Wednesday, February 8, 2023
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BusinessLiquidity shortage returns, new loan applications halt

Liquidity shortage returns, new loan applications halt

Banks have been compelled to halt considering new loan applications due to a liquidity crunch affecting the banking sector.

Because of the lack of cash, banks are having problems clearing huge sums of checks and disbursing loans among themselves.

It has already been informed to the managers of branches of many banks that they must implement stringent processes when their clients are transferring large sums of money.

The Reporter was able to speak with customers of two private banks who claimed they had been advised to wait while applying for a new loan.

The customer said, “I attempted to get a two million birr loan; however, I was instructed to wait because of the severe liquidity deficit at now.”

Another client said, “I tried to apply for a car loan, but the bankers informed me that they do not accept new applications at this time.

When the Reporter phoned at least five private banks’ call centers, they verified that they had stopped taking new loan applications.

Except in cases where loans had already been granted, banks have halted giving staff loans until the liquidity situation improves. The same applies to other types of loans.

Private bank executives are calling the current liquidity crunch “seasonal,” despite the fact that it is affecting banks of all sizes.

“Considering it is a harvesting season, the shortage is expected. This year’s inflation has resulted in a huge rise in the amount of money withdrawn by exporters in order to pay farmers,” said Dereje Zenebe, president of Zemen Bank.

The liquidity crisis occurs at a time when banks are required to invest 20 percent of their loans in government bonds, which have an interest rate of just nine percent—much lower than their average lending rate of 14.5 percent at the end of the previous year.

There is also a yearly bond purchase requirement from the Development Bank of Ethiopia, equivalent to one percent of the outstanding loan amount at the bank. With the regulation taking effect at the end of the previous fiscal year, the banks had already paid up 10 billion birr.

“Tax collections, which bring billions of birr into the account of the Commercial Bank of Ethiopia, and harvesting, are both seasonal activities that have contributed to the cash crunch. Nonetheless, this is made worse by the mandatory requirements that must be met,” said senior executives of one of private banks.

Abdulmenan Mohammed (PhD), a financial expert with almost two decades of experience, agrees.

“Although it is a seasonal issue, the central bank is expected to relax the reserve requirement during such times. The mandatory rules that force the banks to spend a significant portion of their resources to fulfill reserve requirements and purchase bonds are to blame for the banks’ heavy load,” said the financial expert.

Commercial banks have a total of 1.6 trillion birr in outstanding loans until the end of the last fiscal year, a 24 percent increase over the prior year.

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