Thursday, February 29, 2024
BusinessBanks call for amendment to mandatory bond

Banks call for amendment to mandatory bond

Interest-free banks notify the central bank of their inability to fulfill the requirement

Commercial banks urged Officials of the National Bank of Ethiopia (NBE) to amend the mandatory rule, which demands financial institutions invest one percent of their outstanding credit on a bond issued to support the Development Bank of Ethiopia (DBE).

Through their interest group, Ethiopian Bankers’ Association, the financial institutions communicated their concerns to the regulatory body in a study they conducted for months. It is a move that followed the introduction of a series of directives which pushed them to operate under tight liquidity conditions.

The central bank compelled banks to invest in the one percent bond scheme almost two months ago, despite the outstanding financial performance registered by the DBE, which netted a gross profit of 3.2 billion birr in the last fiscal year.

A decision that left the leaders of commercial banks disappointed, the rule coincided with the adjustment made in reserve requirement from five percent to 10 percent. The adjustment is another mandatory requirement bank executives want to see amended.

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The Association contested the rule as it demands commercial banks allocate one percent of their outstanding credit, instead of the annual aggregate, to buy the bond. Dubbed as DBE Bond, it bears an interest two percentage points higher than the minimum interest rate at the period of issuance with a maturity of three years.

“It will definitely affect the operations of commercial banks, especially the Commercial Bank of Ethiopia (CBE), which has an outstanding credit of over 700 billion birr,” said Muluneh Aboye, Vice President of CBE.

The outstanding credit in the banking system has reached 1.3 trillion Birr during last year. Out of the aggregate amount, the share of private banks is around 46 percent.

Awash, Bank of Abyssinia and Dashen are the leaders among private banks in the credit market, which is now at standstill following the loan freezing imposed by the National Bank of Ethiopia since August 2021. Estimates indicate banks would be compelled to invest at least 14 billion birr during the first implementation of the mandatory rule.

If we buy the bond from our outstanding credit every year, it would be a doubling-up on what was already computed, stated President of Dashen Bank, Asfaw Alemu, who was unwilling to disclose additional information as the study is yet to be delivered to the regulatory body.

It is not only conventional banks that are unhappy with the one percent mandatory bond. Interest-free banks have also communicated with NBE’s officials in a separate application calling for amendment of the rule, which does not only demand the investment of one percent of loan on the bond but also pays interest when it matures.

“We cannot invest a penny on something that pays interest, including bond, as it would be against Shariah’s principle,” said Kedir Abas, Strategy Director of Zamzam Bank, which recently joined the banking industry with a paid up capital of 880 million Birr invested by over 11,200 people.

Kedir and his fellows in the interest free banking sector proposed for the adoption of a new rule by the NBE that takes the business model of interest-free banks into consideration.

“Mudrabah is one possible way as it enables us to invest in Shariah-compliant project financed by the Development Bank of Ethiopia with zero interest and share the profit later,” Kedir added.

But for the executives of CBE, buying the bond, whether under a new arrangement or an adjusted amount, is not an appealing idea.

“While the rule does not make clear whether it applies to us, we wanted to be exempted as we largely finance public projects with a significant value in the development of the economy,” Muluneh, the VP, said.

For the officials of the NBE, however, the concerns of commercial banks does not seem to be convincing.

“The amount is small considering what they get from credit. However, a direction has been given to come up with a solution for interest-free banks as they cannot buy the bond like the conventional ones,” remarked Fikadu Degafe, Vice Governor and Chief Economist of the regulatory body.

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Video from Enat Bank Youtube Channel.

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