Wednesday, February 8, 2023
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BusinessCentral bank sevenfolds microfinance capital threshold

Central bank sevenfolds microfinance capital threshold

The National Bank of Ethiopia (NBE) has introduced a new directive that compels microfinance institutions (MFIs) to meet a minimum paid-up capital requirement 75 million birr, an increase from 10 million birr.

The minimum initial paid-up capital required to obtain a new microfinance business license is set at 75 million birr, which shall be fully paid in cash and deposited in a bank to the account of the microfinance institution under formation.

Existing MFIs whose paid-up capital is below the new requirement have to raise their paid-up capital to the new threshold by the end of January 2028. Such microfinance institutions are required to submit an action plan for a capital increase to the central bank within three months after the effective date of the directive.

In an effort to open up the financial sector for foreign competition and in a move to pressure financial institutions to cope with the dropping value of the birr, the NBE raised commercial banks’ paid-up capital to five billion birr and insurance companies’ paid-up capital to 500 million birr in the past year.

So far, there are 45 MFIs operating in the market, of which the big four pioneer MFIs have upscaled to banks in the past few months. Two-thirds of the remaining MFIs have capital below the new 75 million birr threshold. About 15 existing MFIs have capital between 10 million and 20 million birr, while some have between 100 million and 500 million birr. This suggests that there is a wide range of maturity levels among the MFIs.

Nevertheless, several requests for new licenses have been in the process at the NBE.

Industry players also welcome the new threshold.

“The existing threshold was very low and disproportional to the loan portfolio of MFIs. Many MFIs want to give large loans, but they are restricted by small capital,” Teshome Yeshi, CEO of Yemisrach MFI, said.

The new threshold is not unexpected, but it is good for the growth of MFIs, according to him.

MFIs are prohibited from giving loans exceeding one percent of their capital. This means that an MFI with a capital of 20 million birr can only loan 200,000 birr. The new threshold is expected to raise the amount of loan a single borrower can get from MFIs.

The threshold increment is also recommended as an enabler for MFIs to adjust to the consecutive depreciation of the birr. However, Teshome says the new threshold might be a challenge for small and new MFIs to achieve the new threshold shortly.

But he hopes that MFIs can sell new shares to the diaspora, which he says is an opportunity to raise capital quickly and gain capital in hard currency. However, the NBE suspended the directive allowing for the sale of shares to the diaspora.

“MFIs have a significant role in ensuring access to finance for small and medium businesses across the country, which have no collateral to access bank credits. MFIs are also fulfilling their mission in rural areas where bank presence is scarce. As a result, MFIs need further support to grow fast and fulfill the low access to finance in the economy,” added Teshome.

According to the NBE’s 2020/21 report, less than 300,000 people in Ethiopia have access to bank credit. This is mainly because banks’ collateral requirements are deterring loan seekers. On the other hand, over five million people have taken loans from MFIs.

Though the cumulative capital of all MFIs reached 27.9 billion birr in 2020–21, 84.8 percent of it was held by the four big MFIs. The big four pioneer MFIs, which NBE allowed to transform to banks, are Amhara, Oromia, Omo, and Addis MFIs. Dedebit MFI was also allowed to grow into a bank, though its transition was not completed.

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