Bankers fear liquidity shortages may delay the process
The National Bank of Ethiopia (NBE) has ordered all commercial banks to resume banking services in areas controlled by the Ethiopian National Defense Force (ENDF). The banks have to assess the status of their branches and undertake auditing before reopening branches in Tigray, parts of Amhara, and the Afar region, where banking and other basic services have been offline for the past two years.
The central bank convened the presidents of all commercial banks last week and discussed issues concerning reopening branches and non-performing loans (NPLs) among others. “The NBE now expects progress from the commercial banks. We expect a report from them regarding the areas in which they resumed operations and the challenges they face in other areas. Directions were given to the banks even before last week,” Frezer Ayalew, banking supervision directorate director at the NBE, told The Reporter.
Some of the commercial banks are already resuming operations in areas where telecom and electricity have been reconnected. These areas include the Amhara and Afar regional states. Banks in Tigray can start operations, but only after conducting audits, according to Frezer.
Each commercial bank has hundreds of branches in conflict-affected areas, with the Commercial Bank of Ethiopia (CBE) having over 300 branches.
The banks have been requesting that NBE write off NPLs, especially in Tigray. The Development Bank of Ethiopia (DBE) alone requested that the central bank take off over 10 billion birr in NPL in Tigray.
However, the NBE is determined to keep the NPL in the banks’ financial statements.
“The commercial banks will have to collect loans provided before the war. They have to collect the NPLs. The loans cannot be canceled. Once the banks re-establish their communications with their clients and assess the status of the projects, they must collect the loans,” Frezer said.
The banks, according to Frezer, must continue their normal activities after conducting the assessments. “The NPLs are public funds. They cannot be written off. It is a deposit collected from the public that was given as a loan. Canceling the loans means the public loses its deposit. So the projects must be assessed, operationalized, and the loans paid back. The banks can give time until the projects get on track,” Frezer explained.
However, commercial banks are currently worried about the huge liquidity demand they are anticipated to infuse into the branches in the war regions because the branches have to start from scratch with a new cash injection.
“Liquid cash availability will be the biggest issue in resuming bank service there. This liquidity demand is in addition to the cost of the branch resumption. The cash demand is high. Before the war, the deposit mobilizations in these areas were high,” Daniel Tekeste, president of Lion International Bank (LIB), said. “We have to redirect our resources to this area. We reached a consensus with NBE that we needed their support to this end.”
The NPLs were one of the issues banks discussed with the NBE, according to Daniel. “The status of the NPL will be known after the audit. We have to know the status of the collateral. For instance, if a factory is collateralized for the loan, we have to assess the status of the factory.”
LIB has over 135 bank branches and sub-branches in the war-affected area of northern Ethiopia. The bank started preparations right after the peace agreement was signed last month in Pretoria between the federal government and the Tigray People’s Liberation Front (TPLF).
During the meeting with the NBE, the bankers discussed how commercial banks will face a shortage of local currency to service their branches in conflict zones. The NBE also agreed that it supports commercial banks in ways other than resource mobilization. The NBE is expected to provide low-interest loans to ease the banks’ liquidity issue.
“In urban areas, higher liquidity is required, while the cash demand in rural banks might be lower. The deposit size varies from area to area. There are areas where extremely high deposits occur. This means these areas need higher liquidity now. But we will also consider other alternatives to filling the cash demand,” Daniel said.
The NBE ordered each commercial bank to establish a steering committee that coordinates the activities on the ground with the ministerial committee established at a national level and taskforces under it. The steering committee inside each commercial bank follows up on the progress on the ground and reports challenges to the NBE. Then the ministerial committee coordinates at the national level.
The committee reports to the PM, which comprises the NBE, Ministry of Trade and Regional Integration (MoTRI), Ministry of Transport and Logistics (MoTL) and others. Individual bank steering committees report directly to the NBE.
