Commercial banks in Ethiopia are witnessing an increase in non-performing loans (NPL) as customers based in the embattled Tigray region are unable to repay their loans.
Ever since war broke out between the forces of the defunct Tigray People’s Liberation Front (TPLF) and the Ethiopian National Defence Forces (ENDF) almost three and half months ago, business has been at a standstill in the region with banks being forced to close their doors for over a month.
The ongoing fighting in the region, coupled with the economic uncertainty, made it difficult for banks to collect loans and follow-up financed projects, a situation which is raising their non-performing loans. Some banks are even facing difficulties to discover the whereabouts of their customers, according to sources.
Especially banks which have relatively higher presence in Tigray have been highly impacted by the conflict. This includes Commercial Bank of Ethiopia, Wegagen Bank, which was highly linked with the Endowment Fund for the Rehabilitation of Tigray (EFFORT), a conglomerate of businesses that were owned by the TPLF, and Lion Bank, which was in the midst of constructing its headquarters in Mekelle.
“Every one of us has been affected by the fighting. No bank is immune to the problem,” Getachew Solomon, President of Lion Bank, told The Reporter.
The two biggest private banks, Dashen and Awash, have also been highly impacted by the fighting and they are likely to witness an increase in bad loans since they were not able to collect loans from the region.
“While collecting loan is now unthinkable in the region, banks are left between a rock and hard place. Some of us don’t even know the whereabouts of our money collected by branches in the region,” said a Senior Executive working at one of the private banks.
Before the conflict, the NPL of Wegagen Bank was at 5.3 percent, the highest amongst all commercial banks and three percentage points higher than that of the recommended rate of the National Bank of Ethiopia (NBE), while Lion’s was at 4.6 percent, the fourth highest in the industry.
Sources indicated that the figure will now jump more than twice the previous amount.
Of more than 6,124 branches of commercial banks throughout Ethiopia, 10 percent are located in Tigray, where all financial institutions have a presence.
The region, where around six percent of the country’s population lives, accounts for six percent of farm output and eight percent of export earnings.
Despite concerns over an increase in bad loans, however, Cepheus Capital, a private equity firm, said a major system-wide NPL problem also does not appear to be emerging at private banks (aided in part by central bank forbearance). “Even the likely uptick in NPLs this coming year should be one that most banks can cope with given their low initial (NPL) starting positions, good provisioning levels, and on-going growth in their lending books. A credit crunch is thus not on the horizon either for 2021 or 2022,” Cepheus Capital explained.