Another Liquidity Crisis within Three Months!

Can the private commercial banks sustain the blow from runaway of deposit to the state-owned Commercial Bank of Ethiopia (CBE)? How much longer before they start to get scared enough to run on banks, questions Zafu Eyessuswork Zafu, the veteran finance man in the country. He can be reached at

Following growing complaints and lamentations about the acute shortage of foreign exchange in the country and the long cue for allocation (waiting period of up to six months or more), it was not such a long time ago – between January 4 and 11, 2017, to be more precise – some two billion dollars was made available through the Commercial Bank of Ethiopia (CBE). The money was made available to a market that had been long starved of foreign exchange at terms more stringent than previously existed – like having to pay 100pc cash in advance for opening letters of credit (LC) instead of the usual 20pc to 30pc margin.

One of the immediate impacts of such a dispensation was the transfer of vast sums of cash from the private commercial banks to the CBE with the inevitable consequence of seriously jeopardizing the liquidity positions of those banks. Quite a number of them had to request some of their substantial customers to refrain from issuing large payment orders as they were short of cash.

In many highly monetized economies, such a state of affairs could have prompted a run on banks with disastrous consequences.

The private commercial banks whose liquidity positions had been severely affected, had to borrow cash from the supervisory authority, the National Bank of Ethiopia (NBE), in order to meet the liquidity requirement of 15pc of Net Current Liability as set out in in a directive issued in 2014. Adding insult to the injury done already, the central bank offered cash advances at the highest lending interest rate of 16.5pc, which commercial banks charge their customers.

Would not this be tantamount to doing the same thing that any ordinary “rent collector” would do? Should not the role of the central bank be to assist the banks to alleviate their sudden liquidity trauma by availing immediate stabilization cash advances at “softer” terms and thereby staving off any possible bank scare by the public?

As if that occurrence of early January 2017 was not scary enough, another one billion dollars was made available to the market between March 18 and 31, 2017, again through the state-owned Bank alone. It was sold on the same terms as that of last January. The private commercial banks were once again rattled and had to scramble for cover – having to offer very high interest rates to depositors. Some of the banks remain unable to meet the minimum liquidity ratio required by the regulator.

Some of them became adamant and decided not to borrow from the central bank to mitigate the crisis as they did the previous time, choosing rather to face whatever consequences were to follow.

And what can the central bank do when it knows that the crisis was being fomented by its failure to regulate fairly and professionally? What can it do when the crisis is no more an aberration but a systemic failure brought about by its refusal to play the role of an impartial regulator?

Private commercial banks are confronted once again by what appears to be an intended and calculated measure that could foment not only an atmosphere of unpredictability. It would also cast a grave doubt about the wisdom and attitude of policymakers towards the private sector. Instances such as this could be seen as a reflection of a deep-seated misunderstanding of the positive role a wisely and skillfully regulated industry could play in the nation’s ambitions for rapid, equitable and sustainable growth and development.

If indeed the National Bank of Ethiopia is driving the policy for the country’s financial sector, and if indeed it is said to be guided by wisely and carefully planned, more inclusive, balanced and equitable rationale, is it not time for the regulator to be more transparent, consultative and predictable than it has been so far? What about the Association? What role does it play in influencing the future development of the industry? What about the boards of the banks? Do they have any role at all in the matrix of the development of the banks they are expected to lead as representatives of the shareholders?

The prevailing national regulatory and structural dispensation of the banking industry would appear to be characterized more by the conspicuous disconnect, between the various stakeholders than by well-informed, enlightened, coordinated and proactive thrust towards to and rationale for a banking industry worthy of the profession and the enormous trust reposed in it.

Perhaps a less harmful but no less misguided anomaly currently happening in the banking sector is the unfair “cut-throat” competition for foreign exchange that most banks are engaged in. Television and radio stations as well as the print media are replete with what I consider is an intense and yet misguided campaign by the majority of the commercial banks in the country to attract the most they can of the foreign exchange coming into the country.

The essence of the campaign is to persuade prospective recipients of foreign currency remittances through them (advertising banks) by offering gifts ranging from sedan automobiles to general cartage trucks, wide-screen televisions to deep freezers and refrigerators, smartphones to laptops. Some had even promised to pay cash to such recipients. From the list of gifts on offer by some banks and the costly media campaign they launch, it is millions, if not tens of millions of Birr, such banks are prepared to spend to obtain hard currency – albeit at effective rates higher than those fixed by the central bank.

The campaign is misguided because it neither increases or adds to nor helps to identify new sources of foreign currency coming into the country. It simply increases the effective cost of the currency above and beyond the rate of exchange the central bank fixes. Doing so not only violates the rules of the “managed” exchange rate regime but also constitutes yet another “depreciation” mechanism of the Birr against foreign currencies.

Concomitantly, the practice contributes to an inflationary pressure coming through the back door.

I recognise the legitimacy of government supervision or even regulation of the financial sector. But I also believe such supervision to be knowledgeable, fair and proactive.

By Zafu Eyessuswork Zafu
He is a the veteran finance man in the country.

Published on Apr 14,2017 [ Vol 17 ,No 884]



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