Complete Trust or Blind Faith?

Welcome to the latest edition of ፍራንክ Digest!

And a Happy X-mas Eve to you all🎄🎅⛄🦌 🎁

Your weekly brief on all things Finance and Investing. Quick, enjoyable reads for busy professionals in 5 minutes or less.

Here’s what’s coming your way:

• 🏷️ Money Going MIA?

• ☘️ Banking On Green Financing

• 🗝️ The Key Takeaways

Thanks for reading!

Why Your Money Is Not Always At The Bank

Banking

Wait what? Are you saying that when people are not watching, our money goes out for a stroll - That would be weird, our money doesn’t have legs ሲጀመር

But let’s be serious for a minute, if you checked your account balance on this lovely morning, you would have seen your banking app telling you the exact amount that’s in there.

And of course, why wouldn't it be? After all, banks have software that accurately tracks transactions so that the number you see on the screen is always the amount that sits at your bank.

Or is it…? 😏 Queue the dramatic music 🥁

Here’s the breakdown: banks are just gatekeepers to the rest, they collect funds, keep them on their books (term used to describe a ledger - a debits and credits tracker of all money movements) until they find ways to deploy them.

To make money, banks offer a lot of services: safe deposit boxes, foreign currency exchanges, transfers (mobile money & ATM cards), LC facilitation and all sorts of loans.

Let’s focus on that last one though, LOANS. 

All that money we beg the bank to loan to us is money that is actually owned by us, the depositors. Two things here:

1. The irony, right?

2. There’s a huge chunk of money originating from businesses too

Now, back to explaining this peculiar business model: loans have been at the forefront of revenue generation for banks, especially for our local banks.

Your money earns 7 to 8 percent while banks take it and give it to a lender at twice if not more the rate. 

Evil or Genius? 

Call it whatever you want to call it but the system works and has worked for centuries.

But despite what seems like a cavalier way of moving money around, there are risk and compliance measures that make sure that banks don’t run out of money if depositors come calling.

Traditionally, banks are expected to originate 80 to 90 percent of their loans from their deposits. Experts call this the Loan-to-Deposit Ratio or LDR and is a general indication of liquidity. High ratios result in low liquid assets (cash). National Bank of Ethiopia’s (NBE) threshold is at 85%.

This figure is suggestive but generally accepted. According to NBE’s Financial Stability report in November, the banking sector for the financial year ending June 2024 had an LDR of 60.2%, dropping 0.4% from the previous year.

The report also highlighted that liquid assets of banks only incorporated a small share of high quality liquid asset (cash). This explains why some banks face real-time interbank transfer delays. At a large scale, this would be reason enough to lead to a bank run (Most recently, Silicon Valley Bank in the US failed due to this scenario)

‘So what are you saying, guys? If I go to Awash, CBE or Abyssinia and so on, does that mean they won’t let me withdraw all of my hard earned Birr if I wanted to?’  

No they will, after all, it’s your money. 

And this is because just like there’s loan concentration to a few, 58.5% of the total banking sector deposits are held by 0.4% of depositors. This is mostly composed of State-Owned Enterprises (SOE) which also happen to be the major borrowers, leaving little room for large & unexpected deposit withdrawals. Of course, we’re talking about the banking sector as a whole, but the situation at your individual bank may be different.

This brings us to Deposit Insurance Fund that was put into law a few months ago, which guarantees that your money will be safe up to a certain threshold (ETB 100,000)

Bottom line, it’s true that your money (at least most of it) is out there being spent by someone else. That’s the norm, but rest assured that, come withdrawal, you will be made whole provided that not all the depositors come looking for their cash as well. 

As Gordon Gekko famously once said Money never sleeps, pal.

Key Takeaways

1. Nomad Money: Most banking is based on taking your money and using it to lend it at a higher rate. In Ethiopia, this is mostly to SOEs and large businesses

2. Disparity? Interest on deposits are in the 7 to 8 percent range while loan interest can vary but are usually much higher comparatively.

3. What Does This Mean To You: Money never sleeps, it’s always working. Risk and compliance measures make it so your money can be ready to be withdrawn when needed unless there is a run on the bank. But systems of mitigation like Deposit Insurance offer a sense of protection so the system doesn’t collapse which means, if you’re a smart cookie, spreading your liquid cash in different banks can help you protect ETB 100K at a time 😉
    

ፍራንክ Picks 

🚶🏽 Event: Founders Live Addis Ababa - ALX [Jan 18, 2025 · 2 - 5pm EAT]

🗞️ In the news: Startups to get $750K grant trough EDTF

♟️ Innovation: Amhara Bank joins the QR train

Unlocking the Green Economy: Carbon Credits

Financing

We all know the climate crisis is no joke, and the world is scrambling to figure out how to tackle it. The 21st century way to tackle global issues is to provide market incentives to ensure private sector participation and leverage global finance.

Kind of like promising your child sweets so they eat their greens. This is where green financing enters the playing field— how to fund efforts to save the planet.

Green Bonds and Carbon Credits are the tools du jour 🍽️. They’re market-based solutions designed to get businesses to pay for their environmental pollution while rewarding those trying to fix the mess.

So, What’s the Deal with Carbon Credits?

Picture this: a permission slip that lets a company release a certain amount of carbon dioxide or other greenhouse gases (GHG) into the atmosphere. But here’s the catch—it’s not a free-for-all. Most countries cap the level of emissions companies can emit and reduce the limit every year to meet the 2030 Climate Agenda.

Companies can buy credits if they emit beyond the set limit from projects that are working hard to reduce those pesky greenhouse gases. Think of it as a “pay to pollute” system that funnels money to projects like reforestation or renewable energy.

It’s kind of like charging the bad guys 🥷to fund the heroes in the climate drama.

Ethiopia’s Green Game Plan

Let’s zoom in on Ethiopia. Since 2015, the country’s been on board with the UN’s Sustainable Development Goals (SDGs), and woven these goals into its economic development plans.

So, what does this mean? Well, there’s a potential USD 726 million on the table for Ethiopia, with a big chunk set aside for food security and health. But here’s the exciting part: Ethiopia is also diving into climate-friendly projects like afforestation (hello, trees!) that sequesters carbon from the environment and off-grid solar systems that bring clean electricity & water to rural areas.

These initiatives aren’t just saving the planet—they’re earning carbon credits along the way.

The Green Business Boom

If you’re in the business world, you should definitely be paying attention. Programs like Pioneering Green Partnerships (P4G) are making it easier for businesses in low- and middle-income countries to get in on the carbon credit action. Ethiopia’s been part of this program since 2018 and has already brought 12 projects into the fold.

Take Aifa Foods, for example— reducing post-harvest waste by drying fruits and vegetables (good for the environment and their bottom line), or African Bamboo, turning endemic bamboo varieties into sustainable construction materials to replace plastic, steel and concrete. It’s a win-win for both business and planet.

The Global Carbon Market—It’s Booming!

The carbon market is turning out to be the star athlete in fighting climate change. The European Union Emissions Trading Scheme is leading the charge, making it the largest carbon market globally. And the best part? It’s covering industries that really need to clean up their act or pay up, like electricity generation from fossil fuels, manufacturing, and transport (aviation and maritime).

According to a recent study commissioned by FSD Africa, Africa is emerging as a key contributor to the growth in carbon credits seeing an increase in its global share from 10% in 2021 to 26% in 2023.

But, It’s Not All Sunshine and Rainbows

Small and Medium Enterprises (SMEs) might hit some roadblocks when it comes to accessing these financing opportunities. The technical know-how required, long certification processes and complex financing can be a major pain in the neck.

Let’s not forget “Impact Washing”—that’s when companies overstate how much good they’re doing (not always intentional). This may have lead to stagnant pricing of carbon credits from African, Asian and Latin American projects amid concerns of integrity. Equally concerning is that over 90% of intermediaries that facilitate carbon credit transaction do not disclose their fees, often absorbing up to 60% of project funds.

This is why transparent Carbon Credit trading platforms need to be established and regulated by a robust environmental certification authority. For instance, Egypt has created the world’s first regulated Carbon Trading Market handling accreditation, issuance, listing, and trading of carbon reduction certificates on the Egyptian Stock Exchange.

So, yeah, it’s a bit of a mess, but with proper regulation, it’s fixable.

What’s in It for You?

If you’ve got a business idea that’s got a green twist, consider tapping into initiatives like P4G or head to Ethiopian Environment Protection Authority (EPA) for other programs backed by the UN SDGs. These platforms can guide you through the carbon credit maze, helping you scale your business while also doing your bit for the planet.

It might take some work, but hey, building your empire and making a positive impact? Totally worth it.

Key Takeaways

1. Fighting Climate Change—comes with financing opportunities for green projects.

2. Local Businesses Taking Advantage— 12 projects stand to benefit from the Pioneering Green Partnerships (P4G) program

3. Challenges Remain— Accessing carbon credits often requires technical expertise, long certification periods and a winding path to unlocking the funds  

Thanks for sticking with us, ፍራንክ family! If you enjoy your weekly digest as much as we do, spread the word - we’ll be sliding in with more next week!