The National Bank of Ethiopia (NBE) has advanced to the state-owned banking giant, Commercial Bank of Ethiopia (CBE), one billion dollars in foreign currency, which risks putting private banks in a liquidity crunch.
The announcement made two weeks ago led depositors of private banks to withdraw their deposits in huge sums. This sudden outflow of cash from almost all the private banks escalated in the last week, according to sources from the private banks.
Two weeks ago, CBE started releasing pending applications for Letters of Credit (LC), which had been delayed for the past 10 months. The Bank started releasing foreign currency after securing forex from the central bank. The main beneficiaries are companies that are engaged in the manufacturing sector.
Unlike the usual practices, the margin, which is the amount required to be deposited at the bank to get an LC, is 100pc of the required amount. Previous trends required depositing 30pc of the value of the LC requested.
“Cash withdrawals have been enormous, starting from the past two weeks,” said a senior bank manager who wished to remain anonymous. “It has been affecting our deposit mobilisation.”
CBE’s deposit mobilisation has been increasing during the past years. In the last six months of the current fiscal year, CBE managed to mobilise 320 billion Br, which is only 150 billion Br less than the deposits mobilised by all 16 private banks put together.
When asked for comment, Tiruneh Mitafa, vice governor of NBE for Financial Institutions Supervision Cluster, said that he is not informed about the issue at all and that details are available at the foreign reserve department of the National Bank.
“The liquidity problem will be severe because a huge amount of deposits will be drained out of private banks as importers move their deposits to CBE in a rush to scramble on limited foreign currency,” commented Abdulmenan Mohammed Hamza, a banking expert, and analyst at London Portobello Ltd.
Zafu Eyesusworqe, board chairman of United Bank shares Abdulmenan’s view. “The liquidity problem could affect the banks to the extent of killing their power to disburse loans, especially the newer and younger banks,” commentedZafu.
Last year, NBE’s injection of 2.3 billion dollars to CBE caused private banks to lose deposits of about 4.4 billion Br within a few weeks.
“Considering this fact, private banks might lose deposits of up to two billion Br to CBE,” Abdulmenan said in a written comment to Fortune.
“This grant of foreign currency from the central bank shows the preferential treatment CBE is getting from the government. This is very unfair to private banks as it is eroding their competitive position in many ways such as foreign currency dealing, deposit mobilisation, liquidity level and maintaining customers,” according to Abdulmenan.
This action of the central bank came after a severe foreign currency crisis that the country has been facing since the beginning of the current fiscal year. Last year’s foreign currency earnings were 500pc lower than the amount the country spent on import items during the year. Ethiopia spent 16 billion dollars on imports while the foreign currency earning was only three billion dollars.
Aggravating the problem has been the decline of the country’s foreign currency earning following the recent political unrest in the country. On the other hand, loans and grants to the country have declined as donors and development partners cut their funding because of the high amount of money donated last year to drought relief efforts.
“The private commercial banks whose liquidity positions had been severely affected, had to borrow cash from the NBE in order to meet the liquidity requirement of 50pc of Net Current Liability,” explains Zafu.
Belihu Takele, acting communications manager of CBE, told Fortune that the relevant departments were not available to make a comment as of the time of printing.
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