They are expected to invest additional 18 billion birr this year
The Development Bank of Ethiopia (DBE) secures 10.3 billion birr from the sale of bonds to commercial banks based on a new rule introduced last year. The 17 banks operational in the fiscal year 2020/2021 invested in the bonds.
They were required to buy bonds to support the country’s policy bank using one percent of their outstanding credit, which surpassed 1.3 trillion birr as of July 8, 2021.
It was a measure challenged by industry insiders who saw the mandatory rule as an obstacle to increase their liquidity level.
Through the lobby group they established two decades ago, the Ethiopian Bankers Association, the banks pleaded with officials at the National Bank of Ethiopia (NBE) to reverse the rule, but their attempts bore no fruit.
“Almost all banks have finished buying the bonds using one percent of their outstanding credit,” Frezer Ayalew, banking supervision director at NBE, confirmed to The Reporter.
The directive has been in effect since last August and commands commercial banks to keep investing the threshold one percent until the aggregate bond reached 10 percent of their total outstanding loan and advances.
Despite industry insiders’ concerns that the mandatory rule would have an impact on bank performance, financial institutions’ performance was exceptional last fiscal year. Customers borrowed 534 billion birr from commercial banks, bringing the total to 1.8 trillion birr. The banks are expected to buy 18 billion birr worth of bonds this year after they present their audited report to shareholders.
Insurance companies are also required to pay 15 percent of their net income to buy DBE bonds beginning with the current fiscal year.
Overjoyed by the invested bonds from the commercial banks, Yohannes Ayalew (PhD), president of DBE, has figured out how his bank will use the money. Small and medium enterprises (SMEs) and corporates on projects in agriculture and industry will be highly financed, the president said.
“The main reason behind the decision for the banks to buy the bonds is to use it on the development and industry projects,” Yohannes told The Reporter.
All the banks that the DBE was expecting to invest in its bonds have met the expectations, and the insurers are yet to begin investing this year as well, Yohannes explained.
A top official at United Insurance Company said the obligation to invest 15 percent of their net income would negatively affect the insurers’ performance, but would have no use to the government since it might be small. The banks are where the government can source huge money in the form of bonds.
Last year in November, insurers complained to the central bank to ease the obligation of investing in DBE bonds, only to get rejected later.