Parliament has approved a request from the Commercial Bank of Ethiopia (CBE) to issue long-term bonds in order to raise its capital by 26.5 billion Br to 40 billion Br. The request was tabled before Parliament three weeks ago. It is expected that the bonds will help balance the disproportionate growth of assets and capital in the Bank. Last year, CBE’s capital rose by five percent to 13.5 billion Br, while its assets showed a 27pc upsurge to 384.6 billion Br.
With the approval of the request, the Bank will now be able to reach the international standards set by the International Monetary Fund (IMF) that the capital of a bank should reach 44 billion Br.
The Ministry of Finance & Economic Cooperation will issue the bonds on behalf of the government. The bond will mature in 10 years after a five-year grace period, without any interest or tax.
Even though CBE’s total assets are more than that of all the private banks put together, the Bank’s capital to asset ratio is at 3.5pc, which is three times lower than the private banks’ average, making CBE the most under-capitalized bank in the country.
The asymmetric growth of deposits and capital was also another reason for issuing the bond. The Bank’s total deposits doubled to 288.5 billion Br over the past four years. Capital rose by 48pc to 13.5 billion Br over the same time period. The bonds are expected to reduce the risks associated with the Bank’s ability to meet its obligations to its depositors.
Despite the possible benefits of the bond for the capital structure of the Bank, CBE should use the bond to raise it paid up capital, which has been stagnant since 2012/13, according to Abdulmenan Mohammed Hamza, an analyst at London Portobello.
During the debate session in Parliament, a question was raised about whether the raising of CBE’s capital would adversely affect the private banks.
“Our focus is to participate in mega projects rather than competing in small projects with the private banks,” said Brehanu Abebe, chairman of Parliament’s standing committee for budget and finance.
Three weeks ago, Bereket Simon, CBE’s board chairman, made it clear that the issuing of the bond had nothing to do with private banks.
“The intention is not to compete with private banks,” he told Fortune three weeks ago. “Every bank has a distinct target.”
The capital increase is a wake-up call for private banks to do the same, according to a banking industry veteran with decades of experience.
“The raise might widen the gap between private banks and CBE,” said the banking veteran.”It will raise CBE’s ability to lend more and increase customers’ confidence in the Bank.”
Last year, CBE disbursed loans of 33.7 billion Br, slightly higher than the amount disbursed by all 16 private banks in the country.
“This gap might widen as CBE’s capital soars,” said the expert.
Currently, the capital of all banks has reached over 43 billion Br. CBE’s share of the total capital is around 31pc. Founded 50 years ago, CBE amalgamated with the Construction & Business Bank a year ago, which raised its capital by more than half a billion Br.
Trends of profit before tax over the past five years reveal that CBE is leading the financial industry by controlling close to 20 pc of the industry’s profit before tax. In the same period, the Bank’s profit increased annually by 41pc. However, the profit growth recorded during 2015/16 is four times lower than that of the five years average.