The Development Bank of Ethiopia (DBE) has stopped providing loans to finance commercial agricultural projects for an undetermined period. The Bank issued a circular at the beginning of the month, signed by its President, Esayas Berhe, ordering staff not to process any loans for agricultural projects. This includes both new and expansion projects that may come to its table.
One possible reason for this move is what happened in some projects in Gambella, causing DBE to face a problem, a bank official who wished not to be named, told Fortune. Cases where the Bank was tricked by developers into giving two loans for the same agriculture project are now under investigation.
Agricultural loans account for 17.3pc of the 75.5 billion Br total loans given in Ethiopia, the highest share after industry. The agriculture sector also accounts for 8.5pc of all outstanding loans, surpassed by industry, domestic trade, imports, and housing and construction. In the fiscal year that ended June 2015, agricultural loans amounted to 13 billion Br of loans and 18.6 billion Br had been accumulated in outstanding credit.
“It seems like commercial farming is not operating as the government expected,” said Bisrat Teshome, a developmental expert who also works as a consultant.
He shared his experience working with a textile company as a consultant. Sourcing problems are always a headache for those in that industry. It cannot continue buying cotton from smallholder farmers in a fragmented way; commercial farming has to support it, he explained. And the demand for the type and scale of cotton needed cannot be easily met without agricultural financing.
Given the risks involved in this dilemma, this change in arrangements for financing could also make a difference in the way industry sourcing takes place.
“The bank is transforming itself,” Esayas said. “The way agricultural investment has been handled will also change.”
DBE is currently undergoing some reforms. Late last year, it had come up with a new ratio of borrowers’ contributions to financing their own projects. Local investors are required to cover 25pc while the remaining 75pc would be covered by loan financing. Foreign-owned companies, however, are now required to equally share the financing – on a 50-50 basis. Before that, all borrowers were required to provide 30pc to get 70pc financing from DBE.
The second major change occurred just two weeks ago. By a directive from the central bank, DBE, like other banks, was required to change its interest rate, which had been 8.5pc until that point. Currently, the interest rate is 12pc on all loans, with the rate being lowered for priority sector investments but only until the project could prove that it was being successful.
On receipt of the central bank’s directive, Esayas cited increased bad loans as the reason for the change.
“Due to interest drawbacks,” he had said at the time, “it is believed that the Bank has to protect itself from continuous damage of failed projects.”
In the central bank’s self-audited report for the last fiscal year, the DBE had issued loans worth 6.84 billion Br – less than two per cent of loans issued in the country, and just four per cent of the number of loans issued by the Commercial Bank of Ethiopia (CBE). It had collected four billion Birr, and accumulated outstanding credit worth 27.6 billion Br.
These figures indicate that the agricultural sector is suffering from its own woes.
Because of gaps in the regional states’ administration and lack of coordination with the federal government, local officials are implicated in allocating the same plot of land to multiple developers, the official also indicated.
Land under the auspices of the Federal government, particularly the Agricultural Land Investment Administration Agency, reserved for agriculture in the region – was partitioned and allocated by local governments.
Recently close to 100 investors were found to have title deeds for land reserved for a special economic zone. Thirty of those with an area of 48,443ha of land found in Gambella, Dima Wereda, which had given them deeds to the land, were recently ordered by the same wereda to leave the land they had already started working on.
This may give the Bank time to reflect upon itself and come up with something that will solve its shortcomings, the official added.
The new directive does not end all types of agricultural financing.
Projects to which the Bank has already given its commitment, will not be treated under this circular, while developers with total investments of up to 37.5 million Br can use the Bank’s lease financing scheme, Esayas explained. The scheme is designed in a way that DBE will cover the cost of machinery from purchase to commissioning and the rest, such as working capital, will be financed by the developer. It will work on 20pc to 80pc ratio where the former is covered by the developers.
Machinery will be leased to them and when they finish paying all that is owed to the Bank, they will own that machinery.
“We are almost done with the preparation to launch the lease financing,” Esayas told Fortune. “There are requests that we have already received from borrowers and we will start it soon,” he continued.
For the last five to six months the Bank has been developing policies and manuals on how lease financing should operate.
“As far as the project financing for farms goes, we believe we will finish and resume it within one month,” Esayas disclosed to Fortune.
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