The National Bank of Ethiopia (NBE) has discovered that the account of Lion Insurance Company was overstated by 13 million Br in 2015/16 owing to the understatement of the Firm’s legal provision during the same period, resulting in a loss in the just-ended budget year.
This is a major setback for the 10-year-old company that declared 15 million Br of net profit during the 2015/16 fiscal year – 13pc lower than the previous year. Although the management of the Bank refrained from disclosing the amount of loss, this will be the third time that the Firm reports a loss since its establishment.
The Central Bank unveiled the overstatement half year after the approval of the audited report by the shareholders as well as the Bank itself.
Initially, the Central Bank, in its quarterly assessment of commercial banks, seized 30 million Br in the account of Lion that was recorded as an income last year instead of being legal provision.
Later on, this was reduced to 13 million Br after the Bank made a reassessment, implying that the overstatement had doubled the initial estimate.
Furthermore, to compensate the overstatement, the Central Bank has ordered the Firm to make an adjustment this year, creating a financial distortion in the accounts of the Firm.
“NBE itself made an accounting error while calculating the overstatement,” said Negasi Yoseph (PhD), chief executive officer (CEO) of Lion, acknowledging that the overstatement is true. “The Bank, in the first assessment, assumed that we have not put aside anything as a legal provision.”
However, the actions of the Central Bank seem to be an unwise move for Negasi despite the fact that it made an alteration.
“The action of the Bank is not logical,” he said. “The regulatory body is forcing us to put a provision for a policy for which we are not liable.”
Since 2015, all insurers were directed by the Central Bank to put a 100pc legal provision for every pending case lingering at courts. The main aim of the direction was to reduce unforeseen risk arising from losing the case.
“Although this will bring more strength to the Bank, I don’t think it should exceed 50pc,” Negasi said. “In our case, we put a provision only for the amount for which we are liable.”
The action of the Central Bank also seems unfair for banking analysts.
“There are accounting policies and procedures regarding maintaining provision for legal cases,” said Adulmenan Mohammed, a financial expert with 15 years of experience. “To keep provision for legal cases, there should be an assessment of the outcome of the case and the magnitude.”
With a five percent market share, Lion has collected a premium of 354.3 million Br during the past fiscal year from general insurance policies such as liability, motor and engineering class of businesses.
“If there is sufficient reason to believe that Lion will lose the case, adequate provision should be held,” Abdulmenan said.
Despite our repeated efforts, the representatives of NBE were unavailable to comment on the issue.
Source : Fortune