Lack of Policy

Lack of Policy Framework Chocks DBE

More than four billion birr was not disbursed in nine months

Five years ago, the Development Bank of Ethiopia (DBE) announced that it planned to give out a large amount of loans to the manufacturing sector, which faced a lack of finances for years. Despite these stated efforts, many local investors argue that they’ve had difficulty in accessing finances. They say that the Bank is plagued by bureaucratic inefficiencies and that it tends to favour foreign investors. In fact, a closer look at the nine-month report of the Bank from the just-ended fiscal year shows that DBE had disbursed only 54Pct of what it planned. They claim that unsettled land issues of loan applicants, and their limited capacities to upfront 30Pct of the equity they need to get 70Pct financing were the major reasons for the Bank’s weak loan disbursement. DBE leaders say policy hurdles that the Bank faces, i.e., the limitation it not accept requests from Small and Micro Enterprises, have contributed to the reasons why a large sum of money has been idle this fiscal year. EBR’s Fasika Tadesse spoke with Bank officials and local investors to write why more than four billion birr was not disbursed to those who need it.

It was in the beginning of the 2010/11 fiscal year that the state policy financial institution, the Development Bank of Ethiopia (DBE), announced its five-year strategic plan with the aim of giving out an unprecedented amount of loans to the manufacturing sector, which, at the time, was crippling due to lack of finances. The strategy, which was planned in tandem with the five-year Growth and Transformation Plan (GTP), was expected to lay the foundation for a strong and locally-driven manufacturing sector, which is one of the cornerstones of Ethiopia joining middle income status by 2025.
Almost five years after DBE laid out its plan, local investors engaged in the manufacturing sector have complained about the weak loan approval and disbursement process of the DBE. Daniel Shitaye (name changed to protect anonymity) is a local investor who feels as though the DBE’s loan approval process leaves much to be desired.
Daniel manages a manufacturing company located outside of Addis Ababa. He and his partners developed an expansion plan with the aim of shifting its manufactured goods from serving the local market to making export grade products. Immediately, the management of the company approached the DBE for an ETB6 million loan to cover their operating costs and to buyout the company’s loan it received from the Commercial Bank of Ethiopia (CBE).
“We preferred to approach the DBE [for a loan because] it has the smallest lending interest rate and its focus area of finance matches with our investment. We were paying a 9.5Pct loan interest to CBE before deciding to be a client of DBE,” says Daniel.
The relatively low interest rate that the DBE provides is an appealing factor to business managers. The current interest rate for the priority areas of the DBE stands at 8.5Pct per annum. However, the average lending interest rate of private commercial banks stood at 11.88Pct by the 2013/14 fiscal year, according to the National Bank of Ethiopia (NBE).
Despite the appeal of DBE loans, Daniel says their attempts to attain one proved unfruitful. “Lags in the process and the extended bureaucracy were the major challenges for our company’s trial to get the loan from DBE, which was finally concluded by failure in obtaining the loan,” argues Daniel.
A number of companies from priority financing areas – including manufacturing, commercial agriculture, agro-processing, mining and extractive industries – have made attempts to receive funding from the Bank. The DBE uses funds from the NBE, which were collected from all commercial banks operating in Ethiopia, except for the DBE and the CBE, in the form of NBE bills equivalent to 27Pct of their new loan disbursements, to provide credit for investors.
Many local investors claim that it is not because of lack of finances that the DBE is rejecting their requests. Rather, they argue, the problem boils down to institutional inefficiency. In fact, since the announcement of Teklewold Atnafu, governor of the central bank, in April 2011 about the introduction of NBE bills, all 16 private banks and the state-owned Construction and Business Bank purchased NBE bills worth ETB26 billion by end of the 2013/14 fiscal year.
The NBE says that the directive was implemented in order to provide more financing for priority areas that often don’t receive enough loan disbursements. As Teklewold described it at the time: “the directive, which requires these commercial banks to purchase NBE bills equivalent to 27Pct of the new loan disbursements with the objective of funding the DBE, was introduced as a result of the very low private banks loan disbursement to long-term projects.”
The bills have an annual interest rate of 3Pct – which is 40Pct lower than the interest rate paid by banks that mobilized the money – and a five-year maturity date. It can be used as collateral for loans or for any agreement made with domestic banks. The central bank is to pay the principal and interest of the bill at the end of five years, which expired at the end of the just-ended fiscal year, which also marks the end of the first phase of the GTP.
But the road has not been as smooth as the government hoped, since the DBE is failing to disburse the money that was collected from banks. In the first nine months of the just-ended fiscal year, the DBE managed to approve ETB7.84 billion, while the plan was to approve ETB11.1 billion, which is only 71Pct of the targeted plan. Meanwhile the bank managed to disburse ETB4.86 billion while its plan for disbursement was ETB8.94 billion (54Pct of the plan), according to the Bank’s performance report.
The major share of loans was disbursed to the manufacturing sector, amounting to ETB3.01 billion, which is 62Pct of the total loans. Textile, cement and metal industries significantly benefited from these loans. The agriculture sector came next, with a share of ETB1.1 billion (22Pct). The remaining amount of loans were disbursed to the mining and energy, and finance sectors.
The Bank hasn’t approved and disbursed more than a third of its plan for the first nine months of the year. Tadesse Hatiya, Vice President of Credit Services at the DBE, attributes this to two major problems. “The lack of a policy framework to approve loans for the Small and Micro Enterprises [SMEs] and the lags in the process of land-related issues [by loan applicants], constrain the Bank not to approve [and disburse] loans in accordance with its plan,” he told EBR.
In addition to these, the disbursement performance was low because most of the companies whose loan request was approved did not raise the 30Pct equity required from them after the approval.
But Tadesse rejects the claims of local investors that the DBE favours foreign investors. He says that in the past nine months only 31Pct of the total loans disbursed went to foreign investors, while the remaining were provided to local investors.
Critics say Tadesse’s argument doesn’t validate DBE’s loan disbursement performance in the previous years. In fact, Prime Minister Hailemariam Desalegn, who gave policy remarks at the closing of a three-day forum held from June 30-July 2, 2014, said that much of the loans DBE disbursed in 2013/14 fiscal year went to foreign investors because only few local firms came with proposals that were well done to convince his policy bank.
Whatever the reasons may be, experts and international financial organizations argue that the money collected from banks has not been properly utilised. A report released by the International Monetary Fund (IMF) on October 2014 also stresses that the NBE bill should be phased out. In its report, the IMF says that the DBE is not using the money to finance the government priority areas; rather, it is purchasing Treasury bills and continues to severely constrain private commercial bank operations.
Essayas Bahre, president of the DBE, admits to purchasing Treasury bills until the DBE disburses the approved loans, saying the Bank is doing so in order to compensate for the 3Pct interest rates they pay to the NBE. “Investment loans take time, unlike business loans, as investment loans are disbursed in phases after the client uses the 30Pct equity, so we do not want to deposit the money in our account paying the 3Pct interest rate, so we purchase 180-day government Treasury bills,” he explains.
Some industry insiders share the analysis of the IMF. They argue that the amount of the bills purchased threatens liquidity and may give rise to a shortage of working capital in the economy, as well as an increase in the prices of imported goods, as importers pay higher lending interest rates due to the longer terms of the loans they are forced to take.
“The NBE bill is affecting the liquidity of our bank,” says Asfaw Alemu, president of Dashen Bank S.C, one of the largest private banks in Ethiopia. “But to overcome the liquidity problem, we are aggressively working on resource mobilization, which the management of the Bank believes is a way out.” Dashen used to open five or six new branches every year, but now it is averaging 30 new branches every year, according to the President.
Industry insiders say that banks are incurring losses due to the interest rate of the bills, which is 3Pct, substantially lower than 11.88Pct, which is the average lending interest rate of private commercial banks, according to a senior manager from the Ethiopian Bankers Association. “The effect has been seen on some private banks whose profits have declined,’’ says the official. “Banks are very much challenged, as the amount that goes to the NBE is beyond their capacity.”
The impact of this policy measure has been to crowd out private sector credit, even if commercial banks are currently enjoying high profitability by focusing on non-interest bearing activities and interest rate spreads, according to the IMF.
All commercial banks operating in the country and DBE together disbursed ETB59.9 billion during the 2013/14 fiscal year, according to the NBE. This figure went up by 10.5Pct from the preceding year. Of the total loans disbursed, 35.1Pct were by private banks, while the share of public banks was 64.9Pct. Regarding disbursement by sector, 34Pct went to industry, followed by agriculture (18.1Pct) and domestic trade (15.2Pct), while other sectors consumed the remaining balance, according to the NBE.
Even if the loan disbursement increased by 10.5Pct in the last fiscal year, most of the increment came from the government banks. On the other hand, private banks disbursed the same amount of money in both 2012/13 and 2013/14 fiscal years amounting to ETB21 billion, as the NBE data reflects.
According to stakeholders, the NBE directive has been distortionary and has triggered unnecessary portfolio adjustments by banks. Private banks adjusted their portfolios toward long-term loans to avoid paying a large amount of money towards NBE bills due to higher turnover of short-term loans. They also raised fees and commissions to make up for lower returns on NBE bill holdings. The situation was exacerbated by the subsequent amendment to the NBE directive that requires banks’ short-term loans to be at least 40Pct of total loans at any given time.
The policy of directed lending mainly to public enterprises in an environment of negative real interest rates results in a significant transfer of resources from creditors (savers) to borrowers, especially in the public sector, according to the IMF.
While local investors and private banks complain, DBE authorities explain that the Bank is working toward reducing the time needed for project assessment and approval, by avoiding the back and forth for the project proposals. The average time for the review and approval of proposals is 32 to 40 days, but DBE is currently averaging 41 days, which should be improved, according to Tadesse.
Until changes happen, banks are striving to survive as they aggressively work on deposit mobilization as well as non-interest and foreign exchange activities.
At the same time, investors such as Daniel, who failed to get loans from the DBE, must search for other options to obtain money to run their investment. He says that he partnered with foreign investors in the hopes of getting working capital from the injection from the joint venture partner, according to the general manager.
In the meantime, the Ethiopian Bankers Association, which had 4 discussions with the NBE since the implementation of the directive, managed to reach an agreement with officials of NBE to increase NBE bills interest rate from the current 3Pct for the next five years. The rate of increase is not yet settled.
Despite such attempts, however, the IMF strongly suggests that phasing out the NBE bill would help to realize the objectives of the GTP in a much more sustainable manner. The proceeds from this requirement that are transferred to the DBE should be used to increase access to credit for small-scale entrepreneurs through private banks to promote financial inclusion, according to the IMF. EBR

3rd Year • July 16 – August 15 2015 • No. 29

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