It is not easy to draw a line on the boundaries between agencies. These have been a cause for inefficiency, confusion, and unresponsiveness.
State-owned financial institutions are real manifestations of these problems.
The case of the Construction & Business Bank (CBB) revealed the confusion that could be caused by the overlap of a mission. CBB had been doing similar function as the Commercial Bank of Ethiopia (CBE). It resulted in the neglect of CBB by policymakers due to overwhelming attention afforded to the CBE.
Inevitably, poor performance had been its fate. And finally, it was swallowed by the CBE.
The Development Bank of Ethiopia (DBE) is another example. Both DBE and CBE have been dealing with project financing for many years. Why such overlap existed has been questioned over many years. Recently, this task was exclusively sent to its rightful place, DBE.
DBE was established for supplying funds for long-term projects whereas CBE is tasked with providing loans for working capital. Over the past decade, a huge overlap has been created as CBE has drifted from its original mission. It has become a bank with multiple functions. It finances mega energy generation projects, rail networks, large plants, housing projects, and agricultural loans. This is not to mention its role as a financier of other government financial institutions.
The financial report of CBE shows that only corporate bonds for energy and rail projects account 42.4pc of total loans, advances and corporate bonds of the Bank. If other types of long-term loans are considered, the figure could be much higher. Confusingly, DBE is involved in similar lines of lending despite preferential terms.
As a result, putting a clear demarcation between them is hard.
Recently, senior managers at CBE got one more challenging job. They are assigned to provide long-term loans to homebuyers when the various housing schemes commence delivering houses.
It is clear that considering the urgency of the matter, CBE was selected as it has the organisation, branch networks, and resources to handle registrations of a significant number of homebuyers. Yet, the new role is not only overstretching CBE making it lose its focus. Now, it is engaged in many unrelated operations, possibly one of the reasons for non-delivery of the houses which have been completed to date.
In fact, serious problems have not cropped so far as CBE has been at the earlier stage, registration and deposit collection, of the whole process. Both are relatively easier in comparison to what will follow. When homebuyers begin to receive their houses, CBE should brace itself for the tough job of dealing with hundreds of thousands of them.
More than a million homebuyers have been registered for various housing schemes. No doubt the number will increase in the future. Identifying eligible borrowers, dealing with their title deeds, deposits, loans, repayments, conditions of the properties, court cases, repossessions upon default or for breaking conditions of a loan, auctions, and sales of repossessed properties are heavy responsibilities.
I believe CBE is far from having sufficient experience to handle these tasks, for they require specialist skills, resources and organisation.
Housing loans have their unique future. The nature of the operation and the risks of this line of lending is different from commercial lending. This industry is marked by a large number of similar types of borrowers, many of them in precarious employment, long repayment periods, and dependency of repayment on the credit worthiness and income of the borrowers.
CBE should refocus its attention at what it was established for, including the need to offload housing related operations. Spinning housing related tasks off CBE and handing it over to a new institution would help the state-owned bank focus on its primary mission.
Setting up a new housing bank, which deals with housing finances would stir a new sector: mortgage and related activities. Moreover, if crisis strikes or other operational messes turn up, handling a separate institution is much easier than untangling CBE.
The new institution could have different financing sources, deposits from homebuyers, its capital, long-term loans from CBE, private financial agencies and from the public. As it will be engaged in the supply of long-term loans, its financing sources should be tailored to the nature of its operation.
The opening of branches across sub-cities, training employees in mortgage financing, developing proper systems and structures would enable the new institution to better manage the financing of the various housing schemes. The nature of such a bank is different from existing commercial banks; the central bank can give directives in relations to doubtful loans, capital adequacy, valuation of property, and arrears.
The central bank can also create an enabling condition for investors, who have been put off by the huge capital requirement for commercial banking, to engage in this area of financing.
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