“Our Decision of Loan Approval is not Dictated by the Passport Loan Applicants Possess”

Following Ethiopia’s drive for continued economic growth and development, the need for investment financing has significantly increased. The state-owned Development Bank of Ethiopia (DBE), one of the main project financiers in the country has also significantly increased its capacity to respond to the country’s strong drive for development.

In this exclusive interview, Amanyehun R. Sisay, executive editor and Mikias Merhatsidk, editor-in-chief of Ethiopian Business Review, discuss, with Esayas Bahre, president of the century-old bank, issues concerning the financing of the manufacturing sector, corruption in the institute and the opening up of the financial sector for foreign banks, among others. Excerpts:

EBR: Development Bank of Ethiopia is a policy bank. How do you reconcile this with its additional motive of profit making?
Esayas Bahre: The Bank is not mainly established to make profit, even though its operations are profitable. The profit will help the bank sustain itself through the years and will enable it to operate independently. That is why the loan it provides is interest-based; enabling the bank to make certain profit. But the bank’s main objective is to support the country’s economic development; we provide finance needed for the rapid and sustainable development of the nation.

The Bank has planned to loan ETB21.9 billion to the manufacturing sector and 16 billion to the agricultural sector in its five year strategic plan, which coincides with the GTP. Now that you are on the fourth year of your plan; how well have you progressed?
We have achieved 90 to 100Pct of the targets we set for loan provision in the last three years of GTP. As you may know, the GTP is an ambitious plan. And still our loan approval has shown significant growth. Loan disbursement is another step. The loans permitted are disbursed phase by phase.

The Bank’s Nonperforming Loans (NPLs) were ETB2.1 billion in the 2009/10 fiscal year, 22.8Pct of its total loan portfolio. Have you managed to bring it down to a healthy level?
Yes; DBE has shown great progress in decreasing its nonperforming loans (NPL). After investigating the root causes of previous problems, we designed recovery strategy on each specific case and put great effort into it. We provided grace period for some of the projects, solved problems of some of the projects and in case where a project has no hope, we worked on phasing it out. After doing these we were able to pull down the nonperforming loans ratio from our portfolio below 10Pct. And it has been that way for the last two years. This is a great achievement! According to the Association of African Development Financial Institutions’ standard, below 15Pct NPL is healthy. Our goal in terms of loan collection has also been achieved.

But the limit set by the National Bank of Ethiopia (NBE) is five Pct NPL.
We are also striving to reach that level but development banks and commercial banks are different in their loan provision. Usually, the former focuses on short term loans while the latter tend to be project financiers. Project finances are medium or long term loans. Therefore, a project’s inability to return the loan for a certain period of time does not mean the bank’s capacity is deteriorated permanently. In any case, we are working to reach this stage. Last year it was around eight Pct.

Recently government officials are pleading local businesses to engage in the manufacturing sector, in fact promising improved access to finance. Are you ready to satisfy the demand from these investors?
The country’s financial capacity has been growing over time. Our capacity to give loan has also been growing but projects these days are requiring huge capital. Even though we will finance what we are able to, international loan providers should also participate. What we have been doing until now is developing flagship projects that can lead the way and show what can be achieved in the economy. This will boost the confidence of international financier. Now, international financiers are showing interest in operating in Ethiopia. Some of them have opened branches here. In Ethiopia, it is important for different loan providers to come together in a consortium to cofinance projects. This is the future. Our bank will not continue to be the only loan provider institution for these kinds of projects.

Are there projects that you are partnering with international financiers?
Yes we have been working with the African Development Bank, European Development Bank, PTA Bank and the World Bank.

A couple of months ago, the bank withdrew the loans it had approved for Habesha Cement and four other companies; Why did this happen?
There were projects where loans were approved but to receive the approved loan, the right amount of equity must first be secured. There are other projects on the table waiting their turn, so considering the amount of time that took the projects to secure the equity; we were not able to wait for so long. In addition to that, if a project is not implemented within a given time frame, the feasibility of the project will become questionable. Due to these and similar reasons the loans were withdrawn.

How much finance is availed for the manufacturing sector in this fiscal year?
Since we have given special attention to the manufacturing sector, more than 70Pct of our portfolio will be dedicated to the sector.

Last year, DBE approved ETB1.3 billion for the agricultural sector. This is 57Pct of the plan. Can you explain why?
This ration can be changed only through the participation of the public. The public must be aware that agriculture is profitable; and they should invest in the sector. In our part, we have travelled long distance to encourage investment in the sector. Previously, there was no finance for agriculture because it was generally perceived as a risky venture. Now we have to avoid such assumptions. In fact, we encourage investment in the sector. We will allocate even larger amounts. Yet this by itself is not enough. Projects testify agriculture is profitable if worked by mitigating risks and ensuring closer follow-ups. From this experience we are encouraging investors to invest in agriculture and we will continue supporting investment, but it is their participation which raises the portion of portfolio.

Will the 30/70 ratio of financing projects change in the near future?
In our loan policy 30Pct equity will be required to access the rest [70Pct] of the investment from the bank. This is the bank’s policy. The policy is not compromised for foreign or local investors. Rather my message to investors, especially foreign ones, is: when their project requires huge finance, it will be good if they contact foreign banks and ease the burden on DBE. We will cover some of the finance, but if there is a situation where they can access loans from international financiers, it will be good if they utilize it. This means the money that could be disbursed to other projects will not be spent on a single project.

Some companies who took out loans to be engaged in the export market, because the bank gives preferential treatment for exporters, have reportedly diverted significant amount of their products to the domestic market. Do you have mechanisms to follow up on such kinds of misconduct?
We follow up whether the finance taken is used for the intended purpose by making sure things on the ground are the same as what they look like on paper. Then, follow on the proper implementation of the project starting with the use of the equity. We follow up and cross check the true value of the materials, using price index of items purchased in our database. We first make sure the investment equity is paid through professionals, second we make sure whether the first disbursement is effectively utilized on the project. The same procedure will be strictly adhered to in subsequent milestones of the project to disburse the next instalment.

Once the project is finalized, we again start following upon commencement of production. If the project is for instance, export-oriented, it will have export targets. So we will follow up to what extent the target is accomplished. If the company which was established to export is found selling in the domestic market, it is a crime; and there are different stakeholders which follow up on such kinds of crimes. They follow up companies who use export incentives and sell their produce within the country. The offenders will be punished and the privileges will be taken away. Therefore, it is illegal to sell within the country while enjoying export incentives.

People who have come to the bank seeking a loan, especially those engaged in the agriculture sector, say the loan appraisal process is long and tiresome, taking months, why is this so?
We are trying as much as possible to shorten the loan processing time. When the Business Process Reengineering (BPR) programme is implemented, we have taken the experience of different countries. The aim was shortening the loan processing time. However, even when we take experiences of best practices even in the international financial institutions, it is not easy to appraise finance requests of projects. When a given project is appraised, many issues are scrutinized in detail. Therefore, only few projects are approved in less than six months, even by international financiers. But with the goal of speeding up economic growth in Ethiopia, our bank is trying to shorten loan appraisal time. We have fixed our standard time at 35 working days, but this may not be the case for all projects, because some projects are new territory for us too. Data collection to verify such projects takes time.

Even in such cases, we only take a few more days than the standard time. Most of the time the appraisal duration is prolonged when some documents of the projects submitted is missing or when the documents are questionable. Projects with the proper documents are easily approved. Now, on average, it takes 40 working days for project appraisal. That is around two months.

As many foreign investors are coming to Ethiopia, there is fear among domestic investors regarding access to finance. Do you have a policy of balancing loan appraisal and disbursement to local and foreign investors?
Foreign Direct Investment (FDI) is growing in the country. This is the result of the government’s effort to attract FDI. Our decision of loan approval is not dictated by the passport loan applicants possess. We help Ethiopians take the lead and encourage local investors; equally we support foreign investors who come and provide technology and knowledge transfer to the country. Therefore lots of foreign investors are coming, and this still needs to grow. We encourage local investors to increase their technological capacity and strengthen their financial capacity but encouraging them does not mean favouring them or discouraging others. So we will continue to support investors regardless of their origin. And we hope the number and volume of investment will increase in the country. Since foreign investors came recently they took about 40Pct of our overall portfolio. The rest is held by local investors.

Some of the work processes and work environments in the Bank, especially in regional offices are prone to corruption and customers complain about this. Are you aware of such practices? What are you doing to solve this? Is corruption a threat to the bank?
In regional offices, there is a limit of ETB15 million on the scale of projects they can handle. Besides this, we have been giving training on enhancing better work ethics and principle. In addition to this, teams from the headquarters are dispatched when there are comments of misconduct in regional offices. We investigate these kinds of incidents and take corrective measures. And we always work diligently so that corruption will not become a threat to the bank.

Highly experienced employees in other public financial institutions leave for various reasons, particularly due to low wages. And this has become a serious problem for the institutions. Is DBE’s experience any different?
DBE’s experience is not different from other public financial institutions; but the main thing is to work on human resource development. Workers will not stay forever. Since workers leave due to various reasons, the solution is to generate professionals in numbers, working on capacity building and creating experiences. We have links with different development banks in many countries. Using these connections, we prepare training and experience sharing programmes in those institutions. Though workers leave, we replace them with competent work force.

You have recently received USD25 million to finance micro and small enterprises from the Chinese Development Cooperation Bank. How are you using it?
We work with different international financiers to access increased funds. Some of these funds are directly disbursed by us whereas the rest are disbursed to micro and small enterprises through micro finance institutions. We administer different foreign funds through our special fund administration office. This office channels loans for the intended targets, presents reports, and helps the release of funds and follows up on implementation. There are projects that target women as well, and we follow all intently.

The bank is credited with being the reason behind the success of the horticultural sector, but in some cases there were defaults. As the main source of finance, how do you evaluate the performance of the sector?
Four years ago, the horticultural sector was in trouble. At the time, detailed studies were done on a project basis and as a sector overall. Some of the problems in the sector were associated with managerial issues and others were problems with payment schedule; there were also other problems. So, tailored solutions were developed to every stakeholder. The bank also tried to solve problems of capital, payment schedule, and others; and if the projects could not go on, they were foreclosed; in any case solutions of every kind were considered. Most of the projects are now in good shape. Certain projects have been sold and now they are exporting under different ownership, after expanding and reaching an economic size. Now the horticultural sector is in a good condition but it has to grow.

Reportedly there were cases where loans were approved due to the presentation of a mere letter from high officials, in fact some of the defaults in the sector are blamed on such kinds of malpractice; what do you say?
As far as I know, there is no procedure which allows the acquisition of a loan by presenting a letter from high officials. The bank gets into the sector believing that it needs support. It is difficult to say that the bank had sufficient knowledge at the time. From the beginning, the profitability of the sector was in question and commercial banks retreated but since the sector is useful for the country’s development, we should go a certain distance. How investors get into the business and how the bank gets prepared is another issue. But through the process we have built our capacity to support the sector. Some investors were reluctant to pay their dues because they knew that during foreclosure, the flowers will die and the farm will be worthless, so they thought we will not foreclose. The measure to solve this problem was, we prepared ourselves to take over the projects by training workers in order to get the management skill for certain interim period; and we were able to sell it later. This shows that if the bank wants to take measures, it has the ability to do so.

What are the main sources of finance for the bank?
Previously, it was operating using loans from different institutions within and outside the country. However, now, the 27Pct bond from the commercial banks has become the main source of funding. This has been a stable source. Though this is the basic source of funding, we also have additional sources from abroad; time deposits and others also contribute.

How much did you get through the 27Pct bond purchase from commercial banks the previous year?
I do not know the exact figure.

What do you think is the biggest accomplishment of the bank in its more than 100 years of existence?
The bank has been operational for over 100 years. This by itself is an accomplishment. Understanding the need for and imagining a bank that works exclusively on agriculture and industry at that time is outstanding. However, the bank’s existence simply continued without significant result through different governments. Five years ago, while undertaking Business Process Reengineering, the bank started questioning its reason d’être. Then it came up with a new vision, i.e., to make its projects 100Pct successful by 2025. It aimed for projects which support the development of the country. It is against this vision that every worker’s role is evaluated. To evaluate the bank’s achievement by the development support it gives is a great accomplishment. Giving clarity to the mission and vision to the workers and defining what it stands for was necessary. So now, the success of the bank is evaluated in terms of the contribution it makes to economic development and the number of successful projects it help to establish, which in turn will be evaluated in terms of revenue generation, and export and tax payments the projects create. Implementing numerous projects of this kind can change the country’s economy and we are evaluating ourselves using these criteria, and they are successful.

As a banker, do you think it will be beneficial for the finance industry to start the gradual opening of the sector to foreign investors now?
When we see the distance we have come through and the positions that domestic banks used to have and where they are now; we can say that the decision not to open the sector for foreign investment was a success. The capacity of domestic financial institutions has been enhanced because of this decision. Unlike many other African nations, Ethiopia has managed to create indigenous banks that can satisfy the demands of the domestic market. However, this is a process and I think when the financial sector reaches a certain level of competency, the industry will be open to foreign investors. Yet banks in the country are working on activities like increasing the accessibility of the sector, which foreign banks may not be interested in. Then once the required level of competency is achieved, the foreign banks may open shop here. Better services will also be provided. EBR

2nd Year . November 2013 . No9