The Development Bank of Ethiopia (DBE), biggest lender of the land, by order of the central bank, is to revise its policy of prime lending modes.
“Due to interest drawbacks, it is believed that the Bank has to protect itself from continuous damage of failed projects.” Esayas Behre, president of the Bank told Fortune.
National Bank of Ethiopia, the central bank, endowed with the power of overseeing banks’ performance including adjusting interest rates on deposits and loans.
According to “Interest rates directive no. 11/2010, the principle around lending is fully liberalized, with banks reserving the right to decide on the number, size and interest rate of loans issued.
An exception to the rule of liberalized rate setting however, is contained in the clause which explicitly states that lending rates on loan rediscount facilities are decided by the NBE.
The new policy revision on interest was communicated to DBE. But sources close to the issue disclosed that directors had second thoughts before implementation.
“The new policy will not bring fundamental change to priority area [export and import substitution businesses] loan provisions,” DBE’s president said. “It is only a matter of time.”
Previously any exporter and business in import substitution that produced the licence and required documents would automatically enjoy the privilege of a lower interest rate for priority areas.
Interest rate for priority areas was 8.5pc per annum.
That is no longer the case.
The new policy treats everyone equally at an entry, with a standing interest rate of 12pc per annum.
According to Esayas, the 3.5pc difference will be put on hold, until the business proves itself successful as per the project plan submitted to the Bank.
“This is tricky and will lead to cumbersome bureaucratic hurdles in the sector,” a senior bank expert commented.
A long-time business customer of DBE shared the expert’s scepticism.
“This, I am afraid, will open the door for corruption, unless the Bank comes up with refined procedures for evaluation of the ‘progress’, it will fall in an individual’s hands,” he opined.
On the other hand he is clear on the merits of the new prudent policy by the central bank, particularly with the growing number of bad loans.
“The central bank usually acts in good faith and creates a conducive environment,” the businessman continued. “The moment it is abused, the counter law comes out, severely defying the very purpose.”
DBE is a specialized financial institution established to promote the national development agenda through development finance and close technical support to viable projects from the government’s priority areas.
Accordingly, its priorities follow the trails of the Growth & Transformation Plan, where as much emphasis is placed upon import substitution as on export expansion to reduce trade deficit.
Government’s priority list includes leather and leather products, sugar, cement, metals, chemicals, pharmaceuticals and agro-processing.
The expert adamantly argued that the new policy leaves these areas compromised.
“The Bank is avoiding taking risks – the core business of the bank,” he said. “Why would a business come to a bank that is not willing to share the business risk?”
He further argued that in a context where commodity prices fall internationally is negatively affecting the export business, to the point where it so volatile, the policy should have been revised in the opposite direction
Commercial banks and the DBE disbursed 75.5 billion Br in new loans to various economic sectors during 2014/15 fiscal year, witnessing a 25.9pc annual increase in line with higher deposit mobilization and collection of loans.
For the year 2015/16, DBE alone announced in August 2015, that it has put aside a 76 billion Br loan for priority projects. This will be disbursed through its 32 branches with each regional branch empowered to extend loans up to 15 million Br in priority area projects. Loans in excess of 15 million Br come under the jurisdiction of the Head Office credit process.
Ethiopia,with 14pc stands at 71 in the world rank of prime lending rates, the average annual interest rates commercial banks charge on new loans. Globally the highest prime lending rate goes as high as 62pc, in Madagascar and as low as .32 pc in the EU region.
“The new policy might possibly push the prime lending rate of the country,” the businessman speculates. “Commercial banks follow the pace of the DBE.”
The President of DBE, however, sees no changes coming either in the industry, or in the priority sector areas’ performance.
“We have finalized all preparation and implementation will begin immediately,” he said. “Sensitization and awareness creation to clear the fog of misunderstanding will also be our prime engagement.”