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BusinessEthiopian banks struggle to process L/C contracts

Ethiopian banks struggle to process L/C contracts

A severe shortage of foreign exchange, that has plagued the economy so far, has further led to banks struggling to find international go-between/correspondent banks to process payments in Letter of Credits (L/C), The Reporter has learnt.

It is to be recalled that some banks were on the verge of defaulting until the National Bank of Ethiopia (NBE) intervened last year. The central bank availed USD 300 million to commercial banks.

Back in 2018, Philippe Le Houerou, Chief Executive Officer of the International Financial Corporation (IFC), a private sector arm of the World Bank Group, and Yinager Dessie (PhD), Governor of NBE, signed agreements seeking to guarantee imports to Ethiopia. With the growing import bills swelling to around USD 20 billion a year, banks are struggling to secure confirmations from foreign banks. When asked about the cases banks, Yene Hasab Tadesse, manager of Forex Statistics at the NBE told The Reporter that she has no information about that. The allocation of hard currency to local banks, Yene Hasab said, depends on the availability of reserves.

From the banking industry, the Commercial Bank of Ethiopia (CBE) stands out as a leading financier, accumulating most of the unpaid L/Cs. Abie Sano, having recently assumed the leadership of the bank, opted not to comment on the matter saying, “I am not aware of what you are saying.” But, many banks are now having a difficult time to process and confirm their L/Cs due to dwindling international go-between banks which are willing to accept their business based on L/C system.

Basically, banks open L/Cs on behalf of importers. When the banks open L/Cs, they must obtain confirmations from external or corresponding banks, where the importers are shipping from. The foreign banks usually assign confirmation lines set for local banks. However, many commercial banks failed to settle payments within the maturity time of the L/Cs. Hence, the corresponding banks arduously started to require a 100 percent cash deposit as a guarantee to proceed with the confirmations of the L/Cs.

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Only once the equivalent amount is transferred to the corresponding banks, the shipments of goods are authorized to proceed.  L/C remains the only singlehandedly utilized international trade instrument of payments across the banking sector in Ethiopia.

IFC estimates that every year, Ethiopian banks end-up with outstanding L/C accrued between USD 200 to 300 million payable to foreign banks. However, until last year, no defaults were recorded by Ethiopian banks except for the eventual delays.

Bank in 2016, NBE had issued a directive that bans the approval of L/Cs without collecting a minimum of 30 percent of the value of the L/C in cash up-front. Also, NBE specified priority areas eligible to receive hard currencies on a first-come-first-served basis.

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