NBE’s New Directive Lifts Microfinance Paid Up Capital to Two Million Birr

The move has been made to increase the competitiveness of microfinance institutions in Ethiopia



The National Bank of Ethiopia (NBE) has issued a directive that requires Microfinance Institutions (MFIs) to have a minimum paid-up capital of two million Birr, effective October 1, 2013. This is a tenfold increment from the previous requirement of 200,000 Br. The fate of MFIs that do not fulfil the new requirement will be a merger or liquidation, according to the directive.

Existing MFIs with capital under this amount are expected to meet the requirement within five years. They will do this by raising their paid-up capital to a benchmark amount the NBE has set for each year. By June 20, 2014, for instance, such MFIs are required to have a minimum paid-up capital of 500,000Br. This must increase to a million Birr, 1.3 million Br and 1.6 million Br, respectively for each successive year, before reaching two million Birr by June 30, 2018.

There are currently 33 MFIs operating in the country, reaching 2.89 million clients through 1,244 branch offices. Out of these, only six have passed the new two million Birr mark, according to data from the NBE.  Aggar Micro Finance, which has a paid up capital of close to 11 million Br, is the only privately-owned MFI whose capital exceeds the requirement. The rest are regional government-funded MFIs, known as the ‘big five’. These include – the Oromia Credit & Savings Share Company (OCCSICO) and the Amhara, Dedebit (Tigray), Addis (Addis Abeba) and Omo (Southern Region) Credit and Savings Institutes.

“MFI’s may not have increased paid-up capital, but they mobilise a lot of money and advance big loans” Gezahegn Kassa, principal examiner at the MFI directorate of the NBE, told Fortune.

MFIs under formation, who have not yet applied for licensing, must raise the full two million Birr before commencing operations. While four MFIs are already in the pipeline to be established, according to data from the NBE, none have yet submitted the required document for licensing.

One of these is Nisir Micro Finance, which is planning to commence operations in December 2013. The new directive will not adversely affect Nisir, as it has already decided to start with a paid-up capital of above five million Birr, according to Michael Addisu, promoter and project manager for Nisir. However, he declined to disclose the exact amount so far raised before the company’s general assembly on October 26, 2013.

It is the first time that the NBE has changed the capital requirement for MFIs after setting the previous requirement 17 years ago. This came when developing a regulatory framework for the establishment of such institutions. The change is based on several studies that suggest the old capital requirement is no longer feasible in making MFIs competitive.

It was the lowest requirement for paid-up capital in the world, according to a 2011 MFI country survey done by MFtransparency.org – a US-based organisation that promotes price transparency in MFI loan transactions.

With such a small capital, the MFIs are “compelled to suffer from a lack of funds to scale up their operations” and “consequently operate with a loss for many years”, reads a paper prepared by Sintayehu Desalegn, examiner of Micro Finance Institutions at the NBE.

Indeed, a lot of the MFIs in the country only seek to meet the 200,000 Br capital requirement, mostly via funding from Non-Governmental Organisations (NGO), and hardly make an impact on the sector. It is the big five regional MFIs that account for 90pc of the 13.3 billion Br in total assets mobilised by the sector, according to data from the NBE.

Sintayehu’s paper predicts that the eventual fate of institutions with small capital will be acquisition or liquidation. It further recommends that the capital be raised.

Taking this into consideration, officials at the MFI directorate of the NBE have been working on setting a new paid-up capital baseline for the past year. They finally settled on two million Birr (105,646 dollars).

MFIs are the third type of financial institutions to see an increase in their paid-up capital requirements. The NBE first started with banks, which were ordered to increase their paid-up capital to 500 million Br, from the previous 75 million Br, in September 2011. Insurance companies were next, in April 2013. The NBE asked that they increase paid-up capital for general insurance from four million Birr to 60 million Br and long-term insurance from three million Birr to 15 million Br.

The paid-up capital requirement is not the only new directive in the MFI sector to take effect last week. The NBE has also issued another directive that waives the limits placed on MFIs when they invest in businesses, if the investment is on financial infrastructure, capital goods leasing and interest-free banking services. The limits placed on MFI investment include restricting its equity contributions in a single business to only three percent of capital, and total investment in all businesses to 10pc.

 

 



By ELLENI ARAYA
FORTUNE STAFF WRITER

Published on October 06, 2012 [ Vol 14 ,No 701]


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