The cash-strapped Ethiopian Deposit Insurance Fund (EDIF) is considering reselling Treasury bills worth 1.5 billion birr back to the National Bank of Ethiopia (NBE) in case of higher claims.
In an effort to address its cash demand, heads of the Fund are mulling to accept recommendation of the World Bank, which proposes for the central bank to repurchase the Treasury bills previously sold to the Fund.
Established in July 2023, the EDIF has collected a capital of 1.6 billion birr from banks and microfinance institutions as their initial and quarterly contribution, over the past three months.
Out of this amount, the Fund utilized 1.5 billion birr to acquire Treasury bills from the NBE, while the remaining 100 million birr was allocated to ensure interest-free deposits.
According to MergaWakweya, the founding CEO of the Fund, this has left the organization with no cash on hand.
EDIF was primarily formed to ensure depositors. However, as the Fund invested almost all of its money in NBE’s treasury bills and interest-free bonds, it currently lacks cash on hand in case of potential refunding claims from depositors.
Consequently, the Fund has opted to convert its Treasury bills into liquid cash. The two bodies, NBE and EDIF will make an agreement to repurchase and resell the T-bills back to each to other.
“We will enter a repurchase agreement with the NBE. Under the repurchase agreement, we can return the treasury bills to the NBE and take back the Treasury bill in cash. The NBE keeps the Treasury bill for the time being. Once we find cash in the future, we will repurchase the treasury bill, returning the cash back to NBE,” explained Merga.
This scheme of transaction is advised by the World Bank, according to Merga.
The primary source of capital for the Fund is derived from collecting 0.03 percent of deposits from all banks and microfinance institutions. This amount is calculated at the end of each financial year but is collected quarterly.
The Fund is expected to set aside capital at any time to compensate depositors in case of any risks to their deposits.The Fund is also authorized to invest its surplus capital in T-bills.
“We chose to invest only in treasury bills because it is safe and we can convert it to liquidity any time we need money. But treasury bills are only issued by the central bank,” Merga said.
“Once a secondary capital market is introduced in Ethiopia, we can sell our treasury bills to other institutional investors. But until then, our option is the ‘repurchase agreement’ with the NBE,” Merga explained.