Glasshalf Empty or Half Full?

Many Think NBE Bill Will Make Private Banks Grow, but Fear Liquidity Crunch

In March 2011, the National Bank of Ethiopia (NBE) came up with a policy insisting private commercial banks to buy bonds, using 27Pct of their annual loans and advances, to help finance loans from the Development Bank of Ethiopia. The NBE says this was necessary to strengthen the private sector. Since then close to ETB50 billion has been sacked out from private banks and used to finance investment in manufacturing.
Although the requirement of purchasing NBE bill had negative and significant impact on the liquidity and profitability of the banks, insiders say it has stirred competition in the industry, thereby contributing to improved performance – increased deposit mobilisation and financial inclusion. EBR’s Ashenafi Endale explores the issue further. It will soon be six years since the National Bank of Ethiopia (NBE), responsible for fostering a sound financial system in the country, came up with a policy requiring private banks in Ethiopia to surrender 27Pct of the loans and advances they disburse to buy what came to be known as the NBE Bills. The Central Bank says this was necessary to support government’s intention of uplifting the lingering manufacturing sector by providing improved access to finance. The NBE issued the directive back in March 2011, payable with 3Pct annual interest rate and a principal payable after five years maturity time.
Five years down the line, close to ETB50 billion has been collected from the 16 private banks. Despite the tremendous pressure, the trend has awakened private banks, after a decade and half years of ‘business as usual’ modus operandi. Since the directive caused liquidity crunch casting its shadow on the banks profitability, they were pushed to find alternative ways of mobilising deposits. The result has been positive – substantially expanded branches and deposits thus improving the financial inclusion in the country.
Industry insiders indicate that since the 3Pct interest rate is far less than the average 13Pct lending interest rate of the industry, private banks have lost over ETB5 billion in profits over the last five years. “This could have helped the banking industry in achieving other requirements that the NBE has issued, which includes expanding branches by 25Pct annually and increasing paid up capital to ETB2 billion,” an official at the Ethiopian Bankers Association told EBR. “However, none of the banks have come head to head with NBE, because banks know that it will never change.”
NBE officials, however, downsize the effect of the directive. Yohannes Ayalew, vice governor of the NBE told EBR that although much is talked about the adverse effects of the directive noting bad has happened in the banking industry. “Private banks had surplus deposits, which they used to put in the volts of NBE before as excess reserve,” he said. “Observing this fact, we decided to go on with the directive in order to utilise this excess resource.”
Although they did not agree with Yohannes’ argument in its entirety, some private bank managers say such regulatory constraints have been fuelling significant growth in the industry over the last five years. They say, the policy has urged the banks to reach out to the tens of millions of unbanked population, putting a lot of emphasis on quality and further pushing them to specialise and add services.
“The directive dried the base of banks’ fund available for credit,” says Mulugeta Alebachew, Director for Marketing and Corporate Communication at Dashen Bank. However, says Mulugeta, [this] pushed banks to work hard on mobilising deposits [by branching out].’’
Until June 2016, Dashen bought ETB6.43 billion worth of NBE bill. The figure was up from ETB5.8 billion in the previous year. This has earned the Bank an interest income of ETB192 million during the year.
In order to resist the challenges created by the NBE’s directive Dashen’s deposit mobilisation effort increased to ETB22.8 billion as of June 16, up by 15Pct compared with the figure in the previous year.
This resource mobilisation was made possible due to aggressive branch expansion, structural overhaul, human resource development and broad based strategic initiatives. These all investment has, however, caused a profit decline, though intangible with just only 1Pct less in net profits compared with last year performance of ETB729 million. Opening 64 new branches last year, Dashen’s total branch reached to 220 while it’s paid up capital increased by about ETB300 million from the figure in the previous year to reach ETB1.5 billion.
Fikru Woldetensae, Marketing and Corporate Communication Director at Wegagen Bank, agrees with Mulugeta: “Despite the challenges [the policy] created, NBE’s regulatory intervention has served as a driving factor for [exponential] growth of the banking industry.”
“Demand for loans is the first factor that triggered competition among banks,” says Fikru. “However, the NBE directive has served as a secondary driving force for the heated competition in the banking industry currently.”
As of June 2016, Wegagen’s investment in NBE bills reached ETB4.6 billion, up from ETB4.16 billion a year before. This has earned the bank an ETB134 million as interest income. On the other hand, its total deposit stood at ETB11.9 billion, showing a 16.1Pct growth compared with the figure in the previous year. Opening 45 new branches during the year, Wegagen increased total branch network by about 39Pct to reach 161.
Not only Dashen and Wegagen have increased their branches immensely in recent years. In fact, the total branch network of private banks increased from 1,564 in June 2015 to 1,927 a year later – demonstrating an expansion by more than 23Pct. Seven years ago, the total branch network in the country was 612.
Ojeuna Mekconenn, Director of Promotion & Public Relations at Zemen Bank speaks about the benefits of branch expansion. He says, the move has helped Zemen to substantially increase deposit. “[Improving] accessibility and profitability are parts of our vision to become a five star bank by 2020,” he says.
Established in 2006 and has been in operation since 2008, Zemen continued as a single branch bank until 2013. The bank revised its strategy three years ago and since then expanded its services with 17 banking centres.
The Bank sets to open its flagship branch at Bole Medehanialem, a burgeoning business district in Addis Ababa, at the end of February 2017. In addition, the Bank plans to open three more centres in the capital and another three in regional towns in 2017. Zemen also launched a new saving account category offering customers to setup and maintain accounts with funds as low as ETB5,000. Since establishment, the minimum monthly balance an account holder has to maintain was ETB25,000.
Branch expansion has been the main tool of deposit mobilisation for banks. However, in the age of a modern technology-aided banking era, some industry insiders wonder why the NBE force banks to stick to the old brick and mortar model of banking. There are others who say that branch expansion is still important and in fact not enough to mobilise deposits to meet the growing demand for affordable loans. “Had the ETB50 billion gone to the private sector, it could have improved business activities,” says a manager of a private bank who spoke to EBR on the condition of anonymity. “Opening a new branch costs ETB5 million to ETB10 million, and a monthly running cost.”
Insiders argue that currently, a branch opened in densely populated areas mobilises an average of ETB 5 million per year. This means, “Branch expansion is not helping to mobilise as much money needed as fast,” according to the manager. In light of the situation that the banks are putting customers in need of loan in the waiting list, he explains why several banks are working to increase fixed time deposit, which is a higher and negotiated interest-bearing deposit.
“Some exporters and few business people have a large sum of idle money at hand; such people used to deposit money at banks under this account. NGOs and institutions that were expected to deposit the money in normal accounts are also in this category now,” says the manager. “But in recent years, these institutions understood that banks are desperately in need of deposits, they negotiate with all banks to get higher interest rate offers.”
Even then, many banks are pursuing the strategy. For instance, Dashen mobilised ETB635.7 million as of June 2011 under fixed account. The figure increased to ETB1.6 billion in 2016. On the other hand, Wegagen’s term deposits increased to ETB588.7 million as of June 2016 from ETB265.8 million five years ago.
According to some bankers, the interest rates of fixed deposit reach up to 9Pct, far more than the 5Pct offered for regular saving. Banks, in turn, lend the fund to desperate investors, with up to 18Pct interest rate. Even though banks are trying to solve the shortage of loanable money in such a way, experts say the system adversely affects banks. This is because the depositors take their money at once after maturity. This exposes the banks for wide imbalances as such deposits mature between three to six months.
The other method private banks follow to compensate the loss due to the central bank’s directive is increasing service charges. Bank service charge, which includes overdraft and foreign transaction fees, is an administrative expense levied to compensate costs incurred by the banks in the process of transaction.
In the meantime, the NBE is conducting a study to decide the modality to disburse the principal of the 27Pct bill purchase. Its vice governor says the study will be finalised by the end of the current fiscal year and the central bank is planning to establish the bond market by the next fiscal year.
According to officials, the bond market was supposed to be established in the second quarter of the last fiscal year. The bond market, also known as debt market or credit market is a financial market where participants issue new debt in the primary market, or buy and sell debt securities in secondary markets.
Banking experts EBR talked to argue that, as of now, stock market is more needed than bond market since there are many companies established but could not get off the floor, because of the lack of capital. There are also several companies, including banks and insurances, which established names for excellence, and can benefit by the launching of stock market in the country. EBR