In an effort to help relieve war-affected areas in Tigray State cope with loan repayment obligations, the National Bank of Ethiopia (NBE) has ordered banks to restructure non-performing loans (NPLs).
The move comes just months after similar action was taken to rebuild conflict-affected businesses operating in Amhara and Afar regions to help them recover from war damages.
Bankers are unhappy with the decision as they had already requested the central bank write off all loans given to businesses in Tigray.
Prior to the new NBE direction, some commercial banks had been trying to take possession of debtors’ properties, since the war in Tigray ended following the Pretoria agreement in November 2022.
According to an NBE circular, bankers are instructed to maintain a 50 percent provision for NPLs in Tigray, indicating that half of Tigray’s NPLs could potentially be recovered.
The central bank did not authorize outright loan cancellation but refinancing, renegotiation, rescheduling and gradual NPL repayment.
Per the NBE circular, loans in Tigray and Tigray-based businesses that incurred NPLs due to the war will get relief from repayment obligations for one and a half years. During this time, banks can renegotiate with clients and reschedule loans based on clients’ capacity and consent.
The central bank temporarily suspended several directives Governing Asset Classification and Provisioning, Credit Bureau Establishment and Operation, and those for Development Finance Institutions (in the case of Development Bank of Ethiopia).
The regulatory body also ordered banks to provide priority access to foreign exchange and refinancing for debtors. This aims to enable affected investments in Tigray to import materials and resume operations. Once they start generating revenue, they will pay back loans.
Except for banks established in the past two years, all existing banks in the country have NPLs in Tigray.
Apart from commercial banks, the DBE also reported having 10 billion birr in NPLs in Tigray.
Banks can normally only extend or reschedule loans a maximum of six times. But the NBE has allowed banks to reschedule Tigray loans once again. The circular also allows banks to provide fresh financing and foreign exchange to non-performing loan projects immediately, without waiting for producers.
“This aims to enable war-affected projects to resume production by importing spare parts and raw materials,” said Hussein Amde, chief credit director at Wogagen Bank.
With 112 branches in Tigray, Wogagen is among the commercial banks with substantial loan portfolios in Tigray. But now, 100 percent of its Tigray loans are non-performing.
Banks are expected to work out non-performing loans on a case-by-case basis.
Banks must work out the NPLs in the next one and a half years but debtors cannot be forced to pay during this time. “We will extend loan repayment periods by two years, three years or more, based on projects’ consent and capacity,” said Hussein.
Lion International Bank president Daniel Tekeste says the NBE circular will enable war-affected investments to restart operations. The bank’s high level non-performing loans in Tigray resulted from its significant lending in the region.
“We have 141 branches in Tigray, including some in parts of Afar like Abala. There are no loans to be canceled. This circular only concerns managing NPLs. Unless cured, loan recipients under NPLs cannot take out additional loans or resume production,” Hussein said.
However, investors and debtors in Tigray are unhappy with the circular’s provisions.
“We want debt cancellation for investments affected by the Tigray war,” says Daniel Mekonnen, head of the Tigray Investment Commission. He notes there were 13,000 investment licenses in Tigray before the war.
Investors and debtors in Tigray have requested that the NBE, federal investment commission and Ministry of Finance cancel principal and interest on their loans.
The Tigray region has written letters to these institutions requesting full debt cancellation for investments affected by the Tigray war.
Commercial banks also complain that they cannot afford to refinance Tigray’s NPLs.
The central bank has not allocated any new funds for refinancing these loans or to provide priority access to foreign exchange.
Instead, commercial banks would need to refinance the NPLs and provide priority forex access using their existing balance sheets. However, the banks say they do not have sufficient resources to do so.
“Unless the NBE provides new cash injections to banks, we cannot inject fresh financing to NPL projects as we are already facing a liquidity shortage,” said Hussein.
Banks also demand the central bank amend the rule requiring exporters to surrender 70 percent of foreign exchange earnings.
“While they have not responded to our request, we have also asked the central bank to forgive accrued interest rates for projects in Tigray. So the NBE did not address the issues of cash injections, relaxing retention rates or interest rate forgiveness that we requested,” said Hussein.
Financial analyst Abdulmenan Mohammed (PhD), based in London, appreciates the NBE’s decision but argues the provisions are insufficient. He says while the circular ensures debtors in Tigray avoid the black list, loan write-offs force banks to maintain 100 percent provisions.
“One and a half years is not enough for the loan suspension. Three years is reasonable as Tigray is still not back to normal and it will take time for businesses to resume,” Abdulmenan says.
Abdulmenan also argues the provisions are fruitless without NBE cash allocations for banks and higher foreign exchange retention rates. Unless the central bank allocates fresh cash and banks provide financing from capital, interest rates will be unbearable for Tigray clients, according to him.
“The circular provisions are lip service if the NBE does not provide new allocations.”
Abdulmenan also stresses the NBE must exempt war-affected investors from paying interest for past loans. “They are victims of a war they did not cause. They should not pay interest for years they could not work,” he says.