The issue of poor access to finance was top of the agenda when the Ethiopian Public Private Consultation Forum (EPPCF) presented their study, last week. There were nine major challenges listed, along with recommendations as to how the sector could shift to improve performance. The governor of the National Bank of Ethiopia (NBE), presidents of Banks, experts, manufacturers and representatives of the business sector were all present to discuss the proposals. Although all parties were able to agree on certain aspects of the study, there was room for disagreement in some areas also, reports FASIKA TADESSE, FORTUNE STAFF WRITER.
The Ethiopian Public Private Consultation Forum (EPPCF) of the Ethiopian Chamber of Commerce and Sectoral Association (ECCSA) has disclosed a problem of access to finance. This has emanated from the liquidity problem in banks, which has been caused by the 27pc bond purchase requirement.
During the public private dialogue forum, which was held on Friday June 6, 2104, at the Sheraton Addis Hotel, the consultation forum presented a study to examine the policy and regulatory constraints on access of finance for private investors.
The study lists nine major challenges of the business sector for access of finance, along with recommendations. Eyob Tekalegne, coordinator of the consultation forum, presented the study for the attendants of the forum, including Akalewolde Atnafu, governor of the National Bank of Ethiopia (NBE), the presidents of Banks, experts, manufacturers and representatives of the business sector.
The points raised by the study were administrative and regulatory hurdles in obtaining loans and foreign exchange, the absence of a capital market, the vague definition given to investment funds, liquidity problems at banks, finance lease issues, mobile banking problems and the discouraging process of investment licensing issuance as major challenges that the business sector is facing.
As to the constraints of access to foreign exchange, the directive that imposes 100pc Letter of Credit (L.C) for importers was mentioned as a major cause for the short fall of exporter capital. The study asked for the amendment of the directive to deduct the rate to 30pc or cancel it completely.
The point was rejected by the explanation of Bekalu Zeleke, president of the Commercial Bank of Ethiopia (CBE), stating that the banks are asking only 30pc in advance payment for Letters of Credit based on the business company’s profile or the connection with the bank.
The other problem motioned for the shortage of foreign currency was the pre-advance payment of imports for foreign companies, which is capped not to exceed 5000 dollars. The study explained the increment of the dollar exchange rate became a constraint for the importers and recommends that banks increase the rate.
Liquidity problems at banks caused by the 27pc bond purchase from the NBE to provide loans, along with the inconsistence of loan portfolios at the banks, is also mentioned as a major constraint for banks.
Moreover, the limitation of the 40pc loan stipulation for short term, and the three years duration grace time to pay back the loan, should be improved to a year, recommends the study.
The other recommendation stressed that the bond purchase rate should be cancelld or decreased to a lower rate.
Eyob also emphasises in his presentation that the specifications of collateral to give loans by the banks should shift its dependency from vehicles and construction to other capital assets by questioning the rating system of the banks.
The directive that excludes foreign currency stipulation to micro finance and the prerequisite which capped the loan provision of the micro finances by one percent, said it led the financial institutions to be subjugated by only four institutions, and recommends amending or cancelling the directive.
The absence of a capital market by selling bonds and shares meant that investors were dependent on loans as the only way to access finance, says the study. The study strongly suggests the establishment of the capital market in the economic system.
The capability of laws and regulations for joint venture deals on equity discourages foreign investors from participating in an area that would support the private investor for access of finance. The presenter, Eyob, recommended for the issuance of laws to facilitate the equity fund functionality.
Bekalu admitted that the rating of the collateral for the loan provision has a problem, because the banks are rating based on the price of the collateral not on the existing market. He also accepted the gap in the financial lease system and mentioned they are working with the government to establish a Lease Company.
But he disagreed with the study’s mentioned problem of mobile banking. He countered: “rather we are facing a problem because investors are not using the mobile banking system, whereas we pushed our capacity to 18 million”.
On his side, Akalewolde admitted that the lower financial capacity of the country is the major challenge for investment and suggests the solution is increasing the savings rate and income of an individual.
“The financial flow of over 50pc is generated from loans, Foreign Direct Investment (FDI) and grants from outside of the country,” said Akalewolde. “This shows that we failed to provide the level of finance wich the economy is demanding.”
Along with the amendment to the bond purchase rate, he also rejected the recommendation of increasing the loan rate to financial institutions from one percent by mentioning – “it will crash with the aim of micro finances established, to support the rural area farmers and they will serve others as banks”.
He claimed that the study’s finding, which stated that there is a liquidity problem at is groundless and argued that the financial capacity of banks is increasing.
“The number of people who obtained loans from banks was 89,000 in 2011,” said the Governor. “It has now reached to 147,000, since last March”.
He also explained that the saving rate of an individual raised form 20pc in 2011 to 85pc in March 2014. The capacity of banks in providing loans has also reached 263 billion – an increase of 110pc annually.
Nevertheless, he accepted the recommendation of the amendment of the 5,000 dollars in advance payment of importers to the foreign country of their supplier, “if it really is a constraint for the businesses, we will review and make amendments on it”, he added.
He also agreed on the establishment of the new loan provision system for small financial institutions.
He strongly opposed the recommendation of the amendment on the bond purchasing rate – “saying the 27pc should be cancelled is equal to saying that industrial led economic policy of the country should cease”, he commented.
The financial preparation proclamation, which will make the loan provision service of all banks uniform, was prepared by the Ministry of Finance and Economic Development (MOFED) and sent to the House of Peoples Representative (HPR) for approval, the governor of the NBE told Fortune.
Finally, the public private forum announced their common stand on the improvements of the 5,000 dollar cap of advance payment by importers for the foreign company supplier and the establishment of the special credit line to small and medium Enterprises. They rejected, however, the decision to decrease the 27pc bond purchase rate, as well as the extension of short term loan payment time from three years to a year.
The forum also concluded the decision of the establishment of a special committee, which will work on solving the problem mentioned by the private sectors.
The Ethiopian Public Private Consultation Forum was established in 2011. Up to now, it has organised eight public private dialogue forums on the business environment reforms, such as taxation, the registration process of business licenses and the issue of dividend tax.
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