Permitted to use two percent of their reserve
Commercial banks are instructed to lend 12 billion birr from their reserves put at the National Bank of Ethiopia (NBE) for players in the coffee industry across Ethiopia. A decision said to be the first of its kind, the move gives the green light to banks to use upto two percent of their reserve for this particular purpose.
Approved by the central bank, the decision is expected to solve the financial constraint faced by growers, suppliers and exporters of coffee for harvesting process, which requires huge finances to pay daily laborers and collect produce from farmers.
Ever since the government placed a suspension on loans, actors in the coffee market have been complaining of facing shortages in finance to collect their output, a situation that has led to a loss of coffee beans in south western part of Ethiopia.
Even though the loan freeze was totally lifted last month, banks were not in a position to satisfy the needs of the coffee sector, because of liquidity shortages faced due to an increase in reserve requirements, from five to 10 percent in September 2021.
“We have given a permit for commercial banks to use two percentage points of their reserves, lowering the requirement to eight percent, so that they provide loans for the coffee market,” said Fikadu Digafe, vice governor and chief economist at the central bank, adding the decision would enable coffee producers meet the USD 1.1 billion export target for this year.
Ethiopian Coffee Growers, Producers & Exporters Association welcomed the latest decision of the central bank.
“Getting finance has been a daunting task lately, leading to a loss of coffee output, which is affecting the export sector. Our need for working capital surged drastically because of a surge in price of coffee in the local market,” said Hussien Ambo (PhD), chairperson of the Association.
The move by the central bank also received a positive nod among executives of commercial banks.
“It is a timely decision made based on our request. We believe it would boost our liquidity and avert the financial constraint faced by coffee growers,” said Teferi Mekonnen, president of Oromia Bank.
Coffee accounts for almost a fourth of Ethiopia’s total export earnings, which stood at USD 3.6 billion during the last fiscal year and almost six million quintals of coffee was produced during the last Meher season in 2021. Exports account for half of the total coffee production, while the rest is consumed locally.
“Coffee is like no other sector. So, we should not be treated like any other businesses,” said Hussien, urging commercial banks to avail the finance as soon as possible.
The new rule will be applicable until the end of July 2022. However, banks will be required to attain the 10 percent reserve requirement when the deadline ends.
Ethiopia has 21 commercial banks, of which two of them are providers of full-fledged interest-free banking services, while the rest provide conventional financial services. Until the end of last year, outstanding credit in the banking industry reached 1.3 trillion Birr, with total deposit surpassing 1.4 trillion Birr during the same period.
Contributed by Dawit Taye& Samson Berhane