on the amount of equity. Such a notion may not have been practiced in any other economy, but could still prove to be expedient for countries like Ethiopia, after the appropriate due diligence. It might also set a good example to other similar countries in the future.

 – Is an Account and Development Economist By Training and Works At African Bamboo PLC, a Company With a Presence Inside Hawassa Industrial Park. Read more here