Thursday, June 13, 2024

Reform supplier credit schemes, bankers say


Financial industry pundits are recommending that the government reevaluate the suppliers’ credit scheme which excludes local investors and instead give priority to foreign companies. They say getting the letter of credit up front breaches the first come first serve directive of National Bank of Ethiopia.
The banking industry leaders that have links to the local and foreign based businesses, and  FDI, argue that the supplier’s credit scheme not only affects local investors but the financial institutions themselves because there is a default risk from their clients.
One of the prominent private bank presidents, who requested anonymity, told Capital that initially the notion of the supplier’s credit indirectly forced the banks that applied without the consultation of them to settle the payment with maturity date. “It has forced the banks to face a default risk which affects the country,” he said.
The supplier’s credit by itself is given priority to the clients who are allowed to access the scheme and not those who registered and are waiting to get the LC.
“When the banks secure hard currency they focus on settling the credit rather than approve the LC for its other clients who are not included on the supplier’s credit scheme, which is also another effect on local investors,” Dereje Zebene, President of Zemen Bank said.
Concerns are also being raised by experts that the scheme is genuine or free from any misbehavior. “It has to be cross checked whether it is a genuine supplier or not, besides that the cost includes hidden expense like interest,” they stressed.
The sector actors stated that the supplier’s credit might also promote the parallel (black) market. “We are seeing that sometimes their supplier’s credit is processed from Djibouti. Who is there in Djibouti?” bankers that Capital spoke questioned. They noted that the imported items have already reached Djibouti by those who have a stake in the parallel market.. They said that it may show that illegal actors are using this scheme to abuse the legal market.
“It is obvious that those who have advantage in the supplier’s credit scheme are enjoying the market without competition from other local producers,” Asfaw Alemu, President of Dashen Bank told Capital. “This system has also forced the local producers to be excluded from the market and suffer from  bankruptcy due to  several expenses including overhead cost and salary for employees that are difficult to avoid,” he added.
“If they have debt in banks they will also be unable to settle their credit, which forced banks to seize the assets. But it needs adequate data to speak on it and indicate the effect on companies and at the same time on banks,” Asfaw explained.
“When this kind of crisis occurs it becomes difficult for banks to sell the assets of defaulted investors since there won’t be real buyers because all banks have assets to sell out,” Dereje said.
When local investors, who have thousands of employees, layoff their workers, it will also affect the social structure, according to experts. “The supplier’s credit scheme that excludes local investors will also allow foreign companies to be the major market actors, which is against stand the national identity,” one banker said.
“It is not acceptable to exclude local companies to access foreign currency in the scheme,” another banker added.
Addisu Haba, President of Ethiopian Bankers Association and Debub Global Bank, told Capital that the local banks do not have a problem with the local currency to settle the credit. “But the scheme has forced banks to pay the supplier’s credit with foreign currency which is highly scarce when the maturity date comes,” he said.
“If the foreign companies who are engaged in export it would be acceptable but the supplier’s credit scheme includes all actors who sell their products locally or export them,” the association head said.
“Since the government endorsed the new directive we did not facilitate LC for clients coming in the usual trend,” a bank president who did not want to be named said.
“Since I gave the suppliers credit I have to also settle the payment when the maturity date comes. So it will be difficult for my bank to approve other LCs since the priority is for credit settlement,” he added.
Another banker also argued that the credit scheme has escalated the shortage of the hard currency. “A hard currency shortage at banks is observed,” he argued.
He also stated that local investors who already borrowed a huge amount of money from local banks have defaulted since they could not produce and cover their costs and other required settlements including scheduled debt payment.
It has been reported that in the past fiscal year the percentage of banks with non-performing loans (NPL) has grown compared with the previous trend, but banks declined to verify this.
Addisu said that members of the association did not discuss the issue. “It is difficult for me to comment on it since I do not have organized data,” he added.
A president of one of the oldest private banks told Capital that as per the NBE law his bank has given priority to clients that have a support letter from NBE for the scheme of suppliers credit whether it imports priority items or not.
“Local companies that have a support on priority criteria of NBE would not get priority because we don’t have adequate resources and give prime service for clients with supplier’s credit,” he said. “If the supplier’s credit had not come into effect we would serve several clients who are waiting in the queue,” he added.
The bankers said that they tabled the challenge for the new governor, Yenager Dessie (PhD), during the one to one discussion with every bank leader, but they said that the new governor needs more time for change.
Most of the bankers agreed that the supplier’s credit has affected their businesses. Besides that they insist the government should open the hard currency allocation as opposed to strictly controlling it. The government has put the first come first serve into priority sectors but it is not effective.

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