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NBE likely to lift NBE bills, allow banks alternative to credit allocation

After a meeting between bank presidents and the National Bank of Ethiopia (NBE), which regulates the financial sector, banks are hopeful that NBE bills will be lifted and they will be permitted to create an alternative proposal to the letter of credit (LC) allocation.
The new leaders of NBE and bank heads met on Thursday November 1, at the central bank to discuss issues in the financial sector.
On that occasion, hope was secured that the controversial NBE bill directive imposed since 2011 would be lifted, according to sources who attended the meeting.
The directive mandated that all banks except the Commercial Bank of Ethiopia and Development Bank of Ethiopia, both which are state owned, buy 27 percent of NBE bills for every loan disbursement at a three percent interest rate with a five year maturity period.
Banks have claimed that the NBE bills shrink their liquidity and smash their capacity to provide loans for clients. They have also argued that the 3 percent interest rate goes against the minimum market rate that NBE itself imposed. When the directive, ‘MFA/ NBEBILLS/001/2011’, became effective the minimum interest rate was 5 percent and then increased to 7 percent a year ago when the birr devalued by 15 percent along with other major hard currencies.
During several discussions including public private dialogue forums the issue was one of the top topics brought up by the private sector but the government strongly defended and rejected the claim. International partners like the International Monetary Fund (IMF) also expressed their concern about the directive. They stated that the directive could affect the private sector’s access to finance.
In 2015 during talks with financial institution leaders including banks, insurance companies and micro finance organizations, the former central bank leaders said that insurance firms may share the burden and be included in similar schemes. However this has not yet been applied in the insurance industry.
On Thursday bankers expressed their concern about the directive.
Yinager Dessie (PhD), Governor, who chaired the meeting, disclosed that the central bank has created an exit strategy to lift the directive, according to sources.
He said that NBE is working to develop an exit plan. “It is good news for the banking sector,” one of the bank presidents, who requested anonymity, told Capital. “In general I think the discussion was fruitful. They are trying to solve challenges faced by the sector but it may be a bit difficult for them to do this in a short period since there are a lot of challenges and they have been imposed for several years,” he added.
The central bank has also given an opportunity for banks to come up with an alternative proposal to implement a LC operation. In relation to the hard currency shortage and fraud the central banks have applied several rules and procedures on the IBD at the banks.
In February 2016 NBE applied a directive known as ‘Transparency in Foreign Currency Allocation and Foreign Exchange Management,” Directives No.FXD/45/2016’ that made banks provide service to their customers on a first come first serve scheme to tackle misdemeanors at IBD.
However, banks and foreign currency buyers have expressed their complaints about the law, which was amended last year.
In the past banks wanted the regulatory body to ease the new directive that controlled the way banks handle hard currency. They asked the central bank to give them the responsibility of managing the LC process.
They say the directive is not relevant to their day to day activity.
The directive has also imposed priority sectors in terms of access the hard currency at banks.
Besides the priority sectors sub article 6.2 of the directive indicated that a bank shall sell foreign currency to its customers on a first come first serve basis.
During Thursday’s meeting bankers expressed their concern about the directive which they claim does not benefit banks or customers.
They said illegal actors are still accessing the hard currency and distributing it unfairly. The central bank leaders argued that they applied to directive to create fairness. “They told us to come up with a proposal to replace the directive,” sources said.
The Ethiopian Bankers Association is expected to handle the proposal work.
In a related development, NBE has amended the ‘Bank Corporate Governance Directive No. SBB/62/2015’.
This is the first directive that Yinager has signed as governor. It replaces the 2015 directive sub article 6.7 into the following: ‘resolution of shareholders meeting shall not come into force before completing registration of the minutes of the meeting at a relevant government agency. However, a dividend payment shall be affected on the date and methods of payment as decided by the ordinary general meeting.’
The replaced sub article was not allowed to settle dividend payments before the completing registration of the minutes of the meeting with appropriate government organ, which is the Documents Authentication and Registration Agency.


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