Commercial Bank of Ethiopia (CBE), the largest bank in Ethiopia, is seeking government approval to increase its paid-up capital from 63 billion birr to 500 billion birr in order to finance ambitious expansion plans, according to executives of the state-owned bank.
The bank submitted the request three months ago to Ethiopian Investment Holding (EIH), the sovereign wealth fund that oversees state-owned enterprises including CBE.
But sources say final sign-off requires a policy change beyond EIH’s remit, and the bank’s application has faced bureaucratic delays.
“EIH may take time. Our request is stronger. The government also needs to revise policies. But we expect approval to raise the capital this fiscal year,” said CBE President Abe Sano.
CBE has set its sights on reaching 250 billion birr in capital within five years by retaining more profits instead of handing them to the government, as the bulk state ownership demands. It is developing a strategy to reach its capital goal over the next decade.
The major source of capital would be allowing the bank to retain more of its profits instead of submitting them to the government, according to Abe.
“We requested that the government stop taking CBE’s annual profits. The plan is to reinvest those profits and use them to accumulate capital,” he said.
But analysts warn the request could strain government finances.
While hopeful of a quick decision, Abe admits it’s not as straightforward as it looks.
“It’s complex. Issues at EIH are not the only considerations. Other state firms also requested capital raises from EIH, putting pressure on the budget,” said Abe. “This is because it reduces the SOEs’ dividend and capital flow into the government’s coffers. So, the government might have to prioritize.”
Giving CBE more freedom would mean less dividend payments – forcing government to prioritize.
CBE officials say capital increase is needed for two reasons.
First, the bank’s assets of one trillion birr far exceed its authorized capital of 40 billion birr.
“Our current 63 billion birr capital is insufficient. Banking law requires sufficient capital as liabilities grow, for depositors’ safety,” said Abe.
Second, CBE needs firepower ahead of Ethiopia’s banking sector opening up.
“In birr terms our capacity is huge, but in terms of USD, it still lags behind neighboring countries,” said Abe. “When foreign players enter, we must be able to compete.”
The capital rise will ensure CBE’s soundness for both external competition and domestic competition, Abe added.