National treasury issues bond to inject capital
A shocking decline of the Capital Adequacy Ratio (CAR) at the largest state-owned bank, Commercial Bank of Ethiopia (CBE) – currently at the lowest critical level of four percent – has prompted the government to deposit a security bond worth 26.5 billion birr.
The security bond is intended to raise the bank’s paid up capital. In a bid to apply it quickly, the government has tabled a draft proclamation on Tuesday before the House of People’s Representatives (HPR). The bill proposes an issuance of the security bond worth 26.5 billion birr.
If approved, the Ministry of Finance and Economic Cooperation (MoFEC) will issue the security bond that will raise CBE’s total capital to 40 billion birr.
After the capital injection, CBE’s CAR is expected to rise significantly to 13.2 percent, well above the acceptable international minimum standard of 8 percent.
An explanatory document attached with the bill details the factors which led the government to increase CBE’s paid up capital. A staggering fall of CBE’s Capital Adequacy Ratio (CAR) is among the main factors.
CAR is a worldwide measurement to gauge a bank’s capital in relation to its risk weighted assets and current liabilities. It helps central banks to regulate commercial banks in a bid to prevent them from taking excess leverage and becoming insolvent in the process. CAR specifically protects depositors of the bank from an eventuality of financial meltdown and instability in the banking system.
According to the explanatory document, CBE’s total asset and liabilities at the end of 2009 was 74.2 billion birr while its aggregate capital and legal reserves at the time was 5.5 billion birr resulting in the CAR to dip into a 7.4 percent ratio. Though this was below the international standard, what has been observed through the years up until June 2015 and at present are the most shocking. The bank’s total liabilities in June 2015 has climbed to 303.2 billion birr while the aggregate capital and legal reserves stood at 12.9 billion birr that led the CAR to nosedive to the lowest critical level of 4.4 percent, the document shows. Even though it is not specified on the document the bank’s total liabilities has reached at 385 billion birr in November 2016 while its capital and legal reserves were maintained at the same level of the previous year.
The bank’s Loan to Capital Ratio (LCR) and the Loan to Deposit Ratio (LDR) explicitly supplement the bank’s financial leverage. According to the explanatory document, the bank’s LCR including government security bonds in the year 2009 was at 409 percent has climbed to 2016 percent in June 2015.
At the same time the LDR has climbed to 114 percent in June 2015.Thus it is difficult for the largest bank, CBE to absorb risk weighted liabilities and operational risks with the deteriorating capital, the explanatory document read.
The draft bill empowers MoFEC to issue the security bond utilize it to raise the CBE’s capital. Literally, the bill amounts of injecting 26.5 birr capital to the state owned bank although CBE will access this capital on loan from the national treasury with favorable terms of zero interest rate and around fifteen years of maturity date.
In fact, the bond will mature in ten years period after a grace period of five years, according to the draft bill. The bond to be issued in accordance with the draft bill will not bear interest.
The House has referred the bill to the Budget and Finance Affairs Standing Committee for further scrutiny.
