A BANKER’S NOTION-Do Margins Rightly Absorb Risks?

Weeks after the 12-year-old Ethiopian Bankers Association (EBA) installed a new face in its highest position, Berhanu Woldesilassie, president of Dashen Bank and a member of EBA’s board, remains hopeful that it can evolve into a viable supporting institution.

A certified manager from the International Certifiers for Professional Associations (ICPA), Berhanu set foot into the banking industry in 1978 when he first joined the Commercial Bank of Ethiopia (CBE) as a clerk. He gradually assumed the post of inspector during his 18-year-stay at the CBE.

Berhanu’s first encounter with the evolving private banking industry came in May 1996 when he was employed by Dashen as a credit officer. In November of the same year, he was appointed as deputy manager for finance. After working in this position for another six months, he was promoted into the position of credit manager.

Seven years later, he climbed up the ladder to vice president for operations. And four years later, he was transferred to the position of vice president for resource management. After this, he was able to clench the helm to become the president of the Bank.

Berhanu received his Bachelor’s Degree from the Addis Abeba University (AAU) in 1988. In this interview with BINYAM ALEMAYEHU, EDITOR-IN-CHIEF, Berhanu discusses the contribution of the letter of credit (LC) service, the decrease in gains from foreign exchange dealings and the fierce competition in the private banking industry. Excerpts.

FORTUNE: The letter of credit (LC) service, which contributes to 35pc to 40pc of Dashen’s income, is one of the crucial services you offer. But how reliable has it been, considering that much of it has to do with buyers and sellers?

Berhanu Woldesilassie: All activities at Dashen are guided by prudently drawn out policies and procedures. The international banking operation, as a core banking function of Dashen, is also guided by policies and procedures.

The policies and procedures guiding our international banking operation incorporate all relevant directions given by the Central Bank and also adheres to international standards. This involves uniform customs and practices, formulated by the International Chamber of Commerce.

Q: Margins play a decisive role in the service. Are the margins on LC provisions similar or do they involve differences?

In our case, the letter of credit can be availed with or without a margin. It all depends on the applicant’s position.

If the applicant is a well-organised and highly liquid company, with a strong financial standing, it can apply for zero margin. But most of our customers do not have the financial capacity to open the LC at a 100pc margin. In this case, they apply for lesser credit margins. The approval depends on the credit analysis outcome, which determines the credit worthiness of a particular customer.

When the credit analysis outcome indicates that the customer is financially strong, with good credit rating, a better financial standing and a  satisfactory credit record, the LC margin to be applied will be lower.

For those customers who are more reliable and have proved their reputation, we charge lower margins. For those who do not fulfill these criteria, we charge more.

The margin also depends on the type of product. In some cases, where we are presented with risky products, we may not even allow any margin at all. There are goods that can be imported with a low margin, as well as those that can be imported at higher margins.

Q: Problems arise when the goods do not have any market or when the products are not sellable. In such case, buyers are reluctant to pay the unpaid margin and collect the document. What do you do?

To avoid that risk, we impose higher margins. For marketable products, the margins will be lower. But the credit worthiness is also considered before making decisions.

The average margin is between 25pc and 30pc. This is common to the majority of goods and to most of the customers.

For riskier ones, we go up to 50pc or even 60pc. In the worst cases, we push the margin up to 100pc and may not allow any margin for customers who are not reliable.

Q: When is the importer required to pay interest?

For LCs that are open with no margin, we do not calculate interest. Otherwise, once the paying bank assures that the conditions of the LC are fulfilled – all documents are clear and complete in accordance with the LC terms – they charge our account and pay the money to the exporters.

This means that the unpaid margin is paid on behalf of our customer through the paying bank. At this time, we begin to calculate our interest.

If, for example, a 30pc margin is allowed, the remaining balance of 70pc is paid to the supplier upon the presentation of documents. Beginning from that specific date until the time the document is collected by the buyer, the interest should be calculated.

The opening date is different from the interest calculation date. Interest starts on the date our account is charging.

Q: Various cases of risks could be mentioned related to the service. Some customers do not pay the unpaid margin on time.

We deal with documents. The documents are our guarantee. The importer will not have right on the goods unless he collects the documents from us. To get the documents, he has to pay the unpaid margin.

We do not have much experience of this problem. But sometimes it can happen. The recourse when it happens is clearing the document through customs process because we have the right. We can endorse.  We clear the documents and sell the goods.

But these occasions are rare, because initially we conduct careful evaluation of the customer. We do not just give LC margin to people we do not know. They are expected to have some business experience.

Q: What about goods unknown inEthiopia? Do you give LC margin to those?

No, we do not do that. For new products, we may not be encouraged to give LC margin. Even when we do, it is at significantly higher margins.

There are other types of difficulties faced, like the inconsistent description of goods and errors in insurance documents. Sometimes changes included in the invoice may not be authorised in the credit.

We face some of those things. But it should be remembered that it is governed by the LC terms and conditions. If there is any discrepancy in the document, the correspondent bank does not have the authority to charge the account. The buyer here must be advised.

Q: Once the two banks have agreed, the LC margin must be paid to the exporter, even if something happens to the good. Doesn’t this increase the risk?

Many things can happen in the process. But the document often specifies the various conditions that will be considered in the process. There are many details which we cannot exhaustively describe. What matters is that buyer and seller must agree. The banks are  intermediary in their role.

Q: Fierce competition in the industry, mainly demonstrated in the scrambling of trained and professionally experienced manpower, has become a bottleneck for the bourgeoning industry. Dashen Bank, busy with a spate of expansion, has closed the 2012/13 fiscal year with less profit than the previous year. Is there any recourse to disengage from stiff competition in human resources?

Competition is always there. In fact, we expect that it is going to get even tougher. But our policy is to grow our own tree.

The policy we follow, regarding human resource mobilisation, is hiring a high quantity of professionally trained manpower from colleges and give them intensive training. They become accustomed to the culture of the Bank through a continuous process of development.

While opening the 31 area banks, we never went to the market in search of trained and experienced managers. We trained them ourselves.

We are also thinking about alternative ways. We should not be limited to opening branch offices.

Last year, we have opened 30 plus branches. This year, maybe, we will open fewer branches. The future trend does not show this. It rather points to alternative service outlets, like mobile banking and agency banking. We are undertaking projects to launch these two. We have deployed 132 ATMs all over the country.

Q: With 737.2 million Br, Dashen is a well capitalised bank. How will the Bank resolve the adverse effects of capitalisation?

We believe that we still have to raise our capital. But we have to do that in a prudent way.

We do not consider capital on its own as a competitive advantage. We rather value capital in terms of its contribution to the overall growth of the Bank.

Recently, during the annual shareholders meeting, the paid-up capital was raised to 1.1 billionBr.The registered capital is 2.2 billionBr.

Q: Why has your performance in the area of foreign exchange dealings declined? Gains on foreign exchange dealings have gone down to 258.44 million Br and service charges and commissions have decreased to 399.74 millionBr.The decrease in service charges and commissions is disappointing. Doesn’t this require an appropriate strategy on your part?

But earning from exchange is not an acceptable income. It is an income generated as a result of depreciation in value. It is the exchange rate between the dollar and the Birr, which is constantly decreasing, that drives it.

As bankers, we do not appreciate this. What we appreciate rather is the revenue as a result of increased service charge and commission.

On the decrease in our foreign dealings, last year, we can say that there was a significant amount of transfer that we received for a specific purpose, which is not repeating. The large transfer amounts we gained in the previous year increased the income that we generated from our international banking operation.

But, as the nature is not repetitive, last year’s figures do not show this. But it is not a trend created as a result of declining business. Sometimes transactions affect you in a positive or negative way.

Q: Banks are operating under very stringent conditions. We can take the National Bank of Ethiopia (NBE) directive ordering private commercial banks to purchase treasury bills to the value of 27pc of their loans disbursed, since July 2010. How will you sail through this?

The strategy we follow is the enhancement of resource generation. To overcome these challenges, we have to increase access to deposits. This will help us to grow, whilst satisfying the requirements that the regulations oblige us to meet.

It is only in this way that we can grow. That is something done for the benefit of the nation. As responsible corporate citizens, we have to support it.

But we also have to balance so that we can meet the challenges we face in this direction. So that brings us to work more on deposit mobilisation.

Q: Is the Ethiopian Bankers Association (EBA), where you hold a seat on the Board, doing enough? Some in the banking industry harbour doubts on its effectiveness in representing the voices of bankers in a solidified manner.

The Association has its own roles. There are many things that it has done. For instance, it has created an environment to have good communication with the Central Bank.

It conducts various studies focusing on the problems faced by the banks. Not only conducting studies, but it has also submitted them to the concerned authorities for remedies.

Q: Have any of its efforts come to fruition?

To some extent, yes. I would say it is doing its level best.

Q: Like what?

The forum, in particular, has helped to create a smooth relation with the Central Bank and should be appreciated. Issues affecting banks have been brought to the floor of this forum and discussed, thus helping us get closer to the remedies.

The various regulations issued by the government affecting banks have been discussed. Had this association not been there, none of these would have materialised.

Q: But its visibility is questioned, as banks try to meet the challenges or air their views independently, in times like their annual assemblies. Where does the Association fit in?

But I beg to differ here. To be frank, many of the appreciable works have been conducted with the help of this Association.

There are a number of activities conducted focusing on the problems faced. Of course, there are issues the Association has not so far addressed.

All issues raised cannot be resolved in one go. We have to appreciate the good works done.

I disagree with those, who make it look like the Association is inactive. It is active in a way it can be. It has, for instance, developed a strategic plan, which is reviewed by the Board.

Published on December 29, 2013 [ Vol 14 ,No 713]



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