Political Uncertainty Pushes Banks to Massive Liquidity

It is not common to hear business owners being hesitant to apply for loans. In addition to the usual cumbersome process of obtaining letters of credit and lack of foreign currency, they are shying away from borrowing as a result of an unsettled political situation, higher interest rates and a less than satisfactory economy.

“I do not want to borrow any money from the bank,” says one of the machinery importers in Ethiopia. “Letters of credit [LCs] are not approved on time, and we are paying interest without being able to use the loans.”

Over liquidity is growing as deposit mobilisation grows, reinforced by a growing population ans as more and more businesses are leaving their money in banks worrying industry’s players.

It has pushed the average loan-to-deposit ratio to 65.5pc for private banks in the past fiscal year, according to unaudited financial reports. Given the banking industry’s record, this may not seem alarming, but industry players believe that it deserves attention.

“It shows that some banks have hit over 70pc,” says an executive manager at a middle-level bank. “These banks are very liquid, and they need scrutiny.”

The total deposit of private banks reached 277 billion Br, which includes saving, and demand and time deposits last fiscal year. This figure stood at 202 billion Br during the preceding year.

Younger banks such as Bunna Bank have recognised the effects.

“Unlike previous times, the banking industry is experiencing liquidity and a decrease in the number of borrowers,” says Eskezia Mengiste, chief of operations at Bunna.

Other players in the industry do not see a significant change when it comes to deposit interest rates.

“We aggressively mobilised deposits in the first quarter. Thus, the banks might be liquidized,” Asfaw Alemu, president of Dashen Bank, says.

He also does not believe that there is a decline in interest for borrowing but only a recent directive that limited the number of borrowers.

Soon after the devaluation of the Birr by 15pc against a basket of major currencies last fiscal year, a 16.5pc credit cap on outstanding loans was instituted by the National Bank of Ethiopia (NBE).

Together with a two percentage points increase to deposit interest rates to seven percent, the directive was intended to arrest inflation by limiting the amount of money in circulation. The ceiling on credit caps did not extend to manufacturers and exporters, though.

“As the regulation was set until the end of last fiscal year, there were challenges then,” Asfaw says. “Tax seasons will make the coming terms more challenging, unlike what we are witnessing.”

The executive at a mid-level bank shares Asfaw’s general assessment of the situation in the banking industry.

“At this point, we have close to 400 million Br cash for day-to-day activities,” he says. “With over 60pc in long-term loans, reserves and government bonds, the current liquidity is normal.”

The government, to absorb excess liquidity in the banking system, issues bonds for banks. The major financial instrument through which the government achieves this is treasury bills.

Manufacturers do not agree though. Although some say that they still have the interest to borrow, wrongful evaluation schemes of borrowers are pushing them away.

“The banks are engaging in unprofessional transactions,” CEO of a sesame producer and exporter firm, tells Fortune. “They have been advancing loans to businesses without carrying out the necessary due diligence.”

The industry players share this concern.

“The banks are challenged to find quality and genuine borrowers,” says Asfaw. “What we are trying to do is scrutinise the borrowers to identify defaulters.”

Given the challenge to find suitable borrowers and the credit cap of last year, some banks are turning their attention increasingly to non-interest exchanges.

“The banks are set to follow a different strategy to rectify the problem,” says Eskezia.

The banks non-interest incomes come from remittances and transfer fees. They also plan to decrease interest rates for time-deposits. The private banks used to pay up to 16pc of interest for time deposits, which has lately hit as low as 12pc.

Yet experts find that such new strategies are necessary since they are unconvinced by the claim raised from the industry’s players.

“The current liquidity problem, if it exists, will go away in a short time,” says Habib Mohammed, a financial industry analyst with a decade and a half years of experience.

The rise in the rates of time deposits and high borrowing interest rates are the primary culprits, according to Habib.

Business people agree here.

“Because of the high-interest rates, businesses are reaching the point where they couldn’t afford to pay back the loan,” an exporter told Fortune.

Leaders of the business community also stress the weakness of the economy and political instability as major deterrents. These are concerns the banking industry recognises.

“The past few years have seen unprecedented uncertainty,” Asfaw says. “But with recent changes, we hope such problems will be addressed.”

The banking industry has seen some reforms over the past year after the appointment of Yinager Dessie (PhD) in place of the long-serving governor of the central bank, Teklewolde Atnafu.

Key moves applauded by the banking industry, and introduced by the Macroeconomic Committee led by the Prime Minister, included raising interest rates by two percentage points to five percent for central bank bonds, where private banks are compelled to purchase 27pc of the gross loans they disburse.

The bond fell under criticism after the central bank increased deposit interest rates to seven percent.

Another was upgrading the central bank’s purchase rates for 30pc of the foreign currency the private banks earn to mid rate.

Yet analysts argue that given the slow economy and high borrowing rates, the private sector might fail to pay its dues in time.

“The banks should think about the high-interest rates they have in place,” Habib said. “Some businesses may become defaulters.”






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