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More businesses defaulting on loans

Ethiopia’s banks have reported an increasing amount of non-performing loans, Capital learnt.
Sources from financial firms told Capital that the ratio of NPLs have increased, reversing the previous trend. The National Bank of Ethiopia (NBE) recently issued a new rule, mandating that the NPL be less than five percent of the outstanding loan. However according to information Capital obtained, the ratio of NPLs increased since the government devaluated the birr by 15 percent against major hard currencies.
According to experts it is now more common for debtors to not make their payments on time and there have been more defaults. This has occurred after the central bank issued a directive limiting banks’ outstanding loans by 16.5 percent compared with the preceding year, if the person they are loaning the money to is not engaging in an export related business. Furthermore, according to sources in the financial industry, some smaller banks have already maxed out on the amount of loans they are allowed to disburse.
“If a debtor knows they are not going to be able to get a new loan until next year they are less likely to use the money they earn to pay off their loan,” experts explained.
Sources at the financial firms, including higher officials agreed that this is occurring in private banks, although they declined to give more details.
“Even though there is a five percent limit on NPLs before this trend started in most banks you would only see three percent of NPLs, an expert in the financial sector said. He explained that the current condition may affect the youngest banks. Larger banks have more capital, allowing them to follow the National Bank’s 16.5 percent directive.
The private sector has claimed that the new law hinders it from obtaining adequate loans while they are also facing a shortage of hard currency.

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