January 9, 2012

Ethiopian Central Bank Lowers Reserve Requirements, Marginally

Filed under: Ethiopia — ethiopiantimes @ 8:28 pm

Teklewold Atnafu, governor of the central bank, signed, last week, two directives lowering reserve requirements on deposits by five percentage points down to 10pc, and liquidity requirements to 20pc from 25pc.

It was a decision that many in the banking industry hardly expected but was thought to marginally improve the liquidity crunch private banks have suffered since April 2011. Neither were many in the industry impressed by the decision last week, Fortune learnt.

To the discomfort of leaders in the banking industry, National Bank of Ethiopia (NBE) issued a directive six months ago compelling all private banks to buy bonds from the state-owned Development Bank of Ethiopia (DBE), amounting to 27pc of the loans and advances they make.

With the exception of the three state-owned banks, all banks were told to redirect part of their deposits to buying bonds with three per cent interests. This had followed another decision to lift a two-year old cap that had been imposed on lending advances.

However, this was in addition to a series of reserves that the central bank obliged them to hold: 15pc of all savings, term, and current account deposits as well as 15pc of primary (legal) and five per cent of secondary assets, in a bid to secure risks.

Purchases of savings bonds, with five-year maturity dates, have only allowed banks to use the bills they purchase as collateral for loans or for any agreement made with domestic banks and has minimised the impact of lifting the lending cap, according to industry analysts.

Many in the industry were worried at the time that this was too much to ask for from an emerging industry and rang the alarm that such a measure would dry private banks of their deposits, possibly sending them down the illiquidity road.

A total of 38.3 billion Br in deposits was held by private commercial banks in June 2010. Of this, a minimum of 5.7 billion Br was held at the central bank as a reserve requirement, and 21.4 billion Br was disbursed in loans, leaving 11.3 billion Br in excess reserves, according to research conducted by Access Capital Services.

Through the directive, which has forced commercial banks to buy treasury bills, 11 billion Br was expected to be diverted from banks to the government, during the 2010/11 fiscal year, Access Capital estimated.

Six months down the road, many of the banks, including the bigger ones, were starved of Birr, unable to finance letters of credit (LCs) or approve loans.

This also led to the release of a captive deposit market to be fiercely contested by the banks, particularly the state-owned Commercial Bank of Ethiopia (CBE). Mobilising deposits from savers, whether individuals or organisations, has come to be a tough row for many, where each bank began to offer generous and more competitive interest rates on deposits.

“We reached a point where we could not pay for the checks that each one of us had at the central bank and needed to clear our payments and settlement accounts,” said a senior manager of a commercial bank. “The situation gets to an alarming stage.”

Alarmed, authorities at the central bank had been judged by their directives signed by the Governor on Monday, January 2, 2012.

Banks are required to comply with these rules, reporting weekly to the central bank their balances showing their reserve levels. Failure to comply subjects banks to penalties at twice the interest rates they charge on loans and advances.

“I was surprised and, in fact, happy about the new directive,” Brehanu Getaneh, president of the Ethiopian Bankers’ Association, an industry lobby group, and chief of United Bank, told Fortune.

However, this will only have an impact on easing the liquidity problems many of the private banks run into. It will do little to change their cash-strapped situation, according to an industry analyst that has closer association with many of the private banks.

A president of a private bank, who requested anonymity, agreed.

“Reducing the reserves requirement will ease our liquidity problems that we were having due to savings bills that affected our performance more than the lending cap,” he told Fortune.

Indeed, savings bills have been a bone of contention between commercial banks, whose lending ability and prospects for profit declined, and the central bank, whose officials were determined to redirect resources to finance long-term public projects, while discouraging short-term loans.

The total loan disbursements of banks in 2009/10 amounted to 21.4 billion Br, an increase of 21pc over the previous year, according to Access Capital.

Analysts in the industry agree that unless the central bank lowers the 27pc requirement imposed on banks to buy savings bills, the private banks will continue to suffer from a liquidity crunch.

“They may not get rid of the bonds,” said an industry analyst. “But, they should lower the requirement to 10pc or 15pc.”

Others, however, saw it as the beginning of a retreat by the central bank from its stringent requirements on banks to buy bonds from the DBE.

“It was doomed not to work from the start,” said a macroeconomist. “The net effect of the directive on bond purchases has been a near freeze of investment and slowdown of business.”

While the recent measure by the central bank is appreciable, it poses a risk of inflationary pressure if not offset by a decline in food prices in the coming two months, according to Eyob Tesfaye (PhD), a microeconomic analyst.

An injection of additional money in the economy, estimated to reach seven billion Birr, could create a new monetary phenomenon he said.


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